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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the three months ended |
| September 30, 2019 |
| OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number 001-37540
HOSTESS BRANDS, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | 47-4168492 |
(State or other jurisdiction of incorporation or organization)
| (I.R.S. Employer Identification No.) |
1 East Armour Boulevard | 64111 |
Kansas City, | MO | (Zip Code) |
(Address of principal executive offices) | |
(816) 701‑4600
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each Class | Ticker Symbol | Name of each exchange on which registered |
Class A Common Stock, Par Value of $0.0001 per share | TWNK | The Nasdaq Stock Market LLC |
Warrants, each exercisable for a half share of Class A Common Stock | TWNKW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.:
|
| | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non‑accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐ No ☒
Shares of Class A common stock outstanding - 120,947,081 shares at November 5, 2019
Shares of Class B common stock outstanding - 9,455,184 shares at November 5, 2019
HOSTESS BRANDS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2019
INDEX
|
| | |
| | Page |
|
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
|
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
Cautionary Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Statements that constitute 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 our future operating performance and statements addressing events and developments that we expect or anticipate will occur are also considered forward-looking statements. All forward‑looking statements included herein are made only as of the date hereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as updated by subsequent filings. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. We undertake 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)
|
| | | | | | | | |
| September 30, | | | December 31, |
ASSETS | 2019 | | | 2018 |
| | | | |
Current assets: | | | | |
Cash and cash equivalents | $ | 266,871 |
| | | $ | 146,377 |
|
Accounts receivable, net | 115,857 |
| | | 105,679 |
|
Inventories | 38,582 |
| | | 38,580 |
|
Prepaids and other current assets | 12,182 |
| | | 8,806 |
|
Total current assets | 433,492 |
| | | 299,442 |
|
Property and equipment, net | 227,114 |
| | | 220,349 |
|
Intangible assets, net | 1,858,943 |
| | | 1,901,215 |
|
Goodwill | 535,853 |
| | | 575,645 |
|
Other assets, net | 11,376 |
| | | 14,062 |
|
Total assets | $ | 3,066,778 |
| | | $ | 3,010,713 |
|
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| | | | |
Current liabilities: | | | | |
Long-term debt and lease obligations payable within one year | $ | 10,166 |
| | | $ | 11,268 |
|
Tax receivable agreement payments payable within one year | 10,700 |
| | | 4,400 |
|
Accounts payable | 69,811 |
| | | 65,288 |
|
Customer trade allowances | 44,593 |
| | | 42,010 |
|
Accrued expenses and other current liabilities | 23,389 |
| | | 18,137 |
|
Total current liabilities | 158,659 |
| | | 141,103 |
|
Long-term debt and lease obligations | 972,838 |
| | | 976,736 |
|
Tax receivable agreement obligations | 125,023 |
| | | 64,663 |
|
Deferred tax liability | 252,986 |
| | | 277,954 |
|
Total liabilities | 1,509,506 |
| | | 1,460,456 |
|
| | | | |
Commitments and Contingencies (Note 12) |
| | |
|
| | | | |
Class A common stock, $0.0001 par value, 200,000,000 shares authorized,120,947,081 and 100,046,392 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 12 |
| | | 10 |
|
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 9,455,184 and 30,255,184 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 1 |
| | | 3 |
|
Additional paid in capital | 1,140,126 |
