Utz Brands, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes included in Item 8 of this Annual Report on Form 10-K. 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 this Annual Report on Form 10-K. Our fiscal year end is the Sunday closest to December 31. Our fiscal year 2021 ended January 2, 2022 and was a fifty-two-week fiscal year, our fiscal year 2022 ended January 1, 2023 and was a fifty-two-week fiscal year, and our fiscal year 2023 ended December 31, 2023 and was a fifty-two-week fiscal year. Our fiscal quarters are comprised of thirteen weeks each, except for fifty-three-week fiscal periods 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 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 are a leading United States manufacturer of branded salty snacks, producing 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 BFY brands, includes Utz®, ON THE BORDER® , Zapp’s®, Golden Flake®, Boulder Canyon®, Hawaiian® Brand, and TORTIYAHS!®, among others, and enjoys strong household penetration in the United States, where our products can be found in approximately 49% of U.S. households as of December 31, 2023. As of December 31, 2023, we operate 14 manufacturing facilities across the United States with a broad range of capabilities. As of December 31, 2023, our products are distributed nationally to grocery, mass merchant, club, convenience, drug and other retailers through direct shipments, distributors, and approximately 2,250 direct-store-delivery (“DSD”) routes. We have historically expanded our geographic reach and product portfolio organically and through acquisitions. Based on 2023 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. 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 $38 billion U.S. salty snacks category, within the broader approximately $129 billion market for U.S. snack foods as of December 31, 2023. The salty snacks category has grown retail sales at an approximate 10.1% compound annual growth rate ("CAGR") during 2019 through 2023 with a major spike in 2020 driven by consumption following the outbreak of the novel coronavirus ("COVID-19") and again from 2022 through 2023 driven by inflation. In the last few years snacking occasions have been on the rise as consumers increasingly seek out convenient, delicious snacks for both on-the-go and at-home lifestyles. A 2023 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 year ended December 31, 2023, U.S. retail sales for salty snacks based on Circana data increased by 8.7% versus the comparable prior year period while our retail sales increased 6.3%. The 2 year CAGR during 2022 and 2023 was 12.2% for U.S. retail sales of salty snacks, during which time our retail sales increased by 11.3%. 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. 46 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 transformation 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 includes 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 shortly after fiscal year 2022. On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“Inflation Reduction Act”), 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; 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 December 31, 2023, we had $851.5 million in variable rate indebtedness, down from $867.4 million as of January 1, 2023. As of December 31, 2023, our variable rate indebtedness was benchmarked to the Term SOFR Screen Rate (‘SOFR”). As of December 31, 2023, we have entered into interest rate hedges covering $584.6 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 loan by City National Bank which is secured by a majority of the real estate assets of the our subsidiaries (the “Real Estate Term Loan”) (Refer to Note 8. “Long-Term Debt.”) to our audited consolidated financial statements included under Part II, Item 8 of this Annual Report on Form 10-K (our “Audited Financial Statements”)) 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 fiscal year ended December 31, 2023 was 6.3%, up from 4.7% during the fiscal year ended January 1, 2023. 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 Audited Financial Statements 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. Recent Developments and Significant Items Affecting Comparability Acquisitions and Dispositions During fiscal year 2022, the Company focused on increasing manufacturing and streamlining distribution. In April 2022, the Company purchased a brand new, recently completed snack food manufacturing facility in Kings Mountain, North Carolina from Evans Food Group Ltd. d/b/a Benestar Brands and related affiliates. The Company paid the full cash purchase price of $38.4 million at the closing and concurrently with the facility purchase, the Company sold 2.1 million shares of the Company’s Class A Common Stock for $28.0 million, to affiliates of Benestar in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933. During fiscal year 2023 and 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 asset purchases and resulted in expense of $1.5 million and $23.0 million for the fiscal years ended December 31, 2023 and January 1, 2023, respectively. 