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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, 2021 |
| 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 - 130,093,017 shares at August 3, 2021
HOSTESS BRANDS, INC.
FORM 10-Q
For the Three Months Ended June 30, 2021
INDEX | | | | | | | | |
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Item 4. | | |
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Item 1A. | | |
Item 2. | | |
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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 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/A for the year ended December 31, 2020, 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) | | | | | | | | | | | | | | | |
| June 30, | | | December 31, | |
| 2021 | | | 2020 | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 218,807 | | | | $ | 173,034 | | |
Accounts receivable, net | 148,726 | | | | 125,550 | | |
Inventories | 52,164 | | | | 49,348 | | |
| | | | | |
Prepaids and other current assets | 13,150 | | | | 21,614 | | |
Total current assets | 432,847 | | | | 369,546 | | |
Property and equipment, net | 311,535 | | | | 303,959 | | |
Intangible assets, net | 1,956,147 | | | | 1,967,903 | | |
Goodwill | 706,615 | | | | 706,615 | | |
Other assets, net | 17,976 | | | | 17,446 | | |
Total assets | $ | 3,425,120 | | | | $ | 3,365,469 | | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
| | | | | |
Current liabilities: | | | | | |
Long-term debt and lease obligations payable within one year | $ | 14,103 | | | | $ | 13,811 | | |
Tax receivable agreement payments payable within one year | 10,000 | | | | 11,800 | | |
Accounts payable | 67,751 | | | | 61,428 | | |
Customer trade allowances | 47,620 | | | | 46,779 | | |
Warrant liabilities | 1,316 | | | | 861 | | |
Accrued expenses and other current liabilities | 44,514 | | | | 55,715 | | |
| | | | | |
Total current liabilities | 185,304 | | | | 190,394 | | |
Long-term debt and lease obligations | 1,107,021 | | | | 1,113,037 | | |
Tax receivable agreement obligations | 137,274 | | | | 144,744 | | |
Deferred tax liability | 310,992 | | | | 295,009 | | |
Other long-term liabilities | 1,585 | | | | 1,560 | | |
Total liabilities | 1,742,176 | | | | 1,744,744 | | |
| | | | | |
Commitments and Contingencies (Note 10) | | | | | |
| | | | | |
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 130,459,939 and 130,347,464 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 13 | | | | 13 | | |
| | | | | |
Additional paid in capital | 1,297,670 | | | | 1,281,018 | | |
Accumulated other comprehensive loss | (4,728) | | | | (10,407) | | |
Retained earnings | 412,680 | | | | 356,101 | | |
Treasury stock | (22,691) | | | | (6,000) | | |
Stockholders’ equity | 1,682,944 | | | | 1,620,725 | | |
| | | | | |
Total liabilities and stockholders’ equity | $ | 3,425,120 | | | | $ | 3,365,469 | | |
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, 2021 | | | June 30, 2020 | | June 30, 2021 | | | June 30, 2020 |
| | | | | | | | | |
Net revenue | $ | 291,485 | | | | $ | 256,226 | | | $ | 556,906 | | | | $ | 499,711 | |
Cost of goods sold | 186,379 | | | | 166,852 | | | 356,281 | | | | 331,000 | |
Gross profit | 105,106 | | | | 89,374 | | | 200,625 | | | | 168,711 | |
Operating costs and expenses: | | | | | | | | | |
Advertising and marketing | 13,144 | | | | 11,158 | | | 24,925 | | | | 21,221 | |
Selling expense | 9,454 | | | | 12,378 | | | 18,084 | | | | 30,498 | |