| | | 925,902 |
|
Accumulated other comprehensive income (loss) | (687 | ) | | | 2,523 |
|
Retained earnings | 312,759 |
| | | 271,365 |
|
Stockholders’ equity | 1,452,211 |
| | | 1,199,803 |
|
Non-controlling interest | 105,061 |
| | | 350,454 |
|
Total liabilities and stockholders’ equity | $ | 3,066,778 |
| | | $ | 3,010,713 |
|
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2019 | | | September 30, 2018 | | September 30, 2019 | | | September 30, 2018 |
| | | | | | | | | |
Net revenue | $ | 227,211 |
| | | $ | 210,982 |
| | $ | 691,009 |
| | | $ | 635,574 |
|
Cost of goods sold | 156,791 |
| | | 150,604 |
| | 461,951 |
| | | 437,098 |
|
Gross profit | 70,420 |
| | | 60,378 |
| | 229,058 |
| | | 198,476 |
|
Operating costs and expenses: | | | | | | | | | |
Advertising and marketing | 10,627 |
| | | 9,563 |
| | 30,186 |
| | | 27,371 |
|
Selling expense | 6,992 |
| | | 7,467 |
| | 23,822 |
| | | 22,606 |
|
General and administrative | 17,736 |
| | | 13,569 |
| | 54,483 |
| | | 39,315 |
|
Amortization of customer relationships | 5,755 |
| | | 5,994 |
| | 17,749 |
| | | 17,983 |
|
Other operating expense (income) | 5,739 |
| | | 92 |
| | 6,256 |
| | | (12 | ) |
Total operating costs and expenses | 46,849 |
| | | 36,685 |
| | 132,496 |
| | | 107,263 |
|
Operating income | 23,571 |
| | | 23,693 |
| | 96,562 |
| | | 91,213 |
|
Other expense: | | | | | | | | | |
Interest expense, net | 9,813 |
| | | 9,974 |
| | 30,351 |
| | | 29,063 |
|
Gain on buyout of tax receivable agreement | — |
| | | — |
| | — |
| | | (12,372 | ) |
Other expense (income) | — |
| | | (36 | ) | | 1,286 |
| | | 133 |
|
Total other expense | 9,813 |
| | | 9,938 |
| | 31,637 |
| | | 16,824 |
|
Income before income taxes | 13,758 |
| | | 13,755 |
| | 64,925 |
| | | 74,389 |
|
Income tax expense | 3,029 |
| | | 2,603 |
| | 10,915 |
| | | 9,315 |
|
Net income | 10,729 |
| | | 11,152 |
| | 54,010 |
| | | 65,074 |
|
Less: Net income attributable to the non-controlling interest | 1,944 |
| | | 3,211 |
| | 12,615 |
| | | 14,010 |
|
Net income attributable to Class A stockholders | $ | 8,785 |
| | | $ | 7,941 |
| | $ | 41,395 |
| | | $ | 51,064 |
|
| | | | | | | | | |
Earnings per Class A share: | | | | | | | | | |
Basic | $ | 0.08 |
| | | $ | 0.08 |
| | $ | 0.39 |
| | | $ | 0.51 |
|
Diluted | $ | 0.07 |
| | | $ | 0.08 |
| | $ | 0.37 |
| | | $ | 0.49 |
|
Weighted-average shares outstanding: | | | | | | | | | |
Basic | 115,196,195 |
| | | 99,958,244 |
| | 106,904,733 |
| | | 99,931,167 |
|
Diluted | 121,122,895 |
| | | 102,963,080 |
| | 110,804,367 |
| | | 104,299,251 |
|
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
| | | | | | | |
Net income | $ | 10,729 |
| | $ | 11,152 |
| | $ | 54,010 |
| | $ | 65,074 |
|
Other comprehensive income (loss): | | | | |
| | |
Unrealized gain (loss) on interest rate swap contract designated as a cash flow hedge | (741 | ) | | 460 |
| | (5,912 | ) | | 5,581 |
|
Tax benefit (expense) | 172 |
| | (97 | ) | | 1,255 |
| | (1,175 | ) |
Comprehensive income | 10,160 |
| | 11,515 |
| | 49,353 |
| | 69,480 |
|
Less: Comprehensive income attributed to non-controlling interest | 1,858 |
| | 3,318 |
| | 11,447 |
| | 15,308 |
|
Comprehensive income attributed to Class A stockholders | $ | 8,302 |
| | $ | 8,197 |
| | $ | 37,906 |
| | $ | 54,172 |
|
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Voting Common Stock | | Class B Voting Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interest |
| Shares | | Amount | | Shares | | Amount | | | | | | | | | | |
Balance–December 31, 2017 | 99,791,245 |
| | $ | 10 |
| | 30,319,564 |
| | $ | 3 |
| | $ | 920,723 |
| | $ | 1,318 |
| | $ | 208,279 |
| | $ | 1,130,333 |
| | $ | 342,240 |
|
Comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 2,082 |
| | 23,841 |
| | 25,923 |
| | 6,331 |
|