47 Commodity Trends We regularly monitor worldwide supply and commodity costs so that 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, may 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. We experienced an increase in pricing in certain commodity trends that continued to rise throughout fiscal year 2022 and have since stabilized during fiscal year 2023. Commodity cost increases in commodity trends 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 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 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. As of December 31, 2023, substantially all of our DSD routes are managed by IOs. As of January 1, 2023, the mix between IOs and RSPs was approximately 93% and 7%, respectively. The conversion process involves selling distribution rights to a defined route to an IO. As we converted a large number of routes in a year, there is a meaningful decrease in the selling, distribution 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 consolidated 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. Controls and Procedures Prior to the consummation of the Business Combination, we were not required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act and were therefore not required in connection with periods ended prior to the consummation of the Business Combination to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Since the consummation of the Business Combination, we are required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which require our management to certify financial and other information in our quarterly and annual reports. We were required to provide an annual management report on the effectiveness of our internal control over financial reporting beginning with our annual report for the fiscal year ended January 3, 2021. Beginning with the fiscal year ended January 2, 2022, our independent registered public accounting firm was required to assess and attest to the effectiveness of our internal control over financial reporting. Results of Operations Overview The following tables present selected financial data for the fiscal year ended December 31, 2023 and fiscal year ended January 1, 2023. We have prepared our discussion of the results of operations by comparing the results for the fiscal year ended December 31, 2023 to the results of operations for the fiscal year ended January 1, 2023. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations , in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, for discussion of the results of operations for the fiscal year ended January 1, 2023, compared to the fiscal year ended January 2, 2022, which is incorporated by reference herein. 48 For the Fiscal Year Ended December 31, 2023 For the Fiscal Year Ended January 1, 2023 Net sales $ 1,438,237 $ 1,408,401 Cost of goods sold 981,751 959,344 Gross profit 456,486 449,057 Selling, distribution and administrative expenses Selling and distribution 273,923 294,061 Administrative 159,196 150,343 Total selling, distribution, and administrative expenses 433,119 444,404 (Loss) gain on sale of assets, net (7,350) 691 Income from operations 16,017 5,344 Other (expense) income Interest expense (60,590) (44,424) Other income 3,066 400 Gain on remeasurement of warrant liability 2,232 720 Other expense, net (55,292) (43,304) Loss before income taxes (39,275) (37,960) Income tax expense (benefit) 757 (23,919) Net loss (40,032) (14,041) Net loss attributable to noncontrolling interest 15,095 13,649 Net loss attributable to controlling interest $ (24,937) $ (392) Fiscal Year Ended December 31, 2023 versus Fiscal Year Ended January 1, 2023 Net sales Net sales were $1,438.2 million for the fiscal year ended December 31, 2023 and $1,408.4 million for the fiscal year ended January 1, 2023. Net sales for the fiscal year ended December 31, 2023 increased $29.8 million or 2.1% over the fiscal year 2022. The increase in net sales for the fiscal year ended December 31, 2023 was primarily related to the flow-through of pricing actions that were taken in 2022 in response to inflationary pressures which accounted for a 4.6% increase in net sales, partially offset by a volume/mix decline of 1.8% due to SKU rationalization as well as 0.7% decline in net sales related to continued IO conversions. IO discounts increased from $156.8 million for the fiscal year ended January 1, 2023 to $179.3 million for the corresponding fiscal year ended December 31, 2023. Excluding the impacts of increased IO discounts related to IO conversions, organic net sales increased 2.8% for the fiscal year ended December 31, 2023 versus the fiscal year ended January 1, 2023. 49 Net sales are evaluated based on classification as Power and Foundation brands. Our Power Brands are comprised of our iconic heritage Utz brand and iconic On The Border® brand; craft brands such as Zapp’s ®, Golden Flake ® Pork Skins, TORTIYAHS!, and Hawaiian ®; BFY brands such as Boulder Canyon ®; strong regional snacking brands such as Bachman®, Tim’s Cascade® Snacks, and "Dirty" Potato Chips®; and selected licensed brands such as TGI Fridays ®. Our Foundation Brands include strong regional snacking brands, such as Golden Flake ® Chips and Cheese, Snyder of Berlin ®, and R.W. Garcia®; and BFY brands such as Good Health®, as well as other partner and private label brands. On February 5, 2024, the Company sold the Good Health and R.W. Garcia brands the to affiliates of Our Home™. For the fiscal year ended December 31, 2023, Power brand invoiced sales increased by approximately 8.6%, while Foundation brand invoiced sales decreased approximately 5.4% from fiscal year 2022. The increase in Power brand invoiced sales was due primarily to favorable pricing actions and increased volumes, partially offset by