Utz Brands, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 27, 2020; filed November 5, 2020. Utz manufactures and distributes branded salty snacks through retail channels, including its direct-store-delivery network. The August 28, 2020 business combination with Utz Brands Holdings, LLC created distinct “Predecessor” and “Successor” accounting periods. Acquisition accounting materially changed asset values, so the reported Successor figures are not directly comparable with the Predecessor figures. Where noted below, combined-period comparisons are management’s unaudited, non-GAAP presentation.
Financial performance and position
| Metric | Third quarter 2020 | 39 weeks 2020 |
|---|---|---|
| Combined net sales | $248.0 million, up 24.2% from $199.6 million | $718.0 million, up 26.8% from $566.5 million |
| GAAP gross profit | $86.2 million; 34.8% margin, versus 35.0% | $251.1 million; 35.0% margin, versus 33.2% |
| GAAP net income (loss) | $(7.3) million combined, versus $10.3 million | $1.0 million combined, versus $10.6 million |
| Adjusted EBITDA | $38.2 million, versus $27.3 million; 15.4% versus 13.7% of sales | $100.0 million, versus $69.9 million; 13.9% versus 12.3% of sales |
| Operating cash flow | Quarter-specific combined value not clearly provided | $2.9 million, versus $4.1 million |
Third-quarter sales growth reflected acquisitions and increased at-home snacking. Excluding acquisitions and changes in independent-operator discounts, sales grew 9.5% for the quarter and 11.0% year to date. Adjusted EBITDA is a non-GAAP measure; the filing provides reconciliations and cautions that it should be considered alongside GAAP results.
- Cash and liquidity: Cash was $32.0 million at September 27, 2020. Current assets were $226.7 million and current liabilities $126.5 million. The undrawn asset-based revolver had $101.8 million available, net of letters of credit.
- Debt: Term debt was approximately $411.5 million and other notes payable approximately $34.1 million at quarter-end. The company paid down debt as part of the business combination; the new capital structure and acquisition accounting make comparison with year-end balances imperfect. The company reported compliance with its financial covenant.
- Cash flows: For the 39 weeks, investing cash outflow was $210.0 million, primarily reflecting the business combination and $14.8 million of capital expenditures. Financing cash outflow was $249.9 million, primarily reflecting debt repayment.
- Other balance-sheet items: Goodwill was $664.3 million and intangible assets were $854.9 million, largely reflecting acquisition accounting. A $51.4 million tax receivable agreement (TRA) liability was recorded. The company declared a $0.05-per-share dividend on Class A common stock during the Successor period.
Material changes and significant items
- The August 28 business combination was accounted for using the acquisition method. The provisional business enterprise value was approximately $1.86 billion; the purchase price allocation was not final at quarter-end.
- Utz acquired Kennedy in October 2019 and Kitchen Cooked in December 2019. Those acquisitions contributed to reported growth and make period comparisons less like-for-like.
- Quarterly gross profit included $5.8 million of expense from the acquired inventory fair-value step-up. Business-combination and acquisition-related costs also affected results; management’s Adjusted EBITDA excludes specified items.
- Debt repayments included a $111.6 million principal prepayment on the first-lien term loan and repayment of a separate secured first-lien note. A $2.5 million early-termination fee was recorded in the Successor period.
- On November 2, 2020, after quarter-end, Utz acquired certain H.K. Anderson assets for less than $10 million, including inventory, to add filled pretzels to its product offering.
Outlook, commentary, and risks
Management said demand remained higher than the prior year as consumers increased at-home snacking during COVID-19, and the company increased production and distribution to serve demand. Management stated that it was continuing to monitor customer and consumer behavior and evaluate the pandemic’s financial impact. The filing provides no quantified earnings or revenue guidance.
- Power-brand sales grew approximately 10% in the quarter and 13% year to date, excluding acquisitions and higher independent-operator discounts; Foundation-brand sales declined approximately 2% and 1%, respectively. Management attributed Foundation softness partly to foodservice, convenience, and smaller “up-and-down-the-street” customers.
- Management cited productivity initiatives, volume leverage, and lower commodity costs as supports to margins, while warning that raw-material prices, customer and product mix, promotional needs, and sales velocities can pressure margins.
- COVID-19 could continue to affect demand by channel, operations, workforce availability, and supply chains. The company also faces commodity-cost, competitive, consumer-preference, customer-concentration, and distribution-network risks.
- Approximately $410 million of variable-rate indebtedness used LIBOR as a benchmark; the filing notes uncertainty around LIBOR’s expected phaseout and possible replacement rates. A $250 million interest-rate swap hedged a portion of rate exposure.
- The company had $53.0 million of fixed-price ingredient purchase commitments. It also disclosed independent-operator loan guarantees, a $1.3 million reserve for a Pennsylvania sales-tax assessment, and an unclaimed-property audit for which potential liability on customer overpayments could not be reasonably estimated. Management did not expect currently pending litigation to have a material adverse effect.
- The TRA requires payment to continuing members of 85% of specified realized tax benefits. Payments may vary, could exceed actual tax savings in some circumstances, and may accelerate under specified events.
Important facts for investors to verify
- Reconcile the combined-period growth and margins to the underlying Predecessor and Successor statements, and distinguish GAAP results from management’s non-GAAP measures.
- Assess how much of sales and Adjusted EBITDA growth came from COVID-related demand, acquisitions, and underlying organic performance, and whether demand persists across channels.
- Review the final purchase price allocation, including the large goodwill and intangible-asset balances, and monitor future amortization or impairment effects.
- Evaluate debt maturities, variable-rate exposure, revolver availability, covenant terms, and the potential cash demands of the TRA and dividends.
- Track the resolution of the tax assessment and unclaimed-property audit, as well as the exposure under independent-operator guarantees and purchase commitments.