Share-based compensation, including income taxes of $98 | 59,989 |
| | — |
| | — |
| | — |
| | 1,721 |
| | — |
| | — |
| | 1,721 |
| | — |
|
Adoption of new accounting standards, net of income taxes of $83 | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | 191 |
| | 198 |
| | 85 |
|
Exchanges | 64,380 |
| | — |
| | (64,380 | ) | | — |
| | 1,033 |
| | — |
| | — |
| | 1,033 |
| | (1,033 | ) |
Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,153 | ) |
Payment of taxes for employee stock awards | — |
| | — |
| | — |
| | — |
| | (407 | ) | | — |
| | — |
| | (407 | ) | | — |
|
Tax receivable agreement arising from exchanges, net of income taxes of $50 | — |
| | — |
| | — |
| | — |
| | (350 | ) | | — |
| | — |
| | (350 | ) | | — |
|
Balance–March 31, 2018 | 99,915,614 |
| | 10 |
| | 30,255,184 |
| | 3 |
| | 922,720 |
| | 3,407 |
| | 232,311 |
| | 1,158,451 |
| | 343,470 |
|
Comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 770 |
| | 19,282 |
| | 20,052 |
| | 5,658 |
|
Share-based compensation, net of income taxes of $287 | 3,889 |
| | — |
| | — |
| | — |
| | 811 |
| | — |
| | — |
| | 811 |
| | — |
|
Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,310 | ) |
Payment of taxes for employee stock awards | — |
| | — |
| | — |
| | — |
| | (29 | ) | | — |
| | — |
| | (29 | ) | | — |
|
Balance-June 30, 2018 | 99,919,503 |
| | 10 |
| | 30,255,184 |
| | 3 |
| | 923,502 |
| | 4,177 |
| | 251,593 |
| | 1,179,285 |
| | 343,818 |
|
Comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 256 |
| | 7,941 |
| | 8,197 |
| | 3,318 |
|
Share-based compensation, net of income taxes of $537 | — |
| | — |
| | — |
| | — |
| | 979 |
| | — |
| | — |
| | 979 |
| | — |
|
Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (70 | ) |
Balance-September 30, 2018 | 99,919,503 |
| | $ | 10 |
| | 30,255,184 |
| | $ | 3 |
| | $ | 924,481 |
| | $ | 4,433 |
| | $ | 259,534 |
| | $ | 1,188,461 |
| | $ | 347,066 |
|
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Voting Common Stock | | Class B Voting Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity | | Non-controlling Interest |
| Shares | | Amount | | Shares | | Amount | | | | | | | | | | |
Balance–December 31, 2018 | 100,046,392 |
| | $ | 10 |
| | 30,255,184 |
| | $ | 3 |
| | $ | 925,902 |
| | $ | 2,523 |
| | $ | 271,365 |
| | $ | 1,199,803 |
| | $ | 350,454 |
|
Comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (1,216 | ) | | 21,126 |
| | 19,910 |
| | 4,984 |
|
Share-based compensation, net of income taxes of $613 | — |
| | — |
| | — |
| | — |
| | 1,668 |
| | — |
| | — |
| | 1,668 |
| | — |
|
Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (457 | ) |
Exercise of public warrants | 50 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance–March 31, 2019 | 100,046,442 |
| | 10 |
| | 30,255,184 |
| | 3 |
| | 927,570 |
| | 1,307 |
| | 292,491 |
| | 1,221,381 |
| | 354,981 |
|
Comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (1,789 | ) | | 11,483 |
| | 9,694 |
| | 4,605 |
|
Share-based compensation, net of income taxes of $563 | 20,241 |
| | — |
| | — |
| | — |
| | 1,936 |
| | — |
| | — |
| | 1,936 |
| | — |
|
Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,459 | ) |
Exercise of employee stock options | 1,788 |
| | — |
| | — |
| | — |
| | 23 |
| | — |
| | — |
| | 23 |
| | — |
|
Payment of taxes for employee stock awards | — |
| | — |
| | — |
| | — |
| | (124 | ) | | — |
| | — |
| | (124 | ) | | — |
|
Exchanges | 9,255,400 |
| | 1 |
| | (9,255,400 | ) | | (1 | ) | | 110,734 |
| | 292 |
| | — |
| | 111,026 |
| | (111,026 | ) |
Tax receivable agreement arising from exchanges, net of income taxes of $10,109 | — |
| | — |
| | — |
| | — |
| | (17,610 | ) | | — |
| | — |
| | (17,610 | ) | | — |
|
Balance-June 30, 2019 | 109,323,871 |
|
| 11 |
|
| 20,999,784 |
| | 2 |
| — |
| 1,022,529 |
| | (190 | ) | | 303,974 |
