Press Release

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Hostess Brands, Inc. Announces Second Quarter 2019 Financial Results
08/07/19

Reports Record Net Revenue Quarter and Strong Gross Profit Growth

KANSAS CITY, Mo.--(BUSINESS WIRE)--Aug. 7, 2019-- Hostess Brands, Inc. (NASDAQ: TWNK) (NASDAQ: TWNKW) (the “Company”), today reported its financial results for the three and six months ended June 30, 2019.

Business Highlights for the Second Quarter 2019 as Compared to the Prior Year Period

  • Net revenue increased $25.2 million, or 11.7%, to $241.1 million due to higher volume of both core and new Hostess® branded products driven by distribution and merchandising support as well as realization of price increases.
  • Total Company point of sale in tracked channels increased 6.3% and market share of 19.0% was up 81 basis points.
  • Gross profit increased $16.6 million, or 24.8%, to $83.5 million due to higher sales volume and pricing actions as well as continued operating efficiencies.
  • Net income was $16.7 million, compared to $24.6 million, or diluted earnings per share of $0.10 per share. The decline was primarily due to discrete income tax adjustments of $7.8 million.
  • Adjusted net income increased $3.8 million or 18.9% to $24.1 million, representing $0.17 adjusted earnings per share.
  • Adjusted EBITDA increased $7.5 million, or 15.7%, to $55.1 million, or 22.9% of net revenue, compared to $47.6 million, or 22.1% of net revenue.
  • Cash and cash equivalents were $189.3 million as of June 30, 2019 with a leverage ratio of 4.0x, both driven by operating cash flows of $74.1 million for the six months ended June 30, 2019.

Despite Reduction for the Anticipated Sale of In-Store Bakery Operations ("ISB"), the Company Reiterates 2019 Net Revenue and Adjusted EBITDA Outlook

  • The Company expects continued organic revenue growth well above the Sweet Baked Goods (“SBG”) category in 2019 driven by Hostess® branded core and new product innovation due to expanded distribution and improved merchandising execution as well as benefits from increased pricing. This will be partially offset by reduced revenue from the anticipated disposition of ISB in the third quarter of 2019.
  • The Company expects full year 2019 adjusted EBITDA of $200 million to $210 million, an increase of 7% to 13% over 2018, primarily driven by revenue growth and achievement of operational efficiencies, partially offset by the anticipated divestiture of ISB in the third quarter of 2019.
  • The Company has improved its expected leverage ratio estimate to 3.2x to 3.4x at the end of 2019, driven by strong operating cash flows and the anticipated cash received from the divestiture of ISB.

“The continued execution against our pillars for growth are evidenced this quarter by meaningful revenue growth, increased market share and improvement in our industry-leading profitability,” commented Andy Callahan, President and Chief Executive Officer. “The strength of the Hostess® brand and our investments in our fundamental capabilities have helped us achieve broad-based success across channels. We will continue to focus on execution in the second half of 2019 as we build upon our strong foundation for sustainable growth and shareholder value creation.”

1This press release contains certain non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income attributed to Class A stockholders and adjusted earnings per share (“Adjusted EPS”). Please refer to the schedules in the press release for reconciliations of non-GAAP financial measures to the comparable GAAP measure. Unless otherwise stated, all comparisons of financial measures in this press release are to the second quarter of 2018. All measures of market performance contained in this press release, including point of sale and market share, include all Company branded products within the SBG category as reported by Nielsen but do not include other products sold outside of the SBG category. All market data in this press release reflect the restatement of convenience channel data executed by Nielsen for the 13-week period ended June 29, 2019. The Company's leverage ratio is net debt (total long-term debt less lease obligations, unamortized debt premiums and cash and cash equivalents) divided by adjusted EBITDA for the trailing twelve-month period.

Second Quarter 2019 Compared to Second Quarter 2018

Net revenue was $241.1 million, an increase of 11.7%, or $25.2 million, compared to $215.8 million. The net revenue growth was primarily from increased sales of Hostess® branded products driven by higher volume of both core products and new Hostess® branded breakfast products as distribution and merchandising support improved in multiple sales channels. Dolly Madison® branded products also provided revenue growth as the Company leveraged the acquired Cloverhill customer relationships. Net revenue also benefited from increased pricing implemented in the fourth quarter of 2018.

