Simply Good Foods Co. — FY2020 Form 10-K Summary
Business and period: Simply Good Foods sells nutrition and better-for-you snacks under the Atkins and Quest brands. This annual report covers the 52 weeks ended August 29, 2020; the comparison period ended August 31, 2019 was 53 weeks. Quest was acquired on November 7, 2019, so FY2020 results include Quest only from the acquisition date. Figures below are in U.S. dollars.
Financial performance
| Metric | FY2020 | Prior comparable period |
|---|---|---|
| Net sales | $816.6 million | $523.4 million |
| Gross profit / margin | $324.3 million / 39.7% | $217.4 million / 41.5% |
| Operating income / margin | $78.2 million / 9.6% | $72.8 million / 13.9% |
| Net income / diluted EPS | $34.7 million / $0.35 | $47.5 million / $0.56 |
| Adjusted EBITDA (non-GAAP) | $153.9 million / 18.8% of sales | $98.7 million / 18.9% of sales |
| Operating cash flow | $58.9 million | $73.0 million |
| Cash and cash equivalents, year-end | $95.8 million | $266.3 million |
| Term debt, principal outstanding, year-end | $606.5 million | $196.5 million |
Sales rose 56.0%, primarily reflecting Quest, which contributed $286.8 million in sales after acquisition; management attributed 54.8 percentage points of the reported increase to the acquisition. Atkins sales increased 1.2%. Growth comparisons are affected by the extra week in FY2019. Gross margin fell 180 basis points, mainly due to a $7.5 million Quest inventory step-up charge and Quest’s slightly lower gross margins. Net income declined 27.0%, reflecting higher operating costs and interest expense, including acquisition-related costs and financing.
FY2020 operating expenses included $27.1 million of business transaction costs, $10.7 million of Quest integration costs, $5.5 million of restructuring charges, and a $3.0 million SimplyProtein brand impairment charge. Adjusted EBITDA increased 55.9%, but its margin was approximately flat year over year. The company reported diluted EPS of $0.35 versus adjusted diluted EPS of $0.91; the latter is a company-defined non-GAAP measure and includes substantial adjustments.
Liquidity, cash flow, debt, and capital
- Cash from operations was $58.9 million, down $14.1 million, with management citing transaction and integration costs and working-capital changes.
- Investing cash outflow was $984.0 million, primarily the $982.1 million net cash cost of the Quest acquisition. Financing provided $754.7 million, including equity proceeds and new term borrowing.
- At year-end, current assets were $260.3 million and current liabilities were $71.5 million. The $75 million revolving facility had no borrowings outstanding; $5.9 million of letters of credit reduced availability.
- The $606.5 million term loan bears variable interest, with a disclosed effective rate of 4.8% at year-end, and matures in 2024. The company reported compliance with debt covenants and no required term-loan principal payments during the following 12 months. Management stated liquidity was adequate for at least the next 12 months.
- Management estimated a 1 percentage-point increase in interest rates would increase annual interest expense by approximately $6.4 million, assuming average variable-rate debt levels.
- The company issued shares for approximately $350 million net in October 2019 to help fund Quest. It paid no dividends and made no share repurchases in FY2020; $47.9 million remained under its repurchase authorization.
Material developments, outlook, and risks
- COVID-19: Initial pantry loading was followed by fewer shopping trips and on-the-go occasions, particularly affecting bars and the mass channel. Trends improved as restrictions eased but plateaued in the fourth quarter. Quest outperformed its category share, while Atkins remained softer amid reduced weight-management interest and mass-channel traffic. Management said pandemic effects and demand patterns remained uncertain for FY2021; the filing gives no quantified sales or earnings guidance.
- Restructuring: A new integrated organization became effective August 31, 2020. Total restructuring costs were expected to be approximately $8.1 million, including $5.5 million recognized in FY2020; remaining severance payments were expected through FY2021 and the first quarter of FY2022.
- SimplyProtein sale: On September 24, 2020, the company sold the brand’s assets for approximately $8.8 million—$5.8 million cash and a $3.0 million note receivable—with the buyer assuming certain liabilities. This was a subsequent event, after fiscal year-end.
- Concentration and execution risks: Walmart represented approximately 34% of FY2020 sales and Amazon approximately 10%. The business relies on a limited retailer base, contract manufacturers, and a single U.S. logistics provider. Other stated risks include changing consumer preferences, competition, ingredient and packaging costs, food safety and labeling regulation, acquisition integration, and variable-rate debt.
- Contingencies and controls: The company reported no litigation it considered material, but had $1.3 million reserved for potential settlements at year-end. The financial statement audit and internal-control audit opinions were unqualified. Quest, representing 47.8% of consolidated assets and 35.1% of sales, was excluded from management’s internal-control assessment because it had been recently acquired.
Key facts investors should verify
- How much reported growth and future earnings depend on Quest, and whether integration benefits and synergies are being realized.
- Whether COVID-era changes in channel traffic, consumer usage, and Atkins demand persisted or reversed after year-end.
- Cash conversion, working-capital requirements, and debt repayment capacity given lower operating cash flow, higher interest expense, and variable-rate exposure.
- Retailer concentration and customer purchasing commitments, particularly Walmart’s share of sales and the at-will nature of retailer arrangements.
- The accounting explanation for the $3.0 million SimplyProtein impairment: the filing states the quantitative assessment found fair value exceeded carrying value, yet also reports an impairment charge.
- The final Quest purchase-price allocation and the performance of acquired intangible assets, including the significant goodwill and brand values recorded.
- The company’s FY2021 restructuring costs, cash obligations, and proceeds and collectability of the note receivable from the SimplyProtein sale.