General and administrative | 23,504 | | | | 24,153 | | | 45,689 | | | | 49,348 | |
Amortization of customer relationships | 5,878 | | | | 7,110 | | | 11,756 | | | | 13,594 | |
Business combination transaction costs | — | | | | — | | | — | | | | 4,282 | |
Other operating expense | — | | | | — | | | — | | | | 27 | |
Total operating costs and expenses | 51,980 | | | | 54,799 | | | 100,454 | | | | 118,970 | |
Operating income | 53,126 | | | | 34,575 | | | 100,171 | | | | 49,741 | |
Other expense (income): | | | | | | | | | |
Interest expense, net | 9,954 | | | | 10,580 | | | 19,971 | | | | 22,305 | |
| | | | | | | | | |
| | | | | | | | | |
Change in fair value of warrant liabilities | 531 | | | | 16,382 | | | 455 | | | | (62,718) | |
Other expense | 1,067 | | | | 1,132 | | | 1,430 | | | | 1,685 | |
Total other expense (income) | 11,552 | | | | 28,094 | | | 21,856 | | | | (38,728) | |
Income before income taxes | 41,574 | | | | 6,481 | | | 78,315 | | | | 88,469 | |
Income tax expense | 11,727 | | | | 5,493 | | | 21,736 | | | | 5,741 | |
Net income | 29,847 | | | | 988 | | | 56,579 | | | | 82,728 | |
Less: Net income attributable to the non-controlling interest | — | | | | 1,200 | | | — | | | | 1,492 | |
Net income (loss) attributable to Class A stockholders | $ | 29,847 | | | | $ | (212) | | | $ | 56,579 | | | | $ | 81,236 | |
| | | | | | | | | |
Earnings per Class A share: | | | | | | | | | |
Basic | $ | 0.23 | | | | $ | — | | | $ | 0.43 | | | | $ | 0.66 | |
Diluted | $ | 0.21 | | | | $ | — | | | $ | 0.41 | | | | $ | 0.15 | |
Weighted-average shares outstanding: | | | | | | | | | |
Basic | 131,354,059 | | | | 123,638,723 | | | 131,096,686 | | | | 123,381,190 | |
Diluted | 138,925,489 | | | | 123,818,404 | | | 138,026,854 | | | | 125,312,658 | |
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| | | | | | | |
Net income | $ | 29,847 | | | $ | 988 | | | $ | 56,579 | | | $ | 82,728 | |
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on interest rate swap designated as a cash flow hedge | (1,810) | | | (3,006) | | | 5,251 | | | (15,795) | |
Reclassification into net income | 1,152 | | | 1,097 | | | 2,479 | | | 1,178 | |
Income tax benefit (expense) | 175 | | | 481 | | | (2,051) | | | 3,650 | |
Comprehensive income (loss) | 29,364 | | | (440) | | | 62,258 | | | 71,761 | |
Less: Comprehensive loss attributed to non-controlling interest | — | | | 1,096 | | | — | | | 659 | |
Comprehensive income (loss) attributed to Class A stockholders | $ | 29,364 | | | $ | (1,536) | | | $ | 62,258 | | | $ | 71,102 | |
See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Voting Common Stock | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders’ Equity | | |
| Shares | | Amount | | | | | | | | | | | | Shares | | Amount | | | | |
Balance–December 31, 2020 | 130,347 | | | $ | 13 | | | | | | | $ | 1,281,018 | | | $ | (10,407) | | | $ | 356,101 | | | 444 | | | $ | (6,000) | | | $ | 1,620,725 | | | |
Comprehensive income | — | | | — | | | | | | | — | | | 6,162 | | | 26,732 | | | — | | | — | | | 32,894 | | | |
Share-based compensation | 146 | | | — | | | | | | | 2,723 | | | — | | | — | | | — | | | — | | | 2,723 | | | |
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Exercise of employee stock options | 20 | | | — | | | | | | | 262 | | | — | | | — | | | — | | | — | | | 262 | | | |
Exercise of public warrants | 672 | | | — | | | | | | | 7,722 | | | — | | | — | | | — | | | — | | | 7,722 | | | |
