Utz Brands, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following management's discussion and analysis of our financial condition and results of operations ("MD&A") should be read in conjunction with our unaudited combined interim consolidated financial statements as of and for the thirteen weeks ended April 2, 2023, together with our audited combined consolidated financial statements for our most recently completed fiscal year set forth under Item 8 of our Annual Report on Form 10-K for the year ended January 1, 2023. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended January 1, 2023 and other filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our fiscal year end is the Sunday closest to December 31. Our fiscal year 2022 ended January 1, 2023 and was a fifty-two-week fiscal year, our fiscal year 2023 will end on December 31, 2023 and is a fifty-two-week fiscal year. Our fiscal quarters are comprised of thirteen weeks each, except for fifty-three-week fiscal years for 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 U.S. manufacturer of branded salty snacks. We produce a broad offering of salty snacks, including potato chips, tortilla chips, pretzels, cheese 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 in the U.S., where our products can be found in approximately 48% of U.S. households. We operate 16 manufacturing facilities across the U.S. 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 approximately 2,200 DSD routes. Our company was founded in 1921 in Hanover, Pennsylvania, and benefits from over 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 2022 retail sales, we are the second-largest producer of branded salty snacks in our core geographies. 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 $36 billion U.S. salty snacks category, within the broader approximately $121 billion market for U.S. snack foods as of April 2, 2023. Retail sales of 19 the salty snacks category has grown 14.8% over the thirteen weeks ended April 2, 2023. A recent study from Circana cites that 54% of consumers eat snacks to add excitement to their daily diet, up two points versus two years ago and that 49% of consumers snack three or more times per day, up four points versus two years ago. 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 trends to continue to drive consistent retail sales growth for salty snacks for the foreseeable future. For the thirteen weeks ended April 2, 2023, U.S. retail sales for salty snacks based on Circana data increased by 14.8% versus the comparable prior year period. In the same period, our retail sales increased 9.4% over the thirteen weeks ended April 2, 2023. 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, 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 – On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted which included various tax provisions with retroactive effect. The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 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 the first installment of $3.9 million paid as of December 31, 2021, and the remaining $3.9 million was paid at the start of fiscal year 2023. 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. On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implemented a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. The Company continues to evaluate the impact of the Inflation Reduction Act of 2022; however, we believe it is unlikely to have a material effect on our consolidated financial position, results of operations, and cash flow. Financing Costs and Exposure to Interest Rate Changes – As of April 2, 2023, we had $884.6 million in variable rate indebtedness, up from $867.4 million at January 1, 2023. As of April 2, 2023 our variable rate indebtedness is benchmarked to the Term SOFR Screen Rate (‘SOFR”). As of April 2, 2023, we have entered into interest rate hedges covering $587.3 million of debt, of which, $500.0 million is covered through September 30, 2026 and a hedge that covers the outstanding principal balance of the Real Estate Term Loan through September 2032. Our interest rate hedge strategy has limited some of our exposure to changes in interest rates. 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 thirteen weeks ended April 2, 2023 was 5.6%, up from 3.9% during the thirteen weeks ended April 3, 2022. 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 7. "Long-Term Debt" and Note 8. "Derivative Financial Instruments and Purchase Commitments" to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this filing for additional information on debt, derivative and purchase commitment activity. The Company has experienced the effect of increased interest rates on the portion of its debt that is not hedged and, continued rising interest rates could negatively impact our net income. 20 Recent Developments and Significant Items Affecting Comparability Commodity Trends 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, which may be impacted in unanticipated ways due to climate change, 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 to cover longer term cost inflation, 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 fiscal year 2020, we began to experience an increase in pricing in certain commodity costs that continued to rise throughout fiscal years 2021 and 2022, and have continued to rise in the first quarter of 2023. Continued commodity cost increases 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 since early in 2021 and may continue to rise which may also 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 cost changes. While the costs of our principal raw materials fluctuate, 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. Market factors including supply and demand may result in higher costs of sourcing those materials. 