THE SIMPLY GOOD FOODS COMPANY
This Quarterly Report on Form 10-Q (this "Report") contains forward-looking
statements. When used anywhere in this Report, the words "expect," "believe,"
"anticipate," "estimate," "intend," "plan" and similar expressions are intended
to identify forward-looking statements. These statements relate to future events
or our future financial or operational performance and involve known and unknown
risks, uncertainties and other factors that could cause our actual results,
levels of activity, performance or achievements to differ materially from those
expressed or implied by these forward-looking statements. These statements
include, but are not limited to, the effect of the novel coronavirus
("COVID-19") on our business, financial condition and results of operations. We
disclaim any undertaking to publicly update or revise any forward-looking
statements contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based. These statements reflect our current views with respect
to future events and are based on assumptions subject to risks and
uncertainties. Such risks and uncertainties include those related to our ability
to sell our products.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included in our Annual Report on Form 10-K for the
fiscal year ended August 31, 2019 ("Annual Report") and our unaudited condensed
consolidated financial statements and the related notes appearing elsewhere in
this Report. In addition to historical information, the following discussion
contains forward-looking statements, such as statements regarding the Company's
expectation for future performance, liquidity and capital resources that involve
risks, uncertainties and assumptions that could cause actual results to differ
materially from the Company's expectations. The Company's actual results may
differ materially from those contained in or implied by any forward-looking
statements. Factors that could cause such differences include those identified
in Item 1A. "Risk Factors" of this Report and in Item 1A. "Risk Factors" of our
Annual Report. The Company assumes no obligation to update any of these
forward-looking statements.
Unless the context requires otherwise in this Report, the terms "we," "us,"
"our," the "Company" and "
Overview
The Simply Good Foods Company is a consumer packaged food and beverage company that aims to lead the nutritious snacking movement with trusted brands that offer a variety of convenient, innovative, great-tasting, better-for-you snacks and meal replacements. The Company's nutritious snacking platform consists of brands that specialize in providing products for consumers that follow certain nutritional philosophies, dietary approaches and/or health-and-wellness trends: Atkins® for those following a low-carb lifestyle; Quest® for consumers seeking to partner with a brand that makes the foods they crave work for them, not against them, through a variety of protein-rich foods and beverages that also limit sugars and simple carbs; and SimplyProtein® for consumers looking for protein-enhanced snacks made with fewer, simple ingredients. We distribute our products in major retail channels, primarily inNorth America , including grocery, club and mass merchandise, as well as through e-commerce, convenience, specialty and other channels. Our portfolio of nutritious snacking brands gives us a strong platform with which to introduce new products, expand distribution, and attract new consumers to our products. Our platform also positions us to continue to selectively pursue acquisition opportunities of brands in the nutritious snacking. To that end, inNovember 2019 , we completed the acquisition ofQuest Nutrition, LLC ("Quest"), a healthy lifestyle food company, for a cash purchase price of approximately$1.0 billion (subject to customary adjustments) (the "Acquisition of Quest"). For more information, please see "Liquidity and Capital Resources-Acquisition of Quest."
Effects of COVID-19
InDecember 2019 , a novel coronavirus disease ("COVID-19") was reported and inJanuary 2020 , theWorld Health Organization ("WHO") declared it a Public Health Emergency of International Concern. OnFebruary 28, 2020 , theWHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and onMarch 11, 2020 , theWHO characterized COVID-19 as a pandemic. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. Additionally, various federal, state and local government-imposed movement restrictions and initiatives have been implemented to reduce the global transmission of COVID-19, including reduced or eliminated food services, the closure of retailing establishments, the promotion of social distancing and the adoption of remote working policies. During the third quarter of 2020, we actively engaged with the various elements of our value chain, including our customers, contract manufacturers, and logistics and transportation providers, to meet demand for our products and to remain informed of any challenges within our value chain. Given the unpredictable nature of the COVID-19 pandemic and the initial surge in consumption, we increased finished goods inventory of some of our high velocity products. Based on information available to us as of the date of this Report, we believe we will be able to deliver our products to meet customer orders on a timely basis, and therefore, we expect our products will continue to be available for 25 -------------------------------------------------------------------------------- purchase to meet consumer meal replacement and snacking needs for the foreseeable future. We continue to monitor customer and consumer demand, and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19 situation. Additionally, inMarch 2020 , we borrowed$25.0 million under our$75.0 million revolving credit facility, as a precautionary measure to ensure ample financial flexibility in light of the spread of COVID-19 and the initial surge in consumption. The Company used the proceeds of the Revolving Credit Facility to meet initial elevated customer orders, build finished goods inventory of some of our high velocity items, to support working capital and to support general corporate purposes. With approximately$111.1 million of cash and cash equivalents as ofMay 30, 2020 , including the$25.0 million of proceeds from the revolving credit facility borrowing, realized strong cash flow from operations in the third quarter and no material collectability concerns regarding our customers' ability to pay, we believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. Based on that assessment of our source of liquidity and capital, the$25.0 million borrowing under the revolving credit facility was fully repaid inJune 2020 .
