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UNITED STATES
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
June 30, 2020
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
twnk-20200630_g1.jpg
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.)
7905 Quivira Road
66215
Lenexa,
KS
(Zip Code)
(Address of principal executive offices)
(816701-4600
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTicker Symbol Name of each exchange on which registered
Class A Common Stock, Par Value of $0.0001 per shareTWNKThe Nasdaq Stock Market LLC
Warrants, each exercisable for a half share of Class A Common StockTWNKWThe 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 - 124,409,339 shares at August 5, 2020
Shares of Class B common stock outstanding - 6,301,285 shares at August 5, 2020



HOSTESS BRANDS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2020

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, 2019 and herein, as updated by subsequent filings. The impact of COVID-19 may also exacerbate these risks, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that the Company is not aware of currently. 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.






3



HOSTESS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share data)

June 30,December 31,
20202019
ASSETS
Current assets:
Cash and cash equivalents
$127,779  $285,087  
Accounts receivable, net
141,175  104,892  
Inventories
51,782  47,608  
Prepaids and other current assets
16,572  15,569  
Total current assets
337,308  453,156  
Property and equipment, net
281,144  242,384  
Intangible assets, net
1,980,859  1,853,315  
Goodwill
702,917  535,853  
Other assets, net
17,395  12,993  
Total assets
$3,319,623  $3,097,701  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and lease obligations payable within one year
$13,705  $11,883  
Tax receivable agreement payments payable within one year
17,500  12,100  
Accounts payable
67,169  68,566  
Customer trade allowances
59,293  45,715  
Accrued expenses and other current liabilities
45,366  21,661  
Total current liabilities
203,033  159,925  
Long-term debt and lease obligations
1,109,286  975,405  
Tax receivable agreement obligations
126,208  126,096  
Deferred tax liability
293,329  256,051  
Other long-term liabilities
1,340    
Total liabilities
1,733,196  1,517,477  
Commitments and Contingencies (Note 13)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 124,408,614 and 122,108,086 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
12  12  
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 6,301,285 and 8,409,834 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
1  1  
Additional paid in capital1,176,815  1,152,055  
Accumulated other comprehensive loss(11,034) (756) 
Retained earnings352,998  334,480  
Stockholders’ equity
1,518,792  1,485,792  
Non-controlling interest
67,635  94,432  
Total liabilities and stockholders’ equity$3,319,623  $3,097,701  
See accompanying notes to the unaudited consolidated financial statements.
4


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
Three Months EndedSix Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Net revenue$256,226  $241,060  $499,711  $463,798  
Cost of goods sold166,852  157,610  331,000  305,160  
Gross profit89,374  83,450  168,711  158,638  
Operating costs and expenses:
Advertising and marketing
11,158  10,696  21,221  19,559  
Selling expense
12,378  8,310  30,498  16,830  
General and administrative
24,153  19,276  49,348  36,747  
Amortization of customer relationships
7,110  6,009  13,594  11,994  
Business combination transaction costs    4,282    
 Other operating expense  2,278  27  517  
Total operating costs and expenses54,799  46,569  118,970  85,647  
Operating income 34,575  36,881  49,741  72,991  
Other expense:
Interest expense, net10,580  10,302  22,305  20,538  
Other expense1,132  846  1,685  1,286  
Total other expense11,712  11,148  23,990  21,824  
Income before income taxes22,863  25,733  25,751  51,167  
Income tax expense5,493  9,064  5,741  7,886  
Net income 17,370  16,669  20,010  43,281  
Less: Net income attributable to the non-controlling interest1,200  5,186  1,492  10,672  
Net income attributable to Class A stockholders$16,170  $11,483  $18,518  $32,609  
Earnings per Class A share:
Basic$0.13  $0.11  $0.15  $0.32  
Diluted$0.13  $0.10  $0.15  $0.31  
Weighted-average shares outstanding:
Basic123,638,723  105,072,322  123,381,190  102,618,951  
Diluted124,576,409  109,509,195  125,312,658  105,338,010  


See accompanying notes to the unaudited consolidated financial statements.
5


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)

Three Months EndedSix Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Net income$17,370  $16,669  $20,010  $43,281  
Other comprehensive income (loss):
Unrealized loss on interest rate swap contracts designated as cash flow hedges(1,909) (3,006) (14,617) (5,171) 
Tax benefit481  636  3,650  1,083  
Comprehensive income15,942  14,299  9,043  39,193  
Less: Comprehensive income attributed to non-controlling interest1,096  4,605  659  9,589  
Comprehensive income attributed to Class A stockholders$14,846  $9,694  $8,384  $29,604  


See accompanying notes to the unaudited consolidated financial statements.


