UTZ BRANDS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited combined interim consolidated financial statements as of and for the thirteen and thirty-nine weeks endedOctober 3, 2021 (Successor), together with our audited combined consolidated financial statements for our most recently completed fiscal year set forth under Item 8 of our 2020 Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. See "Cautionary Note Regarding Forward-Looking Statements" included in this Quarterly Report. Our fiscal year end is the Sunday closest toDecember 31 . Our fiscal year 2020 endedJanuary 3, 2021 and was a fifty-three-week period and our fiscal year 2021 will endJanuary 2, 2022 and is a fifty-two-week fiscal year. Our fiscal quarters are comprised of thirteen weeks each, except for fifty-three-week fiscal periods of which the fourth quarter is comprised of fourteen weeks, and end on the thirteenth Sunday of each quarter (fourteenth Sunday of the fourth quarter, when applicable). Overview We are a leading manufacturer, marketer, and distributor of high-quality, branded snacking products inthe United States . We produce a broad offering of salty snacks, including potato chips, tortilla chips, pretzels, cheese snacks, veggie snacks, pork skins, pub/party mixes, and other snacks. Our iconic portfolio of authentic, craft, and "better for you" brands, which includes Utz®, ON THE BORDER®, Zapp's®, Golden Flake®, Good Health®, Boulder Canyon®, Hawaiian® Brand, and TORTIYAHS!®, among others, enjoys strong household penetration inthe United States , where our products can be found in approximately 49% ofU.S. households. We operate 15 manufacturing facilities with a broad range of capabilities, and our products are distributed nationally to grocery, mass merchant, club, convenience, drug and other retailers through direct shipments, distributors, and more than 1,800 direct-store-delivery ("DSD") routes. Our company was founded in 1921 inHanover, Pennsylvania , and benefits from 100 years of brand awareness and heritage in the salty snack industry. We have historically expanded our geographic reach and product portfolio organically and through acquisitions. Based on 2020 retail sales, we are the second-largest producer of branded salty snacks in our core geographies, where we have acquired strong regional brands and distribution capabilities in recent years. Business Combination OnAugust 28, 2020 , CCH domesticated into aDelaware corporation and changed its name to "Utz Brands, Inc. " (the "Domestication") and consummated the acquisition of certain limited liability company units of UBH, the parent of UQF, as a result of a new issuance by UBH and purchases from UBH's existing equity holders pursuant to a Business Combination Agreement, dated as ofJune 5, 2020 (the "Business Combination Agreement") among CCH, UBH and Series U ofUM Partners, LLC ("Series U") and Series R ofUM Partners, LLC ("Series R" and together with Series U, the "Continuing Members"), following the approval at the extraordinary general meeting of the shareholders of CCH held onAugust 27, 2020 . UBI was determined to be the accounting acquirer and UBH was determined to be the accounting acquiree, in accordance with ASC 810, as the Company is considered to be the primary beneficiary of UBH after the Business Combination. Under the ASC 805, Business Combinations, acquisition method of accounting, purchase price allocation of assets acquired and liabilities assumed of UBH are presented based on their estimated fair values as of the closing of the Business Combination. As a result of the Business Combination, UBI's financial statement presentation distinguishes UBH as the "Predecessor" for periods prior to the closing of the Business Combination. UBI, which includes consolidation of UBH subsequent to the Business Combination, is the "Successor" for periods after the closing of the Business Combination. As a result of the application of the acquisition method of accounting in the Successor period, the financial statements for the Successor period are presented on a full step-up basis as a result of the Business Combination, and are therefore not comparable to the financial statements of the Predecessor period that are not presented on the same full step-up basis due to the Business Combination.
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Key Developments and Trends Our management team monitors a number of developments and trends that could impact our revenue and profitability objectives. Long-Term Demographics, Consumer Trends, and Demand - We participate in the attractive and growing nearly$29 billion U.S. salty snacks category, within the broader$97 billion market forU.S. snack foods. The salty snacks category has grown retail sales at an approximately 6.9% compound annual growth rate ("CAGR") over the last four years, including the increased in-home consumption of salty snacks due to COVID-19 during 2020. During fiscal 2020, snacking occasions surged as consumers increasingly seek out convenient, delicious snacks for both on-the-go and at-home lifestyles. According to data from theHartman Group ,The Consumer Goods Forum , and IRI, approximately 50% ofU.S. eating occasions are snacks, with 95% of theU.S. population snacking daily and the average American snacking 2.7 times per day based upon the latest available IRI data. Additionally, the salty snacks category has historically benefited from favorable competitive dynamics, including low private label penetration and category leaders competing primarily through marketing and innovation. We expect these consumer and category trends to continue to drive strong retail sales growth for salty snacks. As a staple food product with resilient consumer demand and a predominantly domestic supply chain, the salty snack category is well positioned to navigate periods of economic disruption or other unforeseen global events. TheU.S. salty snack category has demonstrated strong performance through economic downturns historically, growing at a 4% CAGR from 2007 to 2010 during the last recession. More recently, theU.S. salty snack category demonstrated strong performance during the novel coronavirus ("COVID-19") pandemic which began inMarch 2020 in theU.S. For the thirteen weeks endedOctober 3, 2021 (Successor),U.S. retail sales for salty snacks based on IRI data increased by 7.9% versus the comparable prior year period. In the same period, our retail sales increased by 4.4%. TheU.S. salty snack category has grown at a 8.3% CAGR fromJune 30, 2019 toJuly 4, 2021 , while the Company has grown at a 9.5% CAGR over the same time period. Competition - The salty snack industry is highly competitive and includes many diverse participants. Our products primarily compete with other salty snacks but also compete more broadly for certain eating occasions with other snack foods. We believe that the principal competitive factors in the salty snack industry include taste, convenience, product variety, product quality, price, nutrition, consumer brand awareness, media and promotional activities, in-store merchandising execution, customer service, cost-efficient distribution, and access to retailer shelf space. We believe we compete effectively with respect to each of these factors. Operating Costs - Our operating costs include raw materials, labor, manufacturing overhead, selling, distribution, general and administrative expenses. We manage these expenses through annual cost saving and productivity initiatives, sourcing and hedging programs, pricing actions, refinancing and tax optimization. Additionally, we maintain ongoing efforts led by our project management office, to expand our profitability, including implementing significant reductions to our operating cost structure in both supply chain and overhead costs. Taxes - OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted which includes various tax provisions with retroactive effect. The CARES Act is an approximately$2 trillion emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are effective retroactively for years ending before the date of enactment. We deferred$7.8 million of payroll tax deposits per the CARES Act. The deferred payroll taxes must be deposited in two installments, with half due onDecember 31, 2021 and the remainder onDecember 31, 2022 . The first installment occurred inSeptember 2021 . We continue to evaluate the impact of the CARES Act; however, we believe it is unlikely to have a material effect on our consolidated financial position, results of operations, and cash flow. Financing Costs - We regularly evaluate our variable and fixed-rate debt. We continue to use low-cost, short- and long-term debt to finance our ongoing working capital, capital expenditures and other investments and dividends. Our weighted average interest rate for the thirty-nine weeks endedOctober 3, 2021 (Successor) was 3.5%, down from 4.7% during the thirty-nine weeks endedSeptember 27, 2020 (Successor and Predecessor). We have used interest rate swaps to help manage some of our exposure to interest rate changes, which can drive cash flow variability related to our debt. Refer to Note 8. "Long-Term Debt" and Note 9. "Derivative Financial Instruments and Purchase Commitments" to our unaudited consolidated financial statements included under Part I, Item 1 of this filing for additional information on debt, derivative and purchase commitment activity.
