Simply Good Foods Co annual report, FY2019

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The Simply Good Foods Company — FY2019 Form 10-K

Reporting period: Fiscal year ended August 31, 2019, a 53-week year; the comparable fiscal 2018 period was 52 weeks. This is an annual filing, not a standalone quarterly report. The company sells branded nutritional snacks, bars, ready-to-drink shakes and confections, principally under Atkins and SimplyProtein, in one reportable segment.

Financial performance and liquidity

  • Revenue: $523.4 million, up 21.3% from $431.4 million. Management attributed growth mainly to volume; the extra fiscal week contributed 1.8% to full-year sales growth. International revenue was $25.2 million, about 5% of sales.
  • Profitability: Gross profit was $217.4 million, with a 41.5% gross margin versus 41.8% in 2018. Operating income was $72.8 million (13.9% margin), compared with $64.7 million (15.0%). Net income was $47.5 million versus $70.5 million; diluted EPS was $0.56 versus $0.96. The prior year included a $29.0 million one-time tax benefit.
  • Adjusted EBITDA: $98.7 million, or 18.9% of sales, versus $78.6 million, or 18.2%. This is a company-defined non-GAAP measure.
  • Cash flow: Operating cash flow was $73.0 million, up from $61.0 million. Investing used $1.8 million; financing provided $83.4 million, including $113.5 million from cash warrant exercises and offset by the $26.5 million tax receivable agreement settlement.
  • Balance sheet: Cash and equivalents were $266.3 million; current assets were $357.6 million and current liabilities $48.0 million. Debt principal was $196.5 million, with no revolving-credit borrowings and $75 million of revolving capacity. Total assets were $1.14 billion.
  • Fourth-quarter supplemental figures: The filing reports net sales of $139.2 million, gross profit of $59.2 million, operating income of $12.1 million, net income of $6.1 million and diluted EPS of $0.07. The comparable 2018 quarter reported sales of $108.3 million and net income of $11.7 million.

Material changes and unusual items

  • Sales growth was volume-led, while gross margin declined 30 basis points. Selling and marketing expense rose 14.2%, primarily from greater television and e-commerce investment. General and administrative expense rose 24.9%, including higher incentive compensation, internal-resource investment and a $3.5 million legal settlement reserve.
  • The company retrospectively reclassified shipping, handling and related warehouse costs from operating expenses to cost of goods sold. The reclassification changed reported gross margin presentation but did not affect operating income, net income or EPS.
  • Fiscal 2019 net income was lower than 2018 despite higher operating income, principally because 2018 benefited from the one-time tax item. The company also recorded a $1.5 million gain on settlement of its tax receivable agreement.
  • In August 2019, Simply Good Foods agreed to acquire Quest Nutrition for approximately $1.0 billion, subject to customary closing conditions, and expected completion by calendar year-end 2019. It cited estimated run-rate cost synergies of $20 million over three years. In October 2019, it raised approximately $350 million net through an equity offering; the balance was planned to be funded with cash and committed debt financing.

Outlook, risks and contingencies

  • Management stated that available liquidity was expected to fund operations, growth plans and anticipated Quest-related expenses for at least the next 12 months. The filing provides no quantified standalone earnings or revenue guidance.
  • Quest’s completion, financing, integration, synergy delivery and potential liabilities remain significant uncertainties; acquisition financing would substantially increase indebtedness. The expected synergies are estimates, not guaranteed results.
  • Key business risks include Walmart concentration (44% of FY2019 sales), retailer orders without minimum purchase commitments, reliance on contract manufacturers and a single U.S. distribution center and logistics provider, volatile ingredient and packaging costs, changing nutrition preferences, competition, and food-safety, labeling and reputational risks.
  • Variable-rate debt exposes the company to interest-rate increases; management estimated a 1% rate increase would have raised FY2019 interest expense by about $2.0 million. Debt covenants and restrictions also apply.
  • The company reserved $3.5 million for potential settlement of class-action litigation concerning product-label claims. It reported no litigation it considered material, no goodwill or indefinite-lived intangible impairment in FY2019, and no material off-balance-sheet arrangements.
  • Auditors issued unqualified opinions on the FY2019 financial statements and internal controls. Management and the auditor concluded internal control over financial reporting was effective as of August 31, 2019.

Investor verification priorities

  1. Verify Quest’s closing, final purchase-price adjustments, debt funding, integration progress and realized synergies against subsequent filings.
  2. Assess the effect of the October 2019 share issuance and financing on dilution, leverage, interest expense and cash available after acquisition.
  3. Monitor Walmart concentration, customer ordering trends, gross-margin performance and the sustainability of volume growth.
  4. Review the $3.5 million label-claims litigation reserve and the filing’s fourth-quarter duration: the annual discussion says FY2019’s fourth quarter comprised 14 weeks, while the quarterly-data table labels the August 31 quarter as 13 weeks.
  5. Distinguish GAAP net income and cash flow from Adjusted EBITDA, and account for the extra week and prior-year one-time tax benefit when comparing periods.