| | 1,326,326 |
| | 244,101 |
|
Comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (483 | ) | | 8,785 |
| | 8,302 |
| | 1,858 |
|
Share-based compensation, net of income taxes of $228 | 78,610 |
| | — |
| | — |
| | — |
| | 2,149 |
| | — |
| | — |
| | 2,149 |
| | — |
|
Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,743 | ) |
Payment of taxes for employee stock awards | — |
| | — |
| | — |
| | — |
| | (483 | ) | | — |
| | — |
| | (483 | ) | | — |
|
Exchanges | 11,544,600 |
| | 1 |
| | (11,544,600 | ) | | (1 | ) | | 139,169 |
| | (14 | ) | | — |
| | 139,155 |
| | (139,155 | ) |
Tax receivable agreement arising from exchanges, net of income taxes of $17,185 | — |
| | — |
| | — |
| | — |
| | (23,238 | ) | | — |
| | — |
| | (23,238 | ) | | — |
|
Balance-September 30, 2019 | 120,947,081 |
| | $ | 12 |
| | 9,455,184 |
| | $ | 1 |
| | $ | 1,140,126 |
| | $ | (687 | ) | | $ | 312,759 |
| | $ | 1,452,211 |
| | $ | 105,061 |
|
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands) |
| | | | | | | | | |
| | | Nine Months Ended |
| | | September 30, 2019 | | September 30, 2018 |
Operating activities | | | |
| Net income | $ | 54,010 |
| | $ | 65,074 |
|
| Depreciation and amortization | 32,678 |
| | 31,370 |
|
| Impairment of property, goodwill and intangibles | 1,005 |
| | 1,417 |
|
| Debt premium amortization | (803 | ) | | (810 | ) |
| Tax receivable agreement remeasurement and gain on buyout | 1,296 |
| | (14,124 | ) |
| Non-cash fees on disposal of assets | 1,414 |
| | — |
|
| Share-based compensation | 7,157 |
| | 4,237 |
|
| Deferred taxes | 9,519 |
| | 7,929 |
|
| Loss on sale of assets | 471 |
| | 1 |
|
| Change in operating assets and liabilities, net of acquisitions and dispositions: | | | |
| | Accounts receivable | (13,536 | ) | | (5,451 | ) |
| | Inventories | (3,451 | ) | | 4,670 |
|
| | Prepaids and other current assets | (3,793 | ) | | (2,407 | ) |
| | Accounts payable and accrued expenses | 18,305 |
| | 20,759 |
|
| | Customer trade allowances | 3,080 |
| | (2,794 | ) |
| Net cash provided by operating activities | 107,352 |
| | 109,871 |
|
| | | | | |
Investing activities | | | |
| Purchases of property and equipment | (28,421 | ) | | (32,886 | ) |
| Acquisition of business, net of cash | — |
| | (23,910 | ) |
| Proceeds from sale of business, net of cash | 63,353 |
| | — |
|
| Acquisition and development of software assets | (4,298 | ) | | (2,480 | ) |
| Net cash used provided by (used in) investing activities | 30,634 |
| | (59,276 | ) |
| | | | | |
Financing activities | | | |
| Repayments of long-term debt and lease obligations | (7,470 | ) | | (7,578 | ) |
| Distributions to non-controlling interest | (6,659 | ) | | (9,533 | ) |
| Tax payments related to issuance of shares to employees | (607 | ) | | (436 | ) |
| Cash received from exercise of options | 23 |
| | — |
|
| Payments on tax receivable agreement | (2,779 | ) | | (41,353 | ) |
| Net cash used in financing activities | (17,492 | ) | | (58,900 | ) |
Net increase (decrease) in cash and cash equivalents | 120,494 |
| | (8,305 | ) |
Cash and cash equivalents at beginning of period | 146,377 |
| | 135,701 |
|
Cash and cash equivalents at end of period | $ | 266,871 |
| | $ | 127,396 |
|
|
| | | | | | | | | |
Supplemental Disclosures of Cash Flow Information: | | | |
Cash paid during the period for: | | | |
| Interest | $ | 33,602 |
| | $ | 30,972 |
|
| Net taxes paid | $ | 2,416 |
| | $ | 4,092 |
|
Supplemental disclosure of non-cash investing: | | | |
| Accrued capital expenditures | $ | 1,468 |
| | $ | (59 | ) |
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Hostess Brands, Inc. is a Delaware corporation headquartered in Kansas City, Missouri. The consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing fresh sweet baked goods in the United States.
