Bellring Brands, Inc.: Form 10-Q for the period ended Jun 30, 2021

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of BellRing Brands, Inc. and its consolidated subsidiaries. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein, our audited financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as amended, and the “Cautionary Statement on Forward-Looking Statements” section included below. The terms “our,” “we,” “us,” “Company” and “BellRing” as used herein refer to BellRing Brands, Inc. and its consolidated subsidiaries.

OVERVIEW

We are a consumer products holding company operating in the global convenient nutrition category and a provider of ready-to-drink (“RTD”) protein shakes, other RTD beverages, powders, nutrition bars and nutritional supplements. We have a single operating and reportable segment, with our principal products being protein-based consumer goods. Our primary brands are Premier Protein and Dymatize.

On October 21, 2019, BellRing Brands, Inc. (“BellRing Inc.”) closed its initial public offering (the “IPO”) of 39.4 million shares of its Class A common stock, $0.01 par value per share (the “Class A Common Stock”) and contributed the net proceeds from the IPO to BellRing Brands, LLC, a Delaware limited liability company and BellRing Inc.’s subsidiary (“BellRing LLC”), in exchange for 39.4 million BellRing LLC non-voting membership units (the “BellRing LLC units”).

As a result of the IPO and certain other transactions completed in connection with the IPO (the “formation transactions”), BellRing LLC became the holder of the active nutrition business of Post Holdings, Inc. (“Post”). BellRing Inc., as a holding company, has no material assets other than its ownership of BellRing LLC units and its indirect interests in the subsidiaries of BellRing LLC and has no independent means of generating revenue or cash flow. For additional information on the IPO, see Note 1 within “Notes to Condensed Consolidated Financial Statements.”

The members of BellRing LLC are Post and BellRing Inc. BellRing Inc. holds the voting membership unit of BellRing LLC (which represents the power to appoint and remove the members of the Board of Managers of, and no economic interest in, BellRing LLC). BellRing Inc. has the right to appoint the members of the BellRing LLC Board of Managers, and therefore, controls BellRing LLC. The Board of Managers is responsible for the oversight of BellRing LLC’s operations and overall performance and strategy, while the management of the day-to-day operations of the business of BellRing LLC and the execution of business strategy are the responsibility of the officers and employees of BellRing LLC and its subsidiaries. Post, in its capacity as a member of BellRing LLC, does not have the power to appoint any members of the Board of Managers or voting rights with respect to BellRing LLC.

COVID-19

We continue to closely monitor the impact of the COVID-19 pandemic on our business and remain focused on ensuring the health and safety of our employees, and serving customers and consumers. Our primary categories returned to growth rates in line with their pre-pandemic levels during the fourth quarter of fiscal 2020 and have remained strong in subsequent periods. For additional discussion, refer to “Liquidity and Capital Resources” and “Cautionary Statement on Forward-Looking Statements” within this section, as well as “Risk Factors” in Item 1A of Part II of this report.

Restructuring Charges

In October 2020, we announced our plan to strategically realign our business, resulting in the closing of our Dallas, Texas office and the downsizing of our Munich, Germany location. These actions were substantially completed as of June 30, 2021. For additional information on restructuring costs, refer to Note 4 within “Notes to Condensed Consolidated Financial Statements.”

RESULTS OF OPERATIONS

dollars in millions

Net Sales

Net sales increased $138.4 million, or 68%, during the three months ended June 30, 2021 compared to the corresponding prior year period, driven by increased volume and the lapping of prior year negative impacts of the COVID-19 pandemic. Sales of Premier Protein products were up $111.8 million, or 65%, with volume up 60%. Volume increases were driven by higher RTD protein shake product volumes in the club, food, drug and mass (“FDM”) and eCommerce channels. Average net selling prices increased in the three months ended June 30, 2021 due to targeted price increases, partially offset by increased promotional spending. Sales of Dymatize products were up $21.6 million, or 99%, with volume up 77%. Average net selling prices increased in the three months ended June 30, 2021 due to favorable product mix and decreased promotional spending. Sales of all other products were up $5.0 million.

Net sales increased $201.4 million, or 29%, during the nine months ended June 30, 2021, compared to the corresponding prior year period. Sales of Premier Protein products were up $164.9 million, or 28%, with volume up 28%. Volume increases were driven by higher RTD protein shake product volumes in the FDM, club and eCommerce channels. Sales of Dymatize products were up $34.0 million, or 44%, with volume up 25%. Average net selling prices increased in the nine months ended June 30, 2021 due to favorable product mix. Sales of all other products were up $2.5 million.

