Simply Good Foods Co. — Q1 FY2018 Form 10-Q
Reporting period: Thirteen weeks ended November 25, 2017. The company sells branded nutritional snacks, including Atkins and SimplyProtein products, and licenses frozen meals. The July 2017 Atkins business combination created a new accounting basis: current-period “Successor” results are not directly comparable with prior-year “Predecessor” results. Where possible, management also presents prior-year pro forma results.
Financial performance
| Metric | Q1 FY2018 | Comparison |
|---|---|---|
| Net sales | $106.6 million | Up 6.8% versus reported prior-year sales; management attributes $4.0 million to organic growth and $2.8 million to Wellness Foods. Pro forma prior-year sales were $99.8 million. |
| Gross profit / margin | $52.8 million / 49.5% | Margin improved 70 basis points from 48.8% on a pro forma basis, reflecting favorable mix and lower input costs. |
| Operating income / margin | $19.3 million / 18.1% | Pro forma prior-year operating income was $18.7 million; reported margin was 18.7% in both periods. |
| Net income | $10.2 million; $0.14 per diluted share | Compared with $9.1 million pro forma prior-year net income; reported predecessor net income was $6.8 million and is not directly comparable. |
| Adjusted EBITDA | $23.7 million / 22.2% of sales | Up 6.6% from $22.3 million pro forma; margin was down 10 basis points. Non-GAAP measure. |
| Operating cash flow | $8.8 million provided | Compared with $8.6 million provided in the prior-year predecessor period. |
| Cash and liquidity | $62.9 million cash; $150.4 million current assets; $35.8 million current liabilities | No revolving borrowings; $75 million revolving facility available. |
| Debt | $200 million term loan principal; $192.4 million net carrying amount | Seven-year term loan matures July 2024 and bears variable interest. No revolver borrowings. |
Material changes and notable items
- Sales growth and a 70-basis-point gross-margin improvement were partly offset by higher operating expenses, up 11.4% versus pro forma prior-year expenses. General and administrative expense rose primarily from public-company costs, employee costs, and Wellness Foods.
- Interest expense was $3.0 million, substantially below the reported predecessor period’s $7.1 million, largely reflecting refinancing and lower debt; it was broadly consistent with the pro forma comparison.
- Operating cash flow was offset by $2.4 million of investing outflow, including a $1.8 million Atkins working-capital adjustment and $0.7 million of property and equipment purchases. Cash increased to $62.9 million.
- The company recorded $0.6 million of expense from an increase in the fair value of the Tax Receivable Agreement (TRA) liability, valued at $26.3 million at quarter-end. Estimated undiscounted future TRA payments totaled $39.8 million.
- The Atkins purchase-price allocation remained preliminary; it included $466.8 million of goodwill and $320.0 million of acquired intangible assets at gross value. No goodwill impairment was reported.
Outlook, risks and contingencies
- Management said available liquidity should fund operations, growth plans, and public-company costs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management expects seasonal sales patterns, historically strongest around the post-holiday resolution period and weakest in the fourth fiscal quarter.
- The term loan has variable rates, creating exposure to higher interest expense if market rates rise. The credit facilities include restrictions and covenants; the company had no revolver borrowings at quarter-end.
- TRA payments depend on realized tax benefits and may reduce cash otherwise available to the company; estimates are sensitive to income, deductions, timing, and tax rates.
- The Tax Cuts and Jobs Act, enacted December 22, 2017, is expected to materially affect deferred taxes, the TRA, taxable income, and the effective tax rate. Management anticipated a favorable overall effect but had not completed its analysis.
- Ordinary-course litigation was not expected by management to have a material adverse effect. Endorsement-contract payments of $1.8 million were due over the next year. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Use the pro forma comparison, while accounting for the acquisition-related changes in accounting basis, when assessing underlying year-over-year performance.
- Track whether organic sales growth and gross-margin improvement continue, and whether expense growth—especially public-company and marketing costs—moderates.
- Monitor variable-rate debt service, cash generation, and the timing and amount of TRA payments.
- Follow the final Atkins purchase-price allocation and the quantified effects of the Tax Cuts and Jobs Act on taxes and the TRA.