the impact of continued IO conversions. Foundation brand invoiced sales decrease was primarily driven by volume decline and the impact of continued IO conversion, offset by certain pricing initiatives. The Company's volume for the fiscal year ended December 31, 2023 was impacted by significant SKU rationalization focused on a reduction in private label, co-manufactured and partner branded products, which fall in Foundation Brands, as well as by weight outs and changes to price pack architecture. Cost of goods sold and Gross profit Gross profit was $456.5 million for the fiscal year ended December 31, 2023 and $449.1 million for the fiscal year ended January 1, 2023. Gross profit for the fiscal year ended December 31, 2023 increased $7.4 million or 1.7% over the comparable period in fiscal year 2022. The increase in gross profit for the fiscal year ended December 31, 2023 was driven by productivity and pricing initiatives which were put in place to help reduce the impact of inflation on commodity costs, and wages which hindered gross profit, partially offset by volume decline. During the fiscal year ended January 1, 2023, gross profit was benefited by $6.0 million recorded as a reduction of cost of goods sold related to proceeds received from a settlement of business interruption insurance, which reimbursed certain expenses as we shifted production to other facilities, including co-manufacturers, due to a natural disaster that affected one of our smaller manufacturing facilities. Our gross profit margin was 31.7% for the fiscal year ended December 31, 2023 versus 31.9% for the fiscal year ended January 1, 2023. The decline in gross profit margin was primarily driven by commodity and wage inflation, transitory higher inbound freight costs, offset by the impact of productivity initiatives. Additionally, IO discounts increased to $179.3 million for the fiscal year ended December 31, 2023 from $156.8 million for the fiscal year ended January 1, 2023. IO conversions contributed to a gross profit decline of $9.2 million, or a gross profit margin impact of 0.7%, and the remaining IO discount growth was driven by pricing actions. Selling, distribution and administrative expenses Selling, distribution and administrative expenses were $433.1 million for the fiscal year ended December 31, 2023 and $444.4 million for the fiscal year ended January 1, 2023, a decrease of $11.3 million or 2.5%. The decrease was primarily attributable to lower acquisition and integration costs due to $23.0 million in the prior year period related to the buyout of multiple distributors and reductions of selling costs related to the continued conversion out of Company owned RSP to IO routes, offset by impairments of $12.6 million primarily related to the closing of the Company's manufacturing facility in Birmingham, Alabama and $4.7 million related to a contract termination with a co-manufacturer which both occurred in the current year period, and rising labor and higher stock-based compensation costs. (Loss) Gain on sale of assets (Loss) gain on sale of assets was $(7.4) million for the fiscal year ended December 31, 2023 and $0.7 million for the fiscal year ended January 1, 2023. The Company has continued to convert company-owned routes to IO routes during the fiscal year ended December 31, 2023, which was substantially complete as of December 31, 2023, offsetting the sales price by the respective route intangible asset. The loss during the fiscal year ended December 31, 2023 was primarily related to the sale of the Company's manufacturing facility in Bluffton, Indiana which generated a loss of $13.4 million, partially offset by gain on sale of land for $4.0 million and the sale of IO routes and other fixed assets. Other expense, net Other expense, net was $55.3 million for the fiscal year ended December 31, 2023 and $43.3 million for the fiscal year ended January 1, 2023. The increase in expense was driven by interest expense of $60.6 million for the fiscal year ended December 31, 2023 compared to $44.4 million for the fiscal year ended January 1, 2023. The increase in interest expense is primarily attributable to higher interest rates, which impacted the portion of debt that the Company has not hedged. 50 Income taxes Income taxes were an expense of $0.8 million for the fiscal year ended December 31, 2023 and a benefit of $23.9 million for the fiscal year ended January 1, 2023. The income tax benefit recognized for the fiscal year ended January 1, 2023 is largely driven by the removal of a portion of a valuation allowance, which partially offsets a deferred tax asset, which resulted in a $17.2 million income tax benefit. Please see Note 15. "Income Taxes" of our Audited Financial Statements for addition information. 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, identify 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 discussion and analysis of our financial condition and results of operations. 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 Utz’s 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 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. 