Business context and reporting period
The Simply Good Foods Company’s July 14, 2017 Form 10-Q presents unaudited historical results for NCP-ATK Holdings, Inc. (Atkins Nutritionals), before the July 7, 2017 business combination. Simply Good Foods had no operations at May 27, 2017. The reporting periods are the 13 and 39 weeks ended May 27, 2017, compared with the periods ended May 28, 2016. Atkins sells branded nutritional snacks, including bars and shakes, and receives royalties from its licensed frozen-meal business.
Financial performance and condition
| Metric | 13 weeks ended May 27, 2017 | 39 weeks ended May 27, 2017 |
|---|---|---|
| Net sales | $96.5 million | $298.6 million |
| Gross profit and margin | $43.6 million; 45.1% | $138.9 million; 46.5% |
| Operating income and margin | $10.6 million; 11.0% | $42.4 million; 14.2% |
| Net income | $4.3 million | $14.6 million |
| Adjusted EBITDA (non-GAAP) | $14.8 million; 15.3% of sales | $55.1 million; 18.5% of sales |
For the 39 weeks, operating cash flow was $18.7 million, investing cash outflow was $21.5 million (including the $21.0 million Wellness Foods acquisition), and financing cash outflow was $53.5 million, primarily from debt principal payments. Cash was $22.2 million at May 27, down from $78.5 million at August 27, 2016.
At May 27, net long-term debt was $281.0 million (gross term loans of $283.4 million); no revolving credit was drawn. The company reported $106.2 million of current assets and $35.4 million of current liabilities, with a stockholders’ deficit of $11.6 million. The $20 million revolver was available under the existing credit agreement. Management stated liquidity was expected to be sufficient for operations and obligations for at least the next 12 months.
Material changes versus prior comparable periods
- Reported sales declined 7.7% for the quarter and 7.9% for the 39 weeks. Management attributed the decline principally to the transition of frozen meals from owned sales to a license: frozen-meal sales were replaced by lower royalty revenue. Excluding the licensing change and Wellness Foods acquisition, sales increased 4.8% for the quarter and 5.2% year to date, primarily on higher snacking volume, partly offset by unfavorable pricing and mix.
- Gross margin improved to 45.1% from 40.6% for the quarter and to 46.5% from 41.8% for the 39 weeks. Management cited product mix, cost savings, and stronger snacking performance, while noting the frozen-meal transition affected comparability.
- Net income increased from $0.8 million to $4.3 million for the quarter and from $8.9 million to $14.6 million year to date. Adjusted EBITDA rose 22.3% for the quarter and 15.6% for the 39 weeks. These measures benefited from snacking performance and Wellness Foods, as well as certain non-operating and adjustment items.
- Cash used for debt principal payments was $53.6 million year to date, versus $7.5 million in the prior period. Atkins also invested $21.0 million in Wellness Foods, acquired in December 2016.
Outlook, risks and unusual items
- No numerical forward guidance was provided. Management cited expected public-company costs, which it anticipated would increase general and administrative expenses, and stated its liquidity sources were adequate for at least 12 months.
- On July 7, 2017, Simply Good Foods completed its business combination with Conyers Park and Atkins. The preliminary purchase-price allocation included $746.2 million of total consideration, including a $16.1 million estimated tax-receivable-agreement liability; fair values remain subject to finalization. The prior Atkins credit agreements were repaid/refinanced in connection with the transaction; the filing text does not provide a clear complete summary of the replacement financing terms.
- Key risks include substantial retailer concentration (one retailer represented approximately 47% of gross sales year to date and 31% of gross trade receivables at May 27), intense competition and changing nutrition trends, dependence on third-party manufacturers and a single U.S. distribution center, ingredient-cost and foreign-exchange exposure, and regulatory, labeling, product-quality and recall risks.
- Atkins reported compliance with its debt covenants at May 27. It disclosed ordinary-course litigation that management did not expect to materially adversely affect the financial statements; no material legal proceedings were listed in Part II.
- Frozen-meal licensing changed revenue and cost presentation; the license provides a minimum first-year annual royalty of $4.0 million, increasing 3% annually through year seven. The $1.1 million quarterly warrant-liability fair-value decrease increased reported other income and is non-cash. Wellness Foods purchase-price allocations were preliminary.
Important facts for investors to verify
- Post-combination debt, interest rates, maturities, covenant terms and available liquidity, given repayment of Atkins’ former facilities and the transaction financing.
- Underlying sales, volume, pricing and margin trends excluding the frozen-meal licensing transition and Wellness Foods acquisition.
- Retailer concentration and any changes in purchasing, shelf placement, promotional terms or receivable exposure.
- Final acquisition accounting, including the acquired intangible assets, goodwill and tax receivable agreement, and any resulting effects on earnings and cash flows.
- Adjusted EBITDA reconciliation and the persistence of margin gains, including the effects of warrant remeasurement and other adjustments.