Payment of taxes for employee stock awards | — | | | — | | | | | | | (843) | | | — | | | — | | | — | | | — | | | (843) | | | |
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Balance–March 31, 2021 | 131,185 | | | $ | 13 | | | | | | | $ | 1,290,882 | | | $ | (4,245) | | | $ | 382,833 | | | 444 | | | $ | (6,000) | | | $ | 1,663,483 | | | |
Comprehensive income (loss) | — | | | — | | | | | | | — | | | (483) | | | 29,847 | | | — | | | — | | | 29,364 | | | |
Share-based compensation | 22 | | | — | | | | | | | 1,640 | | | — | | | — | | | — | | | — | | | 1,640 | | | |
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Exercise of employee stock options | 220 | | | — | | | | | | | 3,135 | | | — | | | — | | | — | | | — | | | 3,135 | | | |
Exercise of public warrants | 209 | | | — | | | | | | | 2,405 | | | — | | | — | | | — | | | — | | | 2,405 | | | |
Payment of taxes for employee stock awards | — | | | — | | | | | | | (392) | | | — | | | — | | | — | | | — | | | (392) | | | |
Repurchase of common stock | (1,176) | | | — | | | | | | | — | | | — | | | — | | | 1,176 | | | (16,691) | | | (16,691) | | | |
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Balance–June 30, 2021 | 130,460 | | | $ | 13 | | | | | | | $ | 1,297,670 | | | $ | (4,728) | | | $ | 412,680 | | | 1,620 | | | $ | (22,691) | | | $ | 1,682,944 | | | |
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| 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, 2019 | 122,107 | | | $ | 12 | | | 8,411 | | | $ | 1 | | | $ | 1,123,805 | | | $ | (756) | | | $ | 251,425 | | | $ | 1,374,487 | | | $ | 94,432 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (8,810) | | | 81,448 | | | 72,638 | | | (437) | |
Share-based compensation, net of income taxes of $103 | 106 | | | — | | | — | | | — | | | 2,180 | | | — | | | — | | | 2,180 | | | — | |
Exchanges | 969 | | | — | | | (969) | | | — | | | 11,819 | | | (17) | | | — | | | 11,802 | | | (11,802) | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,613) | |
Exercise of employee stock options | 2 | | | — | | | — | | | — | | | 153 | | | — | | | — | | | 153 | | | — | |
Payment of taxes for employee stock awards | — | | | — | | | — | | | — | | | (1,004) | | | — | | | — | | | (1,004) | | | — | |
Exercise of public warrants | 1 | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | | | — | |
Tax receivable agreement arising from exchanges, net of income taxes of $1,341 | — | | | — | | | — | | | — | | | (1,942) | | | — | | | — | | | (1,942) | | | — | |
Balance–March 31, 2020 | 123,185 | | | $ | 12 | | | 7,442 | | | $ | 1 | | | $ | 1,135,013 | | | $ | (9,583) | | | $ | 332,873 | | | $ | 1,458,316 | | | $ | 80,580 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (1,324) | | | (212) | | | (1,536) | | | 1,096 | |
Share-based compensation, net of income taxes of $496 | 46 | | | — | | | — | | | — | | | 1,929 | | | — | | | — | | | 1,929 | | | — | |
Exchanges | 1,140 | | | — | | | (1,140) | | | — | | | 13,803 | | | (127) | | | — | | | 13,676 | | | (13,676) | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (365) | |
Exercise of employee stock options and warrants | 37 | | | — | | | — | | | — | | | 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 | | | $ | 12 | | | 6,302 | | | $ | 1 | | | $ | 1,148,565 | | | $ | (11,034) | | | $ | 332,661 | | | $ | 1,470,205 | | | $ | 67,635 | |
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See accompanying notes to the unaudited consolidated financial statements.