Gross profit was $83.5 million, or 34.6% of net revenue, compared to $66.9 million, or 31.0% of net revenue. Adjusted gross profit was $83.5 million, or 34.6% of net revenue, a $14.2 million increase as compared to $69.3 million, or 32.1% of net revenue, in the prior year period. Pricing actions and increases in sales volume partially offset the impact of inflationary pressures on ingredient, labor and packaging costs. The Company also benefited from continued operational cost efficiencies.

Operating costs and expenses were $46.6 million, or 19.3% of net revenue, compared to $32.2 million, or 14.9% of net revenue. These costs increased due to higher incentive compensation and additional corporate expenses incurred in connection with the relocation of the Company's primary distribution facility and category sales and marketing functions. Additionally, there was a $1.3 million loss on the remeasurement of the tax receivable agreement obligation in the second quarter of 2019 as compared to a $1.8 million gain on remeasurement in the prior year period driven by changes in estimated future state rates.

The Company's effective tax rate was 35.2% compared to 0.8%. In the second quarter of 2019, the Company recognized a discrete tax expense of $2.8 million as compared to a discrete tax benefit of $5.0 million recognized in the prior year period resulting from revaluing deferred tax balances based on changes in its estimated state apportionment factors and tax rates.

Net income was $16.7 million compared to $24.6 million. Net income attributed to Class A stockholders was $11.5 million, or $0.10 per diluted share, compared to $19.3 million, or $0.18 per diluted share. The decline was primarily due to discrete income tax adjustments of $7.8 million.

Adjusted net income was $24.1 million compared to $20.2 million. Adjusted EPS was $0.17 per diluted share, compared to $0.14 per share. Adjusted EBITDA was $55.1 million, or 22.9% of net revenue, compared to $47.6 million, or 22.1% of net revenue.

Cash from operations for the six months ended June 30, 2019 was $74.1 million compared to $81.2 million for the same period last year. The decrease was attributable to the timing of customer receipts as well as higher working capital needs to facilitate the increased sales volume. Operating cash flow for the second quarter of 2019 was $45.7 million, an increase of 6.5% from the prior year period.

Sweet Baked Goods Segment: Net revenue was $229.3 million, an increase of $25.0 million, or 12.3%, compared to $204.2 million driven by additional volume and price increases. Gross profit was $80.9 million, or 35.3% of net revenue, compared to $64.4 million, or 31.5% of net revenue.

In-Store Bakery Segment: Net revenue was $11.8 million, an increase of $0.2 million, or 1.5%, compared to $11.6 million. The increase in net revenue was attributable to increased sales volume. Gross profit was $2.5 million, or 21.4% of net revenue, compared to gross profit of $2.5 million, or 21.5% of net revenue.

Divestiture of ISB

As previously announced, the Company has entered into a definitive agreement to sell ISB to Sara Lee Frozen Bakery for a purchase price of $65.0 million in cash, subject to post-closing adjustments. The transaction is expected to close during the third quarter, subject to customary closing conditions. The Company expects to use the net proceeds from the transaction to pursue a range of potential strategic options, including reinvesting in its business, de-leveraging its balance sheet, and pursuing potential strategic acquisitions, while effectively managing its capital structure.

New Corporate Headquarters and Research and Development Center

The Company is opening a new consumer research center with a lab, sensory test kitchen and focus group space within the Company's new corporate headquarters building which is relocating within the Kansas City metro area. This new research and development center, which is anticipated to open during the first quarter of 2020, will enhance the Company's in-house innovation capabilities and expand capacity for new product research and development.

