Utz Brands, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The 13-week quarter ended April 4, 2021. Utz manufactures and distributes branded salty snacks through retail channels and a direct-store-delivery network. The company reports Q1 2021 as the “Successor” and Q1 2020 as the “Predecessor”; the August 2020 business combination and acquisition accounting make the periods not fully comparable.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $269.2 million | $228.0 million |
| Gross profit / margin | $95.2 million / 35.4% | $80.0 million / 35.1% |
| Operating income | $9.3 million | $12.2 million |
| Net income (loss) | $(23.3) million | $1.7 million |
| Net income (loss) attributable to controlling interest | $(22.5) million | $1.7 million |
| Basic and diluted EPS | $(0.30) | Not presented for Predecessor |
| Adjusted EBITDA | $37.9 million (14.1% of sales) | $29.2 million (12.8% of sales) |
Sales increased 18.0%, primarily from the Truco, Vitner’s and H.K. Anderson acquisitions and favorable price/mix. Excluding acquisitions and the impact of route conversions, management said sales declined 2.9%. Excluding acquired brands, Power brand sales fell about 1% and Foundation brand sales about 4%. The prior-year quarter benefited from pandemic-related pantry loading. Operating income declined despite higher gross profit, as SG&A rose 26.9% to $86.7 million. Net loss included a $21.5 million noncash loss from warrant remeasurement.
Cash flow and liquidity: Operating cash flow was $(13.2) million, investing cash flow $(25.3) million and financing cash flow $(4.3) million. Cash fell from $46.8 million at January 3 to $4.0 million at April 4. The company had $15.0 million drawn on its $161.0 million ABL facility and reported $93.4 million available, net of letters of credit. The filing’s MD&A narrative appears to misstate operating cash used as $25.3 million; the cash flow statement reports $13.2 million.
Debt: Balance-sheet term debt and revolving credit facility totaled approximately $725.9 million, with an additional $33.6 million of other notes payable and capital lease obligations. In January, the company raised $720 million under a new Term Loan B, bearing interest at LIBOR plus 3.00% and maturing in 2028, to refinance existing term and bridge debt. The reported Term Loan B rate was 3.11% at quarter-end. Weighted-average interest rate was 3.7%, down from 5.4%. The company reported compliance with its financial covenant.
Material changes, outlook and risks
- Acquisitions: Vitner’s assets were acquired for approximately $25 million in February, funded with cash. Recent acquisitions, including Truco and H.K. Anderson, increased sales and operating costs; purchase-price allocations remained provisional.
- Margins and costs: Gross margin improved modestly due to price realization, mix and productivity, partly offset by commodity inflation. Management expected elevated commodity costs to continue through 2021 and cautioned that pricing actions may lag cost increases.
- Operations: Management expected to complete substantially all remaining conversions of company-operated routes to independent operators by Q2 2022. Such conversions can reduce selling expenses but also reduce net sales and gross profit.
- Outlook and subsequent events: The filing provides no specific financial guidance. The company announced a planned approximately $41 million Festida Foods acquisition, expected to close in Q2 2021 and be funded through the revolver. A $0.05-per-share dividend was declared in April and paid in May.
- Risks and contingencies: Variable-rate debt remains exposed to benchmark-rate changes and the LIBOR transition; the filing warns replacement benchmarks could increase interest costs. COVID-19 effects remained under evaluation. Commodity-price exposure is partly managed through purchasing commitments totaling $81.2 million. The company disclosed route-related loan guarantees and a $1.3 million reserve for a Pennsylvania sales-tax assessment; management did not expect pending litigation to be material.
- Reporting and control matters: The company restated prior financial statements for warrant-accounting corrections. It concluded disclosure controls were ineffective at quarter-end because of a material weakness in warrant accounting and oversight of external specialists, and said remediation was underway. The new ERP system went live during the quarter.
Investor verification priorities
- Reconcile the MD&A cash-flow narrative with the financial statements, particularly operating cash use.
- Assess underlying sales trends apart from acquisitions, COVID-19 comparisons and route-conversion discounts.
- Review debt, revolver availability, variable-rate exposure and the planned Festida financing against low quarter-end cash.
- Track commodity inflation, pricing pass-through, route-conversion economics and acquisition integration.
- Monitor remediation of the material weakness and the effects of the warrant-accounting restatement.