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LIBOR Transition - As ofOctober 3, 2021 , we had$789.1 million in variable rate indebtedness, up from$780.0 million atJanuary 3, 2021 . As ofOctober 3, 2021 our variable rate indebtedness is tied to the Eurocurrency Rate which currently uses the London Inter Bank Offered Rate ("LIBOR") as a benchmark for establishing applicable rates. As announced inJuly 2017 , LIBOR is expected to be phased out by the end of 2021. OnNovember 30, 2020 , theBoard of Governors of theFederal Reserve System , theOffice of the Comptroller of Currency and theFederal Deposit Insurance Corporation issued a public statement that the administrator of LIBOR announced it will consult on an extension of publication of certainU.S. Dollar LIBOR tenors untilJune 30, 2023 , which would allow additional legacy USD LIBOR contracts to mature before the succession of LIBOR. The Eurocurrency Rate could change benchmarks, the extent and manner of any future changes with respect to methods of calculating LIBOR or replacing LIBOR with another benchmark are unknown and impossible to predict at this time and, as such, may result in interest rates that are materially higher than current interest rates. If interest rates applicable to our variable interest indebtedness increase, our interest expense will also increase, which could make it difficult for us to make interest payments and fund other fixed costs and, in turn, adversely impact our cash flow available for general corporate purposes. COVID-19 - InMarch 2020 , theWorld Health Organization declared that COVID-19 constituted a "Public Health Emergency of International Concern" and later characterized it as a "pandemic". In response, we have taken necessary preventive actions and continue to implement safety measures to protect our employeeswho are working on and off site. The same time period,March 2020 , also marked the beginning of COVID-19's impact on the consumption, distribution and production of our products. Demand for product increased significantly for several weeks in late March and intoApril 2020 as customers "pantry-loaded" in response to "shelter-in-place" measures that were enacted in many markets. Following that initial spike, in the weeks that followed, demand for product continued to out-pace prior year rates as families have favored "at-home" dining at a greater rate than pre-pandemic levels. We have serviced that demand by increasing production and distribution activities. Our strategic manufacturing capabilities and DSD distribution network have allowed us to effectively service the increased demand and be responsive to evolving market dynamics driven by changes in consumer behavior. We will continue to monitor customer and consumer activity and adapt our plans as necessary to best service the business. Recent Developments and Significant Items Affecting Comparability Acquisitions OnNovember 2, 2020 , we completed the acquisition of certain assets from Conagra Brands, Inc. related to the H.K. Anderson business, a leading brand of peanut butter-filled pretzels for approximately$8 million . The transaction enables us to jump-start our entry into the growing filled pretzel segment, leveraging the synergies of our salty snack platform. OnNovember 11, 2020 the Company caused its subsidiaries, UQF and Heron, to enter into a Stock Purchase Agreement amongUQF, Heron, Truco and Truco Holdings LLC . OnDecember 14, 2020 , pursuant to the Stock Purchase Agreement, the Company caused its subsidiary, Heron, to consummate the Truco Acquisition. Upon completion of the Truco Acquisition,Truco became a wholly owned subsidiary of Heron. At the closing of the Truco Acquisition, the Company paid the aggregate cash purchase price of approximately$405.1 million toTruco Holdings LLC , including payments of approximately$3.0 million for cash on hand atTruco at the closing of the Truco Acquisition, less estimated working capital adjustments, subject to customary post-closing adjustments. In addition, onDecember 14, 2020 , UQF consummated the IP Purchase pursuant to which it purchased and acquired fromOTB Acquisition, LLC the OTB IP pursuant to an Asset Purchase Agreement, datedNovember 11, 2020 , among UQF,Truco Seller andOTB Acquisition, LLC . The IP Purchase was determined to be an asset acquisition under the provisions of ASC Subtopic 805-50. The IP Purchase is accounted for separately from the Truco Acquisition, asTruco and the OTB IP were acquired from two different selling parties that were not under common control and the two acquisitions are separate transactions. The OTB IP was initially recognized and measured by the Company based on its purchase price of$79.0 million since it was acquired in asset purchase and is treated as an indefinite lived intangible assets. OnFebruary 8, 2021 , the Company closed on a definitive agreement withSnak-King Corp. to acquire certain assets of theC.J. Vitner's business, a leading brand of salty snacks in theChicago, IL area. The acquisition increases our distribution in theChicago area andMidwest Region and expands our product offering. The Company paid the aggregate cash purchase price of approximately$25.2 million which was funded from current cash-on-hand. OnJune 7, 2021 , the Company closed on a definitive agreement withGreat Lakes Festida Holdings, Inc. to acquire all assets including real estate located inGrand Rapids, Michigan related to the operations ofFestida Foods a manufacturer of tortilla chips, corn chips, and pellet snacks, and the largest manufacturer of tortilla chips for the Company's ON THE BORDER® brand. The Company paid the purchase price of approximately$40.3 million which was funded in part from incremental financing on an existing term loan.
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Commodity Trends and Labor and Transportation Costs
We regularly monitor worldwide supply and commodity costs so we can
cost-effectively secure ingredients, packaging and fuel required for production.
A number of external factors such as weather conditions, commodity market
conditions, and the effects of governmental, agricultural or other programs
affect the cost and availability of raw materials and agricultural materials
used in our products. We address commodity costs primarily through the use of
buying-forward, which locks in pricing for key materials between three and 18
months in advance. Other methods include hedging, net pricing adjustments, and
manufacturing and overhead cost control. Our hedging techniques, such as forward
contracts, limit the impact of fluctuations in the cost of our principal raw
materials? however, we may not be able to fully hedge against commodity cost
changes, where there is a limited ability to hedge, and our hedging strategies
may not protect us from increases in specific raw material costs. Toward the end
of 2020, we began to experience an increase in pricing in certain commodities
that has continued into the third quarter of fiscal year 2021. We expect this
trend to continue through early 2022 and may adversely impact our net income.
Additionally, the Company has experienced rising costs related to fuel and
freight rates as well as rising labor costs which have negatively impacted
profitability. Transportation costs have been on the rise for the last few
months and may continue to rise which may adversely impact net income. The
Company looks to offset rising costs through increasing manufacturing and
distribution efficiencies as well as through price increases to our customers,
although it is unclear whether historic customer sales levels will be maintained
at these higher prices. Due to competitive or market conditions, planned trade
or promotional incentives, or other factors, our pricing actions may also lag
commodity, delivery, and labor cost changes.
While the costs of our principal raw materials fluctuate and have increased
significantly in the last few quarters, we believe there will continue to be an
adequate supply of the raw materials we use and that they will generally remain
available from numerous sources.
Independent Operator Conversions
Our DSD distribution is executed via company-owned routes operated by route
sales professionals ("RSP" or "RSPs"), and third-party routes managed by IOs. We
have used the IO and RSP models for more than a decade. In fiscal year 2017, we
embarked on a multi-year strategy to convert all company owned RSP routes to the
IO model. The mix between IOs and RSP was approximately 85% and 15%,
respectively as of October 3, 2021 versus 78% and 22% ratio for IOs and RSPs
respectively as of September 27, 2020 . We anticipate completing substantially
all remaining conversions by the second quarter of fiscal year 2022. The
conversion process involves selling distribution rights to a defined route to an
IO. As we convert a large number of routes in a year, there is a meaningful
decrease in the selling and administrative costs that we previously incurred on
RSPs and a corresponding increase in discounts paid to IOs to cover their costs
to distribute our product. The net impact is a reduction in Selling expenses and
a decrease in Net Sales and Gross Profit. Conversions also impact our balance
sheet resulting in cash proceeds to us as a result of selling the route to an
IO, or by creating notes receivable related to the sale of the routes.
Results of Operations
Overview
The following table presents selected unaudited financial data for the thirteen
weeks ended October 3, 2021 (Successor) and the Successor period from August 29,
2020 through September 27, 2020 and the Predecessor periods from June 29, 2020
through August 28, 2020 as well as the combined Predecessor period from June 29,
2020 through August 28, 2020 with the Successor period from August 29, 2020
through September 27, 2020 . Additionally, we have presented the thirty-nine
weeks ended October 3, 2021 (Successor) and the Predecessor period from December
30, 2019 through August 28, 2020 and the combined Predecessor period from
December 30, 2019 through August 28, 2020 with the Successor period from August
29, 2020 through September 27, 2020 .
We have prepared our discussion of the results of operations by comparing the
thirteen weeks ended October 3, 2021 (Successor) with the results of the
combined Successor period from August 29, 2020 through September 27, 2020 and
Predecessor period from June 29, 2020 through August 28, 2020 . Additionally, we
compared the results of the thirty-nine weeks ended October 3, 2021 (Successor)
with the combined Successor period from August 29, 2020 through September 27,
2020 and Predecessor period from December 30, 2019 through August 28, 2020 . We
believe this approach provides the most meaningful basis of comparison and is
more useful in identifying current business trends for the periods presented.
