The Simply Good Foods Company — Fiscal 2021 Second-Quarter 10-Q
Reporting period: The 13 weeks ended February 27, 2021, with six-month results for the 26 weeks ended that date. Comparisons are with the periods ended February 29, 2020. The company sells better-for-you snacks and meal replacements, principally under the Atkins and Quest brands.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $230.6 million, up 1.5% | $461.8 million, up 21.8% |
| Gross profit / margin | $90.3 million / 39.1%, versus 37.6% | $184.3 million / 39.9%, versus 38.9% |
| Operating income | $33.3 million, versus $25.3 million | $72.5 million, versus $22.3 million |
| Net income | $19.1 million, versus $10.7 million | $41.6 million, versus $5.9 million |
| Diluted EPS | $0.19, versus $0.11 | $0.41, versus $0.06 |
| Adjusted EBITDA (non-GAAP) | $42.6 million, up 2.2% | $91.3 million, up 24.2% |
For the quarter, operating margin was 14.5%, versus 11.1%; net margin was 8.3%, versus 4.7%. For the six months, operating margin was 15.7%, versus 5.9%; net margin was 9.0%, versus 1.5%. Six-month comparisons are affected by Quest being included for only part of the prior-year period and by $26.9 million of prior-year Quest acquisition transaction costs.
Cash flow and liquidity: Six-month operating cash flow was $39.8 million, compared with cash used of $14.9 million. Investing activities provided $5.2 million, primarily reflecting $5.8 million cash proceeds from the SimplyProtein sale. Financing activities used $49.9 million, primarily for $50.0 million of term-debt principal repayment. Cash decreased $4.9 million to $91.3 million. Current assets were $289.1 million and current liabilities $80.6 million.
Debt: Term-facility principal was $556.5 million; reported total debt, net of financing fees and including finance leases, was $549.2 million. The company had no revolving-credit borrowings and $4.2 million of letters of credit against its $75 million facility. The term facility matures in July 2024; no term-loan principal payments were required over the next 12 months. The company reported compliance with financial covenants.
Material changes and notable items
- Quarterly sales growth was driven principally by Quest and e-commerce across both core brands. Atkins sales declined year over year; Quest sales rose to $105.0 million from $88.3 million.
- Six-month sales growth primarily reflected Quest’s fuller inclusion in the current period and post-acquisition growth. Atkins North America sales were $236.9 million for the six months, compared with $259.2 million.
- Gross margin improved in both comparisons. Management attributed this largely to the absence of prior-year noncash Quest inventory purchase-accounting step-up costs; higher trade promotions partly offset the benefit.
- The company sold SimplyProtein assets in September 2020 for approximately $8.8 million of consideration ($5.8 million cash and a $3.0 million note receivable), with no gain or loss recognized. Management said the sale allows greater focus on Atkins and Quest.
- Restructuring and related costs were $3.8 million for the six months. The company had incurred $9.3 million since May 2020 and expected total costs of approximately $10.0 million, payable through fiscal 2021 and the first quarter of fiscal 2022.
Outlook, commentary, and risks
- Management expected overall marketplace trends to improve in the second half of fiscal 2021 as mobility and on-the-go consumption increased. It provided no specific revenue or earnings guidance in the supplied filing text.
- COVID-19 continued to affect shopping trips and usage occasions, particularly in the mass channel and for portable bars. Management described Atkins weight-management demand as softer and Quest as outperforming its portion of the category. It said it expected to meet customer orders for the foreseeable future, while emphasizing uncertainty around the pandemic, variants, supply disruptions, customer operations, and consumer behavior.
- Management said input costs were not expected to meaningfully harm fiscal 2021 results, but it was seeing inflationary pressure in planning fiscal 2022 requirements and assessing mitigation options.
- Other investor considerations include $32.2 million of minimum payments on a lease not yet commenced, approximately $2.8 million of endorsement payments due over the next year, and $0.7 million reserved for potential settlements. The company said it knew of no litigation it believed could materially adversely affect it.
Important facts to verify
- How much of reported growth reflects Quest’s different year-over-year inclusion period versus underlying organic demand, and whether Quest momentum can offset weaker Atkins performance.
- Whether gross-margin improvement persists after the prior-year inventory step-up comparison rolls off, particularly given trade promotions and input-cost inflation.
- Whether cash generation remains adequate as working-capital needs, restructuring payments, lease commitments, and debt service evolve.
- Progress toward completing restructuring within the approximately $10.0 million estimated total and the expected timing of remaining charges and payments.
- Potential effects of COVID-19, consumer mobility, supply-chain conditions, and fiscal 2022 input-cost pressures on sales and profitability.