The Simply Good Foods Company — Q3 Fiscal 2021 Form 10-Q
Reporting period: The 13 weeks ended May 29, 2021; year-to-date figures cover 39 weeks. The company sells nutritious snacks and meal replacements under its Atkins and Quest brands, primarily in North America.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $284.0 million | $215.1 million | $745.8 million | $594.4 million |
| Gross profit / margin | $121.0 million / 42.6% | $88.6 million / 41.2% | $305.3 million / 40.9% | $236.2 million / 39.7% |
| Operating income / margin | $60.3 million / 21.2% | $31.1 million / 14.5% | $132.9 million / 17.8% | $53.4 million / 9.0% |
| Net income | $5.9 million | $48.1 million | $22.6 million | $104.9 million |
| Adjusted EBITDA (non-GAAP) | $67.5 million | $43.4 million | $158.8 million | $116.9 million |
- Quarterly sales rose 32.0%; year-to-date sales rose 25.5%. Quest was the principal growth driver. Q3 Quest sales were $127.1 million versus $87.2 million; Atkins sales were $146.1 million versus $121.9 million. E-commerce also grew across both brands.
- Gross margin improved 140 basis points in Q3, attributed primarily to product-form and retail-channel mix, and 120 basis points year to date, primarily because the prior-year period included a $7.5 million non-cash Quest inventory step-up charge.
- Q3 net income fell despite higher sales and operating income, chiefly because the company recorded a $35.8 million non-cash loss from remeasuring its private warrant liability, compared with a $31.7 million gain a year earlier. Year-to-date warrant remeasurement was a $60.7 million loss versus an $82.7 million gain.
- Q3 diluted EPS was $0.06 versus $0.17; year-to-date diluted EPS was $0.23 versus $0.23. The filing’s EPS calculation adjusts the diluted numerator for warrant fair-value gains when applicable.
Cash flow, balance sheet, and debt
- Operating cash flow for the 39 weeks was $91.5 million, compared with $24.1 million in the prior-year period. Investing cash flow was positive $2.5 million, including $5.8 million cash proceeds from the SimplyProtein sale. Financing cash flow was negative $99.9 million, primarily reflecting $100.0 million of term-debt principal payments.
- Cash was $90.2 million at May 29, 2021, down from $95.8 million at August 29, 2020. Current assets were $309.6 million and current liabilities $98.0 million.
- Term Facility principal was $506.5 million; reported debt net of deferred financing fees and including finance leases was $500.4 million. The term loan’s effective rate was 4.8%, maturity is July 2024, and no term-loan principal payments are required during the next 12 months. The $75 million revolver was undrawn; $3.5 million of letters of credit reduced availability. The company reported compliance with financial covenants.
- Management said cash and available financing were sufficient for operations, growth plans, and expected expenses for at least the next 12 months.
Changes, outlook, and risks
- Comparisons are affected by Quest’s acquisition: Quest was included for only part of the prior-year period. Year-to-date sales growth therefore reflects both a longer period of Quest consolidation and Quest sales growth. Prior-year results also included $26.9 million of Quest acquisition transaction costs.
- Management cited greater consumer mobility and improving store traffic, especially in mass and convenience channels, as supporting Q3 sales, particularly bars. Quest outperformed its segment; Atkins improved sequentially, but at a slower rate. Management said it expected to meet customer orders, while noting continuing COVID-19 uncertainty, including potential supply disruptions and changes in customer or consumer behavior.
- Management expected higher raw-material and freight costs from fiscal Q4 2021 and in fiscal 2022. Customers were notified of a planned price increase effective September 2021; the company was assessing other ways to mitigate input-cost inflation. No specific full-year revenue or earnings guidance is provided in the filing.
- The company recorded a $5.0 million Q3 legal-settlement gain. It reported no litigation believed to be material. Restructuring and related costs were $4.0 million year to date, with about $0.4 million of expected additional costs implied by the stated $9.9 million total estimate and $9.5 million incurred to date; the company expected the remaining costs to be paid through fiscal 2021 and Q1 fiscal 2022.
- The SimplyProtein brand assets were sold in September 2020 for approximately $8.8 million of consideration, including $5.8 million cash and a $3.0 million note receivable; no gain or loss was recognized. Management said the sale would focus resources on Atkins, Quest, and other initiatives.
- Following SEC guidance on SPAC warrants, the company classified its 6.7 million private warrants as liabilities and remeasured them through earnings. It restated prior financial statements in amended filings. The company disclosed a material weakness in internal controls over financial reporting related to warrant accounting; management nevertheless concluded current disclosure controls were effective and the financial statements fairly stated in all material respects.
Most important facts for investors to verify
- How much of Quest’s reported growth reflects underlying demand versus the longer comparative consolidation period, and how Atkins trends develop.
- Whether planned pricing offsets higher input and freight costs without materially affecting volume, promotions, or margins.
- The effect of future private-warrant fair-value changes on reported earnings, the status of warrant-accounting remediation, and any further restatements.
- Progress on debt reduction, refinancing or repayment ahead of the July 2024 maturity, and compliance with credit-facility covenants.
- Whether COVID-related demand and supply-chain risks, restructuring costs, and the $3.0 million SimplyProtein note receivable develop as expected.