Operating Profit

Operating profit increased $20.9 million, or 68%, during the three months ended June 30, 2021, when compared to the prior year period. This increase was primarily driven by higher net sales, as previously discussed, partially offset by accelerated amortization expense of $11.8 million related to the discontinuance of the Supreme Protein brand, higher net product costs of $10.5 million due to unfavorable freight, manufacturing and raw material costs, increased advertising and promotional spending of $3.4 million and higher employee-related costs.

Operating profit decreased $0.1 million, or less than 1%, during the nine months ended June 30, 2021, when compared to the prior year period. This decrease was primarily driven by accelerated amortization expense of $29.9 million related to the discontinuance of the Supreme Protein brand, higher net product costs of $20.7 million due to unfavorable freight and raw material costs, restructuring and facility closure costs, including accelerated depreciation, of $5.6 million, increased advertising and promotional spending of $5.9 million and higher employee-related costs. These negative impacts were substantially offset by higher net sales, as previously discussed, and lower costs related to the separation from Post of $1.9 million.

Interest Expense, Net

Interest expense, net decreased $5.8 million during the three months ended June 30, 2021 compared to the prior year period. This decrease was primarily due to lower aggregate principal amounts outstanding under BellRing LLC’s term B loan facility (the “Term B Facility”) and under BellRing LLC’s revolving credit facility (the “Revolving Credit Facility”) and lower net hedging losses recognized on interest rate swaps of $1.4 million during the three months ended June 30, 2021 compared to the prior year period. In addition, the weighted-average interest rate on the aggregate principal amounts outstanding on the Term B Facility and under the Revolving Credit Facility decreased to 4.8% for the three months ended June 30, 2021 from 5.9% for the three months ended June 30, 2020, driven by lower variable interest rates and the refinancing of the Term B Facility during the second quarter of fiscal 2021.

Interest expense, net decreased $7.6 million during the nine months ended June 30, 2021 compared to the prior year period. This decrease was primarily due to lower aggregate principal amounts outstanding under the Term B Facility and under the Revolving Credit Facility during the nine months ended June 30, 2021 compared to the prior year period. In addition, the weighted-average interest rate on the aggregate principal amounts outstanding under the Term B Facility and under the Revolving Credit Facility decreased to 5.5% for the nine months ended June 30, 2021 from 6.4% for the nine months ended June 30, 2020, driven by lower variable interest rates and the refinancing of the Term B Facility during the second quarter of fiscal 2021. See Note 16 and Note 14 within “Notes to Condensed Consolidated Financial Statements” for additional information on our debt and interest rate swaps, respectively.

Loss on Refinancing of Debt

During the three and nine months ended June 30, 2021, we recognized losses related to refinancing fees incurred in conjunction with the refinancing of our Term B Facility of $0.1 million and $1.6 million, respectively. See Note 16 within “Notes to Condensed Consolidated Financial Statements” for additional information on our debt.

Income Taxes

Our effective income tax rate was 8.1% and 7.3% for the three and nine months ended June 30, 2021, respectively, and 7.2% and 12.5% for the three and nine months ended June 30, 2020, respectively. The decrease in the effective income tax rate for the nine months ended June 30, 2021 compared to the prior year period was primarily due to us taking into account for U.S. federal income tax purposes our 28.8% distributive share of the items of income, gain, loss and deduction of BellRing LLC in the period subsequent to the IPO. Prior to the IPO and formation transactions, we reported 100% of the income, gain, loss and deduction of BellRing LLC. In accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes,” we recorded income tax expense for interim periods using the estimated annual effective income tax rate for the full fiscal year adjusted for the impact of discrete items occurring during the interim periods.