The combined results of operations included in our discussion below are not
considered to be prepared in accordance with U.S. GAAP and have not been
prepared as pro forma results under applicable regulations, may not reflect the
actual results we would have achieved had the Business Combination occurred at
the beginning of fiscal 2019, and should not be viewed as a substitute for the
results of operations of the Predecessor and Successor periods presented in
accordance with U.S. GAAP.
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Successor Predecessor
From From
August 29, From December 30,
2020 June 29, 2020 2019
Thirteen weeks Thirty-nine weeks through through through
ended October ended October 3, September 27, August 28, August 28,
3, 2021 2021 2020 2020 2020
Net sales $ 312,680 $ 879,781 $ 79,372 $ 168,656 $ 638,662
Cost of goods sold 210,053 586,353 55,305 106,484 411,595
Gross profit 102,627 293,428 24,067 62,172 227,067
Selling, general and administrative
expenses
Selling 67,985 189,152 16,859 33,648 131,579
General and administrative 30,724 89,698 8,451 25,626 64,050
Total selling, general and
administrative expenses 98,709 278,850 25,310 59,274 195,629
Gain on sale of assets
Gain (loss) on disposal of property,
plant and equipment, net 60 964 5 (14) 79
(Loss) gain on sale of routes, net (1,103) 1,001 59 233 1,264
Total (loss) gain on sale of assets (1,043) 1,965 64 219 1,343
Income (loss) from operations 2,875 16,543 (1,179) 3,117 32,781
Other income (expense)
Interest expense (7,726) (26,483) (1,818) (7,029) (26,659)
Other income (expense) 740 2,216 (2,323) 432 1,271
Gain (loss) on remeasurement of
warrant liability 36,288 34,155 (18,008) - -
Other income (expense), net 29,302 9,888 (22,149) (6,597) (25,388)
Income (loss) before income tax
expense 32,177 26,431 (23,328) (3,480) 7,393
Income tax expense (benefit) 827 2,251 (2,889) 1,344 3,973
Net income (loss) 31,350 24,180 (20,439) (4,824) 3,420
Net loss attributable to
noncontrolling interest 1,902 4,122 2,320 - -
Net income (loss) attributable to
controlling interest $ 33,252 $ 28,302 $ (18,119) $ (4,824) $ 3,420
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Successor Predecessor Non-GAAP Combined
From
August 29,
2020 From
through June 29, 2020 Thirteen weeks
September 27, through ended September
2020 August 28, 2020 27, 2020
Net sales $ 79,372 $ 168,656 $ 248,028
Cost of goods sold 55,305 106,484 161,789
Gross profit 24,067 62,172 86,239
Selling, general and administrative expenses
Selling 16,859 33,648 50,507
General and administrative 8,451 25,626 34,077
Total selling, general and administrative
expenses 25,310 59,274 84,584
Gain on sale of assets
Gain (loss) on disposal of property, plant and
equipment, net 5 (14) (9)
Gain on sale of routes, net 59 233 292
Total gain on sale of assets 64 219 283
(Loss) income from operations (1,179) 3,117 1,938
Other (expense) income
Interest expense (1,818) (7,029) (8,847)
Other (expense) income (2,323) 432 (1,891)
Loss on remeasurement of warrant liability (18,008) - (18,008)
Other (expense) income, net (22,149) (6,597) (28,746)
Loss before income tax expense (23,328) (3,480) (26,808)
Income tax (benefit) expense (2,889) 1,344 (1,545)
Net loss (20,439) (4,824) (25,263)
Net loss attributable to noncontrolling interest 2,320 - 2,320
Net loss attributable to controlling interest $ (18,119) $ (4,824) $ (22,943)
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Successor Predecessor Non-GAAP Combined
From
August 29,
2020 From
through December 30, 2019 Thirty-nine weeks
September 27, through ended September
2020 August 28, 2020 27, 2020
Net sales $ 79,372 $ 638,662 $ 718,034
Cost of goods sold 55,305 411,595 466,900
Gross profit 24,067 227,067 251,134
Selling, general and administrative expenses
Selling 16,859 131,579 148,438
General and administrative 8,451 64,050 72,501
Total selling, general and administrative
expenses 25,310 195,629 220,939
Gain on sale of assets
Gain on disposal of property, plant and
equipment, net 5 79 84
Gain on sale of routes, net 59 1,264 1,323
Total gain on sale of assets 64 1,343 1,407
(Loss) income from operations (1,179) 32,781 31,602
Other (expense) income
Interest expense (1,818) (26,659) (28,477)
Other (expense) income (2,323) 1,271 (1,052)
Loss on remeasurement of warrant liability (18,008) - (18,008)
Other (expense) income, net (22,149) (25,388) (47,537)
(Loss) income before income tax expense (23,328) 7,393 (15,935)
Income tax (benefit) expense (2,889) 3,973 1,084
Net (loss) income (20,439) 3,420 (17,019)
Net loss attributable to noncontrolling interest 2,320 - 2,320
Net (loss) income attributable to controlling
interest $ (18,119) $ 3,420 $ (14,699)
Thirteen weeks ended October 3, 2021 (Successor) versus thirteen weeks ended
September 27, 2020 (Combined)
Net sales
Net sales were $312.7 million , $79.4 million , and $168.7 million for the
thirteen weeks ended October 3, 2021 (Successor), for the successor period
August 29, 2020 through September 27, 2020 and the predecessor period June 29,
2020 through August 28, 2020 , respectively. Net sales for the thirteen weeks
ended October 3, 2021 (Successor) increased $64.7 million or 26.1% over the
comparable period in 2020. The increase in net sales for the thirteen weeks
ended October 3, 2021 (Successor) was primarily related to sales attributable to
the acquisitions of Truco , Vitner's, H.K. Anderson , and Festida Foods .
IO discounts increased to $31.6 million for the thirteen weeks ended October 3,
2021 (Successor) from $25.2 million for the comparable period in 2020. Excluding
the impacts of acquisitions and changes to IO discounts due to RSP to IO
conversion, total net sales increased 2.0% for the thirteen weeks ended October
3, 2021 (Successor) versus the corresponding period in 2020 primarily driven by
pricing actions to help offset inflationary pressures on raw materials and
higher supply chain costs.
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Net sales are evaluated based on our classification as Power and Foundation
Brands. Power Brands ("Power Brands") include our iconic heritage Utz brand and
iconic ON THE BORDER® brand; craft brands such as Zapp's®, Golden Flake® Pork
Skins, TORTIYAHS!, and Hawaiian®; "better for you" brands such as Good Health®
and Boulder Canyon®; and selected licensed brands such as TGI Fridays® and
Herdez®. Our Foundation Brands ("Foundation Brands") are comprised of several
regional brands, including Bachman®, Golden Flake® Chips and Cheese, Tim's
Cascade® Snacks, Snyder of Berlin®, and "Dirty" Potato Chips® as well as partner
and private label brands.
For the thirteen weeks ended October 3, 2021 (Successor), excluding brands
acquired through our H.K. Anderson , Festida Foods , Truco , and Vitner's
acquisitions, Power Brand sales increased by approximately 4.1%, while
Foundation Brand sales decreased approximately 3.1% from the comparable period
in 2020. The decline in net sales for Foundation Brands is due to planned
reductions in private label volume and lapping higher sales driven by changes in
consumer behavior as a result of COVID-19 in the prior year. Partially
offsetting the COVID-19 lap was a rebound in the convenience store channel, as
well as "on-the-go" oriented channels such as food service.
Cost of goods sold and Gross profit
Gross profit was $102.6 million , $24.1 million and $62.2 million for the
thirteen weeks ended October 3, 2021 (Successor), for the successor period
August 29, 2020 through September 27, 2020 and the predecessor period June 29,
2020 through August 28, 2020 , respectively. The increase in gross profit for
thirteen weeks ended October 3, 2021 (Successor) was driven by higher sales
resulting from the acquisitions of Truco , Festida Foods , Vitner's, and H.K.