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands) | | | | | | | | | | | | | | | | | | |
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| June 30, 2021 | | June 30, 2020 | |
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Operating activities | | | | |
| Net income | $ | 56,579 | | | $ | 82,728 | | |
| Depreciation and amortization | 25,223 | | | 26,477 | | |
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| Debt discount amortization | 621 | | | 664 | | |
| Change in fair value of warrant liabilities | 455 | | | (62,718) | | |
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| Unrealized foreign exchange losses | 73 | | | 996 | | |
| Non-cash lease expense | 659 | | | 641 | | |
| Share-based compensation | 4,363 | | | 4,503 | | |
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| Deferred taxes | 13,932 | | | 3,973 | | |
| Loss on sale of assets | — | | | 128 | | |
| Change in operating assets and liabilities, net of acquisitions and dispositions: | | | | |
| | Accounts receivable | (23,194) | | | (11,320) | | |
| | Inventories | (2,816) | | | 4,135 | | |
| | Prepaids and other current assets | 8,844 | | | (1,091) | | |
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| | Accounts payable and accrued expenses | 1,735 | | | 3,323 | | |
| | Customer trade allowances | 827 | | | 8,242 | | |
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| Net cash provided by operating activities | 87,301 | | | 60,681 | | |
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Investing activities | | | | |
| Purchases of property and equipment | (20,051) | | | (23,376) | | |
| Acquisition of business, net of cash acquired | — | | | (318,427) | | |
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| Acquisition and development of software assets | (2,129) | | | (3,402) | | |
| Net cash used in investing activities | (22,180) | | | (345,205) | | |
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Financing activities | | | | |
| Repayments of long-term debt and lease obligations | (5,584) | | | (5,584) | | |
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| Proceeds from long-term debt origination, net of fees paid | — | | | 136,888 | | |
| Distributions to non-controlling interest | — | | | (1,977) | | |
| Repurchase of common stock | (16,691) | | | — | | |
| Tax payments related to issuance of shares to employees | (1,235) | | | (1,036) | | |
| Cash received from exercise of options and warrants | 13,524 | | | 563 | | |
| Payments on tax receivable agreement | (9,270) | | | (1,279) | | |
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| Net cash provided by (used in) financing activities | (19,256) | | | 127,575 | | |
| Effect of exchange rate changes on cash and cash equivalents | (92) | | | (359) | | |
Net increase (decrease) in cash and cash equivalents | 45,773 | | | (157,308) | | |
Cash and cash equivalents at beginning of period | 173,034 | | | 285,087 | | |
Cash and cash equivalents at end of period | $ | 218,807 | | | $ | 127,779 | | |
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Supplemental Disclosures of Cash Flow Information: | | | |
Cash paid during the period for: | | | |
| Interest | $ | 19,451 | | | $ | 21,885 | |
| Net taxes refunded | $ | (1,506) | | | $ | (577) | |
Supplemental disclosure of non-cash investing: | | | |
| Accrued capital expenditures | $ | 5,046 | | | $ | 1,542 | |
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 Hostess® brand dates back to 1919 when Hostess® CupCakes were introduced to the public, followed by Twinkies® in 1930.
Basis of Presentation
The Company’s operations are conducted through wholly-owned operating subsidiaries . 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”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned or controlled subsidiaries, collectively referred to as the Company. For the periods presented, the Company has one reportable segment.
Adoption of New Accounting Standards
In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options”. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. ASU No. 2020-04 is elective and effective as of March 12, 2020 through December 31, 2022. Once elected, this ASU must be applied prospectively for all eligible contract modifications. The Company will adopt Topic 848 when its relevant contracts are modified upon transition to alternative reference rates. The Company does not expect the adoption of Topic 848 to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740)”. This ASU simplifies the accounting for certain income tax related items, including intraperiod tax allocations, deferred taxes related to foreign subsidiaries and step-up in tax basis of goodwill. The ASU is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company adopted the standard effective January 1, 2021. Adoption of Topic 740 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, 2021 and December 31, 2020, the Company’s accounts receivable were $148.7 million and $125.6 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $3.5 million at both June 30, 2021 and December 31, 2020.
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, 2021 | | December 31, 2020 |
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Ingredients and packaging | $ | 24,345 | | | $ | 22,965 | |
Finished goods | 24,012 | | | 23,583 | |
Inventory in transit to customers | 3,807 | | | 2,800 | |
| $ | 52,164 | | | $ | 49,348 | |
Software Costs
Capitalized software is included in “other assets, net” in the consolidated balance sheets in the amount of $15.0 million and $14.7 million at June 30, 2021 and December 31, 2020, 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 $1.0 million and $1.9 million for the three and six months ended June 30, 2021, compared to $1.3 million and $2.6 million for the three and six months ended June 30, 2020, respectively.
