Utz Brands, Inc. — Q2 2021 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 4, 2021. Amounts below are in millions unless stated otherwise.
Business context and comparability
Utz manufactures, markets, and distributes branded snack foods through retail, direct-store-delivery, and other channels. The quarter included contributions from acquisitions, including Truco, Vitner’s, H.K. Anderson, and Festida Foods. Comparisons require caution: the 2021 “Successor” results reflect acquisition accounting and a stepped-up asset basis, while 2020 “Predecessor” results do not, and the periods are not fully comparable.
Financial performance
| Metric | 13 weeks ended July 4, 2021 | 13 weeks ended June 28, 2020 | 26 weeks ended July 4, 2021 | 26 weeks ended June 28, 2020 |
|---|---|---|---|---|
| Net sales | $297.9 | $242.0 | $567.1 | $470.0 |
| Gross profit | $95.6 | $84.9 | $190.8 | $164.9 |
| Gross margin | 32.1% | 35.1% | 33.6% | 35.1% |
| Operating income | $4.4 | $17.5 | $13.7 | $29.7 |
| Net income (loss), consolidated | $16.2 | $6.6 | $(7.2) | $8.2 |
| Net income (loss) attributable to controlling interest | $17.6 | $6.6 | $(5.0) | $8.2 |
| Adjusted EBITDA | $35.7 | $32.6 | $73.7 | $61.8 |
| Adjusted EBITDA margin | 12.0% | 13.5% | 13.0% | 13.2% |
Quarterly sales rose 23.1% and first-half sales rose 20.7%, primarily reflecting acquisitions. Excluding acquisitions and the effects of route-conversion discounts, management reported sales declines of 0.7% for the quarter and 1.6% for the first half. The 2020 comparison benefited from pandemic-related pantry loading. The Q2 controlling-interest profit included a $19.4 million noncash gain from warrant remeasurement; the first-half period recorded a $2.1 million warrant remeasurement loss.
Gross margin declined year over year amid commodity, labor, and inbound-freight inflation and higher independent-operator discounts. Those discounts reduced gross profit by $6.7 million in Q2 and $9.1 million in the first half. SG&A increased 37.3% in Q2 and 32.1% in the first half, reflecting acquisition and public-company costs, related depreciation and amortization, transportation and fuel inflation, and higher marketing spending.
Cash flow, debt, and liquidity
- First-half operating cash flow was approximately $(0.04) million, versus $20.3 million provided in the prior-year period. Management cited working-capital changes, including receivables and inventory, and lower accrued expenses.
- First-half investing cash outflow was $70.5 million, including $66.6 million for the Vitner’s and Festida Foods acquisitions. Financing cash inflow was $50.5 million. Cash declined $20.1 million to $26.7 million from January 3, 2021.
- At July 4, 2021, current assets were $263.5 million and current liabilities $153.9 million. The ABL revolver had no borrowings and $109.0 million available, net of letters of credit.
- Term debt and financing obligations totaled approximately $796.3 million on the balance sheet; other notes payable totaled $36.5 million. Term Loan B had $791.2 million outstanding at a 3.09% rate and matures January 2028. The company added $75 million of Term Loan B principal in June. Debt is largely variable-rate and secured by substantially all assets of UBH and its subsidiaries; the company reported covenant compliance.
Outlook, risks, and unusual items
- Management expected commodity inflation to continue through 2021 and warned that pricing actions could lag cost increases, potentially pressuring income. The filing provides no specific financial guidance for future periods.
- The company expected to complete substantially all remaining conversions of company-operated routes to independent operators by Q2 2022. Management said conversions reduce selling expense but also reduce net sales and gross profit.
- COVID-19 continued to affect consumption, distribution, and production; management said it was monitoring demand and adapting operations. LIBOR transition and higher rates pose risks to interest expense and cash flow.
- The filing reports a material weakness in internal control over financial reporting related to warrant accounting and oversight of external specialists. Management concluded disclosure controls were ineffective as of July 4, 2021 and was working on remediation.
- Other notable items include $64.6 million of fixed-price ingredient purchase commitments, a $28.7 million tax receivable agreement liability, and an ongoing Pennsylvania sales-tax assessment with a $1.3 million reserve. Management did not expect pending litigation to have a material adverse effect.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying sales trends, and account for the non-comparable Successor and Predecessor reporting bases.
- Assess whether pricing, productivity, or other actions can offset commodity, labor, and freight inflation and recover gross margin.
- Review cash conversion and working-capital needs alongside acquisition spending, dividends, and debt service.
- Track variable-rate debt exposure, refinancing terms, covenant headroom, and LIBOR transition provisions.
- Monitor remediation of the reported material weakness and the potential variability of warrant-liability remeasurement in reported earnings.