LIQUIDITY AND CAPITAL RESOURCES

We expect to generate positive cash flows from operations and believe our cash on hand, cash flows from operations and possible future credit facilities will be sufficient to satisfy our future working capital requirements, research and development activities, debt repayments, including both scheduled amortization payments and any mandatory prepayments required from excess cash flow, and other financing requirements for the foreseeable future. Our asset-light business model requires modest capital expenditures, with annual capital expenditures over the last three fiscal years averaging less than 1% of net sales. No significant capital expenditures are planned for the remainder of fiscal 2021. Our ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures and other business risk factors. If we are unable to generate sufficient cash flows from operations, or otherwise to comply with the terms of BellRing LLC’s credit facilities, we may be required to seek additional financing alternatives. Additionally, we may seek to repurchase shares of our Class A Common Stock. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

During the second quarter of fiscal 2021, BellRing LLC entered into a second amendment to its credit agreement (as amended, the “Credit Agreement,” and such amendment, the “Amendment”). The Amendment provided for the refinancing of the Term B Facility on substantially the same terms as in effect prior to the BellRing Amendment, except that it (i) reduced the interest rate margin by 100 basis points resulting in (A) for Eurodollar rate loans, an interest rate of the Eurodollar rate plus a margin of 4.00% and (B) for base rate loans, an interest rate of the base rate plus a margin of 3.00%, (ii) reduced the floor for the Eurodollar rate to 0.75%, (iii) modified the Credit Agreement to address the anticipated unavailability of the London Interbank Offered Rate as a reference interest rate and (iv) provided that if on or before August 26, 2021 BellRing LLC repays the Term B Facility in whole or in part with the proceeds of new or replacement debt at a lower effective interest rate, or further amends the Credit Agreement to reduce the effective interest rate applicable to the Term B Facility, BellRing LLC must pay a 1.00% premium on the amount repaid or subject to the interest rate reduction.

The following table shows select cash flow data, which is discussed below.

dollars in millions

Operating Activities

Cash provided by operating activities for the nine months ended June 30, 2021 was $145.9 million compared to cash provided by operating activities of $27.2 million for the nine months ended June 30, 2020. The increase was primarily driven by favorable working capital changes of $78.8 million, which were primarily due to fluctuations in the timing of purchases and payments of trade payables, the build up of inventory in the prior year period related to lower net sales caused by the COVID-19 pandemic and the timing of promotional activity and fluctuations in the timing of sales and collections of trade receivables. In addition, interest payments decreased $9.5 million compared to the prior year period due to lower aggregate principal amounts outstanding under the Term B Facility and Revolving Credit Facility, as well as the refinancing of the Term B Facility. These positive impacts were partially offset by restructuring costs payments of $4.6 million and increased tax payments of $3.9 million.

Investing Activities

Cash used in investing activities for the nine months ended June 30, 2021 decreased $0.5 million compared to the corresponding period in the prior year resulting from a decrease in capital expenditures.

Financing Activities

Nine months ended June 30, 2021

Cash used in financing activities for the nine months ended June 30, 2021 was $105.0 million. BellRing LLC drew an aggregate of $20.0 million under the Revolving Credit Facility, repaid $55.0 million on the principal balance of the Term B Facility and repaid $50.0 million on the Revolving Credit Facility during the period. In addition, BellRing LLC had net cash transfers of $17.5 million to Post which included tax distributions to Post pursuant to BellRing LLC’s amended and restated limited liability company agreement and state tax withholdings payments on behalf of Post.

Nine months ended June 30, 2020

Cash used in financing activities for the nine months ended June 30, 2020 was $9.1 million. BellRing LLC received proceeds of $686.0 million, net of discount, related to the issuance of the Term B Facility and drew an aggregate of $185.0 million on the Revolving Credit Facility. In addition, BellRing Inc. received $524.4 million from the issuance of its Class A Common Stock in conjunction with the IPO. BellRing LLC had net cash transfers of $22.4 million to Post, which included cash deposits prior to the IPO, tax distributions to Post pursuant to BellRing LLC’s amended and restated limited liability company agreement and state tax withholdings payments on behalf of Post. BellRing LLC also repaid the $1,225.0 million outstanding principal balance of the bridge loan assumed from Post in conjunction with the IPO, repaid $130.0 million of outstanding borrowings on the Revolving Credit Facility and repaid $17.5 million on the principal balance of the Term B Facility. In connection with the issuance of BellRing LLC’s long-term debt, BellRing LLC paid $9.6 million in debt issuance costs and deferred financing fees.

Debt Covenants

Under the terms of the Credit Agreement, BellRing LLC is required to comply with a financial covenant requiring BellRing LLC to maintain a total net leverage ratio (as defined in the Credit Agreement) not to exceed 6.00 to 1.00, measured as of the last day of each fiscal quarter. BellRing LLC was in compliance with its financial covenant as of June 30, 2021, and we do not believe non-compliance is reasonably likely in the foreseeable future.