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 RSPs was approximately 96% and 4%, respectively, as of April 2, 2023 versus 89% and 11% ratio for IOs and RSPs, respectively, as of April 3, 2022. We anticipate continuing to work to complete substantially all remaining RSPs conversions during fiscal year 2023. The conversion process involves selling distribution rights of 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, distribution 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 and distribution 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. 21 Results of Operations Overview The following tables present selected unaudited financial data for the thirteen weeks ended April 2, 2023 and April 3, 2022. (in thousands) Thirteen weeks ended April 2, 2023 Thirteen weeks ended April 3, 2022 Net sales $ 351,433 $ 340,767 Cost of goods sold 246,937 236,960 Gross profit 104,496 103,807 Selling, distribution, and administrative expenses Selling and distribution 65,046 88,110 Administrative 41,040 38,551 Total selling, distribution, and administrative expenses 106,086 126,661 (Loss) gain on sale of assets, net (508) 367 Loss from operations (2,098) (22,487) Other (expense) income Interest expense (14,378) (9,103) Other income 1,615 520 (Loss) gain on remeasurement of warrant liability (2,232) 1,944 Other expense, net (14,995) (6,639) Loss before taxes (17,093) (29,126) Income tax (benefit) expense (2,611) 2,772 Net loss (14,482) (31,898) Net loss attributable to noncontrolling interest 5,355 14,328 Net loss attributable to controlling interest $ (9,127) $ (17,570) Thirteen weeks ended April 2, 2023 versus thirteen weeks ended April 3, 2022 Net sales Net sales was $351.4 million and $340.8 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. Net sales for the thirteen weeks ended April 2, 2023 increased $10.7 million or 3.1% over the comparable period in 2022. The increase in net sales for the thirteen weeks ended April 2, 2023 was primarily related to the flow through of pricing action that were taken in 2022 in response to inflationary pressures accounted for a 9.7% increase in net sales, offset by volume/mix decline of 5.7%, as well as 0.9% decline in net sales related to continued IO conversions. IO discounts increased to $42.2 million for the thirteen weeks ended April 2, 2023 from $34.2 million for the corresponding thirteen weeks ended April 3, 2022. Excluding the impacts of increased IO discounts related to RSP to IO conversion, organic net sales increased 4.0% for the thirteen weeks ended April 2, 2023 versus the corresponding period in 2022. 22 Net sales are evaluated based on classification as Power and Foundation 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 select licensed brands such as TGI Fridays ®. 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®, R.W. Garcia®, as well as other partner and private label brands. For the thirteen weeks ended April 2, 2023 Power brand sales increased by approximately 8.7%, while Foundation brand sales decreased by approximately 4.9% from the thirteen weeks ended April 3, 2022. The increase in Power brand sales is due primarily to favorable pricing action, offset by volume decline and continued IO conversions. Foundation brand sales decrease was primarily driven by volume decline and continued IO conversion, offset by certain pricing initiatives. The Company's volume declined for the thirteen weeks ended April 2, 2023 compared to the lapping of a very strong thirteen weeks ended April 3, 2022. In addition, volume was also impacted by weight outs and price pack architecture, as well as SKU rationalization focused on a reduction in private label and partner brand products. Cost of goods sold and Gross profit Gross profit was $104.5 million and $103.8 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. The increase in gross profit for thirteen weeks ended April 2, 2023 was driven by pricing initiatives which were put in place to help reduce the impact of continued commodity, transportation, and wage inflation which hindered gross profit partially offset by volume decline. Our gross profit margin was 29.7% for the thirteen weeks ended April 2, 2023 versus 30.5% for the thirteen weeks ended April 3, 2022. The decline in gross profit margin was primarily driven by commodity and wage inflation and lower fixed overhead absorption, offset by the impact of productivity initiatives. Additionally, IO discounts increased to $42.2 million for the thirteen weeks ended April 2, 2023 from $34.2 million for the thirteen weeks ended April 3, 2022. IO conversions contributed to a gross profit decline of $3.0 million, or a gross profit margin of 0.9%, and the remaining IO discount growth was driven pricing actions. Apart from the IO discount impact growth the Company's margins over the thirteen weeks ended April 2, 2023 was comparable to margins for the thirteen weeks ended April 3, 2022. Selling, distribution, and administrative expense Selling, distribution, and administrative expenses were $106.1 million and $126.7 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively resulting