The Company’s operations are conducted through indirect operating subsidiaries that are wholly-owned by Hostess Holdings, L.P. (“Hostess Holdings”), a direct subsidiary of Hostess Brands, Inc. Hostess Brands, Inc. holds 100% of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests therein and consolidates Hostess Holdings in the Company’s consolidated financial statements. The remaining limited partnership interests in Hostess Holdings are held by the holders of the outstanding shares of Class B common stock of Hostess Brands, Inc. These limited partnership interests in Hostess Holdings are reflected in the consolidated financial statements as a non-controlling interest.
Basis of Presentation
The consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented, and all such adjustments were of a normal and recurring nature. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018.
The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. The Company sold its In-Store Bakery operations on August 30, 2019.
Adoption of New Accounting Standards
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, along with the related ASUs 2018-01, 2018-10 and 2018-11 (collectively, “Topic 842”). Topic 842 requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. To adopt this standard, the Company utilized a modified retrospective transition method. Under this approach, the results for reporting periods beginning January 1, 2019 are presented under Topic 842. Prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting standards. There was no cumulative effect of applying Topic 842 to the opening balance of retained earnings. The Company has elected to apply the practical expedients under Topic 842 which allow entities to not reassess the lease classification for expired or existing leases and to not reassess if expired or existing contracts contain leases under the Topic 842 definition. The Company has also elected to use hindsight when determining the lease term of existing leases. As a result of the adoption, on January 1, 2019, the Company recognized right of use assets of $8.2 million, offset by associated accumulated amortization of $5.2 million and corresponding lease liabilities of $3.0 million. The recognition of leases subsequent to the adoption of Topic 842 is further described in the Leases section of this footnote.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries (including those for which the Company is the primary beneficiary of a variable interest entity). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and for the reported amounts of revenues and expenses during the reporting period. Management utilizes estimates, including, but not limited to, valuation and useful lives of tangible and intangible assets, valuation of expected future payments under the tax receivable agreement, and reserves for trade and promotional allowances. Actual results could differ from these estimates.
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of September 30, 2019 and December 31, 2018, the Company’s accounts receivable were $115.9 million and $105.7 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $2.7 million and $2.6 million, respectively. In addition, there were customer trade allowances of $44.6 million and $42.0 million as of September 30, 2019 and December 31, 2018, respectively, in current liabilities in the consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost or net-realizable value on a first-in first-out basis.
Abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) are expensed in the period they are incurred.
The components of inventories are as follows:
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
|
| |
|
Ingredients and packaging | $ | 19,527 |
| | $ | 18,865 |
|
Finished goods | 16,654 |
| | 16,446 |
|
Inventory in transit to customers | 2,401 |
| | 3,269 |
|
| $ | 38,582 |
| | $ | 38,580 |
|
Impairment of Property and Equipment
For the nine months ended September 30, 2018, the Company recorded an impairment loss of $1.4 million related to the planned disposition of certain production equipment before the end of its useful life. This loss is included in other operating expenses on the consolidated statement of operations. The measurement of this loss was based on Level 3 inputs within the fair value measurement hierarchy.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Software Costs
Included in “Other assets, net” in the consolidated balance sheets is capitalized software in the amount of $10.9 million and $8.5 million at September 30, 2019 and December 31, 2018, respectively. Capitalized software costs are amortized over their estimated useful life of five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative was $0.7 million and $2.1 million for the three and nine months ended September 30, 2019, respectively, compared to $0.6 million and $2.0 million for the three and nine months ended September 30, 2018, respectively.