Outlook

Despite the impacts of the anticipated divestiture of ISB, the Company reiterated its net revenue and adjusted EBITDA guidance as well as improved its leverage outlook for 2019 to reflect the strong year-to-date financial results:

  • Net revenue growth well above the SBG category;
  • Adjusted EBITDA of $200 million to $210 million, an increase of 7% to 13% from 2018;
  • Adjusted EPS of $0.57 to $0.62, an increase of 6% to 15% from 2018;
  • The net expected increase in cash of $145 million to $155 million would result in a leverage ratio of 3.2x to 3.4x at the end of 2019, absent any acquisitions or other strategic uses of cash, compared to 4.5x at December 31, 2018;
  • Cash provided by operations of $145 million to $155 million, a reduction from previous expectation of $150 million to $160 million;
  • Capital expenditures of approximately $30 million to $35 million;
  • Income tax rate, excluding discrete items, of 21% to 22% giving effect to the non-controlling interest and the related share exchanges occurring in the second quarter. The Company expects to pay minority shareholder distributions of $7.5 million to $8.5 million and corporate tax payments of $2.0 million to $3.0 million in 2019.

The Company provides guidance only on a non-generally accepted accounting principles (non-GAAP) basis and does not provide a reconciliation of the Company's forward-looking financial expectations to the most directly comparable GAAP financial measure because of the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation; including adjustments that could be made for deferred taxes; remeasurement of the tax receivable agreement, changes in allocation to the non-controlling interest, transformation expenses and other non-operating gains or losses reflected in the Company's reconciliation of historic non-GAAP financial measures, the amount of which could be material. Please refer to the Reconciliation of Non-GAAP Financial Measures included in this press release for further information about the use of these measures.

Conference Call and Webcast

The Company will host a conference call and webcast with an accompanying presentation today, August 7, 2019 at 4:30 p.m. EDT to discuss the results for the second quarter. Investors interested in participating in the live call can dial 877-451-6152 from the U.S. and 201-389-0879 internationally. A telephone replay will be available approximately two hours after the call concludes through August 21, 2019, by dialing 844-512-2921 from the U.S., or 412-317-6671 from international locations, and entering confirmation code 13692886. The simultaneous, live webcast and presentation will be available on the Investor Relations section of the Company’s website at www.hostessbrands.com. The webcast will be archived for 30 days.

About Hostess Brands, Inc.

Hostess Brands, Inc. is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing fresh baked sweet goods in the United States. The brand's history dates back to 1919, when the Hostess® CupCake was introduced to the public, followed by Twinkies® in 1930. Today, the Company produces a variety of new and classic treats in addition to Twinkies® and CupCakes, including Donettes®, Ding Dongs®, Zingers®, Danishes, Honey Buns and Coffee Cakes. For more information about Hostess® products and Hostess Brands, please visit hostesscakes.com. Follow Hostess on Twitter: @Hostess_Snacks; on Facebook: facebook.com/Hostess; on Instagram: Hostess_Snacks; and on Pinterest: pinterest.com/hostesscakes.

The Company has two reportable segments: SBG and In-Store Bakery. The SBG segment consists of sweet baked goods, bread and buns and frozen retail products that are sold under the Hostess®, Dolly Madison®, Cloverhill® and Big Texas® brands. The In-Store Bakery segment consists of Superior on Main® and private label products sold through the in-store bakery section of grocery and club stores.

Forward-Looking Statements

This press release contains statements reflecting the Company's views about its future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. Forward-looking statements are generally identified through the inclusion of words such as “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language. Statements addressing the Company's future operating performance and statements addressing events and developments that the Company expects or anticipates will occur are also considered as forward-looking statements. All forward-looking statements included herein are made only as of the date hereof. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