We implemented remote work arrangements and restricted business travel in mid-March, and to date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
Our consolidated results of operations for the thirteen week period endedMay 30, 2020 was significantly effected by changes in consumer shopping and consumption behavior due to COVID-19. At the beginning of the third quarter of 2020, retail takeaway for our products increased significantly in connection with a surge in consumer demand for shelf stable food products. Following a three week period of pantry loading by consumers in early March, subsequent movement restrictions and to stay-at-home orders resulted in fewer on-the-go and away-from-home usage occasions for some of our products. Atkins brand third quarter net sales declined 8.3% as solid e-commerce growth was more than offset by softness in measured channels. However, lower trade promotions and management's decision to reduce marketing, advertising and general and administrative spend resulted in Atkins brand margin expansion and Adjusted EBITDA growth. Based on the duration and severity of economic effects from the COVID-19 pandemic, including but not limited to stock market volatility, the potential for (i) a return to increased rates of reported cases of COVID-19 (which has been referred to as a "second wave"), (ii) unexpected supply chain disruptions, (iii) changes to customer operations, (iv) changes in consumer purchasing and consumption behavior, and (v) the closure of retail establishments, we remain uncertain of the ultimate effect COVID-19 could have on our business. We believe the severity and duration of the COVID-19 pandemic is uncertain and such uncertainty will likely continue through the end of our fiscal year. We also believe there will likely continue to be volatility in third party reported retail takeaway data for our products due to the ongoing COVID-19 outbreak. Refer to Item 1A. "Risk Factors" of this Report for additional information regarding the risks of the pandemics, such as COVID-19.
Restructuring and Related Charges
InMay 2020 , we announced certain restructuring activities in conjunction with the implementation of our future-state organization design, which creates a fully integrated organization with our completed Acquisition of Quest. The new organization design becomes effective onAugust 31, 2020 . These restructuring plans primarily include workforce reductions and changes in management structure. For the thirteen and thirty-nine weeks endedMay 30, 2020 , we incurred$1.4 million of costs for these restructuring activities which have been included within General and administrative on the Consolidated Statements of Operations and Comprehensive Income. Overall, we expect to incur a total of approximately$6.3 million (including the$1.4 million referenced above) in one-time termination benefits and employee severance costs, which are to be paid throughout fiscal 2021 and the first quarter of fiscal 2022. As ofMay 30, 2020 , the outstanding restructuring liability was$1.4 million . Refer to Note 15, Restructuring and Related Charged, of our Notes to Unaudited Condensed Consolidated Financial Statements in this Report for additional information regarding restructuring activities.
Our Reportable Segment
Following the Acquisition of Quest, the Company's operations are organized into
two operating segments; Atkins and Quest, which are aggregated into one
reporting segment, due to similar financial, economic and operating
characteristics. The operating segments are also similar in the following areas:
(a) the nature of the products; (b) the nature of the production processes; (c)
the methods used to distribute products to customers, (d) the type of customer
for the products, and (e) the nature of the regulatory environment. The recently
announced restructuring and new organization design will create an efficient and
fully integrated organization that will continue to support and build
multi-category nutritional snacking brands.
26
--------------------------------------------------------------------------------Key Financial Definitions
Net sales. Net sales consists primarily of product sales less the cost of promotional activities, slotting fees and other sales credits and adjustments, including product returns. We also include licensing revenue from the frozen meals business in net sales. Cost of goods sold. Cost of goods sold consists primarily of the costs we pay to our contract manufacturing partners to produce the products sold. These costs include the purchase of raw ingredients, packaging, shipping and handling, warehousing, depreciation of warehouse equipment, and a tolling charge for the contract manufacturer. Cost of goods sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders.
Operating expenses. Operating expenses consist primarily of selling and marketing, general and administrative, depreciation and amortization, and business transaction costs. The following is a brief description of the components of operating expenses:
• Selling and marketing. Selling and marketing expenses are comprised of
broker commissions, customer marketing, media and other marketing costs.
• General and administrative. General and administrative expenses are
comprised of expenses associated with corporate and administrativefunctions that support our business, including fees for employee salaries,
professional services, integration costs, restructuring costs, insurance
and other general corporate expenses.
• Depreciation and amortization. Depreciation and amortization costs consist
of costs associated with the depreciation of fixed assets and capitalized
leasehold improvements and amortization of intangible assets.
• Business transaction costs. Business transaction costs are comprised of
legal, due diligence, consulting and accounting firm expenses associated
with the process of actively pursuing potential and completed business
combinations, including the Acquisition of Quest.
• Loss in fair value change of contingent consideration - TRA liability.
Loss in fair value change of contingent consideration - TRA liability
charges relate to fair value adjustments of the Income Tax Receivable
Agreement (the "TRA") liability.
