The Simply Good Foods pany(SMPL) - 2024 Q1 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements and accompanying notes for the quarter Consolidated Balance Sheets Consolidated Balance Sheets | Metric (in thousands) | Nov 25, 2023 | Aug 26, 2023 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | Cash | $121,391 | $87,715 | $33,676 | 38.39% | | Total current assets | $396,539 | $371,652 | $24,887 | 6.69% | | Total assets | $2,115,059 | $2,097,084 | $17,975 | 0.86% | | Total current liabilities | $78,989 | $89,857 | $(10,868)| -12.09% | | Total liabilities | $507,881 | $525,985 | $(18,104)| -3.44% | | Total stockholders' equity | $1,607,178 | $1,571,099 | $36,079 | 2.30% | Consolidated Statements of Operations and Comprehensive Income Consolidated Statements of Operations and Comprehensive Income | Metric (in thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------- | | Net sales | $308,678 | $300,878 | $7,800 | 2.59% | | Cost of goods sold | $193,560 | $189,886 | $3,674 | 1.93% | | Gross profit | $115,118 | $110,992 | $4,126 | 3.72% | | Income from operations | $51,820 | $52,490 | $(670) | -1.28% | | Net income | $35,561 | $35,860 | $(299) | -0.83% | | Basic EPS | $0.36 | $0.36 | $0.00 | 0.00% | | Diluted EPS | $0.35 | $0.36 | $(0.01) | -2.78% | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows | Metric (in thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------- | | Net cash provided by operating activities | $47,523 | $8,718 | $38,805 | 445.12% | | Net cash used in investing activities | $(800) | $(1,238) | $438 | -35.38% | | Net cash used in financing activities | $(13,103) | $(20,761) | $7,658 | -36.88% | | Net increase (decrease) in cash | $33,620 | $(13,281) | $46,901 | -353.14% | | Cash at end of period | $121,391 | $54,144 | $67,247 | 124.21% | Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased to $1,607,178 thousand from $1,571,099 thousand, driven by net income of $35,561 thousand[19] - The Company did not repurchase any common stock during the thirteen weeks ended November 25, 2023[19] Notes to Unaudited Consolidated Financial Statements 1. Nature of Operations and Principles of Consolidation - The Simply Good Foods Company is a consumer packaged food and beverage company marketing products under the Quest® and Atkins® brand names[20] - Quest® products target consumers seeking high protein, while Atkins® products cater to a low-carb lifestyle[21] - Products are distributed primarily in North America through major retail channels and e-commerce[21] 2. Summary of Significant Accounting Policies - The Company does not anticipate a material impact from the transition from LIBOR to SOFR[27][28] - The Company is evaluating ASU 2023-07, which updates disclosure requirements for significant segment expenses[29] 3. Revenue Recognition Net Sales by Brand and Geography | (In thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | | :------------- | :-------------------------- | :-------------------------- | | North America | | | | Atkins | $119,498 | $131,745 | | Quest | $181,463 | $161,472 | | Total North America | $300,961 | $293,217 | | International | $7,717 | $7,661 | | Total net sales | $308,678 | $300,878 | - North America net sales increased by 2.6% year-over-year, driven by Quest brand growth which offset softness in Atkins[31] 4. Goodwill and Intangibles - Goodwill remained stable at $543.1 million as of November 25, 2023, with no impairment charges[32] Net Carrying Amount of Intangible Assets | Intangible Asset (in thousands) | Nov 25, 2023 Net Carrying Amount | Aug 26, 2023 Net Carrying Amount | | :------------------------------ | :------------------------------- | :------------------------------- | | Brands and trademarks | $974,000 | $974,000 | | Customer relationships | $117,797 | $120,697 | | Licensing agreements | $11,023 | $11,502 | | Proprietary recipes and formulas | $619 | $869 | | Software and website development costs | $695 | $972 | | Intangible assets in progress | $184 | $79 | | Total Intangible assets, net | $1,104,318 | $1,108,119 | - Amortization expense for intangible assets was $3.9 million for the quarter, consistent with the prior year[33] 5. Long-Term Debt and Line of Credit - The Company amended its Credit Agreement, reducing the interest rate on Initial Term Loans and extending maturity to March 17, 2027[39] - As of November 25, 2023, the Term Facility outstanding balance was $275.0 million with an effective interest rate of 8.0%[45] - The Company was in compliance with all debt covenants as of November 25, 2023[44] 6. Fair Value of Financial Instruments - The fair value of the Company's debt approximated its book value, with the Term Loan classified as Level 2 in the fair value hierarchy[47] 7. Income Taxes Income Tax Provision | Metric (in thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Income before income taxes | $47,108 | $45,556 | | Provision for income taxes | $11,547 | $9,696 | | Effective tax rate | 24.5% | 21.3% | - The effective tax rate increased by 3.2% year-over-year, primarily due to permanent differences[51] 8. Leases Lease Costs | Lease Cost (in thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | | :------------------------ | :-------------------------- | :-------------------------- | | Total operating lease cost | $3,055 | $2,990 | | Total finance lease cost | $54 | $73 | | Total lease cost | $3,109 | $3,063 | Lease Liabilities | Lease Liabilities (in thousands) | Nov 25, 2023 | Aug 26, 2023 | | :------------------------------- | :----------- | :----------- | | Current operating lease liabilities | $7,724 | $7,566 | | Long-term operating lease liabilities | $35,306 | $37,272 | | Current finance lease liabilities | $83 | $143 | | Total lease liabilities | $43,113 | $44,981 | - The weighted-average remaining lease term for operating leases was 6.08 years and for finance leases was 0.37 years[53] 9. Commitments and Contingencies - The Company is not a party to any material litigation that could adversely affect its business[54] - Future payments of $2.9 million are required over the next year for endorsement contracts[55] 10. Stockholders' Equity - The Company has approximately $71.5 million remaining available