These statements inherently involve risks and uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements. These risks and uncertainties include, but are not limited to, maintaining, extending and expanding the Company's reputation and brand image; protecting intellectual property rights; leveraging the Company's brand value to compete against lower-priced alternative brands; correctly predicting, identifying and interpreting changes in consumer preferences and demand and offering new products to meet those changes; operating in a highly competitive industry; the ability to maintain or add additional shelf or retail space for the Company's products; the continued ability to produce and successfully market products with extended shelf life; the ability to drive revenue growth in key products or add products that are faster-growing and more profitable; volatility in commodity, energy, and other input prices and the ability to adjust pricing to cover increased costs; dependence on major customers; geographic focus could make the Company particularly vulnerable to economic and other events and trends in North America; increased costs in order to comply with governmental regulation; general political, social and economic conditions; a portion of the workforce belongs to unions and strikes or work stoppages could cause the business to suffer; product liability claims, product recalls, or regulatory enforcement actions; unanticipated business disruptions; dependence on third parties for significant services; insurance may not provide adequate levels of coverage against claims; failures, unavailability, or disruptions of the Company's information technology systems; the Company's ability to achieve expected synergies and benefits and performance from the Company's strategic acquisitions; dependence on key personnel or a highly skilled and diverse workforce; and the Company's ability to finance indebtedness on terms favorable to the Company; and other risks as set forth from time to time in the Company's Securities and Exchange Commission filings.

As a result of a number of known and unknown risks and uncertainties, the Company's actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified and discussed in Item 1A-Risk Factors in the Company's Annual Report on Form 10-K for 2018. All subsequent written or oral forward-looking statements attributable to us or persons acting on the Company's behalf are expressly qualified in their entirety by these risk factors. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

HOSTESS BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except shares and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

2019

 

 

2018

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

189,284

 

 

 

$

146,377

 

Accounts receivable, net

 

128,187

 

 

 

105,679

 

Inventories

 

42,893

 

 

 

38,580

 

Prepaids and other current assets

 

10,285

 

 

 

8,806

 

Total current assets

 

370,649

 

 

 

299,442

 

Property and equipment, net

 

223,751

 

 

 

220,349

 

Intangible assets, net

 

1,889,221

 

 

 

1,901,215

 

Goodwill

 

574,645

 

 

 

575,645

 

Other assets, net

 

10,713

 

 

 

14,062

 

Total assets

 

$

3,068,979

 

 

 

$

3,010,713

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Long-term debt and lease obligations payable within one year

 

$

13,206

 

 

 

$

11,268

 

Tax receivable agreement payments payable within one year

 

7,700

 

 

 

4,400

 

Accounts payable

 

72,161

 

 

 

65,288

 

Customer trade allowances

 

50,765

 

 

 

42,010

 

Accrued expenses and other current liabilities

 

23,100

 

 

 

18,137

 

Total current liabilities

 

166,932

 

 

 

141,103

 

Long-term debt and lease obligations

 

972,118

 

 

 

976,736

 

Tax receivable agreement

 

85,820

 

 

 

64,663

 

Other long term liabilities

 

107

 

 

 

 

Deferred tax liability

 

273,575

 

 

 

277,954

 

Total liabilities

 

1,498,552

 

 

 

1,460,456

 

 

 

 

 

 

 

Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 109,323,871 and 100,046,392 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

11

 

 

 

10

 

Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 20,999,784 and 30,255,184 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

2

 

 

 

3

 

Additional paid in capital

 

1,022,529

 

 

 

925,902

 

Accumulated other comprehensive income (loss)

 

(190

)

 

 

2,523

 

Retained earnings

 

303,974

 

 

 

271,365

 

Stockholders’ equity

 

1,326,326

 

 

 

1,199,803

 

Non-controlling interest

 

244,101

 

 

 

350,454

 

Total liabilities and stockholders’ equity

 

$

3,068,979

 

 

 

$

3,010,713

 

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except shares and per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,
2019

 

 

June 30,
2018

 

June 30,
2019

 

 

June 30,
2018

Net revenue

 

$

 

241,060

 

 

 

$

 

215,849

 

 

$

 

463,798

 

 

 

$

 

424,592

 

Cost of goods sold

 

 

157,610

 

 

 

 

148,992

 

 

 

305,160

 

 

 

 

286,494

 

Gross profit

 

 

83,450

 

 

 

 

66,857

 

 

 

158,638

 

 

 

 

138,098

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Advertising and marketing

 

 

10,696

 

 

 

 

8,938

 

 

 

19,559

 

 

 

 

