Utz Brands, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the 13 and 39 weeks ended October 3, 2021. Utz manufactures, markets and distributes branded salty snacks through retail channels and a direct-store-delivery network. The company continued expanding through acquisitions, including Vitner’s and Festida Foods in 2021.
Comparisons require care: the August 2020 business combination created “Successor” financial statements with acquisition-accounting step-ups that are not directly comparable with “Predecessor” periods. Management also presents combined prior-year periods for analysis; these are non-GAAP and not pro forma results.
Financial results and liquidity
| Metric | Q3 / as of October 3, 2021 | Comparison or context |
|---|---|---|
| Net sales | $312.7 million | Up 26.1% versus the combined prior-year quarter ($248.0 million); excluding acquisitions and route-conversion-related IO discount changes, sales rose 2.0%. |
| Gross profit and margin | $102.6 million; 32.8% | Margin was 34.8% in the combined prior-year quarter. Higher commodity, labor and freight costs, and increased IO discounts, pressured margin. |
| Operating income | $2.9 million | Combined prior-year operating income was $1.9 million. |
| Net income attributable to controlling interest | $33.3 million | Includes a $36.3 million noncash gain from warrant-liability remeasurement; reported net income was $31.4 million. |
| Adjusted EBITDA (non-GAAP) | $44.8 million; 14.3% of sales | Combined prior-year quarter: $38.2 million; 15.4% of sales. |
| 39-week results | Sales $879.8 million; gross margin 33.4%; net income attributable to controlling interest $28.3 million; Adjusted EBITDA $118.5 million (13.5% of sales) | Sales increased 22.5% versus the combined prior-year period, but declined 0.7% excluding acquisitions and route-conversion-related IO discount changes. Prior-year Adjusted EBITDA was $100.0 million (13.9% of sales). |
| Operating cash flow | $4.3 million for 39 weeks | Combined prior-year period: $2.9 million. |
| Cash and cash equivalents | $26.0 million | Down from $46.8 million at January 3, 2021. |
| Debt and borrowing capacity | $803.7 million of term debt and equipment financing; $35.3 million of other notes payable | No ABL borrowings; $133.2 million available under the ABL facility. Term Loan B interest rate was 3.08%; the company reported $789.1 million of variable-rate indebtedness. |
Total assets were $2.63 billion and total liabilities were $1.13 billion at quarter-end. The company reported compliance with its financial covenant. Acquisitions and capital expenditures contributed to $78.1 million of investing cash outflow for the 39 weeks; financing activities provided $52.9 million.
Material changes and management commentary
- Acquisitions—principally Truco, Vitner’s, H.K. Anderson and Festida Foods—were the main driver of reported sales growth. Excluding acquired brands, Q3 Power Brand sales rose about 4.1%, while Foundation Brand sales fell about 3.1%; management cited planned private-label reductions and comparison with elevated COVID-era demand.
- Inflation in commodities, wages, freight, fuel and transportation increased costs. Pricing actions and productivity gains partly offset these pressures, but management warned that cost increases could continue through early 2022 and that customer sales levels at higher prices are uncertain.
- IO discounts rose to $31.6 million in Q3 from $25.2 million in the combined prior-year quarter, reflecting the shift from company-operated routes to independent operators. The company said the change also reduces selling expenses; it anticipated completing substantially all remaining route conversions by Q2 2022.
- Management reported U.S. salty-snack retail sales growth of 7.9% in Q3 and Utz retail sales growth of 4.4%.
- On November 2, 2021, the company announced an agreement to acquire RW Garcia for approximately $56 million, expected to close in Q4 2021 and be funded with cash and the ABL facility.
Risks, contingencies and unusual items
- Controls: Disclosure controls were deemed ineffective because of a material weakness involving accounting for stock warrants and review of external specialists’ work. Management said remediation was underway, including stronger standardized controls and review procedures.
- Interest rates: Variable-rate debt exposes the company to higher interest expense; management noted uncertainty around the transition from LIBOR to a replacement benchmark. An interest-rate swap hedges a portion of exposure.
- Warrants: Warrant-liability remeasurement materially affected reported earnings. The Q3 gain was noncash and should not be treated as recurring operating profit.
- Other exposures: The company had $44.8 million of fixed-price ingredient purchase commitments, guarantees relating to independent-operator route loans, and a $1.3 million reserve for a Pennsylvania sales-tax assessment. Management did not expect pending litigation to have a material effect.
- Tax receivable agreement: The company had a $25.3 million liability; it may be required to pay continuing members 85% of specified tax benefits realized.
- COVID-19 and supply chain: The company continued to monitor effects on demand, production and distribution, as well as labor, freight and input-cost pressures.
Important facts for investors to verify
- How much sales growth is organic and sustainable after separating acquisition contributions, route-conversion effects and prior-year COVID-related demand.
- Whether pricing and productivity can offset continued commodity, labor and freight inflation without materially weakening volumes or margins.
- Cash conversion and working-capital needs, given modest operating cash flow and the decline in cash balances.
- Debt levels, floating-rate exposure, ABL availability and funding needs for acquisitions and investment.
- Progress remediating the material weakness and the effectiveness of financial-reporting controls.
- Acquisition integration, final purchase-price allocations and the closing and financing of the announced RW Garcia transaction.