| Income Taxes | Income Taxes The sources of income (loss) before income taxes are as follows for the fifty-two week period ended August 25, 2018, the successor period from July 7, 2017 through August 26, 2017, the predecessor period from August 28, 2016 through July 6, 2017, and the fifty-two week period ended August 27, 2016: 52-Weeks Ended From July 7, 2017 From August 28, 2016 through July 6, 2017 52-Weeks Ended August 25, 2018 August 27, 2016 (In thousands) (Successor) (Successor) (Predecessor) (Predecessor) Domestic $ 49,748 $ 78 $ (690 ) $ 17,674 Foreign 3,343 662 2,775 (133 ) Total $ 53,091 $ 740 $ 2,085 $ 17,541 Income tax (benefit) expense was comprised of the following for the fifty-two week period ended August 25, 2018, the successor period from July 7, 2017 through August 26, 2017, the predecessor period from August 28, 2016 through July 6, 2017, and the fifty-two week period ended August 27, 2016: 52-Weeks Ended From July 7, 2017 From August 28, 2016 through July 6, 2017 52-Weeks Ended August 25, 2018 August 27, 2016 (In thousands) (Successor) (Successor) (Predecessor) (Predecessor) Current: Federal $ 2,584 $ 414 $ 7,340 $ 1,413 State and local 159 11 415 135 Foreign 1,001 247 695 454 Total current 3,744 672 8,450 2,002 Deferred: Federal (21,223 ) (379 ) (4,172 ) 4,796 State and local (26 ) (3 ) 259 686 Foreign 141 — 33 23 Total deferred income tax (benefit) expense (21,108 ) (382 ) (3,880 ) 5,505 Total tax (benefit) expense $ (17,364 ) $ 290 $ 4,570 $ 7,507 A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: 52-Weeks Ended From July 7, 2017 From August 28, 2016 through July 6, 2017 52-weeks ended August 25, 2018 August 27, 2016 (In thousands) (Successor) (Successor) (Predecessor) (Predecessor) Statutory income tax expense: 25.5 % 34.0 % 34.0 % 34.0 % State income tax expense, net of federal 3.1 1.7 21.0 3.9 Valuation allowance 0.6 5.2 (0.9 ) 2.2 Taxes on foreign income above (below) the U.S. tax 0.4 (3.3 ) (7.5 ) 0.5 Warrant liabilities — — (11.8 ) 1.4 Tax Cuts and Jobs Act (58.4 ) — — — Change in tax rate (4.0 ) — (4.2 ) 0.6 Non-deductible transaction costs — — 182.7 — TRA contingent consideration (1.5 ) — — — Other permanent items 1.6 1.6 6.0 0.2 Income tax (benefit) expense (32.7 )% 39.2 % 219.3 % 42.8 % For the fifty-two week period ended August 25, 2018 , the effective tax rate differs from the U.S. statutory rate primarily due to the impact of periodic statutory tax rate changes that caused deferred tax balances to be revalued, offset by the inclusion of state income tax expense. For all prior periods reported, the effective rate is higher than the U.S. statutory rate primarily due to state income tax expense, tax losses recognized in jurisdictions for which a tax benefit is not realized, and tax expense associated with nondeductible permanent adjustments. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act” or “TCJA”) was signed into law. The change in the tax law is partially effective in the current 2018 fiscal year and will be fully effective in the 2019 fiscal year. The Tax Act, among other things, reduces the top U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Due to the complexities involved in accounting for the Tax Act, the SEC Staff Accounting Bulletin (“SAB”) 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. The Company is allowed a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. As of August 25, 2018 , we have not completed our accounting for the tax effects of enactment of the Tax Act; however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax and have recorded provisional amounts. We recognized a provisional gain of $31.0 million in 2018, which is included as a component of Income tax (benefit) expense in the accompanying Consolidated Statements of Operations and Comprehensive Income. The Tax Act reduces the corporate federal tax rate to 21% , effective January 1, 2018. U.S. tax law stipulates that our 2018 earnings are subject to a blended statutory tax rate of 25.5% , which is based on the prorated number of days in the fiscal year before and after the effective date. As a result, the Company recorded a provisional decrease to our deferred tax liabilities, net, with a corresponding net adjustment to deferred income tax benefit of $31.0 million , which is included within the Income tax (benefit) expense line item for the period ended August 25, 2018 . While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analysis related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences. The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We recorded provisional amounts for our one-time transition tax liability for of our foreign subsidiaries, resulting in an immaterial increase in income tax expense. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. We are continuing to gather additional information to compute the amount of the transition tax more precisely. No additional income taxes have been provided for any additional outside basis differences inherent in our foreign subsidiaries beyond those basis differences triggered by the transition tax, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of the unrecognized deferred tax liability related to any additional outside basis differences in these entities (e.g., stock basis differences attributable to acquisitions or other permanent differences) is not practicable. We will complete our analysis of the impact of the Tax Act on our outside basis differences in subsidiaries and respective indefinite reinvestment assertions during the measurement period and make additional disclosures, if necessary. With respect to the new Tax Act provision on global intangible low-tax income (“GILTI”), which will apply to us starting in 2019, we have not made an accounting policy election on the deferred tax treatment. Consequently, we have not made an accrual for the deferred tax aspects of this provision. Additionally, the Company does not anticipate the newly enacted Base Erosion and Anti-Abuse Tax (“BEAT”) to have a material impact on its financial statements in future periods. Our accounting for the income tax effects of the Tax Act will be completed during the measurement period allowed under SAB 118, and we will record any necessary adjustments in the period such adjustments are identified. While we were able to make a reasonable estimate of the impact of the income tax effects of the new law, it may be affected by, among other items, further analysis of certain aspects of the Tax Act, subsequent guidance issued by the U.S. government, and changes to estimates made to calculate our existing temporary differences. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at August 25, 2018 and August 26, 2017 were as follows: August 25, 2018 August 26, 2017 (In thousands) (Successor) (Successor) Deferred tax assets Accounts receivable allowances $ 1,885 $ 2,727 Inventories reserves 107 322 Accrued expenses 1,961 2,042 Net operating loss carryforwards 10,150 22,122 Share based compensation 975 154 Tax credits 10,066 7,976 Other 1,051 882 Deferred tax assets 26,195 36,225 Valuation allowance (4,195 ) (3,905 ) Deferred tax asset, net of valuation allowance 22,000 32,320 Deferred tax liabilities: Prepaid expense (419 ) (1,066 ) Excess tax over book depreciation (77 ) 38 Website development costs (238 ) (301 ) Intangible assets (74,342 ) (106,263 ) Other (1,399 ) (287 ) Deferred tax liabilities (76,475 ) (107,879 ) Net deferred tax liabilities $ (54,475 ) $ (75,559 ) The Company had available U.S. federal net operating loss carryforwards of $22.2 million and $48.7 million at August 25, 2018 and August 26, 2017 , respectively. The Company also had state net operating loss carryforwards of $33.6 million and $52.1 million and foreign net operating losses of $14.7 million and $13.7 million at August 25, 2018 and August 26, 2017 , respectively. The federal net operating loss carryforwards will begin to expire in 2034, while state net operating loss carryforwards will begin to expire in 2021. During the fifty-two week period ended August 25, 2018 , there was a $1.0 million increase to the tax loss carryforwards in foreign jurisdictions. As the carryforwards were generated in jurisdictions where the Company has historically recognized book losses or does not have strong future earnings projections, the Company concluded it is more likely than not that the operating losses would not be realized, and thus maintained a full valuation allowance against the associated deferred tax assets. As of August 25, 2018 , the Company has recorded total valuation allowances of $4.2 million . The recognition of the incremental full valuation allowances results in a net zero impact to the Consolidated Statements of Operations and Comprehensive Income. As of August 25, 2018 , the Company has recorded valuation allowances of $4.2 million on deferred tax assets related to foreign net operating loss carryforwards. The majority of this amount represents a full valuation allowance on the deferred tax assets of foreign entities within the United Kingdom, Netherlands, and Spain. Of the valuation allowance on deferred tax assets, $0.6 million relates to state net operating losses. As of August 25, 2018 and August 26, 2017 , the Company has no unrecognized tax benefits. The Company records interest and penalties associated with unrecognized tax benefits as a component of tax expense. As of August 25, 2018 and August 26, 2017 , the Company has no t accrued interest or penalties on unrecognized tax benefits, as there is no position recorded as of the fiscal years. No changes to the