17,808

 

Selling expense

 

 

8,310

 

 

 

 

7,751

 

 

 

16,830

 

 

 

 

15,139

 

General and administrative

 

 

19,276

 

 

 

 

11,185

 

 

 

36,747

 

 

 

 

25,746

 

Amortization of customer relationships

 

 

6,009

 

 

 

 

5,994

 

 

 

11,994

 

 

 

 

11,989

 

Other operating expense (income)

 

 

2,278

 

 

 

 

(1,660

)

 

 

517

 

 

 

 

(104

)

Total operating costs and expenses

 

 

46,569

 

 

 

 

32,208

 

 

 

85,647

 

 

 

 

70,578

 

Operating income

 

 

36,881

 

 

 

 

34,649

 

 

 

72,991

 

 

 

 

67,520

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

10,302

 

 

 

 

9,749

 

 

 

20,538

 

 

 

 

19,089

 

Gain on buyout of tax receivable agreement

 

 

 

 

 

 

 

 

 

 

(12,372

)

Other expense

 

 

846

 

 

 

 

86

 

 

 

1,286

 

 

 

 

169

 

Total other expense

 

 

11,148

 

 

 

 

9,835

 

 

 

21,824

 

 

 

 

6,886

 

Income before income taxes

 

 

25,733

 

 

 

 

24,814

 

 

 

51,167

 

 

 

 

60,634

 

Income tax expense

 

 

9,064

 

 

 

 

194

 

 

 

7,886

 

 

 

 

6,712

 

Net income

 

 

16,669

 

 

 

 

24,620

 

 

 

43,281

 

 

 

 

53,922

 

Less: Net income attributable to the non-controlling interest

 

 

5,186

 

 

 

 

5,337

 

 

 

10,672

 

 

 

 

10,799

 

Net income attributable to Class A stockholders

 

$

 

11,483

 

 

 

$

 

19,283

 

 

$

 

32,609

 

 

 

$

 

43,123

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Class A share:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

0.11

 

 

 

$

 

0.19

 

 

$

 

0.32

 

 

 

$

 

0.43

 

Diluted

 

$

 

0.10

 

 

 

$

 

0.18

 

 

$

 

0.31

 

 

 

$

 

0.41

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

105,072,322

 

 

 

 

99,939,642

 

 

 

102,618,951

 

 

 

 

99,916,161

 

Diluted

 

 

109,509,195

 

 

 

 

104,773,094

 

 

 

105,338,010

 

 

 

 

104,911,474

 

         

Results of Operations by Segment

 

June 30, 2019

 

Six Months Ended

(In thousands)

 

June 30,
2019

 

 

June 30,
2018

 

June 30,
2019

 

 

June 30,
2018

Net Revenue

   

 

 

 

 

 

 

 

 

Sweet Baked Goods

 

$

 

229,273

 

 

 

$

 

204,237

 

 

$

 

442,151

 

 

 

$

 

403,529

 

In-Store Bakery

 

 

11,787

 

 

 

11,612

 

 

 

21,647

 

 

 

 

21,063

 

 

 

$

 

241,060

 

 

 

$

 

215,849

 

 

$

 

463,798

 

 

 

$

 

424,592

 

Gross Profit

   

 

 

 

 

 

 

 

 

Sweet Baked Goods

 

$

 

80,925

 

 

 

$

 

64,359

 

 

$

 

154,069

 

 

 

$

 

133,797

 

In-Store Bakery

 

 

2,525

 

 

 

 

2,498

 

 

 

4,569

 

 

 

 

4,301

 

 

 

$

 

83,450

 

 

 

$

 

66,857

 

 

$

 

158,638

 

 

 

$

 

138,098

 

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

 

 

Six Months Ended

 

 

June 30, 2019

 

 

June 30, 2018

Operating activities

 

 

 

 

 

Net income

 

$

43,281

 

 

 

$

53,922

 

Depreciation and amortization

 

21,939

 

 

 

20,648

 

Impairment of property, goodwill and intangibles

 

1,005

 

 

 

1,417

 

