Utz Brands, Inc. — Q1 2024 Form 10-Q
Business context and period: Utz manufactures and distributes branded salty snacks in the U.S. The quarter covered 13 weeks ended March 31, 2024; comparisons are with the 13 weeks ended April 2, 2023. In February, the company sold its Good Health and R.W. Garcia brands and related facilities and assets to affiliates of Our Home.
Key financial results
| Metric | Q1 2024 | Prior-year quarter |
|---|---|---|
| Net sales | $346.5 million | $351.4 million |
| Gross profit / margin | $119.6 million / 34.5% | $104.5 million / 29.7% |
| Operating income (loss) | $9.7 million | $(2.1) million |
| Net income (loss), consolidated | $2.4 million | $(14.5) million |
| Net loss attributable to controlling interest | $(4.0) million | $(9.1) million |
| Adjusted EBITDA and margin (non-GAAP) | $43.4 million / 12.5% | $40.4 million / 11.5% |
- Net sales declined 1.4%. The divestiture accounted for 2.5 percentage points of the decrease and continued independent-operator (IO) route conversions for 0.4 points; favorable volume/mix and pricing contributed 1.1 and 0.4 points, respectively. Excluding the divestiture and increased IO discounts, sales increased 1.5%.
- Retail sales increased 4.1%; Power brand sales rose approximately 3.9%, while Foundation brand sales fell approximately 8.4%.
- Gross margin rose 4.8 percentage points, primarily on productivity, favorable mix, and pricing, partly offset by inflation and supply-chain investments. Selling, distribution, and administrative expenses increased 3.2% to $109.4 million.
- Net income included a $44.0 million gain on the business sale and an $11.8 million non-cash warrant remeasurement loss. Income tax expense was $26.5 million, including $26.1 million of discrete expense related to the sale; the reported effective tax rate was 91.7% and management reported 1.7% before discrete items.
Cash flow, debt, and liquidity
- Operating cash flow was a use of $9.1 million, compared with a use of $8.4 million. Investing cash flow provided $158.0 million, largely from the $167.5 million sale proceeds; financing used $154.0 million, primarily for debt repayments. Cash declined to $47.0 million from $52.0 million.
- Reported long-term debt, including current portion, was $756.9 million at March 31, versus $899.6 million at year-end. The company reported $701.2 million of variable-rate indebtedness, down from $851.5 million. It used sale proceeds to repay $141.0 million on Term Loan B and $8.5 million on the Real Estate Term Loan.
- ABL borrowings were $0.2 million, with $151.9 million available, net of letters of credit. The company reported compliance with its financial covenants.
- In April, Utz amended and refinanced its $630.0 million Term Loan B, reducing the spread to SOFR plus 2.75% from SOFR plus a credit spread adjustment plus 3.00%; the January 2028 maturity remained unchanged.
Outlook, risks, and other notable items
- The filing provides no specific full-year financial guidance. Management describes ongoing productivity, transformation, cost-saving, sourcing, hedging, and pricing efforts, and expects favorable salty-snack consumer trends to support category growth.
- Management cites continuing exposure to commodity, fuel, freight, and labor costs; pricing actions may lag cost increases or affect sales volumes. Variable-rate debt creates interest-rate risk despite hedges covering $547.0 million of debt at quarter-end. The weighted-average interest rate was 6.6%, versus 5.6% a year earlier.
- Purchase commitments for key ingredients totaled $97.1 million. The company also partially guarantees certain IO route-purchase loans; relevant outstanding balances include $56.3 million of Bank of America loans and $2.5 million at two other banks. Management says the route collateral allows recovery of substantially all loan value upon default.
- In April, the company sold its Berlin, Pennsylvania and Fitchburg, Massachusetts facilities and related assets for $18.5 million. It also entered transition-services and co-manufacturing arrangements with Our Home; approximately $15.5 million received in advance will be recognized over the agreements’ terms.
- Management reported no material changes to previously disclosed risk factors and no pending legal proceeding expected to have a material adverse effect. Disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- How the divestiture and April facility sale affect ongoing sales, production capacity, transition costs, and cash generation.
- Whether gross-margin improvement and Adjusted EBITDA growth persist after excluding transaction-related items and considering the company’s non-GAAP adjustments.
- The impact of the sale-related tax expense, valuation allowances, and deferred tax assets on future reported earnings and cash taxes.
- Debt balances, interest-rate exposure, hedge coverage, and the realized benefits of the Term Loan B refinancing.
- Potential cash-flow demands from ingredient commitments, IO guarantees, capital spending, dividends, and other contractual obligations.