Disaggregation of Revenue
Net revenue consists of sales of packaged food products in the United States, primarily within the Sweet Baked Goods category. The Company also sells products in the United States and Canada within the Cookies category.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables disaggregate revenue by geographical market and category. | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
(In thousands) | Sweet Baked Goods | | | | Cookies | | Total |
United States | $ | 262,491 | | | | | $ | 24,407 | | | $ | 286,898 | |
Canada | — | | | | | 4,587 | | | 4,587 | |
| $ | 262,491 | | | | | $ | 28,994 | | | $ | 291,485 | |
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| Three Months Ended June 30, 2020 |
(In thousands) | Sweet Baked Goods | | | | Cookies | | Total |
United States | $ | 232,620 | | | | | $ | 20,459 | | | $ | 253,079 | |
Canada | — | | | | | 3,147 | | | 3,147 | |
| $ | 232,620 | | | | | $ | 23,606 | | | $ | 256,226 | |
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| Six Months Ended June 30, 2021 |
(In thousands) | Sweet Baked Goods | | Cookies | | Total |
United States | $ | 500,191 | | | $ | 48,210 | | | $ | 548,401 | |
Canada | — | | | 8,505 | | | 8,505 | |
| $ | 500,191 | | | $ | 56,715 | | | $ | 556,906 | |
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| Six Months Ended June 30, 2020 |
(In thousands) | Sweet Baked Goods | | Cookies | | Total |
United States | $ | 458,982 | | | $ | 33,766 | | | $ | 492,748 | |
Canada | — | | | 6,963 | | | 6,963 | |
| $ | 458,982 | | | $ | 40,729 | | | $ | 499,711 | |
Concentrations
For the three months ended June 30, 2021 and 2020, the Company has one customer (together with its affiliates) that accounted for 18.1% and 22.3% of total net revenue, and for the six months ended June 30, 2021 and 2020, 19.3% and 21.7% of total net revenue, respectively.
Foreign Currency Remeasurement
Certain Voortman Cookies Limited (“Voortman”) sales and costs are denominated in the Canadian dollar (“CAD”). CAD transactions have been remeasured into US dollars (“USD”) on the consolidated statement of operations using the average exchange rate for the reporting period. Balances expected to be settled in CAD have been remeasured into USD on the consolidated balance sheet using the exchange rate at the end of the period. During the three and six months ended June 30, 2021, the Company recognized a gain and loss, respectively, on remeasurement of less than $0.1 million, which is reported within other expense on the consolidated statement of operations. During both the three and six months ended June 30, 2020, the Company recognized a loss on remeasurement of $0.7 million which is reported within other expense on the consolidated statement of operations.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Property and Equipment
Property and equipment consists of the following:
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(In thousands) | June 30, 2021 | | December 31, 2020 |
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Land and buildings | $ | 62,737 | | | $ | 59,774 | |
Right of use assets, operating | 32,192 | | | 31,354 | |
Machinery and equipment | 271,196 | | | 255,821 | |
Construction in progress | 23,906 | | | 25,041 | |
| 390,031 | | | 371,990 | |
Less accumulated depreciation and amortization | (78,496) | | | (68,031) | |
| $ | 311,535 | | | $ | 303,959 | |
Depreciation expense was $5.7 million and $11.5 million for the three and six months ended June 30, 2021, compared to $5.2 million and $10.2 million for the three and six months ended June 30, 2020, respectively.
3. Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following: | | | | | | | | | | | |
(In thousands) | June 30, 2021 | | December 31, 2020 |
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Payroll, vacation and other compensation | $ | 11,659 | | | $ | 9,886 | |
Interest rate swap contract | 6,253 | | | 13,694 | |
Incentive compensation | 9,860 | | | 16,199 | |
Accrued interest | 4,707 | | | 4,815 | |
Other | 12,035 | | | 11,121 | |
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| $ | 44,514 | | | $ | 55,715 | |
4. Debt and Lease Obligations
A summary of the carrying value of the debt and lease obligations are as follows: | | | | | | | | | | | |
(In thousands) | June 30, 2021 | | December 31, 2020 |
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Term Loan (3.0% as of June 30, 2021) | | | |
Principal | $ | 1,097,180 | | | $ | 1,102,763 | |
Unamortized debt premium and issuance costs | (4,296) | | | (4,917) | |
| 1,092,884 | | | 1,097,846 | |
Lease obligations | 28,240 | | | 29,002 | |
Total debt and lease obligations | 1,121,124 | | | 1,126,848 | |
Less: Current portion of long term debt and lease obligations | (14,103) | | | (13,811) | |
Long-term portion | $ | 1,107,021 | | | $ | 1,113,037 | |
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2021, minimum debt repayments under the term loan are due as follows:
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(In thousands) | | |
2021 | | $ | 5,584 | |
2022 | | 11,167 | |
2023 | | 11,167 | |
2024 | | 11,167 | |
2025 | | 1,058,095 | |
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Leases
The Company has entered into operating leases for certain properties which expire at various times through 2026. The Company determines if an arrangement is a lease at inception.