Debt discount (premium) amortization

 

(536

)

 

 

(541

)

Non-cash change in tax receivable agreement

 

(483

)

 

 

(14,124

)

Share-based compensation

 

4,780

 

 

 

2,721

 

Deferred taxes

 

5,637

 

 

 

4,994

 

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(22,508

)

 

 

(8,458

)

Inventories

 

(4,313

)

 

 

3,558

 

Prepaids and other current assets

 

(1,661

)

 

 

(1,643

)

Accounts payable and accrued expenses

 

18,168

 

 

 

17,187

 

Customer trade allowances

 

8,755

 

 

 

1,501

 

Net cash provided by operating activities

 

74,064

 

 

 

81,182

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property and equipment

 

(15,398

)

 

 

(19,836

)

Acquisition of business, net of cash

 

 

 

 

(23,910

)

Acquisition and development of software assets

 

(2,907

)

 

 

(1,591

)

Net cash used in investing activities

 

(18,305

)

 

 

(45,337

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Repayments of long-term debt and capital lease obligation

 

(5,056

)

 

 

(5,051

)

Distributions to non-controlling interest

 

(4,916

)

 

 

(9,463

)

Payment of taxes related to the net issuance of employee stock awards

 

(124

)

 

 

(407

)

Cash received from exercise of options

 

23

 

 

 

 

Payments on tax receivable agreement

 

(2,779

)

 

 

(41,353

)

Net cash used in financing activities

 

(12,852

)

 

 

(56,274

)

Net increase (decrease) in cash and cash equivalents

 

42,907

 

 

 

(20,429

)

Cash and cash equivalents at beginning of period

 

146,377

 

 

 

135,701

 

Cash and cash equivalents at end of period

 

$

189,284

 

 

 

$

115,272

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

22,472

 

 

 

$

20,358

 

Net taxes paid

 

$

1,815

 

 

 

$

3,959

 

Supplemental disclosure of non-cash investing:

 

 

 

 

 

Accrued capital expenditures

 

$

1,527

 

 

 

$

1,388

 

 

HOSTESS BRANDS, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income attributable to Class A Stockholders and adjusted EPS, collectively referred to as "Non-GAAP Financial Measures," are commonly used in the Company's industry and should not be construed as an alternative to gross profit, net income or earnings per share as indicators of operating performance or as alternatives to cash provided by operating activities as a measure of liquidity (each as determined in accordance with GAAP). These Non-GAAP Financial Measures may not be comparable to similarly titled measures reported by other companies. The Company has included these Non-GAAP Financial Measures because it believes the measures provide management and investors with additional information to measure the Company's performance and liquidity, estimate the Company's value and evaluate the Company's ability to service debt.

Non-GAAP Financial Measures are adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of the adjustments set forth below. The presentation of Non-GAAP Financial Measures should not be construed as an inference that future results will be unaffected by unusual or recurring items.

The Company defines adjusted EBITDA as net income adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization and (iii) income taxes, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company's results as reported under GAAP. For example, adjusted EBITDA:

  • does not reflect the Company's capital expenditures, future requirements for capital expenditures or contractual commitments;
  • does not reflect changes in, or cash requirements for, the Company's working capital needs;
  • does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debt; and
  • does not reflect payments related to income taxes, the Tax Receivable Agreement or distributions to the non-controlling interest to reimburse its tax liability.

HOSTESS BRANDS, INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(Unaudited, amounts in thousands, except shares and per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 2019

 

June 30, 2018

 

June 30, 2019

 

June 30, 2018

Reconciliation of Adjusted Gross Profit

 

 

 

 

 

 

 

 

Gross profit

 

$

83,450

 

 

$

66,857

 

 

$

158,638

 

 

$

138,098

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

1,802

 

 

1,563

 

 

1,864

 

Special employee incentive compensation

 

 

 

602

 

 

33

 

 

1,552

 

Adjusted gross profit

 

$

83,450

 

 

$

69,261

 

 

$

160,234

 

 

$

141,514

 

 

 

 

 

 