Results of Operations
The effect of COVID-19 during our fiscal third quarter was unprecedented. Third quarter performance was significantly effected by COVID-19 factors that resulted in changes in consumer shopping and consumption behavior. Following a three week period of pantry loading by consumers in early March, subsequent movement restrictions resulted in lower on-the-go and away-from-home usage occasions for some of our products. ConsolidatedSimply Good Foods third quarter net sales increased by 54.2% driven by the Acquisition of Quest. Atkins brand third quarter net sales declined 8.3% as solid e-commerce growth, an increase of 125% as compared to the same prior year period, was offset by softness in measured channels. Net income improved by$2.9 million compared to the same prior year period. Adjusted EBITDA increased 74.2% primarily due to the Acquisition of Quest. Atkins brand third quarter profitability improved as compared to the same prior year period as a result of a reduction in trade promotion, favorable supply chain costs, and lower Selling and marketing and lower incentive compensation. The marketplace trends of our products have improved sequentially as movement restrictions eased during our fiscal third quarter and into the early part of the fiscal fourth quarter of 2020. We believe the increase in consumption is due to increasing brand relevance among consumers, increased shopping trips and more on-the-go consumption. As retail takeaway trends improve, we are increasing marketing and merchandising investments in our brands in anticipation that the benefits of our products will become increasingly more relevant to our target consumers. We believe that as home confinement continues to ease inthe United States , snacking and meal replacement usage occasions will increase, our brand benefits of weight management and active nutrition will grow, and consumer shopping behavior will return to more normal patterns. Overall, the results in the first-half of fiscal 2020 exceeded our expectations with strong performance from both the Atkins and Quest brands, however the COVID-19 situation effected consumer demand for nutritional snacking category products in the fiscal third quarter of 2020. Over the remainder of the fiscal fourth quarter and into fiscal 2021, we intend to position our business for long-term growth. In assessing the performance of our business, we consider a number of key performance indicators used by management and typically used by our competitors, including the non-GAAP measures of Adjusted EBITDA and Adjusted Diluted Earnings Per Share. Because not all companies use identical calculations, this presentation of Adjusted EBITDA and Adjusted Diluted Earnings Per Share may not be comparable to other similarly titled measures of other companies. See "Reconciliation of Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net income for each applicable period. See "Reconciliation of Adjusted Diluted Earnings Per Share" below for a reconciliation of Adjusted Diluted Earnings Per Share to diluted earnings per share for each applicable period. 27
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Table of Contents
Comparison of Unaudited Results for the Thirteen Weeks Ended
The following unaudited table presents, for the periods indicated, selected
information from our Condensed Consolidated Statements of Operations and
Comprehensive Income, including information presented as a percentage of net
sales:
Thirteen Weeks Thirteen Weeks
Ended Ended
(In thousands) May 30, 2020 % of Sales May 25, 2019 % of Sales
Net sales $ 215,101 100.0 % $ 139,468 100.0 %
Cost of goods sold 126,475 58.8 % 82,811 59.4 %
Gross profit 88,626 41.2 % 56,657 40.6 %
Operating expenses:
Selling and marketing 24,510 11.4 % 17,550 12.6 %
General and administrative 28,713 13.3 % 15,947 11.4 %
Depreciation and amortization 4,248 2.0 % 1,892 1.4 %
Business transaction costs 47 - % 758 0.5 %
Total operating expenses 57,518 26.7 % 36,147 25.9 %
Income from operations 31,108 14.5 %
20,510 14.7 %
Other (expense) income: Interest income 29 - % 1,066 0.8 % Interest expense (8,324 ) (3.9 )% (3,428 ) (2.5 )% Loss on foreign currency transactions (418 ) (0.2 )% (153 ) (0.1 )% Other income 59 - % 55 - % Total other expense (8,654 ) (4.0 )% (2,460 ) (1.8 )% Income before income taxes 22,454 10.4 % 18,050 12.9 % Income tax expense 6,045 2.8 % 4,584 3.3 % Net income$ 16,409 7.6 %$ 13,466 9.7 % Other financial data: Adjusted EBITDA(1)$ 43,363 20.2 %
(1) Adjusted EBITDA is a non-GAAP financial metric. See "Reconciliation of Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net income for each applicable period.
Net sales. Net sales of$215.1 million represented an increase of$75.6 million , or 54.2%, for the thirteen weeks endedMay 30, 2020 compared to the thirteen weeks endedMay 25, 2019 . The net sales increase of 54.2% was primarily attributable to the Acquisition of Quest, which drove 62.5% of the increase. Atkins brand net sales decreased 8.3% primarily due to COVID-19 related movement restrictions and stay-at-home orders which resulted in lower on-the-go and away-from-home usage occasions for our products. The Atkins brand benefited from solid e-commerce sales growth and lower levels of trade promotion during the quarter. Cost of goods sold. Cost of goods sold increased$43.7 million , or 52.7%, for the thirteen weeks endedMay 30, 2020 compared to the thirteen weeks endedMay 25, 2019 . The cost of goods sold increase was driven by sales volume growth attributable to the Acquisition of Quest. Gross profit. Gross profit increased$32.0 million , or 56.4%, for the thirteen weeks endedMay 30, 2020 compared to the thirteen weeks endedMay 25, 2019 . Gross profit of$88.6 million , or 41.2% of net sales, for the thirteen weeks endedMay 30, 2020 increased 60 basis points from 40.6% of net sales for the thirteen weeks endedMay 25, 2019 . The increase in gross profit was primarily the result of the Acquisition of Quest, partially offset by the decrease in Atkins brand sales. 28
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Table of Contents
Operating expenses. Operating expenses increased
• Selling and marketing. Selling and marketing expenses
increased
million, or 39.7%, for the thirteen weeks ended May 30, 2020
compared to the thirteen weeks ended May 25, 2019 . Theincrease was
primarily related to the Acquisition of Quest of $8.2 million . This
increase was partially offset by the Company's actions to reduce
television media and marketing spend for Atkins brand due to the
effects of COVID-19.
