Utz Brands, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Utz manufactures and distributes branded salty snacks across the U.S. The second quarter was the 13 weeks ended July 2, 2023; year-to-date (YTD) figures cover the 26 weeks ended that date. Comparisons are to the corresponding periods ended July 3, 2022. Unless noted, amounts below are in millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Net sales | $362.9 | $350.1 | $714.3 | $690.9 |
| Gross profit / margin | $117.4 / 32.4% | $111.5 / 31.9% | $221.9 / 31.1% | $215.3 / 31.2% |
| Operating income (loss) | $2.7 | $5.3 | $0.6 | $(17.2) |
| Consolidated net income (loss) | $(8.6) | $2.5 | $(23.0) | $(29.4) |
| Net income (loss) attributable to controlling interest | $(4.1) | $3.2 | $(13.3) | $(14.4) |
| Adjusted EBITDA / margin | $45.2 / 12.5% | $42.2 / 12.1% | $85.7 / 12.0% | $78.7 / 11.4% |
| Net cash used in operating activities | Not separately stated | Not separately stated | $(4.3) | $(26.3) |
Q2 sales rose 3.6%; management attributed the increase mainly to pricing, partly offset by lower volume/mix and continued independent-operator (IO) route conversions. For YTD, sales rose 3.4%, with pricing contributing 7.8%, offset by a 3.6% volume/mix decline and a 0.8% reduction related to IO conversions. Q2 Power brand sales increased about 11.5%, while Foundation brand sales declined about 8.9%.
Gross margin improved in Q2, reflecting pricing and productivity gains, but edged down YTD. Management cited commodity and wage inflation, higher inbound freight, lower fixed-overhead absorption, and IO discounts as pressures. Q2 selling, distribution and administrative expense increased 6.4% to $114.5; YTD expense decreased 5.9% to $220.5, partly because the prior-year period included $23.0 of distributor buyout costs.
Interest expense increased to $15.0 in Q2 from $10.7, and to $29.4 YTD from $19.8. Q2 diluted and basic loss per Class A share was $0.05; YTD loss per share was $0.16.
Liquidity, debt and cash flow
- At July 2, 2023, cash was $73.7; current assets were $382.9 and current liabilities were $210.9.
- Reported long-term debt, including the current portion, was $967.0, compared with $911.8 at January 1, 2023. Other notes payable totaled $29.8. Debt balances include $775.3 of Term Loan B and $61.0 drawn on the ABL facility.
- ABL borrowing availability, net of letters of credit, was $96.6 at quarter-end, down from $163.0 at year-end. On July 20, 2023, the facility was amended to increase its limit to $225.0 and extend its maturity, subject to the stated Term Loan B-related limit.
- YTD operating cash use was $4.3; investing cash use was $30.8, including $30.2 of property and equipment purchases; financing provided $35.8, including $61.0 of net line-of-credit borrowing. Cash increased $0.7 from year-end.
- Variable-rate indebtedness was $861.7 at quarter-end. Interest-rate hedges covered $586.4 of debt. The weighted-average interest rate was 5.7% YTD, compared with 4.1% in the prior-year period.
Material changes, outlook and risks
- Manufacturing closure: Utz permanently ceased operations at its Birmingham, Alabama manufacturing facility in June 2023, reducing its workforce by about 130. Products continued to be made at other facilities; the Birmingham distribution center remains open. The company recorded $8.9 of related expense: $7.6 in fixed-asset impairments and $1.3 in severance. It also recorded $1.9 of unrelated property and equipment impairment YTD.
- Other unusual expense: A $4.7 liability for terminating a co-manufacturer contract was recorded in Q2 and YTD. Management said the action continued its response to production shifts following a facility damaged by a 2021 natural disaster.
- Demand and pricing: Management reported U.S. salty-snack retail sales growth of 11.9% for the quarter and Utz retail sales growth of 8.8%. It expects favorable snacking trends to support category growth, but reported company volume pressure from SKU rationalization, price-pack changes, weight-outs and comparison with strong prior-year sales. No quantified full-year financial guidance is provided in the filing.
- Cost and rate exposure: Commodity, labor, fuel and freight inflation may pressure profitability. Pricing may lag cost changes or affect customer demand, and the company may not fully hedge input costs. Rising interest rates can increase expense on unhedged variable-rate debt.
- Other exposures: The company reported $110.4 of fixed-price ingredient purchase commitments and IO-loan guarantees, including $42.9 of Bank of America loans outstanding under guarantees. Management said pending litigation was not expected to be material; it reported no material changes to the risk factors in its 2022 Form 10-K. The company recorded a valuation allowance against certain deferred tax assets, citing cumulative losses and uncertainty about future utilization.
Most important facts for investors to verify
- Whether pricing and productivity continue to offset inflation without further weakening volume, and whether Power brand gains can offset Foundation brand declines.
- How the Birmingham closure and production shifts affect ongoing costs, capacity utilization and service levels; distinguish recurring results from the closure and co-manufacturer charges.
- Debt levels, borrowing-base availability and covenant compliance following the July 20 ABL amendment, as well as interest-rate exposure on unhedged debt.
- The quality and sustainability of cash generation, given YTD operating cash outflow and reliance on line-of-credit borrowing to fund cash needs.
- Potential changes in deferred-tax-asset realizability, IO guarantees and purchase-commitment exposure.