 

 

 

 

Adjusted gross margin

 

34.6

%

 

32.1

%

 

34.5

%

 

33.3

%

 

 

 

 

 

 

 

 

 

Reconciliation of Adjusted EBITDA

 

 

 

 

 

 

 

 

Net income

 

$

16,669

 

 

$

24,620

 

 

$

43,281

 

 

$

53,922

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

Income tax provision

 

9,064

 

 

194

 

 

7,886

 

 

6,712

 

Interest expense, net

 

10,302

 

 

9,749

 

 

20,538

 

 

19,089

 

Depreciation and amortization

 

11,060

 

 

10,557

 

 

21,939

 

 

20,648

 

Share-based compensation

 

2,499

 

 

1,098

 

 

4,780

 

 

2,721

 

Tax Receivable Agreement remeasurement and gain on buyout

 

1,278

 

 

(1,752

)

 

(483

)

 

(14,124

)

Impairment of property and equipment, intangible assets and goodwill

 

1,005

 

 

 

 

1,005

 

 

1,417

 

Acquisition and integration costs

 

 

 

1,817

 

 

1,563

 

 

1,864

 

Facility transition costs

ii.

816

 

 

 

 

816

 

 

 

Special employee incentive compensation

 

1,555

 

 

602

 

 

1,910

 

 

1,585

 

Other

i

840

 

 

712

 

 

1,280

 

 

796

 

Adjusted EBITDA

 

$

55,088

 

 

$

47,597

 

 

$

104,515

 

 

$

94,630

 

 

 

 

 

 

 

 

 

 

Reconciliation of Adjusted Net Income and Adjusted EPS

 

 

 

 

 

 

 

 

Net income

 

$

16,669

 

 

$

24,620

 

 

$

43,281

 

 

$

53,922

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

Tax Receivable Agreement remeasurement and gain on buyout

 

1,278

 

 

(1,752

)

 

(483

)

 

(14,124

)

Remeasurement of deferred taxes

 

2,823

 

 

(4,995

)

 

(3,224

)

 

(4,995

)

Impairment of property and equipment, intangible assets and goodwill

 

1,005

 

 

 

 

1,005

 

 

1,417

 

Acquisition and integration costs

 

 

 

1,817

 

 

1,563

 

 

1,864

 

Facility transition costs

ii.

816

 

 

 

 

816

 

 

 

Special employee incentive compensation

 

1,555

 

 

602

 

 

1,910

 

 

1,585

 

Other

i.

840

 

 

 

 

840

 

 

 

Tax impact of adjustments

 

(928

)

 

(57

)

 

(1,337

)

 

1,064

 

Adjusted net income

 

24,058

 

 

20,235

 

 

44,371

 

 

40,733

 

Non-controlling interest allocation of net income

 

(5,186

)

 

(5,337

)

 

(10,672

)

 

(10,799

)

Non-controlling interest allocation of adjustments

 

(679

)

 

(562

)

 

(1,125

)

 

(1,131

)

Adjusted net income attributed to Class A stockholders

 

$

18,193

 

 

$

14,336

 

 

$

32,574

 

 

$

28,803

 

Weighted average Class A shares outstanding-diluted

 

109,509,195

 

 

104,773,094

 

 

105,338,010

 

 

104,911,474

 

Adjusted EPS

 

$

0.17

 

 

$

0.14

 

 

$

0.31

 

 

$

0.27

 

                                   

i. For the three and six months ended June 30, 2019 and 2018, other expenses included transaction and other non-operating professional fees.

ii. For the three and six months ended June 30, 2019, facility transition costs include non-capitalizable costs incurred to move the Company's primary distribution center and category sales and marketing functions.

Source: Hostess Brands, Inc.

Investors, please contact:
Katie Turner
ICR
646-277-1228
katie.turner@icrinc.com

Media, please contact:
Hannah Arnold
LAK Public Relations, Inc.
212-329-1417
harnold@lakpr.com
or
Marie Espinel
LAK Public Relations, Inc.
212-899-4744
mespinel@lakpr.com