twnk-20200630

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

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)

(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 - 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

PART I - Financial Information

Item 1.

Consolidated Financial Statements

Consolidated Balance Sheets (Unaudited)

Consolidated Statements of Operations (Unaudited)

Consolidated Statements of Comprehensive Income (Unaudited)

Consolidated Statements of Stockholders’ Equity (Unaudited)

Consolidated Statements of Cash Flows (Unaudited)

Notes to Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II - Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Default Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

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.

HOSTESS BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

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


	June 30,		December 31,
	2020		2019
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 capital	1,176,815		1,152,055
Accumulated other comprehensive loss	(11,034)		(756)
Retained earnings	352,998		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.

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, 2020		June 30, 2019		June 30, 2020		June 30, 2019

Net revenue	$	256,226	$	241,060	$	499,711	$	463,798
Cost of goods sold	166,852		157,610		331,000		305,160
Gross profit	89,374		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 expenses	54,799		46,569		118,970		85,647
Operating income	34,575		36,881		49,741		72,991
Other expense:
Interest expense, net	10,580		10,302		22,305		20,538


Other expense	1,132		846		1,685		1,286
Total other expense	11,712		11,148		23,990		21,824
Income before income taxes	22,863		25,733		25,751		51,167
Income tax expense	5,493		9,064		5,741		7,886
Net income	17,370		16,669		20,010		43,281
Less: Net income attributable to the non-controlling interest	1,200		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:
Basic	123,638,723		105,072,322		123,381,190		102,618,951
Diluted	124,576,409		109,509,195		125,312,658		105,338,010

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, amounts in thousands)


	Three Months Ended						Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 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 benefit	481		636		3,650		1,083
Comprehensive income	15,942		14,299		9,043		39,193
Less: Comprehensive income attributed to non-controlling interest	1,096		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.

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

Balance–December 31, 2019	122,108,086	$	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		—
Exchanges	969,247	—		(969.247)	—			11,819		(17)		—		11,802		(11,802)
Distributions	—	—		—	—			—		—		—		—		(1,613)
Exercise of employee stock options and warrants	2,205	—		—	—			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, 2020	123,186,308	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		—
Exchanges	1,139,302	—		(1,139,302)	—			13,803		(127)		—		13,676		(13,676)
Distributions	—	—		—	—			—		—		—		—		(365)
Exercise of employee stock options and warrants	36,700	—		—	—			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, 2020	124,408,614	$	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.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)



			Six Months Ended
			June 30, 2020		June 30, 2019
Operating activities
	Net income			20,010			$	43,281
	Depreciation and amortization			26,477			21,939
	Impairment of property, goodwill and intangibles			—			1,005
	Debt discount (premium) amortization			664			(536)
	Tax receivable agreement remeasurement			—			(483)
	Unrealized foreign exchange losses			996			—
	Non-cash lease expense			641			—
	Share-based compensation			4,503			4,780

	Deferred taxes			3,973			5,637
	Loss on sale of assets			128			—
	Change in operating assets and liabilities, net of acquisitions and dispositions:
		Accounts receivable	(11,320)		(22,508)
		Inventories	4,135		(4,313)
		Prepaids and other current assets	(1,091)		(1,661)

		Accounts payable and accrued expenses	3,323		18,168
		Customer trade allowances	8,242		8,755

	Net cash provided by operating activities			60,681			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 paid			136,888			—
	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 warrants			563			23
	Payments on tax receivable agreement			(1,279)			(2,779)

	Net cash provided by (used in) financing activities			127,575			(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 period					285,087				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.

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.

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 goods	24,290		22,513
Inventory in transit to customers	2,219		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 Goods		In-Store Bakery		Cookies		Total
United States	$	232,620	$	—	$	20,459	$	253,079
Canada	—		—		3,147		3,147
	$	232,620	$	—	$	23,606	$	256,226

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


	Three Months Ended June 30, 2019
(In thousands)	Sweet Baked Goods		In-Store Bakery		Cookies		Total
United States	$	229,273	$	11,787	$	—	$	241,060
Canada	—		—		—		—
	$	229,273	$