The Simply Good Foods Company — Q1 Fiscal 2021 10-Q
Reporting period: Thirteen weeks ended November 28, 2020; comparison is the thirteen weeks ended November 30, 2019. The company sells better-for-you snacks and meal replacements under the Atkins and Quest brands, principally in North America.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Net sales | $231.2 million | $152.2 million |
| Gross profit / margin | $94.0 million / 40.7% | $62.2 million / 40.9% |
| Operating income (loss) | $39.2 million | $(3.0) million |
| Net income (loss) | $22.5 million | $(4.8) million |
| Diluted EPS | $0.23 | $(0.05) |
| Adjusted EBITDA (non-GAAP) | $48.7 million | $31.8 million |
| Operating cash flow | $15.2 million | $(7.9) million |
- Sales rose 51.9%; management attributed 51.7 percentage points of growth to the Quest acquisition. Atkins and other legacy sales increased 0.2% overall, with international growth partly offset by the SimplyProtein divestiture and COVID-related impacts.
- Quest sales were $95.8 million versus $17.1 million in the prior-year quarter, when Quest was included only from its November 7, 2019 acquisition date. Atkins sales were $122.8 million versus $127.8 million; international sales were $12.6 million versus $7.3 million.
- Gross margin declined 20 basis points, primarily reflecting Quest’s lower margins; the prior-year quarter also included a $2.4 million noncash inventory step-up charge. Operating expenses fell to 23.7% of sales from 42.8%, largely because the prior period included $26.2 million in Quest acquisition transaction costs.
- Interest expense increased to $8.4 million from $5.0 million, mainly due to debt raised to fund the Quest acquisition. The effective tax rate was 27.1%.
- Operating cash flow improved by $23.1 million year over year, mainly from higher pretax income and fewer transaction and integration costs, partly offset by working-capital changes. Investing provided $5.6 million, primarily from the SimplyProtein sale; financing used $25.1 million, including a $25.0 million term-loan repayment. Cash declined $4.3 million to $91.5 million.
Balance sheet and liquidity
- At November 28, 2020, cash was $91.5 million, current assets $279.0 million, and current liabilities $75.4 million.
- Term-facility principal was $581.5 million; reported long-term debt, net of deferred financing fees and current maturities, was $572.9 million. No revolving-credit borrowings were outstanding; the facility provides up to $75 million, subject to terms and covenants. The company reported covenant compliance and no required term-loan principal payments over the following 12 months.
- Management stated that available liquidity was expected to fund operations, growth plans, and expected expenses for at least the next 12 months. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Changes, outlook, and risks
- The prior-year comparison includes only a partial quarter of Quest results and substantial acquisition-related costs, so reported growth and earnings improvement reflect both the acquisition and the different comparison-period composition.
- Management described the quarter’s results as better than expected and cited Quest momentum and progress on strategic initiatives, but gave no specific full-year revenue or earnings guidance in the provided filing text.
- COVID-19 continued to affect consumer mobility, shopping trips, on-the-go usage occasions, and the mass retail channel. Management said Atkins weight-management demand remained softer, while Quest outperformed its portion of the category. The company cited uncertainty around future demand, customer operations, supply-chain disruptions, and possible establishment closures.
- The SimplyProtein brand assets were sold effective September 24, 2020 for approximately $8.8 million of consideration ($5.8 million cash and a $3.0 million note receivable); no gain or loss was recognized. The buyer also assumed certain related liabilities.
- Restructuring and related costs were $2.5 million in the quarter and $8.0 million cumulatively since May 2020. The company expects approximately $9.2 million in total costs, payable through fiscal 2021 and Q1 fiscal 2022.
- Other items to monitor include $1.3 million reserved for potential settlements, $2.9 million of endorsement payments expected over the next year, and a signed lease with approximately $32.2 million of minimum payments that had not yet commenced. Management reported no litigation it believed material and no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much future sales and earnings growth is attributable to Quest versus organic performance, particularly the trajectory of Atkins.
- Whether gross margin stabilizes as Quest becomes a larger share of sales, and the effects of product mix, promotions, and input costs.
- Debt repayment capacity, interest expense, covenant headroom, and the availability and terms of the revolving facility.
- The cash-flow impact of working capital, restructuring payments, the SimplyProtein note receivable, and the uncommenced lease.
- Whether COVID-related consumer and channel changes, supply constraints, or other risks materially alter demand or the company’s outlook.