under its $150.0 million stock repurchase program[56][57] - No shares were repurchased during the quarter, compared to 546,346 shares for $16.4 million in the prior year period[57] 11. Earnings Per Share Earnings Per Share | EPS Metric | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | | :--------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.36 | $0.36 | | Diluted EPS | $0.35 | $0.36 | - Diluted EPS decreased slightly to $0.35 from $0.36 year-over-year, as weighted average diluted shares outstanding increased[59] 12. Omnibus Incentive Plan - Stock-based compensation expense increased to $4.2 million for the quarter from $3.3 million in the prior year period[62] - Unrecognized compensation cost for stock options, RSUs, and PSUs totaled $28.0 million as of November 25, 2023[63][64][66] - The Company granted 194,353 restricted stock units and 178,788 performance stock units during the quarter[64][66] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting Quest brand growth, margin expansion, and non-GAAP measure reconciliations Overview - The Company aims to lead the nutritious snacking movement with its Quest® and Atkins® brands[73] - The Company's strategy focuses on innovation, organic growth, and potential acquisitions in the nutritional snacking space[73] Business Trends - Business performance improved due to strong Quest sales volume growth offsetting Atkins softness[76] - The Company benefited from lower ingredient and packaging costs, leading to gross margin expansion[76] - Management continues to monitor supply chain dynamics and consumer behavior amid potential economic risks[77] Key Financial Definitions - Net sales are defined as product sales less promotional activities and other sales credits[78] - Cost of goods sold includes costs paid to contract manufacturers for ingredients, packaging, and logistics[79] - Operating expenses comprise selling and marketing, G&A, and depreciation and amortization[80] Results of Operations Key Operating Metrics | Metric (in thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------- | | Net sales | $308,678 | $300,878 | $7,800 | 2.59% | | Gross profit | $115,118 | $110,992 | $4,126 | 3.72% | | Gross profit margin | 37.3% | 36.9% | 0.4% pts | | | Income from operations | $51,820 | $52,490 | $(670) | -1.28% | | Net income | $35,561 | $35,860 | $(299) | -0.83% | | Adjusted EBITDA | $61,965 | $60,766 | $1,199 | 1.97% | - The increase in gross profit margin was primarily driven by lower ingredient and packaging costs[85] - Operating expenses increased by $4.8 million, or 8.2%, due to higher selling, marketing, and G&A expenses[86][90] Reconciliation of EBITDA and Adjusted EBITDA - EBITDA and Adjusted EBITDA are non-GAAP measures used to evaluate operating performance[92] Reconciliation of Net Income to Adjusted EBITDA | Metric (in thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Net income | $35,561 | $35,860 | | Interest income | $(1,090) | $(7) | | Interest expense | $6,034 | $7,055 | | Income tax expense | $11,547 | $9,696 | | Depreciation and amortization | $5,605 | $4,952 | | EBITDA | $57,657 | $57,556 | | Stock-based compensation expense | $4,168 | $3,313 | | Executive transition costs | $366 | $0 | | Other | $(226) | $(103) | | Adjusted EBITDA | $61,965 | $60,766 | Liquidity and Capital Resources - The Company had $121.4 million in cash and believes its liquidity is sufficient for the next twelve months[96] - Principal uses of cash include working capital, debt service, stock repurchases, and acquisitions[95] Summary of Cash Flow Activities | Cash Flow Activity (in thousands) | 13 Weeks Ended Nov 25, 2023 | 13 Weeks Ended Nov 26, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $47,523 | $8,718 | | Net cash used in investing activities | $(800) | $(1,238) | | Net cash used in financing activities | $(13,103) | $(20,761) | - The significant increase in cash from operating activities was primarily due to favorable changes in working capital[111] - Financing activities included $10.0 million in principal payments on the Term Facility and $3.6 million in tax payments related to stock units[114] New Accounting Pronouncements - The Company refers to Note 2 of its financial statements for information on recently issued accounting standards[115] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states there were no material changes in the Company's market risk exposure during the quarter - No material changes in market risk exposure occurred during the thirteen weeks ended November 25, 2023[117] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls with no material changes in internal controls - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of November 25, 2023[119] - There were no material changes in internal controls over financial reporting during the quarter[120] - The Company acknowledges the inherent limitations of internal control systems, which provide reasonable assurance[121] PART II. Other Information Item 1. Legal Proceedings The Company is not involved in any material legal proceedings that could adversely affect its business - The Company is not a party to any material litigation and is unaware of any that could materially affect its business[124] Item 1A. Risk Factors This section indicates no material changes to the risk factors previously disclosed in the Annual Report - There have been no material changes to the risk factors included in the Company's Annual Report[125] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds were reported[126] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[127] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[128] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the quarter - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter[129] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and XBRL documents - Exhibits include certifications (31.1, 31.2, 32.1) and XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[131] Signatures The report is duly signed by the Vice President, Controller, and Chief Accounting Officer on January 4, 2024 - The report was signed by Timothy A. Matthews, Vice President, Controller, and Chief Accounting Officer, on January 4, 2024[136]