Utz Brands(UTZ) - 2025 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Utz Brands, Inc. for Q2 2024 and 2023, including balance sheets, operations, equity, cash flows, and notes Consolidated Balance Sheets Consolidated Balance Sheet Summary | Metric | As of June 30, 2024 (Unaudited) (in thousands) | As of December 31, 2023 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :------------------------------------- | | Total Assets | $2,650,116 | $2,746,736 | | Total Liabilities | $1,244,388 | $1,363,053 | | Total Equity | $1,405,728 | $1,383,683 | - Total assets decreased by $96.6 million, while total liabilities decreased by $118.7 million, leading to an increase in total equity by $22.0 million from December 31, 2023, to June 30, 2024[8] Consolidated Statements of Operations and Comprehensive Income (Loss) Consolidated Statements of Operations Summary | Metric | Thirteen weeks ended June 30, 2024 (in thousands) | Thirteen weeks ended July 2, 2023 (in thousands) | Twenty-six weeks ended June 30, 2024 (in thousands) | Twenty-six weeks ended July 2, 2023 (in thousands) | | :-------------------------------------- | :------------------------------------------------ | :----------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | | Net sales | $356,190 | $362,853 | $702,713 | $714,286 | | Gross profit | $124,754 | $117,393 | $244,327 | $221,889 | | Income from operations | $22,534 | $2,661 | $32,189 | $563 | | Net income (loss) | $25,447 | $(8,553) | $27,843 | $(23,035) | | Diluted EPS | $0.23 | $(0.05) | $0.19 | $(0.16) | - For the thirteen weeks ended June 30, 2024, net sales decreased by 1.8% YoY, while gross profit increased by 6.3% and net income significantly improved from a loss of $8.6 million to a gain of $25.4 million Diluted EPS improved from $(0.05) to $0.23[9] - For the twenty-six weeks ended June 30, 2024, net sales decreased by 1.6% YoY, while gross profit increased by 10.1% and net income significantly improved from a loss of $23.0 million to a gain of $27.8 million Diluted EPS improved from $(0.16) to $0.19[9] Consolidated Statements of Equity Consolidated Statements of Equity Summary | Metric | As of December 31, 2023 (in thousands) | As of June 30, 2024 (in thousands) | | :--------------------------------- | :------------------------------------- | :--------------------------------- | | Total Stockholders' Equity | $669,496 | $685,957 | | Noncontrolling Interest | $714,187 | $719,771 | | Total Equity | $1,383,683 | $1,405,728 | - Total equity increased by $22.0 million from December 31, 2023, to June 30, 2024, primarily driven by net income and share-based compensation, partially offset by cash dividends and distributions[10][11] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Summary | Cash Flow Activity | Twenty-six weeks ended June 30, 2024 (in thousands) | Twenty-six weeks ended July 2, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------------- | :------------------------------------------------- | | Net cash used in operating activities | $(169) | $(4,315) | | Net cash provided by (used in) investing activities | $140,940 | $(30,783) | | Net cash (used in) provided by financing activities | $(126,220) | $35,825 | | Net increase in cash and cash equivalents | $14,551 | $727 | | Cash and cash equivalents at end of period | $66,574 | $73,657 | - Net cash used in operating activities significantly improved from $(4.3) million in 2023 to $(0.2) million in 2024 for the twenty-six-week period[13] - Investing activities shifted from a net cash outflow of $(30.8) million in 2023 to a net cash inflow of $140.9 million in 2024, primarily due to proceeds from business divestitures[13] - Financing activities shifted from a net cash inflow of $35.8 million in 2023 to a net cash outflow of $(126.2) million in 2024, largely driven by debt paydowns using divestiture proceeds[13] Notes to the Consolidated Financial Statements 1. Operations and Summary of Significant Accounting Policies - The Company's primary revenue source is the sale of salty snack items to various retail channels, distributed through its direct-store delivery (DSD) network, direct to warehouse shipments, and third-party distributors[15] - The Company is evaluating new FASB ASUs (2023-09 and 2023-07) regarding income tax and segment disclosures to determine their impact on future financial reporting[16] 2. Divestitures - On February 5, 2024, the Company sold Good Health and R.W. Garcia brands, manufacturing facilities in Lincolnton, NC, and Lititz, PA, and related assets for $167.5 million, recognizing a $44.0 million gain[17] - On April 22, 2024, the Company sold manufacturing facilities in Berlin, PA, and Fitchburg, MA, and related assets for $18.5 million, recognizing a $4.3 million gain[18] - The Company entered into transition services and reciprocal co-manufacturing agreements with Our Home™ that will extend into the first half of 2025[19] 3. Inventories Inventory Breakdown | Inventory Type | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :--------------- | :--------------------------------- | :------------------------------------- | | Finished goods | $67,707 | $65,673 | | Raw materials | $25,309 | $29,757 | | Maintenance