• General and administrative. General and administrative expenses
increased $12.8 million , or 80.1%, for the thirteen weeks ended
May 30, 2020 compared to the thirteen weeks ended May 25, 2019 . The
increase was primarily attributable to the Acquisition of Quest of
$10.2 million , Quest integration related costs of $4.1 million ,
restructuring charges of $1.4 million , and increased stock based
compensation expense of $0.7 million . These increases were partially
offset by reduced Atkins General and administrative costs primarily
due to lower incentive compensation.
• Depreciation and amortization. Depreciation and amortization
expenses increased $2.4 million , or 124.5%, for the thirteen weeks
ended May 30, 2020 compared to the thirteen weeks ended May 25,
2019 . The increase was primarily due to amortization for the
intangible assets recognized in the Acquisition of Quest of $2.1
million .
• Business transaction costs. Business transaction costs decreased
$0.7 million for the thirteen weeks ended May 30, 2020 compared to
the thirteen weeks ended May 25, 2019 . Business transaction costs
incurred in the thirteen weeks ended May 30, 2020 werecomprised of
expenses related to the Acquisition of Quest, and the business
transaction costs incurred within the thirteen weeks ended May 25,
2019 were related to business development activities.
Interest income. Interest income decreased $1.0 million for the thirteen weeks
ended May 30, 2020 compared to the thirteen weeks ended May 25, 2019 primarily
due to $195.3 million of cash on hand being utilized for the Acquisition of
Quest in the first quarter.
Interest expense. Interest expense increased $4.9 million for the thirteen weeks
ended May 30, 2020 compared to the thirteen weeks ended May 25, 2019 primarily
due to the first quarter term loan funding of $460.0 million to partially
finance the Acquisition of Quest, as well as the $25.0 million draw on the
revolving credit facility in the third quarter.
Loss on foreign currency transactions. A loss of $0.4 million in foreign
currency transactions was recorded for the thirteen weeks ended May 30, 2020
compared to a foreign currency loss of $0.2 million for the thirteen weeks ended
May 25, 2019 . The change related to changes in foreign currency rates related to
international operations.
Income tax expense. Income tax expense increased $1.5 million , for the thirteen
weeks ended May 30, 2020 compared to the thirteen weeks ended May 25, 2019 . The
increase in our income tax expense is primarily driven by higher pre-tax book
income, offset by non-deductible transaction costs, and other permanent
differences.
Adjusted EBITDA. Adjusted EBITDA increased $18.5 million , or 74.2%, for the
thirteen weeks ended May 30, 2020 compared to the thirteen weeks ended May 25,
2019 . The increase was primarily due to the Acquisition of Quest as well as cost
efficiencies from reduced Atkins brand operating expenses, levels of trade
promotion during the quarter, reduced marketing spend, and lower incentive
compensation, partially offset by decreases in Atkins brand sales related to the
effects of COVID-19. For a reconciliation of Adjusted EBITDA to its most
directly comparable GAAP measure, see "Reconciliation of Adjusted EBITDA" below.
29
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Comparison of Unaudited Results for the Thirty-Nine Weeks Ended
The following unaudited table presents, for the periods indicated, selected
information from our Condensed Consolidated Statements of Operations and
Comprehensive Income, including information presented as a percentage of net
sales:
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
(In thousands) May 30, 2020 % of Sales May 25, 2019 % of Sales
Net sales $ 594,355 100.0 % $ 384,199 100.0 %
Cost of goods sold 358,129 60.3 % 225,967 58.8 %
Gross profit 236,226 39.7 % 158,232 41.2 %
Operating expenses:
Selling and marketing 69,985 11.8 % 47,598 12.4 %
General and administrative 74,961 12.6 % 41,677 10.8 %
Depreciation and amortization 10,988 1.8 % 5,643 1.5 %
Business transaction costs 26,900 4.5 % 2,087 0.5 %
Loss in fair value change of contingent - % 533 0.1 %
consideration - TRA liability -
Total operating expenses 182,834 30.8 % 97,538 25.4 %
Income from operations 53,392 9.0 % 60,694 15.8 %
Other (expense) income:
Interest income 1,493 0.3 % 2,731 0.7 %
Interest expense (23,882 ) (4.0 )% (10,033 ) (2.6 )%
Gain on settlement of TRA liability - - % 1,534 0.4 %
Loss on foreign currency transactions (596 ) (0.1 )% (421 ) (0.1 )%
Other income 104 - % 176 - %
Total other expense (22,881 ) (3.8 )% (6,013 ) (1.6 )%
Income before income taxes 30,511 5.1 % 54,681 14.2 %
Income tax expense 8,238 1.4 % 13,236 3.4 %
Net income $ 22,273 3.7 % $ 41,445 10.8 %
Other financial data:
Adjusted EBITDA(1) $ 116,889 19.7 % $ 74,556 19.4 %
(1) Adjusted EBITDA is a non-GAAP financial metric. See "Reconciliation of Adjusted EBITDA" below for a reconciliation of Adjusted EBITDA to net income for each applicable period.