The Credit Agreement provides for incremental revolving and term facilities, and also permits BellRing LLC to incur other secured or unsecured debt, in all cases subject to conditions and limitations on the amount as defined and specified in the Credit Agreement.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies and estimates are more fully described in our Annual Report on Form 10-K for the year ended September 30, 2020, as filed with the Securities and Exchange Commission (the “SEC”) on November 20, 2020, as amended on March 9, 2021. There have been no significant changes to our critical accounting policies and estimates since September 30, 2020.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2 within “Notes to Condensed Consolidated Financial Statements” for a discussion regarding recently issued accounting standards.

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made throughout this report, including statements regarding the effect of the COVID-19 pandemic on our business and our continuing response to the COVID-19 pandemic. These forward-looking statements are sometimes identified from the use of forward-looking words such as “believe,” “should,” “could,” “potential,” “continue,” “expect,” “project,” “estimate,” “predict,” “anticipate,” “aim,” “intend,” “plan,” “forecast,” “target,” “is likely,” “will,” “can,” “may” or “would” or the negative of these terms or similar expressions elsewhere in this report. Our results of operations, financial condition and cash flows may differ materially from those in the forward-looking statements. Such statements are based on management’s current views and assumptions and involve risks and uncertainties that could affect expected results. Those risks and uncertainties include, but are not limited to, the following:

• the impact of the COVID-19 pandemic, including negative impacts on the global economy and capital markets, the health of our employees, our ability and the ability of our third party manufacturers to manufacture and deliver our products, operating costs, demand for our on-the-go products and our operations generally;
• our dependence on sales from our RTD protein shakes;
• our ability to continue to compete in our product categories and our ability to retain our market position and favorable perceptions of our brands;
• our dependence on a limited number of third party contract manufacturers for the manufacturing of most of our products, including one manufacturer for the substantial majority of our RTD protein shakes;
• the ability of our third party contract manufacturers to produce an amount of our products that enables us to meet customer and consumer demand for the products;
• our ability to maintain the net selling prices of our products and manage promotional activities with respect to our products;
• our reliance on a limited number of third party suppliers to provide certain ingredients and packaging;
• significant volatility in the cost or availability of inputs to our business (including freight, raw materials, packaging, energy and other supplies);
• our ability to anticipate and respond to changes in consumer and customer preferences and behaviors and introduce new products;
• disruptions or inefficiencies in our supply chain, including as a result of our reliance on third party suppliers or manufacturers for the manufacturing of many of our products, pandemics (including the COVID-19 pandemic) and other outbreaks of contagious diseases, fires and evacuations related thereto, changes in weather conditions, natural disasters, agricultural diseases and pests and other events beyond our control;
• consolidation in our distribution channels;
• our ability to expand existing market penetration and enter into new markets;
• allegations that our products cause injury or illness, product recalls and withdrawals and product liability claims and other litigation;
• legal and regulatory factors, such as compliance with existing laws and regulations, as well as new laws and regulations and changes to existing laws and regulations and interpretations thereof, affecting our business, including current and future laws and regulations regarding food safety, advertising and labeling;
• our ability to identify, complete and integrate or otherwise effectively execute acquisitions or other strategic transactions and effectively manage our growth;
• fluctuations in our business due to changes in our promotional activities and seasonality;
• risks associated with our international business;
• the loss of, a significant reduction of purchases by or the bankruptcy of a major customer;
• the ultimate impact litigation or other regulatory matters may have on us;
• the accuracy of our market data and attributes and related information;
• changes in estimates in critical accounting judgments;
• economic downturns that limit customer and consumer demand for our products;
• changes in economic conditions, disruptions in the U.S. and global capital and credit markets, changes in interest rates, volatility in the market value of derivatives and fluctuations in foreign currency exchange rates;
• our ability to protect our intellectual property and other assets and to continue to use third party intellectual property subject to intellectual property licenses;
• costs, business disruptions and reputational damage associated with information technology failures, cybersecurity incidents and/or information security breaches;
• impairment in the carrying value of goodwill or other intangibles;
• our high leverage, our ability to obtain additional financing (including both secured and unsecured debt) and our ability to service our outstanding debt (including covenants that restrict the operation of our business);
• risks related to our ongoing relationship with Post, including Post’s control over us and ability to control the direction of our business, conflicts of interest or disputes that may arise between Post and us, our obligations under various agreements with Post, including under the tax receivable agreement, and Post’s proposed plan to distribute its interest in us;
• risks associated with our public company status, including the additional expenses we will continue to incur to create and maintain the corporate infrastructure to operate as a public company;
• our ability to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002;
• significant differences in our actual operating results from our guidance regarding our performance;
• our ability to hire and retain talented personnel, employee absenteeism, labor strikes, work stoppages or unionization efforts; and
• other risks and uncertainties included under “Risk Factors” in this report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on November 20, 2020, as amended on March 9, 2021.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