51 The following table provides a reconciliation from Net Income (Loss) to EBITDA and Adjusted EBITDA for the fiscal year ended December 31, 2023 and the fiscal year ended January 1, 2023: (dollars in millions) For the Fiscal Year Ended December 31, 2023 For the Fiscal Year Ended January 1, 2023 Net loss $ (40.0) $ (14.0) Plus non-GAAP adjustments: Income Tax Expense (Benefit) 0.8 (23.9) Depreciation and Amortization 79.5 86.8 Interest Expense, Net 60.6 44.4 Interest Income (IO loans) (1) (2.0) (1.6) EBITDA 98.9 91.7 Certain Non-Cash Adjustments (2) 50.7 11.3 Acquisition and Integration (3) 8.6 45.8 Business Transformation Initiatives (4) 31.0 22.1 Financing-Related Costs (5) 0.2 0.3 Gain on remeasurement of warrant liability (6) (2.2) (0.7) Adjusted EBITDA 187.2 170.5 Adjusted EBITDA as a % of Net Sales 13.0 % 12.1 % (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 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 $15.5 million and $8.8 million of share-based compensation that was awarded to associates and directors for the fiscal year ended December 31, 2023 and the fiscal year ended January 1, 2023, respectively. Asset Impairments and Write-Offs — For the fiscal year ended December 31, 2023, the Company recorded an adjustment for a non-cash loss on sale of $13.7 million related to fixed assets for the sale of the Bluffton, Indiana plant, along with $4.7 million related to the termination of the contract that was settled with the sale, and impairments of $12.6 million related to the closure of the Company's manufacturing facility in Birmingham, Alabama and Gramercy, Louisiana. For the fiscal year ended January 1, 2023, the Company recorded an adjustment for 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 $3.0 million and $0.5 million for the fiscal year ended December 31, 2023 and the fiscal year ended January 1, 2023, respectively. In addition, for the fiscal year ended December 31, 2023, we recorded $1.2 million for the amortization of cloud based computing assets. 52 (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 $9.7 million for the fiscal year ended December 31, 2023, as well as $1.1 million of income for the change of liability associated with the Tax Receivable Agreement for the fiscal year ended December 31, 2023. In fiscal year 2022, the majority of charges are related to the buyout of multiple distributors, which were accounted for as contract terminations resulting in expense of $23.0 million as well as other integration costs. During the fiscal year ended January 1, 2023, we incurred incremental costs of $21.8 million, for the integration of Truco Holdco Inc., R.W. Garcia Co., Inc., Kings Mountain, distributor buyouts, and costs to evaluate other potential acquisitions, as well as $1.0 million for the incremental liability associated with the Tax Receivable Agreement included in the fiscal year ended January 1, 2023. (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 $31.0 million for the fiscal year ended December 31, 2023 and $22.1 million for the fiscal year ended January 1, 2023, which included the closure of our Gramercy, Louisiana and Birmingham, Alabama plants along with various other supply chain, commercial and administrative initiatives. During fiscal year 2023, we completed the closure of our Gramercy, Louisiana and Birmingham, Alabama manufacturing plants along with the sale of our Bluffton, Indiana manufacturing plant. (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 Sources and Uses of Cash We believe that the cash provided by operating activities, our revolving credit facility, our term loans, and derivative financial instruments will continue to provide sufficient liquidity for our working capital needs, planned capital expenditures and future payments of our contractual, and tax obligations. We continually evaluate our financing strategy to meet our short- and longer-term capital needs. From time-to-time, we may dispose of assets or enter into other cash generating transactions, such as through a sale-leaseback, when we deem beneficial. To date, we have been successful in generating cash and raising financing as needed. However, if a serious economic or credit market crisis ensues or other adverse developments arise, it could have a material adverse effect on our liquidity, results of operations and financial condition. ABL Facility On July 20, 2023, the asset based revolving credit facility (as amended, the "ABL facility") with an initial aggregate principal amount of $100.0 million was amended to increase the credit limit to $225.0 million and extend the maturity through the earlier of July 20, 2028, or 91 days prior to the maturity of the $795.0 million in aggregate principal of Term Loan B (as amended, "Term Loan B"). The Company incurred fees of $0.7 million in connection with the amendment to the ABL facility. As of December 31, 2023 and January 1, 2023, $0.4 million and $0.0 million, respectively, was 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 and amounts borrowed. As of December 31, 2023 and January 1, 2023, $158.4 million and $163.0 million, respectively, was available for borrowing, net of letters of credit. Standby letters of credit in the amount of $12.2 million and $12.0 million have been issued as of December 31, 2023 and January 1, 2023, respectively. The standby letters of credit are primarily issued for insurance purposes. Refer to Note 8. “Long-Term Debt” to our Audited Financial Statements for more information. 