Simply Good Foods Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended February 24, 2018 (13 and 26 weeks, respectively). The company sells branded nutritional snacks, principally under Atkins and SimplyProtein. Because the July 2017 business combination created a new accounting basis, reported comparisons with the prior-year predecessor period are not fully comparable; management also presents prior-year pro forma comparisons.
Financial results
Amounts in millions, except per-share data and percentages.
| Metric | Quarter | First half |
|---|---|---|
| Net sales | $109.3; up 6.9% vs. prior-year pro forma | $215.9; up 6.8% vs. prior-year pro forma |
| Gross profit / margin | $50.3 / 46.0%, up 50 basis points | $103.0 / 47.7%, up 60 basis points |
| Operating income | $16.8 | $36.1 |
| Net income | $41.4; diluted EPS $0.56 | $51.6; diluted EPS $0.71 |
| Adjusted EBITDA | $18.8; 17.2% of sales, versus $18.1 / 17.7% pro forma | $42.5; 19.7% of sales, versus $40.4 / 20.0% pro forma |
| Cash from operations | Not separately reported | $25.4, versus $19.4 in the prior-year predecessor period |
- Quarterly sales growth reflected $5.8 million of organic U.S. growth and $1.2 million from Wellness Foods; first-half growth reflected $9.8 million organic growth and $4.0 million from Wellness Foods.
- Management attributed improved gross margin primarily to lower supply-chain costs, with favorable product mix also benefiting the first half. Adjusted EBITDA rose, but its margin declined versus the pro forma prior-year comparison as operating expenses grew.
- Quarterly and first-half net income include a provisional $29.0 million benefit from remeasuring deferred tax liabilities under the Tax Act. Consequently, net income and effective tax rates are not representative of underlying operating trends.
Financial position and liquidity
- At February 24, 2018, cash was $79.0 million; current assets were $161.5 million and current liabilities $33.4 million.
- Term-loan principal was $199.5 million, with $191.5 million reported as long-term debt net of financing costs and $0.7 million as current maturities. The $75 million revolving facility was undrawn. Approximate net debt based on cash and principal was $120.5 million.
- First-half investing cash outflow was $2.6 million, including the $1.8 million working-capital payment related to the business combination; financing cash outflow was $0.3 million.
- Management said available liquidity was sufficient for operations, growth plans and expected public-company costs for at least 12 months. The filing lists $280.9 million of contractual obligations, including debt principal, lease payments and estimated interest.
Outlook, risks and unusual items
- No specific sales, earnings or margin guidance was provided. Management expects seasonal sales patterns to continue: historically strongest around the post-holiday resolution season and weakest in the fourth fiscal quarter.
- The Tax Act’s effects remained provisional. The company said final tax calculations could change deferred-tax balances, future tax expense and cash flows; it also cited potential impacts from net-operating-loss limitations and other provisions.
- The company has a variable-rate term loan, exposing cash flows to increases in market interest rates. Subsequent to quarter-end, on March 16, 2018, the term-loan margin was reduced to LIBOR plus 3.50% or base rate plus 2.50%; the amendment added no debt or proceeds.
- The Tax Receivable Agreement liability was estimated at $27.3 million at quarter-end. Payments depend on realized tax benefits and could reduce cash otherwise available to the company.
- The filing reports ordinary-course litigation, which management did not expect to have a material adverse effect. Management reported effective disclosure controls; internal-control implementation following the business combination remained an ongoing effort.
Important facts for investors to verify
- Whether organic sales growth continues and whether supply-chain savings and product mix sustain gross-margin improvement.
- Underlying earnings and cash generation excluding the provisional Tax Act benefit and other unusual items, including TRA fair-value gains and transaction costs.
- Final Tax Act accounting, future effective tax rates, and the timing and amount of TRA payments.
- Debt-service sensitivity to variable rates, the realized savings from the March 2018 repricing, and availability under the undrawn revolver.
- Whether public-company, selling, distribution and other operating-cost increases pressure Adjusted EBITDA margins.