Anderson , along with pricing actions necessary to help offset higher commodity,
wage, and supply chain costs due to inflationary pressure.
Our gross profit margin was 32.8% for the thirteen weeks ended October 3, 2021
(Successor) versus 34.8% for the comparable period in 2020. The decrease in
gross profit margin was primarily driven by higher commodity, labor, and inbound
freight costs offset by pricing actions and year over year productivity gains.
Additionally, IO discounts increased to $31.6 million for the thirteen weeks
ended October 3, 2021 (Successor) from $25.2 million for the comparable period
in 2020, reducing gross profit by $6.4 million . The increase to IO discounts was
primarily attributable to the planned transition from Company owned DSD routes
to independent operators, which was offset by a reduction of our selling,
general, and administrative expense structure.
Selling, general and administrative expense
Selling, general and administrative expenses increased to $98.7 million , up
$14.1 million or 16.7%, for the thirteen weeks ended October 3, 2021 (Successor)
from $84.6 million for the comparable period in 2020. The increased expenses for
the thirteen weeks ended October 3, 2021 (Successor) were primarily driven by
incremental operating costs associated with acquisitions and being a public
company, totaling $10.4 million , along with incremental depreciation and
amortization of $3.2 million associated with the Business Combination. Other
factors driving increased year-over-year cost include industry-wide inflationary
pressures in transportation and fuel costs of $4.2 million , offset by savings
due to the transition of Company owned DSD routes to independent operators and
lower incentive based compensation.
Gain on sale of assets
Gain on sale of assets was $(1.0) million , $0.1 million and $0.2 million for the
thirteen weeks ended October 3, 2021 (Successor), for the successor period
August 29, 2020 through September 27, 2020 and the predecessor period June 29,
2020 through August 28, 2020 , respectively. Company owned routes were recorded
at fair value as a result of the Business Combination, which resulted in
increasing the IO route asset by $10.5 million . Conversions continued during the
third fiscal quarter of 2021 and gains were offset by the values of the routes
that were established as part of the Business Combination.
Other income (expense), net
Other income (expense), net was $29.3 million , $(22.1) million , and
$(6.6) million for the thirteen weeks ended October 3, 2021 (Successor), for the
successor period August 29, 2020 through September 27, 2020 and the predecessor
period June 29, 2020 through August 28, 2020 , respectively. The increase in
income for the thirteen weeks ended October 3, 2021 (Successor) was primarily
due to a $36.3 million gain from the remeasurement of the warrant liability
compared to a $18.0 million loss for the successor period August 29, 2020
through September 27, 2020 .
Income taxes
Income tax expense (benefit) was $0.8 million , $(2.9) million and $1.3 million
for the thirteen weeks ended October 3, 2021 (Successor), for the successor
period August 29, 2020 through September 27, 2020 and the predecessor period
June 29, 2020 through August 28, 2020 , respectively.
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Thirty-nine weeks endedOctober 3, 2021 (Successor) versus thirty-nine week periods endedSeptember 27, 2020 (Combined) Net sales Net sales were$879.8 million ,$79.4 million and$638.7 million for the thirty-nine weeks endedOctober 3, 2021 (Successor), for the successor periodAugust 29, 2020 throughSeptember 27, 2020 and the predecessor periodDecember 30, 2019 throughAugust 28, 2020 , respectively. Net sales for the thirty-nine weeks endedOctober 3, 2021 (Successor) increased$161.7 million or 22.5% over the comparable period in 2020. The increase in net sales for the thirty-nine weeks endedOctober 3, 2021 (Successor) was primarily related to the acquisitions ofTruco , Vitner's,H.K. Anderson , andFestida Foods . The thirty-nine weeks endedSeptember 27, 2020 (Combined) experienced increased sales across customers and geographies that were heightened by increased in-home consumption of salty snacks due to COVID-19. IO discounts increased to$88.6 million for the thirty-nine weeks endedOctober 3, 2021 (Successor) from$73.0 million for the comparable period in 2020. Excluding the impacts of acquisitions and changes to IO discounts due to RSP to IO conversions, total net sales declined 0.7% for the thirty-nine weeks endedOctober 3, 2021 (Successor) versus the corresponding period in 2020 driven by lapping prior period incremental COVID-19 volume and impacts of supply chain disruptions in 2021. Net sales are evaluated based on our classification as Power and Foundation brands. Power brands include our iconic heritage Utz brand; craft brands such as ON THE BORDER®, Zapp's®, Golden Flake® Pork Skins, and Hawaiian®; "better for you" brands such as Good Health® and Boulder Canyon®; and selected licensed brands such as TGI Fridays® and Herdez®. Our Foundation brands are comprised of several regional brands, including Bachman®, Golden Flake® Chips and Cheese, Tim's Cascade® Snacks,Snyder of Berlin®, and "Dirty" Potato Chips® as well as partner and private label brands. For the thirty-nine weeks endedOctober 3, 2021 (Successor), excluding brands acquired through ourH.K. Anderson ,Truco ,Festida Foods , and Vitner's acquisitions, Power Brand sales increased by approximately 1.0%, while Foundation Brand sales decreased approximately 3.8% over the comparable period in 2020. The decline in net sales for Foundation Brands is due to planned reductions in private label volume and lapping higher sales driven by changes in consumer behavior as a result of COVID-19 in the prior year. Partially offsetting the COVID-19 lap was a rebound in the convenience store channel, as well as "on-the-go" oriented channels such as food service. Cost of goods sold and Gross profit Gross profit was$293.4 million ,$24.1 million , and$227.1 million for the thirty-nine weeks endedOctober 3, 2021 (Successor), for the successor periodAugust 29, 2020 throughSeptember 27, 2020 and the predecessor periodDecember 30, 2019 throughAugust 28, 2020 , respectively. The increase in gross profit for thirty-nine weeks endedOctober 3, 2021 (Successor) was primarily driven by higher sales resulting from the acquisitions ofTruco ,Festida Foods , Vitner's, andH.K. Anderson , along with pricing actions necessary to help offset higher commodity, wage, and supply chain costs due to inflationary pressure. Our gross profit margin was 33.4% for the thirty-nine weeks endedOctober 3, 2021 (Successor) versus 35.0% over the comparable period in 2020. The decrease in gross profit margin was primarily driven by higher commodity, labor, and inbound freight costs due to industry wide inflationary pressures, somewhat offset by gains from pricing actions and benefits from year over year productivity programs. Additionally, IO discounts increased to$88.6 million for the thirty-nine weeks endedOctober 3, 2021 (Successor) from$73.0 million for the comparable period in 2020, reducing gross profit by$15.6 million . The increase to IO discounts was primarily attributable to the planned transition from Company owned DSD routes to independent operators, which was offset by a reduction of our selling, general, and administrative expense structure. Selling, general and administrative expense Selling, general and administrative expenses were$278.9 million ,$25.3 million and$195.6 million for the thirty-nine weeks endedOctober 3, 2021 (Successor), for the successor periodAugust 29, 2020 throughSeptember 27, 2020 and the predecessor periodDecember 30, 2019 throughAugust 28, 2020 , respectively. Selling, general and administrative expenses for the thirty-nine weeks endedOctober 3, 2021 (Successor) increased$57.9 million or 26.2% over the corresponding period in 2020. The increased expenses for the thirty-nine weeks endedOctober 3, 2021 (Successor) were primarily driven by incremental operating costs associated with acquisitions and being a public company totaling$39.3 million , along with the associated depreciation and amortization of$10.6 million associated with the Business Combination. Other factors driving increased year-over-year cost include industry-wide inflationary pressures in transportation and fuel costs of$10.6 million , increased spend for marketing/media of$4.7 million , to drive future growth, offset by savings due to the transition of Company owned DSD routes to independent operators and lower incentive based compensation. 38