6


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
SharesAmountSharesAmount
Balance–December 31, 2018100,046,392  $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 warrants50  —  —  —  —  —  —  —  —  
Balance–March 31, 2019100,046,442  $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 options1,788  —  —  —  23  —  —  23  —  
Payment of taxes for employee stock awards—  —  —  —  (124) —  —  (124) —  
Exchanges9,255,400  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, 2019109,323,871  $11  20,999,784  $2  —  $1,022,529  $(190) $303,974  $1,326,326  $244,101  
Balance–December 31, 2019122,108,086  $12  8,409,834  $1  $1,152,055  $(756) $334,480  $1,485,792  $94,432  
Comprehensive income (loss)—  —  —  —  —  (8,810) 2,348  (6,462) (437) 
Share-based compensation, including income taxes of $103
106,770  —  —  —  2,180  —  —  2,180  —  
Exchanges969,247  —  (969.247) —  11,819  (17) —  11,802  (11,802) 
Distributions—  —  —  —  —  —  —  —  (1,613) 
Exercise of employee stock options and warrants2,205  —  —  —  155  —  —  155  —  
Payment of taxes for employee stock awards—  —  —  —  (1,004) —  —  (1,004) —  
Tax receivable agreement arising from exchanges, net of income taxes of $1,341
—  —  —  —  (1,942) —  —  (1,942) —  
Balance–March 31, 2020123,186,308  12  7,440,587  1  1,163,263  (9,583) 336,828  1,490,521  80,580  
Comprehensive income (loss)—  —  —  —  —  (1,324) 16,170  14,846  1,096  
Share-based compensation, net of income taxes of $496
46,304  —  —  —  1,929  —  —  1,929  —  
Exchanges1,139,302  —  (1,139,302) —  13,803  (127) —  13,676  (13,676) 
Distributions—  —  —  —  —  —  —  —  (365) 
Exercise of employee stock options and warrants36,700  —  —  —  408  —  —  408  —  
Payment of taxes for employee stock awards—  —  —  —  (32) —  —  (32) —  
Tax receivable agreement arising from exchanges, net of income taxes of $952
—  —  —  (2,556) —  —  (2,556) —  
Balance–June 30, 2020124,408,614  $12  6,301,285  $1  $1,176,815  $(11,034) $352,998  $1,518,792  $67,635  
See accompanying notes to the unaudited consolidated financial statements.
7


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Six Months Ended
June 30, 2020June 30, 2019
Operating activities
Net income20,010  $43,281  
Depreciation and amortization26,477  21,939  
Impairment of property, goodwill and intangibles  1,005  
Debt discount (premium) amortization664  (536) 
Tax receivable agreement remeasurement  (483) 
Unrealized foreign exchange losses996    
Non-cash lease expense641    
Share-based compensation4,503  4,780  
Deferred taxes3,973  5,637  
Loss on sale of assets128    
Change in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable(11,320) (22,508) 
Inventories4,135  (4,313) 
Prepaids and other current assets (1,091) (1,661) 
Accounts payable and accrued expenses3,323  18,168  
Customer trade allowances8,242  8,755  
Net cash provided by operating activities60,681  74,064  
Investing activities
Purchases of property and equipment(23,376) (15,398) 
Acquisition of business, net of cash acquired(318,427)   
Acquisition and development of software assets(3,402) (2,907) 
Net cash used in investing activities(345,205) (18,305) 
Financing activities
Repayments of long-term debt and lease obligations(5,584) (5,056) 
Proceeds from long-term debt origination, net of fees paid136,888    
Distributions to non-controlling interest(1,977) (4,916) 
Tax payments related to issuance of shares to employees(1,036) (124) 
Cash received from exercise of options and warrants563  23  
Payments on tax receivable agreement(1,279) (2,779) 
Net cash provided by (used in) financing activities127,575  (12,852) 
Effect of exchange rate changes on cash and cash equivalents(359)   
Net increase (decrease) in cash and cash equivalents(157,308) 42,907  
Cash and cash equivalents at beginning of period285,087  146,377  
Cash and cash equivalents at end of period$127,779  $189,284  

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest$21,885  $22,472  
Net taxes paid (refunded)$(577) $1,815  
Supplemental disclosure of non-cash investing:
Accrued capital expenditures$1,542  $1,527  
See accompanying notes to the unaudited consolidated financial statements.
8


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 Lenexa, Kansas. 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 snack products, including sweet baked goods, cookies and wafers in North America.
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. In January 2020, the Company acquired Voortman Cookies Limited (“Voortman”), a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies.

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, 2019.

For the periods presented, the Company had two reportable segments: Snacking and In-Store Bakery. The Company sold its In-Store Bakery operations on August 30, 2019. Subsequent to the sale, Snacking remains as the Company’s single reportable segment.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“Topic 326”). This ASU requires entities to measure the impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard effective January 1, 2020. Adoption of Topic 326 did not have a material impact on the Company’s 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. 
9


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2020 and December 31, 2019, the Company’s accounts receivable were $141.2 million and $104.9 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $4.9 million and $2.7 million, respectively.
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)
June 30,
2020
December 31,
2019
Ingredients and packaging$25,273  $21,439  
Finished goods24,290  22,513  
Inventory in transit to customers2,219  3,656  
$51,782  $47,608  
Software Costs

Capitalized software is included in “Other assets, net” in the consolidated balance sheets in the amount of $14.6 million and $11.9 million at June 30, 2020 and December 31, 2019, 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 operating expense was $1.3 million and $2.6 million for the three and six months ended June 30, 2020, respectively, compared to $0.7 million and $1.4 million for the three and six months ended June 30, 2019, respectively.
Disaggregation of Revenue
Net revenue consists of sales of packaged food products in the United States primarily within the Sweet Baked Goods category. Beginning with the acquisition of Voortman on January 3, 2020 (see Note 2. Business Combinations), the Company also sells products in the United States and Canada within the Cookies category.
The following tables disaggregate revenues by geographical market and category.
Three Months Ended June 30, 2020
(In thousands)Sweet Baked GoodsIn-Store BakeryCookiesTotal
United States$232,620  $  $20,459  $253,079  
Canada    3,147  3,147  
$232,620  $  $23,606  $256,226  
10


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended June 30, 2019
(In thousands)Sweet Baked GoodsIn-Store BakeryCookiesTotal
United States$229,273  $11,787  $  $241,060  
Canada        
$229,273  $