Concentrations
The Company has one customer (together with its affiliates) that accounted for 10% or more of the Company’s total net revenue. The percentage of total net revenues for this customer is presented below by segment:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(% of Consolidated Net Revenues) | September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
|
| |
| | | | |
Sweet Baked Goods | 22.3 | % | | 20.0 | % | | 23.0 | % | | 18.7 | % |
In-Store Bakery | 0.3 | % | | 0.5 | % | | 0.5 | % | | 0.6 | % |
Total | 22.6 | % | | 20.5 | % | | 23.5 | % | | 19.3 | % |
Leases
Subsequent to its adoption of Topic 842, the Company recognizes a right of use asset and corresponding lease liability on the consolidated balance sheet for all lease transactions with terms of more than 12 months. Agreements are determined to contain a lease if they convey the use and control of an underlying physical asset. Based on the nature of the lease transaction, leases are either classified as financing or operating. Under both classifications, the right of use asset and liability are initially valued based on the present value of the future minimum lease payments using an effective borrowing rate at the inception of the lease. The Company determined the effective borrowing rate based on its expected incremental borrowing rate on collateralized debt. At September 30, 2019, the weighted average effective borrowing rates for outstanding operating leases was 4.5%.
Under a financing lease, interest expense related to the lease liability is recognized over the lease term using an effective interest rate method and right of use assets are amortized straight-line over the term of the lease. Under an operating lease, minimum lease payments are expensed straight-line over the lease term. Lease liabilities are amortized using an effective interest rate method and right of use assets are reduced based on the excess of the sum of the straight-line lease expense and the reduction of the lease liability over the actual lease payments. At September 30, 2019, the average remaining terms on operating leases were approximately one year.
Variable lease payments, such as taxes and insurance, are expensed as incurred. Expenses related to leases with original terms less than 12 months (short-term leases) are expensed as incurred. For all leases related to distribution, bakery and corporate facilities, the Company has elected not to separate non-lease components from lease components.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The table below shows the composition of lease expenses for the period subsequent to the adoption of Topic 842:
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
(In thousands) | September 30, 2019 | | September 30, 2019 |
Amortization of right of use asset, financing lease | $ | 33 |
| | $ | 133 |
|
Interest, financing lease | 4 |
| | 16 |
|
Operating lease expense | 752 |
| | 2,009 |
|
Short-term lease expense | 202 |
| | 884 |
|
Variable lease expense | 188 |
| | 565 |
|
| $ | 1,179 |
| | $ | 3,607 |
|
At September 30, 2019, right of use assets related to operating leases are included in property and equipment, net on the consolidated balance sheet (see Note 3. Property and Equipment). As of September 30, 2019, the Company has no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease on the consolidated balance sheet (see Note 7. Debt and Lease Obligations).
2. Divestiture of In-Store Bakery Operations
On August 30, 2019, the Company sold its In-Store Bakery operations, including relevant trademarks and licensing agreements, to an unrelated party. The operations included products that were primarily sold in the in-store bakery section of U.S. retail channels.The Company divested the operations to provide more focus on future investment in areas of its business that better leverage its core competencies.
The Company received proceeds from the divestiture of $65.0 million prior to transaction expenses and subject to certain post-closing adjustments. In connection with the sale, during the three and nine months ended 2019, the Company recognized transaction expenses of $2.1 million and a loss on disposal of $0.3 million within other operating expenses on the consolidated statement of operations.
3. Property and Equipment
Property and equipment consists of the following:
|
| | | | | | | | |
(In thousands) | September 30, 2019 | | | December 31, 2018 |
| | | | |
Land and buildings | $ | 44,401 |
| | | $ | 47,418 |
|
Right of use assets, operating | 10,374 |
| | | — |
|
Machinery and equipment | 203,507 |
| | | 194,830 |
|
Construction in progress | 13,791 |
| | | 6,059 |
|
| 272,073 |
| | | 248,307 |
|
Less accumulated depreciation and amortization | (44,959 | ) | | | (27,958 | ) |
| $ | 227,114 |
| | | $ | 220,349 |
|
Depreciation and amortization expense was $4.3 million and $12.9 million for the three and nine months ended September 30, 2019, respectively, compared to $4.1 million and $11.3 million for the three and nine months ended September 30, 2018, respectively.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Segment Reporting
The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. The Company’s Sweet Baked Goods segment consists of fresh and frozen baked goods and bread products that are sold under the Hostess®, Dolly Madison®, Cloverhill® and Big Texas® brands. The In-Store Bakery segment consists primarily of Superior on Main® branded and private label products sold through the in-store bakery section of grocery and club stores. The Company divested its In-Store Bakery operations on August 30, 2019. (See Note 2. Divestiture of In-Store Bakery Operations).
