Business context and reporting period
The Simply Good Foods Company (Nasdaq: SMPL) is a consumer packaged food and beverage company focused on nutritional snacks and meal replacements under the Atkins and Quest brands. This Form 10-K covers the 52-week fiscal year ended August 27, 2022; it is an annual report, not a standalone fiscal fourth-quarter report. The filing does not provide a clear standalone Q4 financial results table. The company reported one consolidated operating and reportable segment following further integration of Atkins and Quest.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $1,168.7 million | $1,005.6 million |
| Gross profit / margin | $445.6 million / 38.1% | $409.8 million / 40.7% |
| Operating income / margin | $202.8 million / 17.3% | $173.7 million / 17.3% |
| Net income | $108.6 million | $40.9 million |
| Diluted EPS | $1.08 | $0.42 |
| Adjusted EBITDA (non-GAAP) | $234.0 million / 20.0% of sales | $207.3 million / 20.6% of sales |
| Cash from operations | $110.6 million | $132.1 million |
At August 27, 2022, cash was $67.5 million, total current assets were $351.6 million and current liabilities were $102.2 million. Term-loan principal was $406.5 million, with no revolver borrowings and up to $75 million of revolving capacity (subject to $3.5 million of letters of credit). The term loan carried a 6.2% effective rate and matures in July 2024; no term-loan principal payments were required in the following 12 months. The company reported compliance with its financial covenants. A 1 percentage-point rate increase was estimated to add about $4.1 million to annual interest expense.
Cash used in investing was $8.2 million, including $5.2 million of property and equipment purchases. Cash used in financing was $110.0 million, including $50.0 million of debt principal payments and $59.9 million of share repurchases. The company repurchased 1.72 million shares during the year; approximately $38.0 million remained under its $100 million authorization. It does not expect to pay dividends in the foreseeable future.
Material changes versus the prior comparable period
- Sales rose 16.2%, reflecting higher retail and e-commerce volume for both brands and price increases implemented in the first and fourth fiscal quarters. North American sales increased 18.1%; international sales fell 23.8%, partly due to winding down the European business, which management said reduced total sales growth by 1.2 percentage points.
- Gross profit increased 8.7%, but gross margin fell 260 basis points to 38.1% as higher raw-material, freight and logistics costs and supply-chain disruptions more than offset pricing benefits.
- Operating income increased 16.7%; operating margin remained 17.3%. Adjusted EBITDA increased 12.9%, while its margin declined 60 basis points.
- Net income increased substantially, but the comparison was affected by noncash warrant remeasurement losses: $30.1 million in FY2022 versus $66.2 million in FY2021. FY2021 also included a $5.0 million legal-settlement gain. Interest expense declined $9.7 million, primarily following debt repayments and a repricing amendment.
- Operating cash flow declined $21.5 million. Management attributed the reduction mainly to working-capital cash use of $63.8 million, versus $21.5 million in FY2021, and higher cash taxes. Inventories increased to $125.5 million from $97.3 million.
- The company repaid $50.0 million of term debt, compared with $150.0 million in FY2021. Private warrants were exercised cashlessly in January 2022, resulting in 4.83 million shares issued and no warrants outstanding at year-end.
Outlook, risks and unusual items
Management expects elevated input-cost inflation and supply-chain challenges to persist into FY2023. Price increases and cost-saving initiatives are intended to offset pressure and support growth investment, but the company gave no quantitative FY2023 revenue, earnings or margin guidance. It said it believed it could meet customer orders on a timely basis for the foreseeable future, while continuing to monitor demand, supply and logistics.
- Supply-chain and contract-manufacturer labor constraints, ingredient shortages, freight costs and inflation have caused periodic out-of-stocks, delayed sales recognition and, at times, higher-than-historical inventory.
- Consumer mobility and demand remain uncertain amid COVID-19 effects and inflation; management also monitored possible effects of the Ukraine conflict on raw-material availability and costs.
- Retailer concentration is significant: Walmart represented approximately 31% of FY2022 sales, Amazon 13% and Target 10%. Customer contracts are generally at will and do not require minimum purchases.
- Pricing actions may pressure volumes or consumer demand, while failure to pass on higher costs could further reduce margins. The company does not hedge availability of core ingredients.
- Other disclosed risks include intense competition, changing nutrition preferences, reliance on third-party manufacturers and logistics, variable-rate debt and the July 2024 term-loan maturity.
- The FY2022 restructuring was substantially completed; cumulative restructuring and related costs were $9.9 million, with no outstanding restructuring liability at year-end. No material pending litigation was identified.
- The 2021 restatement related to accounting for private warrants and a related material weakness; the company said the weakness had been remediated. Management and the auditor reported effective internal control over financial reporting as of August 27, 2022, and the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Review subsequent results for whether price increases and cost savings offset elevated input, freight and logistics costs without materially weakening sales volumes or gross margin.
- Track inventory, working-capital movements, operating cash flow and out-of-stock rates, particularly given the FY2022 inventory build and cash-flow decline.
- Assess refinancing or repayment plans for the $406.5 million term loan due in July 2024, including exposure to variable interest rates and covenant requirements.
- Monitor sales and receivables concentration among Walmart, Amazon and Target, and changes in retailer orders or shelf space.
- Reconcile GAAP earnings with non-GAAP Adjusted EBITDA and separate operating performance from warrant-related noncash items and other unusual gains or costs.
- Check subsequent disclosures on European wind-down effects, supply-chain resilience, and any developments in the previously remediated controls weakness or restatement-related matters.