in a decrease of $(20.6) million or (16.2)% over the corresponding period in fiscal year 2022. The decrease in expenses for the thirteen weeks ended April 2, 2023 compared to the thirteen weeks ended April 3, 2022 was primarily attributable to the comparable period having higher acquisition and integration costs related to the buyout of multiple distributors, which were accounted for as contract terminations, and resulted in expense of $23.0 million during the thirteen weeks ended April 3, 2022. The thirteen weeks ended April 2, 2023 included impairments of $1.9 million related to the impairment of fixed assets that were damaged in a natural disaster. The thirteen weeks ended April 3, 2022 included other contract termination expense and related impairments which totaled $2.6 million. Excluding these items selling, distribution, and administrative expenses increased by 3.1% for the thirteen weeks ended April 2, 2023 compared to the corresponding period in fiscal year 2022. We believe that the distributor buyouts will help drive increased future profitability and allow us to better serve our customers. Rising labor and higher stock based compensation costs were partially offset by the reductions of selling costs related to the continued conversion out of Company owned RSP to IO routes. (Loss) gain on sale of assets (Loss) gain on sale of assets was $(0.5) million and $0.4 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectivel y. Th e Company has continued to convert company-owned routes to IO routes during the first fiscal quarter of 2022, offsetting the sales price by the respective route intangible asset. The loss during the thirteen weeks ended April 2, 2023 was primarily related to some small distributor buyouts where a buyout premium was allocated to an asset purchase and sold. 23 Other expense, net Other expense, net was $15.0 million and $6.6 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. The decrease in expense for the thirteen weeks ended April 2, 2023 was primarily due to a $2.2 million loss from the remeasurement of warrant liability for the thirteen weeks ended April 2, 2023 versus a gain of $1.9 million for the thirteen weeks ended April 3, 2022. Also significant was interest expense of $14.4 million for the thirteen weeks ended April 2, 2023 compared to $9.1 million for the thirteen weeks ended April 3, 2022. The additional increase in interest expense is primarily attributable to the additional equipment loan and the Real Estate Loan. Another significant driver increasing interest expense relates to an increase in interest rates, which impacted the portion of debt that the Company has not hedged. Income taxes Inco me tax (benefit) expense was $(2.6) million and $2.8 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. Non-GAAP Financial Measures We use non-GAAP financial information and believe it is useful to investors as it provides additional information to facilitate comparisons of historical operating results, identifies trends in our underlying operating results and provides additional insight and transparency on how we evaluate the business. We use non-GAAP financial measures to budget, make operating and strategic decisions, and evaluate our performance. We have detailed the non-GAAP adjustments that we make in our non-GAAP definitions below. The adjustments generally fall within the categories of non-cash items, acquisition and integration costs, business transformation initiatives, and financing-related costs. We believe the non-GAAP measures should always be considered along with the related U.S. GAAP financial measures. We have provided the reconciliations between the U.S. GAAP and non-GAAP financial measures below, and we also discuss our underlying U.S. GAAP results throughout this MD&A section. Our primary non-GAAP financial measures are listed below and reflect how we evaluate our current and prior-year operating results. As new events or circumstances arise, these definitions could change. When the definitions change, we will provide the updated definitions and present the related non-GAAP historical results on a comparable basis. EBITDA and 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. 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 and Adjusted EBITDA are useful to investors in the evaluation of our operating performance compared to other companies in the salty snack industry, as similar measures are commonly used by companies in this industry, however, we caution that other companies may use different definitions from us and such figures may not be directly comparable to our figures. We have also historically reported an Adjusted EBITDA metric to investors and lenders for covenant compliance. We also report Adjusted EBITDA as a percentage of Net Sales as an additional measure for investors to evaluate our Adjusted EBITDA margins on Net Sales. 