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Gain on sale of assets Gain on sale of assets was$2.0 million ,$0.1 million , and$1.3 million for the thirty-nine weeks endedOctober 3, 2021 (Successor), for the successor periodAugust 29, 2020 throughSeptember 27, 2020 and the predecessor periodDecember 30, 2019 throughAugust 28, 2020 , respectively. Company owned routes were recorded at fair value as a result of the Business Combination, which resulted in increasing the IO route asset by$10.5 million . Conversion continued during the first three quarters of 2021 and gains were offset by the values of the routes that were established as part of the Business Combination. Other income (expense), net Other income (expense), net was$9.9 million ,$(22.1) million and$(25.4) million for the thirty-nine weeks endedOctober 3, 2021 (Successor), for the successor periodAugust 29, 2020 throughSeptember 27, 2020 and the predecessor periodDecember 30, 2019 throughAugust 28, 2020 , respectively. The incremental income for the thirty-nine weeks endedOctober 3, 2021 (Successor) was primarily due to a$34.2 million gain from the remeasurement of the warrant liability, compared to a loss of$18.0 million from the remeasurement of the warrant liability for the successor periodAugust 29, 2020 throughSeptember 27, 2020 . The other primary driver of the change in other income (expense) was related to interest expense which was down slightly from the comparable period. Income tax expense (benefit) was$2.3 million ,$(2.9) million and$4.0 million for the thirty-nine weeks endedOctober 3, 2021 (Successor), for the successor periodAugust 29, 2020 throughSeptember 27, 2020 and the predecessor periodDecember 30, 2019 throughAugust 28, 2020 , respectively. EBITDA, Adjusted EBITDA, and Further Adjusted EBITDA We define EBITDA as Net Income before Interest, Income Taxes, and Depreciation and Amortization. We define Adjusted EBITDA as EBITDA further adjusted to exclude certain non-cash items, such as accruals for long-term incentive programs, hedging and purchase commitments adjustments, remeasurement of warrant liabilities, and asset impairments; Acquisition and Integration Costs; Business Transformation Initiatives; and Financing-Related Costs. We define Further Adjusted EBITDA as Adjusted EBITDA after giving effect to pre-acquisition EBITDA ofTruco , pre-acquisition Adjusted EBITDA of Vitner's, pre-acquisition EBITDA ofH.K. Anderson , pre-acquisition EBITDA of Festida. We also report Further Adjusted EBITDA as a percentage of ProForma Net Sales as an additional measure to evaluate our Further Adjusted EBITDA margins on ProForma Net Sales . Adjusted EBITDA is one of the key performance indicators we use in evaluating our operating performance and in making financial, operating, and planning decisions. We believe EBITDA, Adjusted EBITDA, and Further Adjusted EBITDA are useful to investors in the evaluation of Utz's operating performance compared to other companies in the salty snack industry, as similar measures are commonly used by companies in this industry. We have also historically reported an Adjusted EBITDA metric to investors and banks for covenant compliance. We also report Adjusted EBITDA as a percentage ofNet Sales as an additional measure for investors to evaluate our Adjusted EBITDA margins onNet Sales .
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The following tables provides a reconciliation from Net (Loss) Income for the Successor period fromAugust 29,2020 throughSeptember 27,2020 and the predecessor periods fromJune 29, 2020 throughAugust 28, 2020 andDecember 30, 2019 throughAugust 28, 2020 to the thirteen and thirty-nine weeks endedSeptember 27, 2020 (Combined), respectively: Successor Predecessor Combined From August 29, 2020 From through June 29, 2020 Thirteen weeks September 27, through ended September (dollars in millions) 2020 August 28, 2020 27, 2020 Net Loss$ (20.4) $ (4.8)$ (25.3) Successor Predecessor Combined From August 29, 2020 From Thirty-nine through December 30, 2019 weeks ended September 27, through September 27, (dollars in millions) 2020 August 28, 2020 2020 Net (Loss) Income$ (20.4) $ 3.4$ (17.0) The following tables provides a reconciliation from Net Income (Loss) to EBITDA and Adjusted EBITDA for the thirteen and thirty-nine weeks endedOctober 3, 2021 (Successor) andSeptember 27, 2020 (Combined), respectively: Successor Combined Thirteen Thirteen weeks weeks ended ended October 3, September 27,
(dollars in millions) 2021 2020 Net Income (Loss)$ 31.4 $ (25.3) Plus non-GAAP adjustments: Income Tax Expense 0.8 (1.5) Depreciation and Amortization 20.7 17.4 Interest Expense, Net 7.7 8.8 Interest Income (IO loans)(1) (0.6) (0.6) EBITDA 60.0 (1.2) Certain Non-Cash Adjustments(2) 2.0 (4.5) Acquisition and Integration(3) 11.0 22.3 Business Transformation Initiatives(4) 8.0 1.1 Financing-Related Costs(5) 0.1 2.5 (Gain) loss on remeasurement of warrant liability(6) (36.3) 18.0 Adjusted EBITDA 44.8 38.2 Adjusted EBITDA as a % of Net Sales 14.3% 15.4% HKA Pre-Acquisition Adjusted EBITDA(7) - 0.4 Vitner's Pre-Acquisition Adjusted EBITDA(7) - 0.6 Truco Pre-Acquisition Adjusted EBITDA(7) - 12.9 Festida Pre-Acquisition Adjusted EBITDA(7) - 1.5 Further Adjusted EBITDA$ 44.8 $ 53.6 40
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Successor Combined
Thirty-nine
Thirty-nine weeks weeks ended
ended October 3, September 27,
(dollars in millions) 2021 2020
Net Income (Loss) $ 24.2 $ (17.0)
Plus non-GAAP adjustments:
Income Tax Expense 2.3 1.1
Depreciation and Amortization 59.3 35.4
Interest Expense, Net 26.5 28.5
Interest Income (IO loans)(1) (2.0) (1.8)
EBITDA 110.3 46.2
Certain Non-Cash Adjustments(2) 9.0 (1.7)
Acquisition and Integration(3) 19.0 31.4
Business Transformation Initiatives(4) 13.7 3.5
Financing-Related Costs(5) 0.7 2.6
(Gain) loss on remeasurement of warrant liability(6) (34.2) 18.0
Adjusted EBITDA 118.5 100.0
Adjusted EBITDA as a % of Net Sales 13.5% 13.9%
HKA Pre-Acquisition Adjusted EBITDA(7) - 1.0
Vitner's Pre-Acquisition Adjusted EBITDA(7) - 1.5
Truco Pre-Acquisition Adjusted EBITDA(7) - 38.8
Festida Pre-Acquisition Adjusted EBITDA(7) 2.6 4.6
Further Adjusted EBITDA $ 121.1 $ 145.9
(1)Interest Income from IO Loans refers to Interest Income that we earn from IO
notes receivable that have resulted from our initiatives to transition from RSP
distribution to IO distribution ("Business Transformation Initiatives"). There
is a Notes Payable recorded that mirrors the IO notes receivable, and the
interest expense associated with the Notes Payable is part of the Interest
Expense, Net adjustment.
(2)Certain Non-Cash Adjustments are comprised primarily of the following:
Incentive programs - Utz Quality Foods, LLC , our wholly-owned subsidiary,
established the 2018 Long-Term Incentive Plan (the "2018 LTIP") for employees in
February 2018 . The Company recorded income of $4.1 million and $2.2 million for
thirteen weeks and thirty-nine weeks ended September 27, 2020 (Combined),
respectively. Expenses incurred for the 2018 LTIP are non-operational in nature
and are expected to decline upon the vesting of the remaining phantom units from
fiscal year 2018 and fiscal year 2019 at the end of fiscal year 2021. The
phantom units under the 2018 LTIP were converted into the 2020 LTIP RSUs as part
of the Business Combination. For the thirteen weeks and thirty-nine weeks ended
October 3, 2021 (Successor), the Company incurred $2.1 million and $7.8 million ,
respectively, of stock-based compensation under the 2020 LTIP.
Purchase Commitments and Other Adjustments - We have purchased commitments for
specific quantities at fixed prices for certain of our products' key
ingredients. To facilitate comparisons of our underlying operating results, this
adjustment was made to remove the volatility of purchase commitment related
gains and losses.
(3)Adjustment for Acquisition and Integration Costs - This is primarily
comprised of the following: (i) consulting, transaction services, and legal fees
incurred for acquisitions and certain potential acquisitions; (ii) integration
and restructuring costs related to recently completed acquisitions, which
include Vitner's, Truco , H.K. Anderson , Festida Foods , and other acquisitions;
and (iii) costs associated with reclaiming distribution rights from
distributors.
