The Simply Good Foods Company — Q3 FY2019 Form 10-Q
Business context and period. Simply Good Foods sells nutrition bars, ready-to-drink shakes, snacks and related products, principally under the Atkins brand, and reports one operating segment. This unaudited filing covers the 13 weeks ended May 25, 2019, and year-to-date results for the 39 weeks ended that date; comparatives are the periods ended May 26, 2018. Fiscal-year results may be affected by seasonal consumer purchasing patterns.
Key financial results
| Metric | 13 weeks ended May 25, 2019 | 13 weeks ended May 26, 2018 | 39 weeks ended May 25, 2019 | 39 weeks ended May 26, 2018 |
|---|---|---|---|---|
| Net sales | $139.5 million | $107.2 million | $384.2 million | $323.2 million |
| Gross profit / margin | $65.3 million / 46.8% | $51.3 million / 47.8% | $182.0 million / 47.4% | $154.3 million / 47.7% |
| Operating income / margin | $20.5 million / 14.7% | $13.8 million / 12.9% | $60.7 million / 15.8% | $49.9 million / 15.4% |
| Net income | $13.5 million | $7.1 million | $41.4 million | $58.7 million |
| Diluted EPS | $0.16 | $0.10 | $0.49 | $0.81 |
| Adjusted EBITDA (non-GAAP) | $24.9 million | $17.9 million | $74.6 million | $60.5 million |
Quarterly sales rose 30.1%, operating income 48.6%, net income 88.7% and Adjusted EBITDA 38.8% year over year. Year-to-date sales increased 18.9%, operating income 21.7% and Adjusted EBITDA 23.3%; net income declined 29.5%. The prior-year year-to-date comparison included a substantial tax benefit related to the Tax Cuts and Jobs Act, while the current period recorded $13.2 million of income tax expense.
Cash flow, debt and liquidity
- Cash and cash equivalents were $247.6 million at May 25, 2019, up from $112.0 million at August 25, 2018. Current assets were $339.2 million and current liabilities $39.3 million.
- For the 39 weeks, operating cash flow was $52.6 million, versus $36.2 million a year earlier; capital expenditures were $0.8 million. The filing attributes the operating cash flow increase primarily to working-capital changes.
- Cash from financing was $84.3 million, including $113.5 million from public warrant exercises, offset partly by the $26.5 million TRA settlement, $1.5 million of debt principal payments and share repurchases.
- Term-loan principal was $197.0 million; balance-sheet debt, net of financing fees, was $191.1 million. No amounts were drawn on the $75 million revolving facility, and the company reported compliance with its financial covenants. About $2.0 million of principal payments are due over the next 12 months.
Material changes and management commentary
- Management attributed sales growth primarily to volume. U.S. retail takeaway, as measured by IRI, increased 19.5% for the quarter, while reported net sales growth also reflected the timing of retailer inventory changes versus the prior year.
- Quarterly gross margin declined 100 basis points, and year-to-date gross margin declined 30 basis points. Management said non-price-related customer activity affects gross margin and shifts some activity between gross margin and selling expense.
- Marketing expense increased, principally from television and e-commerce investment. General and administrative expense also increased, including higher incentive compensation and investments in organizational capabilities. Management said gross profit and Adjusted EBITDA growth reflected strong sales, alongside investments it believes may benefit the business over the near and long term.
- The company settled and terminated its Tax Receivable Agreement for $26.5 million in the first quarter and recorded a $1.5 million gain on settlement. The settlement eliminated the reported TRA liability.
- Management said supply conditions had improved and the company was well positioned to meet consumer demand. It stated that cash and available liquidity were expected to support operations and growth for at least the next 12 months; the filing gives no specific revenue or earnings guidance.
Risks, contingencies and other items
- The company identifies seasonal sales patterns, retailer inventory timing, customer promotional activity, and its ability to sell products as relevant business considerations. Results are not necessarily indicative of the full fiscal year.
- Credit-facility covenants restrict certain activities; noncompliance could trigger a default. The company reported compliance as of May 25, 2019.
- The company reported no material pending or threatened litigation known to it and no material off-balance-sheet arrangements. It reported no material changes to the risk factors in its most recent annual report.
- Adoption of the revenue recognition standard had no material financial-statement impact. The company expected adoption of the new lease standard in fiscal 2020 to materially increase lease-related assets and liabilities.
- A $50 million share repurchase program had approximately $48.3 million remaining at May 25, 2019. Private warrants to purchase 6.7 million shares remained outstanding.
Important facts for investors to verify
- Whether continued sales growth reflects durable consumer demand or, in part, retailer inventory timing and promotional activity.
- Whether gross-margin pressure persists as volume grows and customer activity shifts between selling expense and cost of sales.
- How marketing and organizational investments affect operating leverage and future Adjusted EBITDA; this is a non-GAAP measure and may not be comparable across companies.
- The cash balance’s sustainability after one-time warrant exercise proceeds, and the company’s debt service, covenant headroom and future capital allocation.
- The effect of remaining private warrants and equity compensation on diluted share count, and the expected balance-sheet impact of lease-standard adoption.