24 The following table provides a reconciliation from net (loss) to EBITDA and Adjusted EBITDA for the thirteen weeks ended April 2, 2023 and April 3, 2022: (dollars in millions) Thirteen weeks ended April 2, 2023 Thirteen weeks ended April 3, 2022 Net loss $ (14.5) $ (31.9) Plus non-GAAP adjustments: Income Tax (Benefit) Expense (2.6) 2.8 Depreciation and Amortization 20.1 22.1 Interest Expense, Net 14.4 9.1 Interest Income (IO loans) (1) (0.4) (0.5) EBITDA 17.0 1.6 Certain Non-Cash Adjustments (2) 9.2 3.5 Acquisition and Integration (3) 3.7 28.8 Business Transformation Initiatives (4) 8.2 4.4 Financing-Related Costs (5) 0.1 0.1 Loss (Gain) on Remeasurement of Warrant Liability (6) 2.2 (1.9) Adjusted EBITDA $ 40.4 $ 36.5 Adjusted EBITDA as a % of Net Sales 11.5 % 10.7 % (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 most of 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 – The Company incurred $4.6 million and $1.4 million of share-based compensation expense, that was awarded to associates and directors, and compensation expense associated with the employee stock purchase plan for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. Asset Impairments and Write-Offs — For the thirteen weeks ended April 2, 2023, the Company recorded an adjustment for an impairment of $1.9 million related to fixed assets. During the thirteen weeks ended April 3, 2022, the Company recorded an impairment of $2.0 million related to the termination of distribution agreements. Purchase Commitments and Other Adjustments – We have purchase 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 unrealized gains and losses. The adjustment related to Purchase Commitment and Other non-cash adjustments were $2.7 million and $0.1 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. (3) Adjustment for Acquisition and Integration Costs – This is comprised of consulting, transaction services, and legal fees incurred for acquisitions and certain potential acquisitions, in addition to expenses associated with integrating recent acquisitions. Such expenses were $4.9 million for the thirteen weeks ended April 2, 2023, as well as $1.2 million of income for the reduction of the Tax Receivable Agreement Liability associated with the Business Combination. Charges related to the buyout of multiple distributors, which was accounted for as a contract termination resulting in expense of $23.0 million for the thirteen weeks ended April 3, 2022, along with other acquisitions an integration cost of $5.8 million. (4) Business Transformation Initiatives Adjustment – This adjustment is related to consultancy, professional, and legal fees incurred for specific initiatives and structural changes to the business that do not reflect the cost of normal business operations. In addition, gains and losses realized from the sale of distribution rights to IOs and the subsequent disposal of trucks, severance costs associated with the elimination of RSP positions, and ERP transition costs, fall into this category. The Company incurred such costs of $8.2 million and $4.4 million for the thirteen weeks ended April 2, 2023 and April 3, 2022, respectively. 25 (5) Financing-Related Costs – These costs include adjustments for various items related to raising debt and equity capital or debt extinguishment costs. (6) Gains and losses 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. Liquidity and Capital Resources The following table presents net cash provided by operating activities, investing activities and financing activities for the thirteen weeks ended April 2, 2023 and April 3, 2022. (in thousands) Thirteen weeks ended April 2, 2023 Thirteen weeks ended April 3, 2022 Net cash used in operating activities $ (8,443) $ (36,004) Net cash used in investing activities $ (14,018) $ (5,103) Net cash provided by financing activities $ 7,452 $ 14,108 For the thirteen weeks ended April 2, 2023, our consolidated cash balance, including cash equivalents, was $57.9 million or $15.0 million lower than at January 1, 2023. Net cash used in operating activities for the thirteen weeks ended April 2, 2023 was $8.4 million compared to $36.0 million thirteen weeks ended April 3, 2022, with the difference largely driven by the payment of $20.2 million in the first quarter of 2022 related to the buyout of multiple distributors, which were accounted for as contract terminations. The thirteen weeks ended April 2, 2023 also included a larger cash outflow related to the building of inventory compared to the prior year comparable period. Cash used in investing activities for the thirteen weeks ended April 2, 2023 was $14.0 million driven by purchases of property and equipment, versus cash used in investing activity of $5.1 million for the thirteen weeks ended April 3, 2022. Net cash provided by financing activities was $7.5 million for the thirteen weeks ended April 2, 2023, driven by a draw on the line of credit of $20.0 million, offset by the payment of dividends and distribution, and repayments on term debt and notes payable, versus net cash used in financing activities of $14.1 million for the thirteen weeks ended April 3, 2022, which was primarily a result of a draw on the line of credit of $20.0 million and other borrowings offset by payments of dividends and distributions. 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 On November 21, 2017, UBH entered into an asset based revolving credit facility (as amended, the "ABL facility"), pursuant to the terms of that certain First Lien Term Loan Credit Agreement, dated November 21, 2017 (the "Credit Agreement"). On September 22, 2022, the ABL facility was amended to further increase the credit limit up to $175.0 million and replaced the interest rate benchmark from LIBOR to SOFR. As of April 2, 2023 and January 1, 2023, $20.0 million and $0.0 million, respectively, were outstanding under this facility. Availability under the ABL facility is based on a monthly accounts receivable and inventory borrowing base certification, which is net of outstanding letters of credit. As of April 2, 2023 and January 1, 2023, $140.8 million and $163.0 million, respectively, was available for borrowing, net of letters of credit. The ABL facility is also subject to unused line fees (0.5% at April 2, 2023) and other fees and expenses. Standby letters of credit in the amount of $12.0 million have been issued as of April 2, 2023 and January 1, 2023. The standby letters of credit are primarily issued for insurance purposes. 