parts | $7,694 | $9,236 | | Total inventories | $100,710 | $104,666 | - Total inventories decreased by $3.96 million from December 31, 2023, to June 30, 2024, partly due to inventory sales of $6.3 million and $1.6 million related to the Good Health and R.W. Garcia Sale and Manufacturing Facilities Sale, respectively[19] 4. Property, Plant and Equipment, Net Property, Plant and Equipment Summary | Category | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :--------------------------------- | :--------------------------------- | :------------------------------------- | | Property, plant and equipment, net | $300,050 | $318,881 | - Net property, plant, and equipment decreased by $18.8 million, primarily due to the sale of manufacturing facilities and related assets as part of divestitures, including $27.5 million from the Good Health and R.W. Garcia Sale and $12.2 million from the Manufacturing Facilities Sale[20][21] - Depreciation expense for the twenty-six weeks ended June 30, 2024, was $17.0 million, down from $20.9 million in the comparable prior-year period[20] 5. Goodwill and Intangible Assets, Net Goodwill and Intangible Assets Summary | Metric | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :-------------------------- | :--------------------------------- | :------------------------------------- | | Goodwill | $870,695 | $915,295 | | Intangible assets, net | $1,012,447 | $1,063,413 | - Goodwill decreased by $44.6 million due to the Good Health and R.W. Garcia Sale Intangible assets, net, decreased by $50.9 million, primarily from the sale of customer relationships ($26.0 million) and trademarks ($18.3 million) related to the divestiture[21] - The Company purchased an indefinite life intangible right for the use of a third-party brand name for $9.2 million during the thirteen weeks ended June 30, 2024[21] 6. Notes Receivable Notes Receivable Summary | Metric | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :--------------------------------- | :--------------------------------- | :------------------------------------- | | Notes receivable from IOs | $14,549 | $17,650 | - Notes receivable from independent operators (IOs) decreased by $3.1 million, with these notes collateralized by the distribution routes[22] 7. Accrued Expenses and Other Accrued Expenses and Other Summary | Category | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :--------------------------------- | :--------------------------------- | :------------------------------------- | | Total current accrued expenses and other | $68,263 | $77,590 | | Total non-current accrued expenses and other | $73,843 | $76,720 | - Current accrued expenses and other decreased by $9.3 million, while non-current accrued expenses and other decreased by $2.9 million[22][23] - Deferred transition services and other fees of $11.4 million were recorded as of June 30, 2024, related to divestitures[22] 8. Term Debt, Revolving Credit Facility and Other Notes Payable - On April 17, 2024, the Company refinanced its Term Loan B, reducing the interest rate from SOFR + 3.00% to SOFR + 2.75%, and recorded a $1.3 million loss on debt extinguishment[24] - Accelerated payments of $141.0 million on Term Loan B and $17.7 million on Real Estate Term Loan were made during the twenty-six weeks ended June 30, 2024, in connection with divestitures[26] Interest Expense Summary | Metric | Twenty-six weeks ended June 30, 2024 (in thousands) | Twenty-six weeks ended July 2, 2023 (in thousands) | | :-------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | | Total interest expense | $24,040 | $29,397 | 9. Derivative Financial Instruments, Purchase Commitments, Warrants and Fair Value - The Company dedesignated its interest rate hedge accounting on its Real Estate Term Loan effective February 1, 2024, reclassifying $0.3 million of accumulated other comprehensive income to earnings[29] Fair Value and Commitments Summary | Metric | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :--------------------------------- | :--------------------------------- | :------------------------------------- | | Fair value of warrant liabilities | $42,192 | $43,272 | | Purchase commitments | $93,700 | $66,700 | 10. Contingencies - The Company partially guarantees $59.1 million in loans made to IOs by Bank of America and $2.2 million by two other banks for route purchases as of June 30, 2024[35] - All IO loans are collateralized by the routes, providing the Company with the ability to recover substantially all outstanding loan value upon default[35] 11. Supplementary Cash Flow Information Supplementary Cash Flow Details | Metric | Twenty-six weeks ended June 30, 2024 (in thousands) | Twenty-six weeks ended July 2, 2023 (in thousands) | | :-------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | | Cash paid for interest | $34,523 | $28,613 | | Payments for income taxes | $25,645 | $2,564 | 12. Income Taxes Income Tax Summary | Metric | Twenty-six weeks ended June 30, 2024 (in thousands) | Twenty-six weeks ended July 2, 2023 (in thousands) | | :-------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | | Income tax (benefit) expense | $25,236 | $(3,336) | | Effective tax rate | 47.5% | 12.7% | - The