Net sales. Net sales of$594.4 million represented an increase of$210.2 million , or 54.7%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The net sales increase of 54.7% was primarily attributable to the Acquisition of Quest, which drove 50.1% of the increase. Atkins brand net sales increased 4.6% driven by strong e-commerce volume, partially offset by higher trade promotions. Cost of goods sold. Cost of goods sold increased$132.2 million , or 58.5%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The cost of goods sold increase was driven by sales volume growth primarily attributable to the Acquisition of Quest, and the effect of the non-cash$7.5 million inventory step-up related to the Acquisition of Quest. Gross profit. Gross profit increased$78.0 million , or 49.3%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . Gross profit of$236.2 million , or 39.7% of net sales, for the thirty-nine weeks endedMay 30, 2020 decreased 150 basis points from 41.2% of net sales for the thirty-nine weeks endedMay 25, 2019 . The decrease in gross margin was primarily the result of the non-cash$7.5 million inventory step-up and slightly lower gross profit margins of the Quest business. 30 -------------------------------------------------------------------------------- Operating expenses. Operating expenses increased$85.3 million , or 87.4%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 due to the following: • Selling and marketing. Selling and marketing expenses increased$22.4 million , or 47.0%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The increase was primarily related to the Acquisition of Quest of$18.5 million and an increase in e-commerce and television media marketing investments of$1.8 million . • General and administrative. General and administrative expenses increased$33.3 million , or 79.9%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The increase was primarily attributable to the Acquisition of Quest of$23.7 million , Quest integration related costs of$9.4 million , restructuring charges of$1.4 million , and an increase in stock-based compensation expense of$2.0 million . These increases were partially offset by reduced Atkins brand general and administrative costs primarily due to lower incentive compensation. • Depreciation and amortization. Depreciation and amortization expenses increased$5.3 million , or 94.7%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The increase was primarily due to amortization for the intangible assets recognized in the Acquisition of Quest of$4.8 million . • Business transaction costs. Business transaction costs increased$24.8 million for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The$26.9 million incurred in the thirty-nine weeks endedMay 30, 2020 was comprised of expenses related to the Acquisition of Quest. The$2.1 million recorded in the prior year is primarily comprised of expenses relating to business development activities. • Loss in fair value change of contingent consideration - TRA liability. The thirty-nine weeks endedMay 25, 2019 included a loss in fair value change of contingent consideration of$0.5 million . The Income Tax Receivable Agreement (the "TRA") liability was settled in the first quarter of fiscal 2019.
Interest income. Interest income decreased
Interest expense. Interest expense increased$13.8 million for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 primarily due to the first quarter term loan funding of$460.0 million to partially finance the Acquisition of Quest, as well as the$25.0 million draw on the revolving credit facility in the third quarter. Gain on settlement of TRA liability. The Company recorded a$1.5 million gain in connection with the settlement of the TRA liability in the thirty-nine weeks endedMay 25, 2019 . Loss on foreign currency transactions. A loss of$0.6 million in foreign currency transactions was recorded for the thirty-nine weeks endedMay 30, 2020 compared to a foreign currency loss of$0.4 million for the thirty-nine weeks endedMay 25, 2019 . The change relates to changes in foreign currency rates related to international operations. Income tax expense. Income tax expense decreased$5.0 million , for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The decrease in our income tax expense was primarily driven by lower pre-tax book income, offset by non-deductible transaction costs, the one-time tax impact of the settlement of the TRA liability during the thirty-nine week period endedMay 25, 2019 , and other permanent differences. Adjusted EBITDA. Adjusted EBITDA increased$42.3 million , or 56.8%, for the thirty-nine weeks endedMay 30, 2020 compared to the thirty-nine weeks endedMay 25, 2019 . The increase was primarily due the Acquisition of Quest and lower incentive compensation, partially offset by higher trade promotion, and an increase in e-commerce and television media marketing investments. For a reconciliation of Adjusted EBITDA to its most directly comparable GAAP measure, see "Reconciliation of Adjusted EBITDA" below. 31 --------------------------------------------------------------------------------
Reconciliation of Adjusted EBITDA
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to net income as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP).Simply Good Foods defines Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) as net income before interest income, interest expense, income tax expense, depreciation and amortization with further adjustments to exclude the following items: business transaction costs, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal costs, loss in fair value change of contingent consideration - TRA liability, gain on settlement of TRA liability and other non-core expenses. The Company believes that the inclusion of these supplementary adjustments in presenting Adjusted EBITDA, when used in conjunction with net income, are appropriate to provide additional information to investors, and management of the Company uses Adjusted EBITDA to supplement net income because it reflects more accurately operating results of the on-going operations, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to the key metrics the Company uses in its financial and operational decision making. The Company also believes that Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in the non-GAAP calculation.
