Simply Good Foods Co. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended August 26, 2017. Simply Good Foods completed its business combination with Atkins on July 7, 2017. Atkins is the accounting predecessor; the successor and predecessor financial statements use different accounting bases and are not directly comparable. Accordingly, the filing’s supplemental pro forma results offer the more useful full-year comparison. Dollar amounts below are in millions unless stated otherwise.
Business context and key financial metrics
The company develops and sells branded nutritional snacks, principally Atkins bars, ready-to-drink shakes and confections, and SimplyProtein products. Frozen meals became a licensed business in September 2016, with royalty income recognized in net sales. The company operates one reportable segment and uses contract manufacturers.
| Metric | FY2017 pro forma combined | FY2016 pro forma | Change |
|---|---|---|---|
| Net sales | $396.2 | $369.0 | +$27.1, or 7.4% |
| Gross profit / margin | $186.2 / 47.0% | $169.6 / 45.9% | Margin +110 bps |
| Operating income / margin | $58.5 / 14.8% | $47.7 / 12.9% | Higher |
| Net income | $28.7 | $21.3 | +$7.4 |
| Adjusted EBITDA | $72.5 / 18.3% of sales | $64.2 / 17.4% | +$8.3, or 12.9% |
Management attributed sales growth to $20.0 million of growth in Atkins’ core business, primarily increased volume, and $7.1 million from Wellness Foods. Gross-margin improvement reflected cost savings, favorable mix and the prior-year recall impact. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Liquidity and debt: At August 26, 2017, cash and cash equivalents were $56.5 million; current assets were $133.9 million and current liabilities $33.2 million. The company had a $200 million secured term loan, reported at $191.9 million net of financing fees, and an undrawn $75 million revolving facility. The term loan bears variable interest, generally LIBOR plus 4%, and matures in 2024. Contractual obligations included $72.4 million of projected interest payments and $10.3 million of operating lease payments.
Cash flow: In the successor period from July 7 to August 26, operating cash flow was negative $27.4 million, investing cash flow negative $197.3 million and financing cash flow positive $280.8 million. These short-period figures were materially affected by the business combination and transaction-related payments; they should not be read as full-year operating trends. The filing does not provide a comparable full-year pro forma cash-flow statement.
Material changes and unusual items
- The July 2017 business combination established a new accounting basis and materially changed the balance sheet, including $465.0 million of goodwill and $319.1 million of intangible assets at year-end.
- The successor period included a one-time $6.0 million inventory fair-value step-up charged to cost of goods sold. Pro forma results adjust this charge out.
- The predecessor period included $25.6 million of business-combination transaction costs. These costs and other pro forma adjustments make reported predecessor net income and successor-period results poor stand-alone comparators.
- Debt was refinanced in the transaction: the predecessor had $337.2 million outstanding at August 2016, while the successor had $200.0 million of term debt at closing. Pro forma interest expense was $11.9 million, versus historical predecessor interest expense of $27.2 million in FY2016.
- Wellness Foods, acquired in December 2016 for approximately $20.1 million, added the SimplyProtein brand. Atkins also licensed frozen meals to Bellisio; the agreement provides a minimum first-year royalty of $4.0 million, increasing 3% annually through year seven.
Outlook, risks and contingencies
No quantified financial guidance is provided. Management’s stated priorities include expanding self-directed low-carbohydrate consumers, innovating and extending products, growing distribution—including e-commerce and other channels—and pursuing complementary acquisitions. Management said available liquidity was expected to fund operations, growth plans and public-company costs for at least the following 12 months.
Key risks include intense competition and changing consumer views on nutrition; reliance on Walmart, which represented about 42% of sales; dependence on third-party manufacturers, suppliers and a single U.S. distribution center; volatile ingredient, packaging and currency costs; variable-rate debt and covenant restrictions; and execution and integration risks from acquisitions. The company recorded a $25.7 million liability for its Tax Receivable Agreement, with future payments dependent on realizing specified tax benefits. Management reported no litigation it believed material.
The company stated that disclosure controls were effective at year-end. However, management did not assess internal control over financial reporting, citing the recent business combination and the resources required; the auditor did not provide an internal-control attestation. Management also disclosed reliance on manual processes and the absence of an integrated ERP system.
Most important facts for investors to verify
- Whether pro forma revenue and margin gains persist, separating underlying volume growth from the prior-year recall comparison, acquisition contribution and licensing changes.
- The reconciliation and assumptions behind Adjusted EBITDA, including which costs are excluded and whether those exclusions recur.
- Debt-service capacity under variable interest rates, availability and covenants of the revolving facility, and the timing and size of Tax Receivable Agreement payments.
- Customer concentration, particularly Walmart sales and receivables, and the resilience of manufacturing and distribution arrangements.
- Progress in strengthening financial controls and systems following the transaction, given the absence of a management assessment and auditor attestation for internal control over financial reporting.