significant increase in income tax expense and effective tax rate for the twenty-six weeks ended June 30, 2024, was primarily attributable to the Good Health and R.W. Garcia Sale and statutory state tax rate changes[37][60] - The Tax Receivable Agreement (TRA) liability remained stable at $24.3 million as of June 30, 2024, and December 31, 2023[39] 13. Income (Loss) Per Share Income (Loss) Per Share Summary | Metric | Thirteen weeks ended June 30, 2024 | Thirteen weeks ended July 2, 2023 | Twenty-six weeks ended June 30, 2024 | Twenty-six weeks ended July 2, 2023 | | :-------------------- | :--------------------------------- | :-------------------------------- | :----------------------------------- | :---------------------------------- | | Basic income (loss) per share | $0.24 | $(0.05) | $0.19 | $(0.16) | | Diluted income (loss) per share | $0.23 | $(0.05) | $0.19 | $(0.16) | - Diluted EPS significantly improved for both the thirteen-week and twenty-six-week periods, moving from losses in the prior year to positive earnings in 2024[40] 14. Subsequent Events - The Company reviewed events subsequent to the balance sheet date and found no events requiring recognition or disclosure in the financial statements[40] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations, covering key developments, trends, and Q2 2024 performance Overview - Utz Brands, Inc. is a leading U.S. manufacturer of branded salty snacks, with a portfolio including Utz®, ON THE BORDER®, Zapp's®, and Boulder Canyon®[42] - The Company operates 8 primary manufacturing facilities and distributes nationally through direct shipments, distributors, and approximately 2,350 direct-store delivery (DSD) routes[42] - Based on 2023 retail sales, Utz is the second-largest producer of branded salty snacks in its core geographies[42] Key Developments and Trends - The U.S. salty snacks category is a growing $39 billion market; the Company's retail sales increased 1.1% for the thirteen weeks ended June 30, 2024, outpacing the overall category's 0.2% growth[43] - Operating costs are managed through productivity initiatives, sourcing, hedging, pricing actions, refinancing, and tax optimization[43] - Variable rate indebtedness decreased to $736.4 million as of June 30, 2024, from $851.5 million at December 31, 2023, primarily due to debt payments from divestiture proceeds[44] - The weighted average interest rate for the twenty-six weeks ended June 30, 2024, was 5.8%, up from 5.7% in the prior year, with interest rate swaps limiting exposure to rate changes[44] Recent Developments and Significant Items Affecting Comparability - The Company completed two significant divestitures in Q1 and Q2 2024: the Good Health and R.W. Garcia Sale for $167.5 million and the Manufacturing Facilities Sale for $18.5 million[45] - A $9.2 million payment was made to purchase an indefinite life intangible for the use of a third-party brand name[46] - Commodity costs, which rose in 2022, have stabilized in 2023 and into 2024, with the Company using buying-forward and hedging to manage input prices[47] - The Company has substantially completed its multi-year strategy to convert all Company-owned route sales professional (RSP) routes to the Independent Operator (IO) model, impacting selling, distribution, and administrative costs, net sales, and gross profit[48] Results of Operations Thirteen weeks ended June 30, 2024 versus Thirteen weeks ended July 2, 2023 - Net sales decreased by 1.8% to $356.2 million, primarily due to the Good Health and R.W. Garcia Sale (3.3% decrease) and IO conversions (0.1% decrease), partially offset by a 2.3% favorable volume/mix[51] - Gross profit margin increased to 35.0% from 32.4%, driven by productivity and favorable sales volume/mix[52] - Selling, distribution, and administrative expenses decreased by 8.6% to $104.6 million, mainly due to prior-year impairment and severance expenses related to the Birmingham facility closure and a co-manufacturer contract termination[53] - Other income (expense), net, increased by $13.6 million, primarily due to a $10.1 million increase in gain on remeasurement of warrant liability and a $4.8 million decrease in interest expense[55] Twenty-six weeks ended June 30, 2024 versus twenty-six weeks ended July 2, 2023 - Net sales decreased by 1.6% to $702.7 million, primarily due to the Good Health and R.W. Garcia Sale (2.8% decrease) and IO conversions (0.3% decrease), partially offset by a 1.6% favorable volume/mix[56] - Gross profit margin increased to 34.8% from 31.1%, driven by productivity and favorable sales volume/mix[57] - Selling, distribution, and administrative expenses decreased by 2.9% to $214.0 million, mainly due to prior-year asset impairments and a co-manufacturer contract termination[58][59] - Other income (expense), net, increased by $47.9 million, primarily due to a $44.0 million gain on the Good Health and R.W. Garcia Sale and a $5.4 million decrease in interest expense[60] - Income tax expense increased to $25.2 million from a benefit of $(3.3) million, largely attributable to the Good Health and R.W. Garcia Sale[60] Non-GAAP Financial Measures - Adjusted EBITDA for the thirteen weeks ended June 30, 2024, was $45.2 million, up from $25.5 million in the prior year, with Adjusted EBITDA as a percentage of Net Sales increasing to 12.5% from 7.0%[63] - Adjusted EBITDA for the twenty-six weeks ended June 30, 2024, was $93.1 million, up from $85.7 million in the prior year, with Adjusted EBITDA as a percentage of Net Sales increasing to 13.2% from 12.0%[63] Liquidity and Capital Resources Sources and Uses of Cash - The Company believes cash from operating activities, revolving credit facility, term loans, and derivative financial instruments will provide sufficient liquidity for working capital, capital expenditures, and contractual obligations[65] Financing Arrangements - The Company refinanced its Term Loan B on April 17, 2024, reducing the interest rate from SOFR + 3.00% to SOFR + 2.75%[67] ABL Facility ABL Facility Status | Metric | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :--------------------------------- | :--------------------------------- | :------------------------------------- | | Outstanding under ABL facility | $45,177 | $368 | | Available for borrowing | $130,300 | $158,400 | Cash Requirements - Short-term cash requirements include funding operations, acquisitions, stockholder returns, and capital expenditures[69] - Long-term cash requirements primarily relate to funding long-term debt repayments, related interest payments, current and deferred taxes, and operating lease liabilities[69] Off-Balance Sheet Arrangements - The Company has outstanding purchase commitments totaling $93.7 million as of June 30, 2024, for key ingredients to hedge commodity input prices[70] - The Company partially guarantees IO loans totaling $61.3 million ($59.1 million from Bank of America and $2.2 million from other banks) as of June 30, 2024, with routes serving as collateral[70] Cash Flow - Net cash used in operating activities improved to $(0.2) million for the twenty-six weeks ended June 30, 2024, from $(4.3) million in the prior year, driven by changes in accounts payable and accrued expenses[72] - Net cash provided by investing activities was $140.9 million, a significant increase from $(30.8) million used in the prior year, primarily due to $167.5 million in proceeds from the sale of business[72] - Net cash used in financing activities was $(126.2) million, compared to $35.8 million provided in the prior year, mainly due to debt paydowns utilizing divestiture proceeds[73] Debt Covenants - Utz Brands, Inc. and its subsidiaries were in compliance with all financial covenants under their Term Loan B and ABL facility as of June 30, 2024[74] New Accounting Pronouncements - The Company refers to Note 1 for details on recently issued accounting standards, including FASB ASUs 2023-09 and 2023-07[74] Application of Critical Accounting Policies and Estimates - There have been no changes to the Company's critical accounting policies and estimates since the filing of its Annual Report on Form 10-K for the year ended December 31, 2023[74] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to the Company's market risk exposures since the last Annual Report on Form 10-K - The Company's exposures to market risk have not materially changed since the filing of its Annual Report on Form 10-K for the year ended December 31, 2023[75] Item 4. Controls and Procedures Confirms effectiveness of disclosure controls and procedures, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective at a level of reasonable assurance as of June 30, 2024[76] Changes in Internal Control Over Financial Reporting - There were no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[77] PART II - OTHER INFORMATION Item 1. Legal Proceedings Routine litigation is ongoing, but no currently pending legal proceedings are expected to have a material adverse effect - The Company does not believe any currently pending legal proceedings will have a material adverse effect on its business, prospects, financial condition, cash flows, or results of operations[78] Item 1A. Risk Factors No material changes to the Company's risk factors since the last Annual Report on Form 10-K - There have been no material changes to the Company's risk factors since the filing of its Annual Report on Form 10-K for the year ended December 31, 2023[79] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds occurred during the period - No unregistered sales of equity securities or use of proceeds occurred during the period[79] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the period - No defaults upon senior securities occurred during the period[79] Item 4. Mine Safety Disclosures No mine safety disclosures are applicable to the Company - No mine safety disclosures are applicable to the Company[79] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during Q2 2024 - No director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the three months ended June 30, 2024[79] Item 6. Exhibits Lists all exhibits filed as part of this Quarterly Report on Form 10-Q, including certificates, agreements, and certifications - The report includes various exhibits such as the Certificate of Incorporation, Bylaws, Amendment No. 5 to the First Lien Credit Agreement, and certifications from the CEO and CFO[80]