At June 30, 2021 and 2020, right of use assets related to operating leases are included in property and equipment, net on the consolidated balance sheet (see Note 2. Property and Equipment). As of June 30, 2021 and 2020, 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 obligations on the consolidated balance sheet.
The table below shows the composition of lease expense: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
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Operating lease expense | $ | 1,771 | | | $ | 1,269 | | | $ | 3,424 | | | $ | 3,064 | |
Short-term lease expense | 379 | | | 544 | | | 582 | | | 1,558 | |
Variable lease expense | 385 | | | 467 | | | 742 | | | 1,021 | |
| $ | 2,535 | | | $ | 2,280 | | | $ | 4,748 | | | $ | 5,643 | |
5. Derivative Instruments
Warrants
As of June 30, 2021 and December 31, 2020, there were 52,176,000 and 53,936,776 public warrants outstanding, respectively, and 541,658 private placement warrants outstanding. Each warrant entitles its holder to purchase one-half of one share of Class A common stock at an exercise price of $5.75 per half share, to be exercised only for a whole number of shares of Class A common stock. The warrants expire on November 4, 2021, or earlier upon redemption or liquidation. The Company may call the outstanding public warrants for redemption at a price of $0.01 per warrant, if the last sale price of the Company’s common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by Gores Sponsor, LLC or its permitted transferees. The potential resale of the private placement warrants, which would result in a conversion to public warrants, has been registered with the SEC. When sold to the public, the private placement warrants will become public warrants.
In July 2021, the agreement governing the Company’s public and private placement warrants was amended. Subsequent to the amendment, the exercise price for all outstanding warrants is payable through a “cashless exercise” with a premium of $0.25 added to the valuation price of the shares for purposes of calculating the number of shares issuable upon exercise of the warrants.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swap and Foreign Currency Contracts
The Company entered into interest rate swap contracts with counter parties to make a series of payments based on fixed rates ranging from 1.11% to 1.78% and receive a series of payments based on the greater of LIBOR or 0.75%. Both the fixed and floating payment streams are based on the June 30, 2021 notional amount of $600 million reducing by $100 million each year, until $500 million remains outstanding through August 2025. The Company entered into these transactions to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated these derivatives as cash flow hedges. At June 30, 2021, the effective fixed interest rate on the long-term debt hedged by these contracts ranged from 3.36% to 4.03%.
To reduce the effect of fluctuations in CAD denominated expenses relative to their U.S. dollar equivalents originating from its Canadian operations, the Company entered into CAD purchase contracts. The contracts provide for the Company to sell a total of $11.1 million USD for $13.9 million CAD at varying defined settlement dates through June 2022. The Company has designated these contracts as cash flow hedges.
In connection with the agreement to purchase Voortman, the Company entered into a deal-contingent foreign currency contract to hedge the $440 million CAD forecasted purchase price and a portion of the subsequent expected conversion costs. The contract was settled in cash following the completion of the purchase on January 3, 2020.
A summary of the fair value of interest rate and foreign currency instruments is as follows:
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(In thousands) | | | | June 30, 2021 | | December 31, 2020 |
Asset derivatives | | Location | | | | |
Foreign currency contracts (2) | | Other current assets | | $ | 288 | | | $ | — | |
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Liability derivatives | | Location | | | | |
Interest rate swap contracts (1) | | Accrued expenses | | $ | 6,253 | | | $ | 13,688 | |
Foreign currency contracts (2) | | Accrued expenses | | — | | | 6 | |
| | | | $ | 6,253 | | | $ | 13,694 | |
(1) The fair values of these contracts are measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).
