Utz Brands, Inc. — Q3 2023 Form 10-Q
Business context and period. Utz manufactures and distributes branded salty snacks across the United States. This filing covers the 13 and 39 weeks ended October 1, 2023, compared with the periods ended October 2, 2022. Fiscal 2023 is a 52-week year.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $371.9 million | $362.8 million | $1,086.1 million | $1,053.7 million |
| Gross profit / margin | $119.3 million / 32.1% | $118.3 million / 32.6% | $341.2 million / 31.4% | $333.6 million / 31.7% |
| Income (loss) from operations | $5.3 million | $15.0 million | $5.8 million | $(2.2) million |
| Net income (loss) | $16.2 million | $1.5 million | $(6.8) million | $(27.9) million |
| Net income (loss) attributable to controlling interest | $16.0 million | $(0.9) million | $2.7 million | $(15.3) million |
| Adjusted EBITDA and margin | $52.1 million / 14.0% | $47.7 million / 13.1% | $137.8 million / 12.7% | $126.4 million / 12.0% |
Cash flow and liquidity. For the 39 weeks, operating activities provided $49.1 million, investing activities used $37.5 million, and financing activities used $24.5 million. Cash declined $12.8 million from the start of the fiscal year to $60.1 million. At October 1, 2023, current assets were $358.6 million and current liabilities were $227.6 million. The company reported $149.3 million of ABL availability, net of letters of credit.
Debt. Long-term debt, including its current portion, was $915.8 million; other notes payable were $27.8 million. Term Loan B principal was $773.3 million and the Real Estate Term Loan balance was $81.0 million. The Term Loan B weighted-average rate, before hedging, was 8.36% in Q3; the ABL rate was 7.17% at quarter-end. The company said it was in compliance with financial covenants. Interest expense was $15.5 million in Q3 and $44.9 million for the 39 weeks.
Changes versus comparable periods
- Sales rose 2.5% in Q3 and 3.1% year to date, primarily reflecting pricing actions. For the 39 weeks, pricing contributed 6.4% growth, offset by a 2.6% volume/mix decline and a 0.7% decline associated with independent-operator (IO) conversions.
- Power brand sales increased about 9.7% in Q3 and 10.1% year to date; Foundation brand sales fell about 16.6% and 10.4%, respectively. Management attributed volume pressure in part to SKU rationalization, particularly reductions in private-label, co-manufactured and partner-brand products.
- Gross margin contracted 0.5 percentage point in Q3 and 0.3 point year to date. Inflation, IO conversion costs and supply-chain factors offset pricing and productivity benefits.
- Q3 attributable earnings improved from a loss to profit, while 39-week consolidated results remained a net loss. Results included non-cash warrant remeasurement gains of $16.0 million in Q3 and $16.6 million year to date, and tax benefits of $10.1 million and $13.4 million, respectively.
- Year-to-date selling, distribution and administrative expense declined 3.2%, in part because the prior-year period included $23.0 million of distributor buyout/contract termination costs. Current-year expenses include manufacturing-closure impairments and a co-manufacturer contract termination.
- Interest expense increased year over year, reflecting higher rates and debt associated with equipment loans and the Real Estate Term Loan.
Outlook, risks and unusual items
- The filing does not provide a clear numerical full-year earnings or sales guidance target. Management expects salty-snack category trends to support continued retail sales growth, but noted that its Q3 retail sales increased 3.2% versus 5.9% category growth.
- Management cited continued commodity, labor, fuel and freight cost pressures, and said pricing may lag cost increases or affect customer sales levels. Unhedged variable-rate debt leaves earnings exposed to further rate increases; interest-rate swaps cover $585.5 million of debt.
- The company closed its Gramercy, Louisiana and Birmingham, Alabama manufacturing plants and sold its Bluffton, Indiana facility. The Bluffton sale generated a $13.4 million loss, partly offset by a $4.0 million gain on sale of Hanover land. The Birmingham closure included $8.9 million of costs, including $7.6 million of fixed-asset impairments and $1.3 million of severance.
- Commodity purchase commitments totaled $84.4 million. The company also disclosed IO loan guarantees, including $49.6 million of Bank of America-originated loans outstanding that it partially guarantees, and $2.5 million of M&T Bank loans guaranteed and recorded on the balance sheet. Management believes collateral provides substantial recovery, but guarantees remain contingent exposures.
- Management reported no material change in risk factors since the 2022 Form 10-K and no pending litigation expected to have a material adverse effect. It also reported effective disclosure controls and no material change in internal control over financial reporting.
- Operating cash flow was positive for the 39 weeks. The MD&A contains an inconsistent sentence describing the change in cash as an increase; the cash flow statement and balance sheets show cash decreased by $12.8 million.
Investor verification points
- Reconcile the improvement in reported earnings to non-cash warrant gains and unusually large income tax benefits; review the underlying operating trend alongside Adjusted EBITDA.
- Track gross margins, input-cost inflation, pricing realization, SKU rationalization and the continued shift from company-operated routes to IOs.
- Assess leverage, debt maturities, interest-rate exposure, ABL borrowing availability and compliance with loan covenants.
- Monitor cash conversion, capital spending and the costs and operational effects of manufacturing closures and network optimization.
- Review the assumptions behind tax-asset valuation allowances and potential IO guarantee exposure, including collateral and maximum contractual obligations.