Utz Brands, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Utz manufactures and distributes branded salty snacks across the U.S. This filing covers the 13 and 39 weeks ended October 2, 2022; comparisons are with periods ended October 3, 2021. Amounts below are in U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Net sales | $362.8m | $312.7m | $1,053.7m | $879.8m |
| Gross profit | $118.3m | $102.6m | $333.6m | $293.4m |
| Gross margin | 32.6% | 32.8% | 31.7% | 33.4% |
| Operating income (loss) | $15.0m | $2.9m | ($2.2m) | $16.5m |
| Net income (loss) | $1.5m | $31.4m | ($27.9m) | $24.2m |
| Net income (loss) attributable to controlling interest | ($0.9m) | $33.3m | ($15.3m) | $28.3m |
| Adjusted EBITDA | $47.7m | $44.8m | $126.4m | $118.5m |
| Adjusted EBITDA margin | 13.1% | 14.3% | 12.0% | 13.5% |
Financial condition and cash flow
- Cash and liquidity: Cash was $51.8m at October 2, 2022, up from $41.9m at January 2, 2022. Current assets were $347.2m and current liabilities $206.8m.
- Cash flow, 39 weeks: Operating cash provided was $8.1m, compared with $4.3m in the prior-year period. Investing activities used $52.9m, while financing activities provided $54.8m. Capital expenditures for property and equipment were $68.7m.
- Debt: Long-term debt, including current maturities and net of issuance costs, was $902.4m, versus $842.0m at year-end. This included $781.3m of Term Loan B, $76.4m outstanding on the ABL facility, and $53.1m of equipment loans. The company reported $86.1m of ABL availability at quarter-end.
- Interest rate exposure: Weighted-average interest rate was 4.3% for the 39 weeks, up from 3.5%. Utz reported $857.7m of variable-rate indebtedness and hedges covering $500m through September 2026.
Material changes and drivers
- Sales rose 16.0% in Q3 and 19.8% for the 39 weeks. Management cited price/mix increases (14.7% in Q3; 12.5% year to date), distribution gains, organic growth over the year-to-date period, and acquisitions. Q3 volume declined 2.1%, reflecting SKU rationalization and comparison with strong prior-year promotions.
- Gross margin declined year over year, particularly for the 39 weeks, as commodity, wage and transportation inflation and higher depreciation outweighed pricing and productivity measures. Higher discounts to independent operators also reduced gross profit.
- Interest expense increased to $11.6m for Q3 and $31.5m for the 39 weeks, compared with $7.7m and $26.5m, respectively, reflecting higher debt balances and interest rates.
- Reported earnings comparisons were materially affected by non-cash warrant remeasurement. Q3 included a $3.7m loss versus a $36.3m gain a year earlier; the 39-week period included a $4.0m gain versus a $34.2m gain. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided in the supplied filing text. Management expected fiscal 2022 gross input cost inflation, including commodities, labor and transportation, in the mid-to-high teens, and said inflation could continue to pressure earnings. Pricing and productivity initiatives may not fully or promptly offset cost increases.
- In Q3, Utz recorded $4.0m of business-interruption insurance proceeds as a reduction of cost of goods sold following natural-disaster damage at a smaller facility. Year to date, it recorded $2.7m of property impairments and received $3.9m in property-damage insurance proceeds; production shifts and use of a co-manufacturer added costs. Further insurance payments remained under negotiation.
- Distributor contract buyouts and terminations generated $23.0m of expense in the 39-week period. Management said route conversions to independent operators should reduce selling costs, but also reduce reported sales and gross profit through higher operator discounts; substantially all remaining conversions were expected by mid-2023.
- After quarter-end, Utz entered an $88.1m, 10-year real-estate-secured loan, with approximately $85.0m net proceeds, and used proceeds to pay off the ABL facility. A related swap fixed the effective interest rate at approximately 6%. The loan amortizes about $3.5m annually and has a balloon payment at maturity.
- The company reported compliance with its financial covenant at quarter-end. It cited no material changes to its previously disclosed risk factors and did not expect pending litigation to have a material adverse effect. It recorded valuation allowances on certain deferred tax assets, citing cumulative losses and uncertainty about future realization.
Investor verification points
- Check how much of sales growth reflects price increases, acquisitions, distribution gains and organic volume, particularly given Q3 volume decline.
- Assess whether pricing, productivity and cost controls can recover the gross-margin and adjusted EBITDA-margin declines amid expected inflation.
- Review the debt and interest-rate position after the subsequent real-estate loan and ABL repayment, including remaining variable-rate exposure and covenant terms.
- Evaluate the sustainability of cash generation given inventory growth, capital spending and the costs of distributor conversions and buyouts.
- Track insurance recoveries and facility disruption costs, as well as the realization of deferred tax assets and the potential obligations from guarantees and purchase commitments.