Utz Brands, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2022; comparable periods ended July 4, 2021. Utz manufactures and distributes branded salty snacks across U.S. retail and other channels.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $350.1m | $297.9m | $690.9m | $567.1m |
| Gross profit / margin | $111.5m / 31.9% | $95.6m / 32.1% | $215.3m / 31.2% | $190.8m / 33.6% |
| Operating income (loss) | $5.3m | $4.4m | $(17.2)m | $13.7m |
| Net income (loss) | $2.5m | $16.2m | $(29.4)m | $(7.2)m |
| Net income (loss) attributable to controlling interest | $3.2m | $17.6m | $(14.4)m | $(5.0)m |
| Class A diluted EPS | $0.04 | $0.21 | $(0.18) | $(0.07) |
| Adjusted EBITDA / margin | $42.2m / 12.1% | $35.7m / 12.0% | $78.7m / 11.4% | $73.7m / 13.0% |
Q2 sales rose 17.5%; first-half sales rose 21.8%. Management attributed growth to price/mix, organic volume, distribution gains and acquisitions. Excluding acquisitions and increased independent-operator (IO) discounts associated with route conversions, organic net sales grew 13.6% in Q2 and 16.9% in the first half. Q2 price/mix increased 13.0%; first-half price/mix increased 11.3%.
Profitability showed mixed trends: Q2 gross margin edged down 0.2 percentage points, while first-half gross margin fell 2.4 points. Management cited commodity and wage inflation, higher acquired-asset depreciation and increased IO discounts, partly offset by pricing and productivity measures. First-half GAAP operating results included substantial distributor buyout and related costs.
Cash flow, debt and liquidity
- Cash: $20.1m at July 3, 2022, down $21.8m from fiscal year-end.
- First-half cash flow: $26.3m used in operations, versus $0.04m used in the prior-year period; $47.3m used in investing, versus $70.5m; and $51.8m provided by financing, versus $50.5m.
- Investment: Property and equipment purchases were $60.3m. Cash use also reflected inventory build and $20.2m paid for distributor buyouts.
- Debt: Term debt and revolving credit facility carrying amount was $891.3m, compared with $842.0m at January 2, 2022. Other notes payable were $37.3m. The ABL facility had $65.8m drawn and $82.8m available, net of letters of credit.
- Rate exposure: Variable-rate indebtedness was $849.1m; interest-rate hedges covered $500m through September 30, 2026. First-half weighted average interest rate was 4.1%, up from 3.7%. The company reported compliance with its financial covenant.
Material changes, outlook and risks
- Distributor contract buyouts and terminations generated $23.0m of first-half expense; related contract-termination expenses and impairments totaled a combined $2.6m in addition. Management said the conversions are intended to improve future profitability and customer service.
- In April, Utz bought a Kings Mountain, North Carolina manufacturing facility for approximately $38.4m plus assumed liabilities of $1.3m. It concurrently issued 2.1m Class A shares to seller affiliates in a private placement for $28.0m.
- Management expected 2022 gross input-cost inflation, including commodities, labor and transportation, in the mid-to-high teens. It planned to counter costs through pricing and efficiency measures, while noting that customer sales levels at higher prices were uncertain and pricing could lag cost increases. No specific full-year revenue or earnings guidance is provided in the filing text.
- Utz expected to complete substantially all remaining RSP-to-IO route conversions by fiscal year-end 2022. Conversions reduce selling and distribution costs but also lower reported sales and gross profit through higher IO discounts.
- Principal exposures include continued commodity, freight and labor inflation; supply-chain disruption; higher variable-rate borrowing costs and LIBOR transition; execution of acquisitions and route conversions; and uncertain realization of deferred tax assets. The company recorded a valuation allowance against certain deferred tax assets, citing cumulative losses and other evidence.
- Other notable items: a $2.0m impairment of master distribution rights in the first quarter; a $7.7m first-half noncash gain from remeasuring warrant liabilities; and $93.2m of fixed-price ingredient purchase commitments at quarter-end. Management reported no material changes to previously disclosed risk factors and no pending litigation expected to materially affect the company.
Important facts for investors to verify
- How much sales growth reflects sustainable volume and distribution gains versus pricing, acquisitions and route-conversion accounting effects.
- Whether pricing and productivity can offset the forecast mid-to-high-teens input-cost inflation and stabilize gross margins.
- Whether working-capital needs, capital spending and negative operating cash flow improve, and how much liquidity remains available under the borrowing base.
- The sensitivity of interest expense and covenant headroom to higher rates, given variable-rate debt and the partial hedge.
- The timing, cash cost and expected benefits of distributor buyouts and the remaining route conversions.
- Potential effects of tax-asset valuation allowances, outstanding IO loan guarantees and purchase commitments.