26 Term Loans On December 14, 2020, the Company entered into a Bridge Credit Agreement with a syndicate of banks, led by Bank of America, N.A. (the "Bridge Credit Agreement"). The proceeds of the Bridge Credit Agreement were used to fund the Company’s acquisition of Truco and the IP Purchase (each as defined below) from OTB Acquisition, LLC, in which the Company withdrew $490.0 million to finance the acquisition of Truco Holdco Inc. ("Truco" and such acquisition, the "Truco Acquisition") and certain intellectual property from OTB Acquisition, LLC (the "IP Purchase"). The Bridge Credit Agreement bears interest at an annual rate based on 4.25% plus 1 month LIBOR with scheduled incremental increases to the base rate, as defined in the Bridge Credit Agreement. On January 20, 2021, the Company entered into Amendment No. 2 to the Bridge 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 bore interest at LIBOR plus 3.00%, and extended the maturity of the Bridge Credit Agreement to January 20, 2028. The proceeds were used, together with cash on hand and proceeds from our exercised warrants, to redeem the outstanding principal amount of 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. On June 22, 2021, the Company entered into Amendment No. 3 to the Bridge 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. The Company incurred additional debt issuance costs and original issuance discounts of $0.7 million related to the incremental funding. On October 12, 2022, the Company, through its subsidiaries UQF, Kennedy and Condor Snack Foods, LLC (together with UQF and Kennedy, the “Real Estate Financing Borrowers”), entered into a loan agreement (the “Real Estate Term Loan”) with City National Bank which was secured by a majority of the Real Estate Financing Borrowers’ real estate assets. The Real Estate Term Loan holds a principal balance of $88.1 million, with net proceeds of approximately $85.0 million after transaction fees and expenses. The Real Estate Term Loan has a ten-year maturity and amortizes approximately $3.5 million in principal annually, with a balloon payment due at maturity. The Company used a portion of the proceeds from the Real Estate Term Loan to pay off the ABL facility. The Real Estate Term Loan contains a single financial maintenance covenant consisting of a fixed charge coverage ratio that is tested quarterly only during a covenant trigger period consistent with the existing ABL facility. Concurrent with the closing of the Real Estate Term Loan, UQF entered into an interest rate swap transaction to fix the effective interest rate at approximately 5.93%, as discussed in further detail within "Note 8. Derivative Financial Instruments and Purchase Commitments”. The Term Loan B and the ABL facility are collateralized by substantially all of the assets and liabilities of UBH and its subsidiaries excluding the real estate assets secured by the Real Estate Term Loan, 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 covenants as of April 2, 2023. Debt (in thousands) Issue Date Principal Balance Maturity Date April 2, 2023 January 1, 2023 Term loan B (1) June-21 $ 795,000 January-28 $ 777,298 $ 779,286 Real Estate Loan October-22 $ 88,140 October-32 87,259 88,140 Equipment loans (2) 54,400 54,053 ABL facility (3) 20,000 — Net impact of debt issuance costs and original issue discounts (9,667) (9,672) Total long-term debt 929,290 911,807 Less: current portion (19,207) (18,472) Long term portion of term debt and financing obligations $ 910,083 $ 893,335 (1) On September 22, 2022, the Company entered into Amendment No. 4 to the Bridge Credit Agreement ("Amendment No. 4"), which replaced the interest rate benchmark from LIBOR to SOFR. The weighted average interest rate on the Term Loan B debt for the thirteen weeks ended April 2, 2023 was 7.61%. 27 (2) In July 2021, the Company entered into two separate finance lease obligations with Banc of America Leasing & Capital, LLC, which have been treated as secured borrowing. The Company made a series of draws upon these agreements throughout fiscal year 2021 totaling $26.5 million and has drawn a total of $32.4 million in fiscal year 2022 and $2.3 million in fiscal year 2023. These draws bear interest ranging from 3.26% through 6.73% and have varying maturities up through 2028. (3) The facility bore interest at an annual rate based on LIBOR, or SOFR plus a 0.10% credit spread adjustment after the amendment on September 22, 2022, 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%). The Company generally utilizes the prime rate for amounts that the Company expects to pay down within 30 days. The interest rate on the facility as of April 2, 2023 was 8.50%, under the prime rate. The Company elects to use the LIBOR, prior to the amendment on September 22, 2022 which changed the reference rate to SOFR as described above, for balances that are expected to be carried longer than 30 days. The interest rate on the ABL facility as of April 2, 2023 was 6.26%. Other Notes Payable and Capital Leases During