The Simply Good Foods Company (SMPL) — Q3 FY2023 Form 10-Q
Reporting period: The 13 weeks ended May 27, 2023, with year-to-date comparisons covering the 39 weeks ended that date. Comparative periods ended May 28, 2022. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Simply Good Foods sells nutrition-focused snacks and meal replacements, principally under the Atkins and Quest brands, through retail and other channels, primarily in North America.
Financial results
| Metric | Q3 FY2023 | Q3 FY2022 | 39 weeks FY2023 | 39 weeks FY2022 |
|---|---|---|---|---|
| Net sales | $324.8 | $316.5 | $922.3 | $894.5 |
| Gross profit / margin | $119.2 / 36.7% | $118.6 / 37.5% | $333.0 / 36.1% | $343.7 / 38.4% |
| Operating income | $54.2 | $55.3 | $149.2 | $159.2 |
| Net income | $35.4 | $38.8 | $96.9 | $78.4 |
| Diluted EPS | $0.35 | $0.38 | $0.96 | $0.78 |
| Adjusted EBITDA (non-GAAP) | $66.6 | $63.3 | $178.3 | $183.1 |
- Sales mix: Q3 North America sales rose 2.6%; Atkins sales were $142.1 million and Quest sales were $174.5 million. For the 39 weeks, North America sales increased 3.5%, while international sales declined 8.9%. The company also cited a sales-growth headwind from shifting Quest frozen pizza from direct sales to licensing.
- Margins and costs: Q3 gross margin fell 80 basis points year over year; the 39-week margin fell 230 basis points. Higher raw-material, packaging and co-manufacturing costs, along with supply-chain challenges, outweighed some benefit from prior price increases.
- Profit comparison: Q3 net income declined $3.4 million, including higher interest expense. Year-to-date net income rose despite lower operating income, primarily because the prior-year period included a $30.1 million non-cash warrant fair-value loss. Year-to-date Adjusted EBITDA declined 2.6%.
- Cash flow: For the 39 weeks, operating cash flow was $110.4 million, investing cash outflow was $10.4 million, and financing cash outflow was $98.6 million. Operating cash flow improved from $67.4 million, helped by lower cash taxes and less working-capital cash use; cash interest paid increased to $21.3 million from $14.3 million.
Financial position and capital allocation
- At May 27, 2023, cash was $68.8 million; current assets were $349.8 million and current liabilities were $71.3 million.
- Long-term debt, net of financing fees, was $320.9 million, compared with $403.0 million at August 27, 2022. The term loan principal was $325.0 million and its effective rate was 7.7%. No revolving credit borrowings were outstanding; $3.5 million of letters of credit reduced the $75 million facility availability. The company reported covenant compliance.
- On April 25, 2023, the company repriced its term loan and extended maturity from July 2024 to March 17, 2027. It incurred $2.4 million of transaction fees and capitalized $2.7 million of lender fees. No new debt proceeds were received.
- Year-to-date capital expenditures were $10.1 million. The company repurchased 546,346 shares for $16.4 million during the 39 weeks, but none in Q3; approximately $71.5 million remained authorized for repurchases.
Outlook, risks and contingencies
- Management expected inflation-related cost pressures and supply-chain challenges to continue through the remainder of FY2023. Price increases and cost-saving initiatives were expected to offset these pressures only partially; the filing gives no specific earnings or sales guidance.
- Management said it expected to meet customer orders and believed available liquidity would support operations, its growth strategy and expected expenses for at least the next 12 months.
- Risks highlighted include higher ingredient, packaging, manufacturing and logistics costs; labor or supply disruptions; inflation and possible recession affecting consumer demand; and the effects of the Ukraine conflict on raw-material availability and cost. Management cautioned that price increases may not fully offset cost inflation.
- The company reported no litigation it believed material and no material changes to the risk factors in its prior annual report. It expected $3.3 million of endorsement-contract payments over the next year. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Most important facts for investors to verify
- Whether price increases and cost initiatives can stabilize gross margins as elevated input and supply-chain costs persist.
- Whether North American growth can continue amid weaker international sales and the frozen-pizza licensing transition.
- How floating interest rates affect interest expense and cash generation despite the lower debt balance and extended maturity.
- Whether operating cash flow remains sufficient to fund investment, debt service and any future share repurchases.
- Adjusted EBITDA is non-GAAP; compare it with GAAP results and review the company’s reconciliation and exclusions.