53 Cash Requirements Our expected future payments at December 31, 2023 primarily consist of: • Short-term cash requirements related primarily to funding operations (including expenditures for raw materials, labor, manufacturing and distribution, trade and promotions, advertising and marketing, benefit plan obligations and lease expenses) as well as periodic expenditures for acquisitions, shareholder returns (such as dividend payments), property, plant and equipment and any significant one-time non-operating items. • Cash requirements related to Other Notes Payable and Capital Leases (Refer to Note 8. “Long-Term Debt to our Audited Financial Statements). • Long-term cash requirements primarily relate to funding long-term debt repayments and related interest payment on long-term debt (Refer to Note 8. "Long-Term Debt" to our Audited Financial Statements): • Long-term cash requirements related to our deferred taxes (Refer to Note 15. “Income Taxes” to our Audited Financial Statements). • Operating lease liabilities (Refer to Note 16. “Leases” to our Audited Financial Statements). 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. Refer to Note 9. “Derivative Financial Instruments and Purchase Commitments” to our Audited Financial Statements. IO Guarantees Off Balance Sheet The Company partially guarantees loans made to IOs by Cadence Bank, Bank of America and M&T Bank for the purchase of routes, all of which was recorded by the Company as off-balance sheet arrangements. 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. Refer to Note 12. “Contingencies” to our Audited Financial Statements. Cash Flow The following table presents net cash provided by operating activities, investing activities, and financing activities for the fiscal year ended December 31, 2023, and fiscal year ended January 1, 2023: (in thousands) For the Fiscal Year Ended December 31, 2023 For the Fiscal Year Ended January 1, 2023 Net cash provided by operating activities $ 76,640 $ 48,193 Net cash used in investing activities (48,492) (76,067) Net cash (used in) provided by financing activities (49,055) 58,906 At December 31, 2023, our consolidated cash balance, including cash equivalents, was $52.0 million or $20.9 million lower than at January 1, 2023. Net cash provided by operating activities for the fiscal year ended December 31, 2023 was $76.6 million an increase of $28.4 million from the fiscal year ended January 1, 2023. The increase is largely driven by a decrease in inventory levels, an increase in cash net income, and faster cash collections on accounts receivable, partially offset by a decreases in accounts payable and accrued expenses related to more favorable supplier terms as well as timing. Cash used in investing activities for the fiscal year ended December 31, 2023 was $48.5 million a decrease of $27.6 million from the fiscal year ended January 1, 2023. The decrease is largely driven by the decrease in purchases of property and equipment of $32.2 million. Fiscal year 2022 capital expenditures included $38.4 million related to a facilities purchase described further in Note 4. "Property. Plant. and Equipment" to our Audited Financial Statements. Net cash used in financing activities was $49.1 million for the fiscal year ended December 31, 2023 an increase of $108.0 million from the fiscal year ended January 1, 2023. The decrease was primarily attributable to lower net cash borrowings of $83.3 million. 54 Debt Covenants 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 December 31, 2023. Refer to Note 8. “Long-Term Debt” to our Audited Financial Statements for more information. New Accounting Pronouncements See Note 1. "Operations and Summary of Significant Accounting Policies" to our Audited Financial Statements. Application of Critical Accounting Policies and Estimates General Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the 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 our Audited Financial Statements; 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 customer or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are recognized as a change in management estimate as the actual redemption is incurred. 55 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 the distribution routes that we purchase based on the payment that we make to acquire the route as intangible assets and record the purchased distribution routes as indefinite-lived intangible assets under Financial Accounting Standards Board (“FASB”) 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, trade names 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, trademarks, 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 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. For the qualitative impairment 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, on August 28, 2020. Our fiscal year 2023 qualitative analysis concluded that Goodwill and our intangible assets were not impaired. 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. 56 Under the terms of the TRA as part of the Business Combination Agreement, the Company generally will be required to pay to the Continuing Members 85% of the applicable cash savings, if any, in U.S. federal and state income tax based on its ownership in UBH that the Company is deemed to realize in certain circumstances as a result of the increases in tax basis and certain tax attributes resulting from the Business Combination. This is accounted for in conjunction with the methods used to record income tax described above. 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, distribution and administrative expenses. As of each of December 31, 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 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. 57