the first fiscal quarter of 2022, the Company bought out and terminated the contracts of multiple distributors who had previously been providing services to the Company. These transactions were accounted for as contract terminations and resulted in expense of $23.0 million for the thirteen weeks ended April 3, 2022. The outstanding balance of these transactions was $0.5 million as of January 1, 2023, and was paid off during the thirteen weeks ended April 2, 2023. During the first fiscal quarter of 2020, the Company purchased intellectual property that include a deferred purchase price of $0.5 million, of which $0.2 million and $0.3 million was outstanding as of April 2, 2023 and January 1, 2023, respectively. Amounts outstanding under notes payable consisted of the following: (in thousands) As of April 2, 2023 As of January 1, 2023 Note payable – IO notes $ 19,508 $ 21,098 Finance lease obligations 10,547 10,995 Other 200 835 Total notes payable 30,255 32,928 Less: current portion (11,893) (12,589) Long term portion of notes payable $ 18,362 $ 20,339 From time to time, the Company sells notes receivable from IOs to a financial institution. During the thirteen weeks ended April 2, 2023, the Company sold an additional $1.0 million of notes receivable from IOs on its books for $0.9 million to a financial institution. Due to the structure of these transactions, they 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 through June 2032. The Company partially guarantees the outstanding loans, as discussed in further detail within Note 10. "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 any event of default. 28 Interest Expense Interest expense consisted of the following: (in thousands) Thirteen weeks ended April 2, 2023 Thirteen weeks ended April 3, 2022 Company’s term loans, ABL facility, and other long-term debt $ 14,142 $ 8,331 Amortization of deferred financing fees 5 341 IO loans 231 431 Total interest $ 14,378 $ 9,103 Off-Balance Sheet Arrangements Purchase Commitments 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 $73.1 million as of April 2, 2023. The Company accrues for losses on firm purchase commitments in a loss position at the end of each reporting period to the extent that there is an active observable market. The Company has recorded purchase commitment (losses) gains totaling $(2.7) million for the thirteen weeks ended April 2, 2023 and $0.0 million for the thirteen weeks ended April 3, 2022, respectively. IO Guarantees-Off-Balance Sheet The Company partially guarantees loans made to IOs by Cadence Bank for the purchase of routes. The outstanding balance of loans guaranteed was $1.1 million and $1.5 million at April 2, 2023 and January 1, 2023, respectively, all of which was recorded by the Company as off balance sheet arrangements. 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. The Company partially guarantees loans made to IOs by Bank of America for the purchase of routes. The outstanding balance of loans guaranteed that were issued by Bank of America was $40.2 million and $36.0 million at April 2, 2023 and January 1, 2023, respectively, which are off balance sheet arrangements. As discussed in Note 7. "Long-Term Debt", the Company also sold notes receivable on its books to Bank of America during fiscal years 2019, 2021, and 2022, which the Company partially guarantees. The outstanding balance of notes purchased by Bank of America at April 2, 2023 and January 1, 2023 was $16.8 million and $17.9 million, respectively. Due to the structure of the transactions, the sale did not qualify for sale accounting treatment, and 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 in January 2020 so that the Company guaranteed up to 25% of the greater of the aggregate principal amount of loans outstanding on the payment date or January 1 st of the subject year. The outstanding balance of loans guaranteed was $3.1 million and $3.4 million at April 2, 2023 and January 1, 2023, respectively, all of which were included in 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. 29 New Accounting Pronouncements See Note 1. "Operations and Summary of Significant Accounting Policies," to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. Application of Critical Accounting Policies and Estimates General Our consolidated financial statements have been prepared in accordance with U.S. GAAP. 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. 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. 30 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 under Financial Accounting Standards Board 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 of 2022, 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. We have determined that there was no significant impact that affected the fair value of the reporting unit through April 2, 2023 . T herefore, we have determined that it was not necessary to perform a quantitative goodwill impairment test for the reporting unit. 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. 31 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. 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 of April 2, 2023 and January 1, 2023, 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 accounted for as 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures about market risk, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended January 1, 2023. Our exposures to market risk have not changed materially since January 1, 2023.