The COVID-19 pandemic has resulted in significant volatility and uncertainty in the markets in which the Company operates. At the time of this filing, the COVID-19 pandemic has not had, and the Company does not currently believe will have, a significant impact on its exposure to market risk from commodity prices, foreign currency exchange rates and interest rates, among others. For additional discussion, refer to “Liquidity and Capital Resources” and “Cautionary Statement on Forward-Looking Statements” in Item 2 of Part I of this report, as well as “Risk Factors” in Item 1A of Part II of this report.

Commodity Price Risk

In the ordinary course of business, the Company is exposed to commodity price risks relating to the purchases of raw materials. The Company manages the impact of cost increases, wherever possible, on commercially reasonable terms, by locking in prices on the quantities through purchase commitments required to meet production requirements. In addition, the Company may attempt to offset the effect of increased costs by raising prices to customers, which it did on certain products during the third quarter of fiscal 2021. However, for competitive reasons, the Company may not be able to pass along the full effect of increases in raw materials and other input costs as they are incurred.

Foreign Currency Risk

Related to Active Nutrition International GmbH whose functional currency is the Euro, the Company is exposed to risks of fluctuations in future cash flows and earnings due to changes in exchange rates.

Interest Rate Risk

Long-term debt

As of June 30, 2021 and September 30, 2020, BellRing LLC had aggregate principal amounts of $618.7 million and $673.7 million outstanding on its Term B Facility, respectively, and aggregate principal amounts of zero and $30.0 million outstanding under its Revolving Credit Facility, respectively. Borrowings under the Term B Facility and the Revolving Credit Facility bear interest at variable rates. Including the impact of interest rate swaps, a hypothetical 10% increase in interest rates would have an immaterial impact on both interest expense and interest paid during each of the three and nine months ended June 30, 2021 and 2020. For additional information regarding BellRing LLC’s debt, see Note 16 within “Notes to Condensed Consolidated Financial Statements.”

Interest rate swaps

As of both June 30, 2021 and September 30, 2020, the Company had interest rate swaps with a notional value of $350.0 million. A hypothetical 10% adverse change in interest rates would have an immaterial impact on the fair value of the interest rate swaps as of both June 30, 2021 and September 30, 2020. For additional information regarding the Company’s interest rate swap contracts, see Note 14 within “Notes to Condensed Consolidated Financial Statements.”

Evaluation of Disclosure Controls and Procedures

Management, with the Executive Chairman, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the Company, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Executive Chairman, CEO and CFO concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance of achieving the desired control objectives.

Changes in Internal Control Over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the information set forth elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”) and the risk factor set forth below, you should carefully consider the risk factors we previously disclosed in our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission on November 20, 2020, as of and for the year ended September 30, 2020, as amended (the “Annual Report”). Other than the additional risk factor disclosed herein, as of the date of this Quarterly Report, there have been no material changes to the risk factors previously disclosed in the Annual Report. These risks could materially and adversely affect our business, financial condition, results of operations and cash flows. The enumerated risks have been or may be heightened, or in some cases manifested, by the impacts of the COVID-19 pandemic and are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition, results of operations and cash flows.

Post’s proposed plan to distribute its interest in us is subject to inherent risks.

Post intends to distribute a significant portion of its interest in us to Post’s shareholders under a plan of distribution that could include a pro-rata distribution, an exchange offer or a combination of both. This proposed plan is subject to certain conditions, including the approval of our stockholders and the receipt of certain regulatory approvals. No assurance can be given that any of the foregoing conditions will be met. The proposed plan is subject to inherent risks and uncertainties, including, among others: risks that the proposed plan as a whole will not be consummated or that the distribution of our Class A common stock will not be consummated; increased levels of indebtedness and leverage; increased demands on our management and employees to accomplish the proposed plan; and significant transaction costs. In addition, no assurance can be given that the market will react favorably to the proposed plan or any of the transactions contemplated thereby.