uncertain tax position balance are anticipated within the next 12 months, and are not expected to materially impact the financial statements. As of August 25, 2018 , tax years 2013 to 2017 remain subject to examination in the United States and the tax years 2013 to 2017 remain subject to examination in other major foreign jurisdictions where Atkins conducts business. State income tax returns are generally subject to examination for a period of three to five years after the filing of the respective return. Tax Receivable Agreement Concurrent with the Business Combination, the Company entered into the TRA with the historical shareholders of Atkins. The TRA is valued based on the future expected payments under the terms of the agreement (see Note 3 , Business Combination ). As more fully described in the TRA, the TRA provides for the payment by Simply Good Foods to the Atkins’ selling equity holders for certain federal, state, local and non-U.S. tax benefits deemed realized in post-closing taxable periods by Simply Good Foods, Conyers Park, Atkins and Atkins’ eligible subsidiaries from the use of up to $100 million of the following tax attributes: (i) net operating losses available to be carried forward as of the closing of the Business Combination, (ii) certain deductions generated by the consummation of the business transaction and (iii) remaining depreciable tax basis from the 2003 acquisition of Atkins Nutritionals, Inc. In addition, Simply Good Foods will pay the Atkins selling equity holders for the use of 75% of alternative minimum tax credit carryforwards of up to $7.6 million . The TRA is contingent consideration and subsequent changes in fair value of the contingent liability are recognized in income from operations. The Company re-measured the TRA in the second quarter of 2018 due to the Tax Act. The second quarter assessment of these changes resulted in a provisional one-time gain of $4.7 million , recognized in Gain in fair value change of contingent consideration - TRA liability . As of August 25, 2018 , the estimated fair value of these contingent payments is $27.5 million , which has been recorded as a liability and represents 100% of the value of the recorded tax attributes. The TRA assumptions were re-measured for subsequent inputs based on the enacted tax rates under the Tax Act. The significant fair value inputs used to estimate the future expected TRA payments to Roark include the timing of tax payments due to the assessment of the Tax Act, a tax savings rate of approximately 29.2% following the enactment of the Tax Act, a discount rate of approximately 9% , book income projections, timing of expected adjustments to calculate taxable income and the projected rate of use for attributes defined in the TRA. The TRA fair value requires significant judgment and is classified as Level 3 in the fair value hierarchy. The fair value of the instrument may change upon assessment of the Tax Act. Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including: • The amount and timing of the Company’s income - The Company is required to pay 100% of the deemed benefits as and when deemed realized. As such, the Company is generally not required to make payments under the TRA until and unless a tax benefit is actually realized on a filed return. Without income against which specified TRA attributes are deductible, the benefit of such deduction is not deemed realized, resulting in no payment under the TRA. The utilization of such tax attributes and recognition of benefit against Company income will result in payments under the TRA. • The amount and timing of deductions - Similar to the above, the timing of the recognition of deductions and attributes included in the TRA will impact the ultimate timing of payments under the TRA. In turn, the fair value of the TRA payments will fluctuate over time; and • Future tax rates of jurisdictions in which the Company has tax liability, including the finalization of the assessment of the impact of the Tax Act. Payments made under the TRA are due within 90 to 125 days following the filing of the Company's U.S. federal and state income tax returns and require agreement between the Company and Roark. The current portion of the TRA liability are based on the tax returns that reflect activity for the taxable year ended August 26, 2017 . Payments under the TRA are based on the tax reporting positions that the Company determines. The term of the TRA generally will continue until all applicable tax benefit payments have been made under the agreement. As of August 25, 2018 , the un-discounted future expected payments under the TRA are as follows: (In thousands) Estimated future payments 2019 $ 2,346 2020 13,772 2021 13,026 2022 1,640 2023 227 2024 and thereafter 375 Total TRA liability $ 31,386 |