(4)Business Transformation Initiatives Adjustment - This adjustment is related
to consultancy and professional fees incurred for specific initiatives and
structural changes to the business that do not reflect the cost of normal
business operations. In addition, certain historical Rice/Lissette
family-related costs incurred but not part of normal business operations prior
to the Business Combination; ERP conversion and transition costs; costs incurred
related to the conversion of company-owned independent operator routes
(including gains or losses on the sale of routes and severance associated with
the elimination of RSP positions); and restructuring and business optimization
costs, fall into this category.
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(5)Financing-Related Costs - These costs include adjustments for various items related to raising debt and preferred equity capital or debt extinguishment costs. The Company incurred expenses of$0.1 million and$0.7 million for the thirteen weeks and thirty-nine weeks endedOctober 3, 2021 (Successor), compared to$2.5 million and$2.6 million for the thirteen weeks and thirty-nine weeks endedSeptember 27, 2020 (Combined), respectively. (6)Losses (or gains) related to the changes in the remeasurement of warrant liabilities are not expected to be settled in cash, and when exercised would result in a cash inflow to the Company with the Warrants converting to Class A Common Stock with the liability being extinguished and the fair value of the Warrants at the time of exercise being recorded as an increase to equity. (7)Pre-Acquisition Adjusted EBITDA - This adjustment represents the adjusted EBITDA of acquired companies prior to the acquisition date. Liquidity and Capital Resources The following table presents net cash provided by (used in) operating activities, used in investing activities and provided by (used in) financing activities for the thirty-nine weeks endedOctober 3, 2021 (Successor) and thirty-nine weeks endedSeptember 27, 2020 (Combined). Successor Predecessor Combined From August 29, 2020 From Thirty-nine Thirty-nine weeks through December 30, 2019 weeks ended ended October 3, September 27, through September 27, (in thousands) 2021 2020 August 28, 2020 2020 Net cash provided by (used in) operating activities $ 4,282$ (27,748) $ 30,627$ 2,879 Net cash used in investing activities (78,081) (188,501) (21,516) (210,017) Net cash provided by (used in) financing activities 52,929 (239,399) (10,451) (249,850) For the thirty-nine weeks endedOctober 3, 2021 (Successor), our consolidated cash balance, including cash equivalents, was$26.0 million or$20.9 million lower than atJanuary 3, 2021 . Net cash provided by operating activities for the thirty-nine weeks endedOctober 3, 2021 (Successor) was$4.3 million compared to$2.9 million thirty-nine weeks endedSeptember 27, 2020 (Combined), with the difference largely driven by changes in accounts receivable and inventory, and reductions in accrued expenses largely driven by higher year over year compensation payouts. Cash used in investing activities for the thirty-nine weeks endedOctober 3, 2021 (Successor) was$78.1 million mostly driven by theVitner's and Festida Foods acquisitions totaling$66.6 million , versus cash used in investing activity of$210.0 million for the thirty-nine weeks endedSeptember 27, 2020 (Combined), which was primarily driven by the acquisition of UBH and Kitchen Cooked. Net cash provided by financing activities was$52.9 million for the thirty-nine weeks endedOctober 3, 2021 (Successor), which was primarily a result of the payoffs of the First Term Loan and the Bridge Credit Agreement, offset by the borrowings under Term Loan B, proceeds from the redemption of Warrants, and net borrowings on the ABL, versus net cash used in financing activities of$249.9 million for the thirty-nine weeks endedSeptember 27, 2020 (Combined) which was primarily the result of payoff of debt with the business combination. Financing Arrangements The primary objective of our financing strategy is to maintain a prudent capital structure that provides us flexibility to pursue our growth objectives. We use short-term debt as management determines is reasonable, principally to finance ongoing operations, including our seasonal requirements for working capital (generally accounts receivable, inventory, and prepaid expenses and other current assets, less accounts payable, accrued payroll, and other accrued liabilities), and a combination of equity and long-term debt to finance both our base working capital needs and our non-current assets. Revolving Credit Facility OnNovember 21, 2017 , UBH entered into an asset based revolving credit facility (as amended, the "ABL facility") in an initial aggregate principal amount of$100.0 million . The ABL facility was set to expire on the fifth anniversary of closing, orNovember 21, 2022 . OnApril 1, 2020 , the ABL facility was amended to increase the credit limit up to$116.0 million and to extend the maturity throughAugust 22, 2024 . OnDecember 18, 2020 , the ABL facility was amended to increase the credit limit up to$161.0 million . No amounts were outstanding under this facility as ofOctober 3, 2021 andJanuary 3, 2021 . Availability
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under the ABL facility is based on a monthly accounts receivable and inventory borrowing base certification, which is net of outstanding letters of credit and amounts borrowed. As ofOctober 3, 2021 andJanuary 3, 2021 ,$133.2 million and$106.4 million , respectively, was available for borrowing, net of letters of credit. The facility bears interest at an annual rate based on LIBOR plus an applicable margin of 1.50% (ranging from 1.50% to 2.00% based on availability) or the prime rate plus an applicable margin of 0.50% (ranging from 0.50% to 1.00%). Had the Company elected to use the Prime rate, the interest rate on the facility as ofOctober 3, 2021 andSeptember 27, 2020 , would have been 3.75% and 3.75%, respectively. The Company elected to use the LIBOR rate, the interest rate on the ABL facility as ofOctober 3, 2021 was 1.58%. Had there been outstanding balances and the Company elected to use the LIBOR rate as ofSeptember 27, 2020 , the interest rate would have been 1.68%. The ABL facility is also subject to unused line fees (0.5% atOctober 3, 2021 ) and other fees and expenses. Standby letters of credit in the amount of$11.6 million and$14.1 million have been issued as ofOctober 3, 2021 andJanuary 3, 2021 , respectively. The standby letters of credit are primarily issued for insurance purposes. Term Loans OnNovember 21, 2017 , the Company entered into a First Lien Term Loan Credit Agreement (the "First Lien Term Loan") in a principal amount of$535.0 million and a Second Lien Term Loan Credit Agreement (the "Second Lien Term Loan", and collectively with the First Lien Term Loan, the "Term Loans") in a principal amount of$125.0 million . The proceeds of the Term Loans were used to refinance the Company'sJanuary 2017 credit facility and fund the acquisition ofInventure Foods and the repurchase of the predecessor membership units held by a minority investor. The First Lien Term Loan requires quarterly principal payments of$1.3 million beginningMarch 2018 , with a balloon payment due for any remaining balance on the seventh anniversary of closing, orNovember 21, 2024 . OnAugust 28, 2020 , as part of the Business Combination (as described in Note 1. "Operations and Summary of Significant Accounting Policies" and Note 2. "Acquisitions") an advance payment of principal was made on the First Lien Term Loan of$111.6 million . The First Lien Term Loan bears interest at an annual rate based on either LIBOR plus an applicable margin of 3.50%, or prime rate plus an applicable margin of 2.50%. The interest rate on the First Lien Term Loan as ofSeptember 27, 2020 was 5.10%. In connection with Amendment No. 2 to the Credit Agreement, datedNovember 21, 2017 withBank of America, N.A ., as further described within this note, the outstanding balance of$410 million was repaid in full the interest rate on this instrument was 3.64% at the time of payoff. The Company incurred closing and other costs associated with the Term Loans, which were allocated to each loan on a specific identification basis based on original principal amounts. Finance fees allocated to the First Lien Term Loan and the Second Lien Term Loan were$10.7 million and$4.1 million , respectively, which were presented net within "non-current portion of debt" on the consolidated balance sheets for the predecessor periods. Deferred fees are amortized ratably over the respective lives of each term loan. Deferred fees associated with the term loans under theJanuary 2017 credit agreement were fully expensed during 2017 and deferred financing fees were derecognized as a result of the Business Combination as described in the Note 1. "Operations and Summary of Significant Accounting Policies" and Note 2. "Acquisitions". Separately, onOctober 21, 2019 , the Company entered into a Senior Secured First Lien Floating Rate Note (the "Secured FirstLien Note ") in a principal amount of$125.0 million . Proceeds from the Secured FirstLien Note were used primarily to finance the Kennedy acquisition. The Secured FirstLien Note requires quarterly interest payments, with a repayment of principal on the maturity date ofNovember 21, 2024 . The Secured FirstLien Note bears interest at an annual rate based on 3 month LIBOR plus an applicable margin of 5.25%. OnDecember 14, 2020 , the Company entered into a Bridge Credit Agreement with a syndicate of banks, led byBank of America, N.A . (the "Bridge Credit Agreement"). The proceeds of the Bridge Credit Agreement were used to fund the Company's acquisition ofTruco and the IP Purchase fromOTB Acquisition, LLC , in which the Company withdrew$490.0 million to finance the Truco Acquisition and IP Purchase. The Bridge Credit Agreement bears interest at an annual base rate of 4.25% plus 1 month LIBOR with scheduled incremental increases to the base rate, as defined in the Bridge Credit Agreement. The loan converts into an Extended Term Loan if the Loan remains open 365 days after the closing date. As ofJanuary 3, 2021 , the outstanding balance of the Bridge Credit Agreement was$370.0 million , with$120.0 million being repaid from the redemption of the Company's warrants. Commitment fees and deferred financing costs on the Bridge Credit Agreement totaled$7.2 million , of which$2.6 million remained on the books as ofJanuary 3, 2021 . In connection with Amendment No. 2 to the Credit Agreement, and a$12.0 million repayment in the first quarter of 2021, the outstanding balance of$370.0 million was repaid in full and the Bridge Credit Agreement was terminated.