The following unaudited tables below provide a reconciliation of Adjusted EBITDA
to its most directly comparable GAAP measure, which is net income, for the
thirteen and thirty-nine weeks ended
Thirty-Nine Weeks Ended (in thousands) May 30, 2020 May 25, 2019 May 30, 2020 May 25, 2019 Net income$ 16,409 $ 13,466 $ 22,273 $ 41,445 Interest income (29 ) (1,066 ) (1,493 ) (2,731 ) Interest expense 8,324 3,428 23,882 10,033 Income tax expense 6,045 4,584 8,238 13,236 Depreciation and amortization 4,488 1,929 11,607 5,754 EBITDA 35,237 22,341 64,507 67,737 Business transaction costs 47 758 26,900 2,087 Stock-based compensation expense 2,150 1,444 5,945 3,922 Inventory step-up - - 7,522 - Integration of Quest 4,094 - 9,435 - Restructuring 1,386 - 1,386 22 Non-core legal costs 48 179 603 1,330 Loss in fair value change of contingent consideration - TRA liability - - - 533 Gain on settlement of TRA liability - - - (1,534 ) Other (1) 401 171 591 459 Adjusted EBITDA$ 43,363 $ 24,893 $ 116,889 $ 74,556
(1) Other items consist principally of exchange impact of foreign currency transactions and other expenses.
32
--------------------------------------------------------------------------------Reconciliation of Adjusted Diluted Earnings Per Share
Adjusted Diluted Earnings Per Share. Adjusted Diluted Earnings Per Share is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to diluted earnings per share as an indicator of operating performance.Simply Good Foods defines Adjusted Diluted Earnings Per Share as diluted earnings per share before depreciation and amortization, business transaction costs, stock-based compensation expense, inventory step-up, integration costs, restructuring costs, non-core legal costs, change in fair value of contingent consideration - TRA liability, gain on settlement of TRA liability and other non-core expenses, on a theoretical tax effected basis of such adjustments at an assumed statutory rate. The Company believes that the inclusion of these supplementary adjustments in presenting Adjusted Diluted Earnings per Share, when used in conjunction with diluted earnings per share, are appropriate to provide additional information to investors, and management of the Company uses Adjusted Diluted Earnings Per Share to supplement diluted earnings per shares because it reflects more accurately operating results of the on-going operations, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to the key metrics the Company uses in its financial and operational decision making. The Company also believes that Adjusted Diluted Earnings per Share is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. Adjusted Diluted Earnings per Share may not be comparable to other similarly titled captions of other companies due to differences in the non-GAAP calculation.
The following unaudited tables below provide a reconciliation of Adjusted
Diluted Earnings Per Share to its most directly comparable GAAP measure, which
is diluted earnings per share, for the thirteen and thirty-nine weeks ended
Thirteen Weeks Ended Thirty-Nine Weeks Ended
May 30, 2020 May 25, 2019 May 30, 2020 May 25, 2019
Diluted earnings per share $ 0.17 $ 0.16 $
0.23
Depreciation and amortization 0.03 0.02 0.09 0.05 Business transaction costs - 0.01 0.20 0.02 Stock-based compensation expense 0.02 0.01 0.04 0.04 Inventory step-up - - 0.06 - Integration of Quest 0.03 - 0.07 - Restructuring 0.01 - 0.01 - Non-core legal costs - - - 0.01 Gain on settlement of TRA liability - - - (0.01 ) Other (1) - - - - Rounding (2) - - 0.01 -
Adjusted diluted earnings per share
0.71
(1) Other items consist principally of exchange impact of foreign currency transactions and other expenses. (2) Adjusted Diluted Earnings Per Share amounts are computed independently for each quarter. Therefore, the sum of the quarterly Adjusted Diluted Earnings Per Share amounts may not equal the year to date Adjusted Diluted Earnings Per Share amounts due to rounding.