The Company evaluates performance and allocates resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(In thousands) | September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
|
| |
| | | | |
Net revenue: | | | | | | | |
Sweet Baked Goods | $ | 220,156 |
| | $ | 201,693 |
| | $ | 662,307 |
| | $ | 605,223 |
|
In-Store Bakery | 7,055 |
| | 9,289 |
| | 28,702 |
| | 30,351 |
|
Net revenue | $ | 227,211 |
| | $ | 210,982 |
| | $ | 691,009 |
| | $ | 635,574 |
|
| | | | | | | |
Depreciation and amortization: | | | | | | | |
Sweet Baked Goods | $ | 10,514 |
| | $ | 10,020 |
| | $ | 31,076 |
| | $ | 29,270 |
|
In-Store Bakery | 224 |
| | 703 |
| | 1,602 |
| | 2,100 |
|
Depreciation and amortization | $ | 10,738 |
| | $ | 10,723 |
| | $ | 32,678 |
| | $ | 31,370 |
|
| | | | | | | |
Gross profit: | | | | | | | |
Sweet Baked Goods | $ | 68,804 |
| | $ | 58,886 |
| | $ | 222,872 |
| | $ | 192,683 |
|
In-Store Bakery | 1,616 |
| | 1,492 |
| | 6,186 |
| | 5,793 |
|
Gross profit | $ | 70,420 |
| | $ | 60,378 |
| | $ | 229,058 |
| | $ | 198,476 |
|
| | | | | | | |
Capital expenditures (1): | | | | | | | |
Sweet Baked Goods | $ | 14,284 |
| | $ | 12,378 |
| | $ | 26,062 |
| | $ | 34,975 |
|
In-Store Bakery | 2 |
| | 114 |
| | 182 |
| | 332 |
|
Capital expenditures | $ | 14,286 |
| | $ | 12,492 |
| | $ | 26,244 |
| | $ | 35,307 |
|
| |
(1) | Capital expenditures consists of purchases of property and equipment and acquisition and development of software assets paid in cash or acquired through accounts payable. For the nine months ended September 30, 2019, capital expenditures in accounts payable decreased by $6.4 million. For the nine months ended September 30, 2018, capital expenditures in accounts payable decreased by $0.3 million. |
Total assets by reportable segment are as follows:
|
| | | | | | | | |
(In thousands) | September 30, 2019 | | | December 31, 2018 |
|
| | |
|
Total segment assets: | | | | |
Sweet Baked Goods | $ | 3,066,778 |
| | | $ | 2,924,333 |
|
In-Store Bakery | — |
| | | 86,380 |
|
Total segment assets | $ | 3,066,778 |
| | | $ | 3,010,713 |
|
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
After the August 30, 2019 divestiture of the In-Store Bakery operations, the Company retained no assets related to the In-Store Bakery segment.
5. Goodwill and Intangible Assets
In the second quarter of 2019, the Company recognized an impairment charge of $1.0 million in other operating expense on the consolidated statement of operations related to the In-Store Bakery reporting unit. This charge reflects a change in certain market assumptions since the last time the reporting unit was valued in the fourth quarter of 2018 (Level 1 input). In the third quarter of 2019, the Company divested its In-Store Bakery reporting unit (See Note 2. Divestiture of In-Store Bakery Operations). Goodwill activity is presented below by reportable segment:
|
| | | | | | | | | | | |
(In thousands) | Sweet Baked Goods | | In-Store Bakery | | Total |
| | | | | |
Balance as of December 31, 2018 | $ | 535,853 |
| | $ | 39,792 |
| | $ | 575,645 |
|
Impairment | — |
| | (1,000 | ) | | (1,000 | ) |
Divestiture | — |
| | (38,792 | ) | | (38,792 | ) |
Balance as of September 30, 2019 | $ | 535,853 |
| | $ | — |
| | $ | 535,853 |
|
Intangible assets consist of the following:
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
| | | |
Intangible assets with indefinite lives (Trademarks and Trade Names) | $ | 1,408,631 |
| | $ | 1,410,497 |
|
Intangible assets with definite lives (Customer Relationships) | 515,712 |
| | 543,120 | |