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OnJanuary 20, 2021 , the Company entered into Amendment No. 2 to the Credit Agreement ("Amendment No. 2") which provided additional operating flexibility and revisions to certain restrictive covenants. Pursuant to the terms of Amendment No. 2, the Company raised$720 million in aggregate principal of Term Loan B ("Term Loan B") which bears interest at LIBOR plus 3.00%, and extended the maturity of the Credit Agreement toJanuary 20, 2028 . The proceeds were used, together with cash on hand and proceeds from our exercised warrants, to redeem the outstanding principal amount of existing Term Loan B and Bridge Credit Agreement of$410 million and$358 million , respectively. The refinancing was accounted for as an extinguishment. The Company incurred debt issuance costs and original issuance discounts of$8.4 million . The interest rate on Term Loan B was 3.08% as ofOctober 3, 2021 . OnJune 22, 2021 , the Company entered into Amendment No. 3 to the Credit Agreement ("Amendment No. 3"). Pursuant to the terms of Amendment No. 3, the Company increased the principal balance of Term Loan B by$75.0 million to bring the aggregated balance of Term Loan B proceeds to$795.0 million , of which$789.1 million remains outstanding as ofOctober 3, 2021 . The Company incurred additional debt issuance costs and original issuance discounts of$0.7 million related to the incremental funding. The First Lien Term Loan, the Secured FirstLien Note , Term Loan B, and the ABL facility are collateralized by substantially all of the assets of UBH and its subsidiaries, including equity interests in certain of UBH's subsidiaries. The credit agreements contain certain affirmative and negative covenants as to operations and the financial condition of UBH and its subsidiaries. UBH and its subsidiaries were in compliance with its financial covenant as ofOctober 3, 2021 . OnJuly 2, 2021 , the Company entered into an agreement withBanc of America Leasing & Capital, LLC , whereby the Company agreed to sell and lease-back certain manufacturing equipment and warehouse/distribution equipment for$13.0 million . This was accounted for as a financing transaction. The terms of the sale leaseback transaction are for 60 months at an interest rate of 3.26%. OnJuly 28, 2021 , the Company entered into an agreement withBanc of America Leasing & Capital, LLC , whereby the Company amended a master lease agreement to draw up to$19.0 million on new capital improvement projects. During the thirteen weeks endedOctober 3, 2021 the Company has drawn$9.8 million related to certain manufacturing equipment and warehouse/distribution equipment. This was accounted for as a financing transaction, and bears interest at the Bloomberg Short-Term Bank Yield index plus 1.75%. Only interest is due on these loans until the capital projects are completed.
The outstanding principal balance as of
Derivative Financial Instruments To reduce the effect of interest rate fluctuations, the Company entered into an interest rate swap contract onSeptember 6, 2019 , with an effective date ofSeptember 30, 2019 , with a counter party to make a series of payments based on a fixed interest rate of 1.339% and receive a series of payments based on the greater of LIBOR or 0.00%. Both the fixed and floating payment streams are based on a notional amount of$250 million . The Company entered into this transaction to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated this derivative as a cash flow hedge. AtOctober 3, 2021 , the effective fixed interest rate on the long-term debt hedged by this contract was 3.48%. For further treatment of the Company's interest rate swap, refer to Note 10. "Fair Value Measurements" and Note 12. "Accumulated Other Comprehensive Income (Loss)." IO Loan Purchase Commitments The Company partially guarantees loans made to IOs by Cadence Bank for the purchase of routes. The outstanding balance of loans guaranteed was$2.5 million and$4.1 million atOctober 3, 2021 andJanuary 3, 2021 , respectively, all of which was recorded by the Company as an off balance sheet arrangement. The maximum amount of future payments the Company could be required to make under the guarantees equates to 25% of the outstanding loan balance up to$2.0 million . These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. Other Notes Payable and Capital Leases During the first fiscal quarter of 2020, the Company closed on the acquisition of Kitchen Cooked and the acquisition included a deferred purchase price of$2.0 million , of which$1.0 million was outstanding as ofOctober 3, 2021 andJanuary 3, 2021 . Additionally, during the first fiscal quarter of 2020, the Company purchased intellectual property that include a deferred purchase price of$0.5 million , of which$0.4 million and$0.5 million was outstanding as ofOctober 3, 2021 andJanuary 3, 2021 , respectively.
