Business context and reporting period
The Simply Good Foods Company develops and sells branded nutritional snacks, primarily Atkins products, with SimplyProtein and other brands. This Form 10-K covers the 52 weeks ended August 25, 2018; fiscal Q4 was the 13 weeks ended that date. Because the July 2017 business combination created a new accounting basis, the company’s reported successor and predecessor periods are not directly comparable. Full-year comparisons below use the filing’s unaudited pro forma 2017 figures where indicated.
Financial performance and liquidity
| Metric | FY 2018 | Comparable FY 2017 |
|---|---|---|
| Net sales | $431.4 million | $396.2 million, pro forma |
| Gross profit / margin | $207.6 million / 48.1% | $186.2 million / 47.0%, pro forma |
| Operating income / margin | $64.7 million / 15.0% | $58.5 million / 14.8%, pro forma |
| Net income | $70.5 million | $28.7 million, pro forma |
| Adjusted EBITDA | $78.6 million / 18.2% of sales | $72.5 million / 18.3%, pro forma |
| Operating cash flow | $61.0 million | Not clearly provided on a comparable pro forma basis |
Sales increased 8.9% year over year, primarily from 8.3% organic growth and the SimplyProtein acquisition. Gross margin improved 110 basis points, reflecting favorable trade allowances and supply-chain costs. Operating expenses rose 11.9%, including higher G&A, marketing and distribution costs. Adjusted EBITDA increased 8.4%.
Q4 net sales were $108.3 million, gross profit $53.3 million, operating income $14.9 million and net income $11.7 million. The filing does not provide a clear comparable prior-year Q4 figure on the same accounting basis.
At year-end, cash and cash equivalents were $112.0 million; current assets were $185.7 million and current liabilities $30.6 million. Term-loan principal was $198.5 million, with no borrowings under the $75 million revolver. The company reported compliance with debt covenants and said available liquidity should fund operations and strategy for at least 12 months. A 1% increase in variable rates would have increased annual interest expense by approximately $2.0 million.
Material changes, outlook and risks
- Net income included a provisional $31.0 million tax benefit from the Tax Cuts and Jobs Act; the company had not completed its accounting for the law. The reported effective tax rate was negative 32.7%, so earnings growth was substantially affected by a tax item rather than operating performance alone.
- The company changed revenue recognition to recognize sales when customers receive products, rather than when products ship. It deferred $7.8 million of in-transit sales in Q4; it also disclosed $8.2 million of Q3 sales, with $4.0 million of gross profit, that should have been recognized in Q4. Management said the errors were not material and that it remediated a revenue-recognition material weakness during Q4.
- Management emphasized continued brand and product innovation, expansion of SimplyProtein in the U.S., distribution growth (including e-commerce and other channels), and disciplined acquisitions. No specific financial guidance was provided.
- Key risks include Walmart concentration (about 43% of FY 2018 sales), intense competition, changing consumer preferences, ingredient-cost volatility, dependence on contract manufacturers and a single U.S. distribution center, variable-rate debt, and the Tax Receivable Agreement. The company does not expect to pay dividends in the foreseeable future.
- No material litigation was reported. After year-end, public warrant exercises generated approximately $113.5 million of gross proceeds in the subsequent-events note; another passage reports approximately $113.7 million. Remaining public warrants were scheduled for redemption, with future exercises required to be cashless.
Important facts for investors to verify
- How much of reported FY 2018 net income reflects the provisional tax benefit, and what are normalized earnings and cash taxes?
- Whether the revised customer-receipt revenue cutoff controls remain effective and whether any further revenue adjustments are needed.
- How sales, margins and cash generation develop without the favorable tax item, including whether Adjusted EBITDA growth converts into operating cash flow.
- Walmart’s purchasing and shelf-space decisions, and progress diversifying customers and distribution channels.
- The final public-warrant exercise proceeds and resulting share dilution, given the differing proceeds figures in the filing.