Liquidity and Capital Resources
Overview
We have historically funded our operations with cash flow from operations and, when needed, with borrowings under our credit facilities. Our principal uses of cash have been debt service, working capital and the Acquisition of Quest. We had$111.1 million in cash and cash equivalents as ofMay 30, 2020 . We believe our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. 33 --------------------------------------------------------------------------------
Debt and Credit Facilities
OnJuly 7, 2017 , the Company entered into a credit agreement with Barclays Bank PLC and other parties (as amended to date, the "Credit Agreement"). The Credit Agreement provides for (i) a term facility of$200.0 million ("Term Facility") with a seven year maturity and (ii) a revolving credit facility of up to$75.0 million (the "Revolving Credit Facility") with a five year maturity. Substantially concurrent with the consummation of the Acquisition of Atkins, the full$200.0 million of the Term Facility (the "Term Loan") was drawn. The interest rate per annum was based on either (i) a base rate equaling the higher of (a) the "prime rate", (b) the federal funds effective rate plus 0.50% and (c) the Euro-currency rate applicable for an interest period of one month plus 1.00% plus (x) 3.00% margin for the Term Loan or (y) 2.00% margin for the Revolving Credit Facility, or (ii) London Interbank Offered Rate ("LIBOR") adjusted for statutory reserve requirements, plus (x) 4.00% margin for the Term Loan subject to a floor of 1.00% or (y) 3.00% margin for the Revolving Credit Facility. As security for the payment or performance of its debt, the Company has pledged certain equity interests in its subsidiaries. OnMarch 16, 2018 (the "Amendment Date"), the Company entered into an amendment (the "Repricing Amendment") to the Credit Agreement. As a result of the Repricing Amendment, the interest rate on the Term Loan was reduced and, as of the Amendment Date, such loans had an interest rate equal to, at the Company's option, either LIBOR plus an applicable margin of 3.50% or a base rate plus an applicable margin of 2.50%. The Repricing Amendment did not change the interest rate on the Revolving Credit Facility. The Revolving Credit Facility continued to bear interest based upon the Company's consolidated net leverage ratio as of the last financial statements delivered to the administrative agent. No additional debt was incurred, or any proceeds received, by the Company in connection with the Repricing Amendment. The incremental fees paid to the administrative agent are reflected as additional debt discount and are amortized over the terms of the long-term financing agreements using the effective-interest method. OnNovember 7, 2019 , the Company entered into an amendment (the "Incremental Facility Amendment") to the Credit Agreement to increase the principal borrowed on the Term Loan by$460.0 million . The Term Loan together with the incremental borrowing make up the Initial Term Loans (as defined in the Incremental Facility Amendment) and as of the Amendment No. 2 Effective Date (as defined in the Incremental Facility Amendment), the Initial Term Loans bear interest at a rate equal to, at the Company's option, either LIBOR plus an applicable margin of 3.75% or a base rate plus an applicable margin of 2.75%. The Incremental Facility Amendment was executed to finance, in part, the Acquisition of Quest. No amounts under the Term Loan were repaid as a result of the execution of the Incremental Facility Amendment. The Applicable Rate per annum applicable to the loans under the Credit Agreement Amendment is, with respect to any Initial Term Loan that is an ABR Loan (as defined in the Credit Agreement), 2.75% per annum, and with respect to any Initial Term Loan that is a Eurodollar Loan, 3.75% per annum. The incremental term loans will mature on the maturity date applicable to the Initial Term Loans, which date isJuly 7, 2024 . The Credit Agreement contains certain financial and other covenants that limit our ability to, among other things, incur and/or undertake asset sales and other dispositions, liens, indebtedness, certain acquisitions and investments, consolidations, mergers, reorganizations and other fundamental changes, payment of dividends and other distributions to equity and warrant holders, and prepayments of material subordinated debt, in each case, subject to customary exceptions materially consistent with credit facilities of such type and size. The Revolving Credit Facility has a maximum total net leverage ratio equal to or less than 6.25:1.00 (with a reduction to 6.00:1.00 on and after the third anniversary of the closing date of the Credit Agreement) contingent on credit extensions in excess of 30% of the total amount of commitments available under the Revolving Credit Facility. Any failure to comply with the restrictions of the Credit Agreement may result in an event of default. The Company was in compliance with all financial covenants under the Credit Agreement as ofMay 30, 2020 andAugust 31, 2019 . AtMay 30, 2020 , the outstanding balances of the Term Facility and Revolving Credit Facility were$635.5 million and$25.0 million , respectively. During the thirteen weeks endedMay 30, 2020 , the Company borrowed$25.0 million under the Revolving Credit Facility. This was a precautionary measure to preserve financial flexibility and to maintain liquidity in response to the spread of COVID-19 and uncertainty around consumer behavior. The Company used the proceeds of the Revolving Credit Facility to meet initial elevated customer orders in response to COVID-19, to build finished goods inventory of some of its high velocity items, support working capital and support general corporate purposes. Subsequent to the end of the third quarter 2020, the Company fully repaid the$25.0 million borrowing under the Revolving Credit Facility. The Company may repay borrowings under the Revolving Credit Facility at any time without penalty. The Company is not required to make principal payments on the Term Facility over the twelve months following the period endedMay 30, 2020 .