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During the third quarter of 2021, the Company recorded liabilities related primarily to reclaiming distribution rights from distributors, of which$2.8 million was outstanding as ofOctober 3, 2021 . During fiscal 2019, the Company sold$33.2 million of notes receivable from IOs on its books for$34.1 million in a series of transactions to a financial institution. During the first quarter of fiscal 2021, the Company sold an additional$2.3 million of notes receivable from IOs on its books for$2.5 million to a financial institution. During the second quarter of fiscal 2021, the Company sold an additional$5.6 million of notes receivable from IOs on its books for$5.8 million to a financial institution. Due to the structure of the transactions, the sales did not qualify for sale accounting treatment and the Company has recorded the notes payable obligation owed by the IOs to the financial institution on its books; the corresponding notes receivable also remained on the Company's books. The Company services the loans for the financial institution by collecting principal and interest from the IOs and passing it through to the institution. The underlying notes have various maturity dates throughDecember 2028 . The Company partially guarantees the outstanding loans, as discussed in further detail within Note 11. "Contingencies". These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. Interest expense for the thirteen weeks endedOctober 3, 2021 (Successor) was$7.7 million ,$7.0 million of which was related to the Company's credit facility and other long-term debt, of which$0.3 million was related to amortization of deferred financing fees, and$0.4 million of which was related to IO loans. Interest expense for the thirty-nine weeks endedOctober 3, 2021 (Successor) was$26.5 million ,$21.9 million of which was related to the Company's credit facility and other long-term debt, of which$3.5 million was related to amortization of deferred financing fees, and$1.1 million of which was related to IO loans. Interest expense for the Successor period fromAugust 29, 2020 toSeptember 27, 2020 was$1.8 million ,$1.7 million of which was related to the Company's credit facility and other long-term debt and$0.1 million of which was related to IO loans. Interest expense for the Predecessor period fromJune 28, 2020 toAugust 28, 2020 was$7.0 million ,$6.2 million of which was related to the Company's credit facility and other long-term debt,$0.4 million of which was related to amortization of deferred financing fees, and$0.4 million of which was related to IO loans. Interest expense for the Predecessor period fromDecember 30, 2019 toAugust 28, 2020 was$26.7 million ,$23.3 million of which was related to the Company's credit facility and other long-term debt,$1.7 million of which was related to amortization of deferred financing fees, and$1.7 million of which was related to IO loans. The interest expense on IO loans is a pass-through expense that has an offsetting interest income within Other income (expense). Off-Balance Sheet Arrangements Purchase Commitments Additionally, the Company has outstanding purchase commitments for specific quantities at fixed prices for certain key ingredients to economically hedge commodity input prices. These purchase commitments totaled$44.8 million as ofOctober 3, 2021 . The Company has recorded purchase commitment gain (losses) totaling$0.1 million ,$0.1 million and$0.2 million for the thirteen and thirty-nine weeks endedOctober 3, 2021 (Successor) and for the Successor period fromAugust 29, 2020 toSeptember 27, 2020 , respectively. The Company has recorded purchase commitment gain (losses) totaling$0.3 million and$(0.7) million for the predecessor periods fromJune 29, 2020 toAugust 28, 2020 andDecember 30, 2019 toAugust 28, 2020 , respectively. IO Guarantees-Off-Balance Sheet The Company partially guarantees loans made to IOs byBank of America for the purchase of routes. The outstanding balance of loans guaranteed that were issued byBank of America was$13.1 million and$7.1 million atOctober 3, 2021 andJanuary 3, 2021 , respectively, which are off balance sheet. As discussed in Note 8. "Long-Term Debt", the Company also sold notes receivable on its books toBank of America during fiscal 2019 and fiscal 2021, which the Company partially guarantees. The outstanding balance of notes purchased byBank of America atOctober 3, 2021 andJanuary 3, 2021 was$18.7 million and$16.5 million , respectively. Due to the structure of the transactions, the sales did not qualify for sale accounting treatment, as such the Company records the notes payable obligation owed by the IOs to the financial institution on its consolidated balance sheets; the corresponding note receivable also remained on the Company's consolidated balance sheets. The maximum amount of future payments the Company could be required to make under these guarantees equates to 25% of the outstanding loan balance on the first day of each calendar year plus 25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. The Company guarantees loans made to IOs by M&T Bank for the purchase of routes. The agreement with M&T Bank was amended inJanuary 2020 so that the Company guaranteed up to 25% of the greater of the aggregate principal amount of loans
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outstanding on the payment date orJanuary 1st of the subject year. The outstanding balance of loans guaranteed was$5.4 million and$6.6 million atOctober 3, 2021 andJanuary 3, 2021 , respectively, which are included in the notes payable and notes receivable sections of the Company's consolidated balance sheets. These loans are collateralized by the routes for which the loans are made. Accordingly, the Company has the ability to recover substantially all of the outstanding loan value upon default. New Accounting Pronouncements See Note 1. "Operations and Summary of Significant Accounting Policies," to the unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report. Application of Critical Accounting Policies and Estimates General Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States . While the majority of our revenue, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change. Critical accounting policies are defined as those policies that are reflective of significant judgments, estimates and uncertainties, which could potentially result in materially different results under different assumptions and conditions. Management regularly reviews the estimates and assumptions used in the preparation of our financial statements for reasonableness and adequacy. Our significant accounting policies are discussed in Note 1. "Operations and Summary of Significant Accounting Policies", of the unaudited Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q? however, the following discussion pertains to accounting policies we believe are most critical to the portrayal of our financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may affect the comparability of our financial condition, results of operations and cash flows to those of other companies. Revenue Recognition Our revenues primarily consist of the sale of salty snack items that are sold through DSD and Direct-To-Warehouse distribution methods, either directly to retailers or via distributors. We sell to supermarkets, mass merchandisers, club warehouses, convenience stores and other large-scale retailers, merchants, distributors, brokers, wholesalers, and IOs (which are third party businesses). These revenue contracts generally have a single performance obligation, and the Company recognizes revenue when such obligation is satisfied, as described below. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to customers, including applicable discounts, returns, allowances, trade promotion, consumer coupon redemption, unsaleable product, and other costs. Amounts billed and due from customers are classified as receivables and require payment on a short-term basis and, therefore, we do not have any significant financing components. We recognize revenue when (or as) performance obligations are satisfied by transferring control of the goods to customers. Control is transferred upon delivery of the goods to the customer. Shipping and/or handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs. Applicable shipping and handling are included in customer billing and are recorded as revenue as products' control is transferred to customers. We assess the goods promised in customers' purchase orders and identify a performance obligation for each promise to transfer a good that is distinct. We offer various forms of trade promotions and the methodologies for determining these provisions are dependent on local customer pricing and promotional practices, which range from contractually fixed percentage price reductions to provisions based on actual occurrence or performance. Our promotional activities are conducted either through the retail trade or directly with consumers and include activities such as in store displays and events, feature price discounts, consumer coupons, and loyalty programs. The costs of these activities are recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. In 2019, we implemented a system that improves our ability to analyze and estimate the reserve for unpaid costs relating to our promotional activities. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as the actual redemption incurred.
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Distribution Route Purchase and Sale Transactions We purchase and sell distribution routes as a part of our maintenance of our DSD network. As new IOs are identified, we either sell our existing routes to the IOs or sell routes that were previously purchased by us to the IOs. Gain/loss from the sale of a distribution route is recorded upon the completion of the sale transaction and signing of the relevant documents and is calculated based on the difference between the sale price of the distribution route and the asset carrying value of the distribution route as of the date of sale. We record intangible assets for distribution routes that we purchase based on the payment that we make to acquire the route and record the purchased distribution routes as indefinite-lived intangible assets underFinancial Accounting Standards Board Accounting Standards Codification ("ASC") 350, Intangibles -Goodwill and Other. The indefinite lived intangible assets are subject to annual impairment testing.Goodwill and Indefinite-Lived Intangibles We allocate the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, review of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of goodwill and other intangible assets, and potentially result in a different impact to our results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments and thereby impact the fair value of these assets, which could result in an impairment of the goodwill or intangible assets. Finite-lived intangible assets consist of distribution/customer relationships, technology, trademarks and non-compete agreements. These assets are being amortized over their estimated useful lives. Finite-lived intangible assets are tested for impairment only when management has determined that potential impairment indicators are present.Goodwill and other indefinite-lived intangible assets (including trade names, master distribution rights and Company owned routes) are not amortized but are tested for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. We test goodwill for impairment at the reporting unit level. As we have early adopted Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment, we will record an impairment charge based on the excess of a reporting unit's carrying amount over our fair value. ASC 350,Goodwill and Other Intangible Assets also permits an entity to first assess qualitative factors to determine whether it is necessary to perform quantitative impairment tests for goodwill and indefinite-lived intangibles. If an entity believes, as a result of each qualitative assessment, it is more likely than not that goodwill or an indefinite-lived intangible asset is not impaired, a quantitative impairment test is not required. We have identified the existing snack food operations as our sole reporting unit. For the qualitative analysis performed, which took place on the first day of the fourth quarter, we have taken into consideration all the events and circumstances listed in FASB ASC 350, Intangibles-Goodwill and Other, in addition to other entity-specific factors that have taken place from the period of the business combination which assessed goodwill onAugust 28, 2020 . There were no triggering events as ofOctober 3, 2021 that would require an interim impairment analysis prior to the annual impairment test. Income Taxes We account for income taxes pursuant to the asset and liability method of ASC 740, Income Taxes, which require us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. We follow the provisions of ASC 740-10 related to the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. ASC 740-10 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
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The benefit of tax positions taken or expected to be taken in our income tax returns is recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits". A liability is recognized (or amount of net operating loss carryover or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise's potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740-10. Interest costs and related penalties related to unrecognized tax benefits are required to be calculated, if applicable. Our policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling and administrative expenses. As ofOctober 3, 2021 , andJanuary 3, 2021 , no liability for unrecognized tax benefits was required to be reported. We do not expect any significant changes in our unrecognized tax benefits in the next year. Business Combinations We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets. We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.Self-Insurance We are primarily self-insured, up to certain limits, for employee group health claims. We purchase stop-loss insurance, which will reimburse us for individual and aggregate claims in excess of certain annual established limits. Operations are charged with the cost of claims reported and an estimate of claims incurred but not reported. We are primarily self-insured through large deductible insurance plans for automobile, general liability and workers' compensation. We have utilized a number of different insurance vehicles and programs for these insurable risks and recognizes expenses and reserves in accordance with the provisions of each insurance vehicle/program.
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