The Simply Good Foods Company — Q1 FY2022 Form 10-Q
Reporting period: Thirteen weeks ended November 27, 2021; comparisons are with the thirteen weeks ended November 28, 2020 unless noted. The company sells nutritious snacks and meal replacements under Atkins and Quest, primarily in North America. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $281.3 million | $231.2 million | Up 21.7% |
| Gross profit / margin | $116.6 million / 41.4% | $94.0 million / 40.7% | Margin up 70 basis points |
| Operating income / margin | $58.0 million / 20.6% | $39.2 million / 17.0% | Improved |
| Net income / margin | $21.2 million / 7.5% | $43.0 million / 18.6% | Down; substantially affected by warrant fair-value change |
| Basic / diluted EPS | $0.22 / $0.22 | $0.45 / $0.23 | Diluted EPS is affected by warrant accounting and dilution |
| Adjusted EBITDA (non-GAAP) | $65.6 million | $48.7 million | Up 34.7%; margin 23.3% versus 21.1% |
| Operating cash flow | $(7.3) million | $15.2 million | Lower due mainly to working-capital movements |
| Cash and equivalents | $35.4 million | $75.3 million at August 28, 2021 | Quarter-end balance |
| Debt | $431.5 million term facility principal; $427.3 million total debt net of financing fees | $456.5 million term facility principal at August 28, 2021 | $25.0 million principal repaid during the quarter |
Business and material changes
- North America sales increased 24.5%. Atkins sales were $133.8 million, up from $122.8 million; Quest sales were $138.3 million, up from $95.8 million. International sales fell 27.3% to $9.2 million, with the European exit cited as a 1.6% headwind to total company sales growth.
- Management attributed growth to retail and e-commerce volume gains for both brands, improving consumer mobility and store traffic, increased household penetration, product innovation, and a September 2021 price increase.
- Gross margin expanded despite higher raw material and logistics costs and supply-chain challenges. Favorable pricing and product-form and retail-channel mix more than offset those pressures during the quarter.
- Operating expenses rose 6.7% to $58.5 million. Higher selling and marketing spending for brand-building was partly offset by lower general and administrative costs, including fewer integration and restructuring costs.
- Net income fell primarily because the company recorded a $17.3 million non-cash loss from remeasuring liability-classified private warrants, compared with a $20.5 million non-cash gain in the prior-year quarter. The warrant loss also contributed to a higher effective tax rate, reported at 37.7% versus 16.3%.
Liquidity, debt and cash flow
- Cash declined by $39.7 million during the quarter. Operating activities used $7.3 million, investing activities used $4.4 million, and financing activities used $28.0 million, including $25.0 million of term-debt repayments and $3.2 million in taxes related to equity awards.
- Operating cash flow was pressured by seasonal inventory building and timing-related working-capital outflows, including accounts receivable, accounts payable, and accrued expenses. Inventory increased to $112.4 million from $97.3 million at fiscal year-end.
- No borrowings were outstanding under the $75.0 million revolving credit facility at quarter-end; $3.5 million of letters of credit reduced availability. The term facility carried an effective rate of 4.8%, and its $431.5 million principal balance is due at maturity in July 2024. The company reported compliance with its financial covenants.
- Management said available liquidity and capital resources were expected to support operations, its growth strategy, and anticipated expenses for at least the next twelve months. Effective December 16, 2021, a subsequent amendment extended the revolving facility maturity from July 2022 to the earlier of 91 days before the term-loan maturity or December 16, 2026.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expected higher raw material and logistics costs in fiscal 2022 and said it would continue assessing ways to mitigate input-cost inflation. A price increase effective September 2021 and productivity initiatives were intended to help offset costs and fund growth.
- Management reported logistics challenges that had contributed to out-of-stocks, delayed sales recognition, and higher-than-historical inventory. Further ingredient, packaging, labor, contract-manufacturer, or customer-stocking disruptions could result in lost sales.
- COVID-19 effects remained uncertain. Management cited potential new variants, renewed mobility restrictions, supply-chain and labor disruption, changes in customer operations, and a reversal in improving consumer purchasing behavior. It believed it could meet customer orders at acceptable levels based on information available when the report was filed.
- Private warrants held by a related party allow purchase of 6.7 million shares at $11.50 per share and expire July 7, 2022, subject to earlier redemption or liquidation. Their liability is remeasured using a valuation model with significant unobservable inputs; changes can materially affect reported earnings. The reported quarter-end warrant liability was $177.2 million.
- Restructuring costs were immaterial in the quarter; cumulative costs were $9.9 million, against an expected total of approximately $10.1 million, with the remaining balance expected to be paid through Q2 FY2022. The company reported no litigation it believed material and no material changes to the risk factors in its prior annual report.
Important facts for investors to verify
- Whether sales growth, pricing, and favorable mix can continue to offset higher input, logistics, and supply-chain costs, and whether out-of-stocks are affecting demand.
- How much of the quarter’s cash-flow weakness reflects timing and seasonal working capital, and whether working capital converts to cash in subsequent periods.
- The impact of private-warrant remeasurement and potential warrant exercise or expiry on earnings, share count, and liquidity; distinguish these non-cash effects from operating performance.
- Debt repayment capacity, term-loan maturity in July 2024, revolving-facility availability, and compliance with credit-agreement covenants.
- The filing reports a $0.7 million reserve for potential settlements and $2.1 million of endorsement payments due over the next year; monitor changes to these commitments and contingencies.