Public Equity Offering
OnOctober 9, 2019 , we completed an underwritten public offering of 13,379,205 shares of our common stock at a price to the public of$26.35 per share. We paid underwriting discounts and commissions of$0.19 per share resulting in net proceeds to us of$26.16 per share, or approximately$350.0 million (the "Offering"). The Company paid$0.8 million for legal, accounting and registrations fees related to the Offering. The net proceeds were used to pay a portion of the purchase price and related fees and expenses for the Acquisition of Quest. 34
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Acquisition of Quest
OnAugust 21, 2019 , Atkins entered into the Purchase Agreement with the Target Companies,VMG Voyage Holdings, LLC ,VMG Tax-Exempt II, L.P. ,Voyage Employee Holdings, LLC , and other sellers defined in the Purchase Agreement. OnNovember 7, 2019 , pursuant to the Purchase Agreement, Atkins completed the Acquisition of Quest for a cash purchase price at closing of$1.0 billion , subject to customary post-closing adjustments. The Acquisition of Quest was funded by the Company through a combination of cash, equity and debt financing. Total consideration paid on the closing date was$988.9 million . Cash sources of funding included$195.3 million of cash on hand, net proceeds of approximately$350.0 million from the Offering, and$443.6 million of new term loan debt from borrowings under the Incremental Facility Amendment. In the thirty-nine weeks endedMay 30, 2020 , the Company received a post-closing release from escrow of approximately$2.1 million related to net working capital adjustments, resulting in a total net consideration paid of$986.8 million as ofMay 30, 2020 . For the thirty-nine weeks endedMay 30, 2020 the Company incurred business transaction costs$26.9 million including$14.5 million of transaction advisory fees related to the Acquisition of Quest,$3.2 million of unused banker commitment fees,$6.1 million of non-deferrable debt issuance costs for the Incremental Facility Amendment, and$3.1 million of other costs including legal, due diligence, and accounting fees.
Equity Warrants
The Company's private placement warrants to purchase 6,700,000 shares of common stock remain outstanding.
Cash Flows
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
Thirty-Nine Weeks Ended
May 30, 2020 May 25 , 2019
Net cash provided by operating activities
Operating activities. Our net cash provided by operating activities decreased$28.5 million to$24.1 million for the period endedMay 30, 2020 compared to$52.6 million for the period endedMay 25, 2019 . The decrease in cash provided by operating activities was primarily driven by significant business transaction and integration costs as well as changes in working capital. The decrease was partially offset by increased cash from operations related to the Acquisition of Quest. Investing activities. Our net cash used in investing activities increased to$984.3 million for the period endedMay 30, 2020 compared to$0.8 million of net cash used in investing activities for the period endedMay 25, 2019 . The increase was primarily due to the Acquisition of Quest of$982.1 million , net of cash acquired. Financing activities. Our net cash provided by financing activities was$805.6 million for the period endedMay 30, 2020 compared to$84.3 million for the period endedMay 25, 2019 . Net cash provided by financing activities for the period endedMay 30, 2020 includes gross proceeds of$352.5 million from the Offering offset by issuance costs of$3.3 million , proceeds of$460.0 million from the Term Facility borrowing related to the Incremental Facility Amendment offset by issuance costs of$8.2 million , and$25.0 million of proceeds from the borrowing under the Revolving Credit Facility. The cash provided by financing activities for the period endedMay 30, 2020 was offset by$21.0 million of principal payments on the Term Facility, an increase of$19.5 million compared to the prior year. Our net cash provided by financing activities for the period endedMay 25, 2019 also includes$113.5 million of cash received from warrant exercises, and is partially offset by the payment of the TRA liability of$26.5 million and debt principal payments of$1.5 million on the Term Facility.
Contractual Obligations
The Company's contractual obligations are related to its Credit Agreement and its finance and operating leases. OnNovember 7, 2019 , the Company entered the Incremental Facility Amendment to increase the principal borrowed under the Term Facility by$460.0 million . As a result of the Acquisition of Quest, the Company obtained additional lease obligations. During the third quarter of 2020, the Company borrowed$25.0 million under the Revolving Credit Facility to meet initial elevated customer orders in response to COVID-19, to build finished goods inventory of some of its high velocity items, and as a precautionary measure to ensure it maintains ample financial flexibility in light of the spread of COVID-19. Subsequent to the end of the third quarter 2020, the Company fully repaid the$25.0 million borrowing under the Revolving Credit Facility. 35
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Table of Contents
The Company's contractual obligations relating to debt and leases at
Payments due by period
(in thousands) Total Year 1 Years 2-3 Years 4-5 Thereafter
Long-term debt obligations $ 660,500 $ 25,000 $ 1,794 $ 633,706 $ -
Interest payments 145,490 35,470 70,791 39,229 -
Operating leases 34,610 5,010 9,784 7,986 11,830
Finance leases 1,127 313 609 205 -
Total $ 841,727 $ 65,793 $ 82,978 $ 681,126 $ 11,830 Off-Balance Sheet Arrangements
As ofMay 30, 2020 , we had no material off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.
New Accounting Pronouncements
For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report. The adoption of ASC Topic 842 resulted in a change to our lease accounting policy, as discussed in Note 9 of our unaudited interim condensed consolidated financial statements in this Report. There have been no other significant changes to our critical accounting policies sinceAugust 31, 2019 . Refer to Note 2 of our unaudited interim condensed consolidated financial statements in this Report for further information regarding recently issued accounting standards.
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