Simply Good Foods Co. — Q3 FY2022 Form 10-Q
Business context and reporting period: The company sells nutritious snacks and meal replacements under Atkins and Quest, primarily in North America. This unaudited quarterly report covers the 13 weeks ended May 28, 2022; year-to-date figures cover 39 weeks. Comparisons are with the periods ended May 29, 2021.
Financial performance
| Metric | Q3 FY2022 | 39 weeks FY2022 |
|---|---|---|
| Net sales | $316.5 million, up 11.5% | $894.5 million, up 19.9% |
| Gross profit and margin | $118.6 million; 37.5%, down 510 basis points | $343.7 million; 38.4%, down 250 basis points |
| Operating income | $55.3 million, versus $60.3 million | $159.2 million, versus $132.9 million |
| Net income / diluted EPS | $38.8 million / $0.38 | $78.4 million / $0.78 |
| Adjusted EBITDA | $63.3 million, down 6.2% | $183.1 million, up 15.3% |
| Operating cash flow | Not provided for the quarter | $67.4 million, versus $91.5 million |
Sales gains reflected increased Atkins and Quest retail and e-commerce volume and the September 2021 price increase. Higher raw-material, freight and logistics costs, together with supply constraints, pressured gross margin. Q3 net income’s sharp increase was principally due to a prior-year $35.8 million noncash warrant remeasurement loss and should not be read as equivalent growth in underlying operations; Q3 Adjusted EBITDA declined.
Cash, debt and liquidity
- Cash was $56.7 million at May 28, 2022, down from $75.3 million at August 28, 2021. Year-to-date operating cash flow was $67.4 million; investing used $7.3 million and financing used $78.5 million.
- Operating cash flow fell year over year amid working-capital cash use of $44.2 million (versus $24.1 million) and cash taxes of $43.4 million (versus $15.3 million).
- Term Facility principal was $406.5 million; reported long-term debt, net of financing fees and current maturities, was $402.6 million. The term loan matures in July 2024, with no required principal payments over the following 12 months. The effective rate was 4.7% at period-end.
- The $75 million revolving facility had no borrowings; $3.5 million of letters of credit reduced availability. The company reported covenant compliance and stated it expects liquidity to cover operations and needs for at least 12 months.
Material changes and unusual items
- North American sales rose 12.9% in Q3 and 22.2% year to date; international sales declined 25.1% and 25.9%, respectively, primarily reflecting the European exit.
- Debt principal was reduced by $50 million year to date. A January 2022 repricing lowered the applicable term-loan rate and replaced LIBOR reference provisions with SOFR provisions.
- Private warrants were exercised cashlessly in January, resulting in 4.83 million shares issued and eliminating the warrant liability. Year-to-date results still include a $30.1 million noncash warrant fair-value loss, compared with $60.7 million in the prior-year period.
- The company repurchased 789,742 shares for $28.5 million year to date and had approximately $69.3 million remaining under its expanded $100 million authorization.
- The prior-year comparable periods included a $5 million legal-settlement gain. The company substantially completed its restructuring in Q3; aggregate restructuring and related costs since the 2020 announcement were $9.9 million.
Outlook, commentary and risks
No numerical sales, earnings or margin guidance is provided. Management expects supply-chain challenges and elevated raw-material, freight and logistics costs to persist through the rest of FY2022 and into FY2023. An additional price increase was planned for late in Q4 FY2022; management said price increases and productivity initiatives should help offset cost pressures and support growth investment. The company said it expected to meet customer orders for the foreseeable future, while noting that out-of-stocks and delays had affected sales and inventory levels.
Key uncertainties include persistent supply and labor disruptions, inflation and consumer purchasing behavior, COVID-19-related changes, and potential effects of the Ukraine conflict on raw-material availability and cost. Management stated that no litigation was believed material and that there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether planned pricing and productivity actions offset inflation without materially weakening demand or volume.
- Whether supply, labor and logistics constraints improve, including the effect of out-of-stocks on sales and inventory.
- Underlying earnings and margin trends apart from noncash warrant remeasurement and other prior-period unusual items.
- Cash conversion and working-capital needs, and the company’s capacity to address the July 2024 term-loan maturity.
- The continuation and pace of share repurchases relative to cash generation and debt reduction.