(2) The fair values of foreign currency contracts are measured on a recurring basis by comparison to available market information on similar contracts (Level 2).
A summary of the gains and losses related to interest rate and foreign currency instruments in the consolidated statement of operations is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | Six Months Ended |
(In thousands) | | | | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Gain on derivative contracts designated as cash flow hedges | | Location | | | | | | | | |
Interest rate swap contracts | | Interest expense, net | | $ | 1,152 | | | $ | 1,097 | | | $ | 2,479 | | | $ | 1,178 | |
| | | | | | | | | | |
Loss on other derivative contracts | | Location | | | | | | | | |
| | | | | | | | | | |
Foreign currency contracts | | Other expense | | $ | — | | | $ | — | | | $ | — | | | $ | (255) | |
| | | | | | | | | | |
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to the Company’s Class A stockholders for the period by the weighted average number of shares of Class A common stock outstanding for the period excluding non-vested share-based awards. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards including RSUs and stock options as well as public and private placement warrants.
Below are basic and diluted net income per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Numerator: | | | | | | | | |
Net income (loss) attributable to Class A stockholders (in thousands) - basic | | $ | 29,847 | | | $ | (212) | | | $ | 56,579 | | | $ | 81,236 | |
Less: Change in fair value of warrant liabilities | | — | | | — | | | — | | | (62,718) | |
Numerator - diluted | | 29,847 | | | (212) | | | 56,579 | | | 18,518 | |
Denominator: | | | | | | | | |
Weighted-average Class A shares outstanding - basic | | 131,354,059 | | | 123,638,723 | | | 131,096,686 | | | 123,381,190 | |
Dilutive effect of warrants | | 6,867,024 | | | — | | | 6,319,296 | | | 1,744,314 | |
Dilutive effect of RSUs | | 555,050 | | | 179,681 | | | 486,250 | | | 187,154 | |
Dilutive effect of stock options | | 149,356 | | | — | | | 124,622 | | | — | |
Weighted-average shares outstanding - diluted | | 138,925,489 | | | 123,818,404 | | | 138,026,854 | | | 125,312,658 | |
| | | | | | | | |
Net income per Class A share - basic | | $ | 0.23 | | | $ | — | | | $ | 0.43 | | | $ | 0.66 | |
| | | | | | | | |
Net income per Class A share - diluted | | $ | 0.21 | | | $ | — | | | $ | 0.41 | | | $ | 0.15 | |
| | | | | | | | |
For warrants that are liability-classified, during periods when the impact would be dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method. During the three and six months ended June 30, 2021, the diluted weighted-average shares outstanding includes the dilutive impact of equity-classified warrants.
Stock options that were excluded from the computation of diluted weighted average shares, because their effect was anti-dilutive, for the three and six months ended June 30, 2021, were 31,051 and 71,240 compared to 711,870 and 600,919 for the three and six months ended June 30, 2020, respectively.
7. Income Taxes
The Company is subject to U.S. federal, state and local income taxes as well as Canadian income tax on its controlled foreign subsidiary. The income tax provision is determined based on the estimated full year effective tax rate, adjusted for infrequent or unusual items, which are recognized on a discrete basis in the period they occur. The Company’s estimated annual effective tax rate is 27.5% prior to taking into account any discrete items.
The effective tax rate was 28.2% and 84.8% for the three months ended June 30, 2021 and 2020, respectively. The effective tax rates for the respective periods were impacted by non-taxable losses from the change in fair value of warrant liabilities of $0.5 million and $16.4 million, respectively. The effective rate for the period ended June 30, 2021 was also impacted by the removal of the non-controlling interest. The effective tax rate was 27.8% and 6.5% for the six months ended June 30, 2021 and 2020, respectively. The effective tax rate for the respective periods were impacted by non-taxable losses of $0.5 million and non-taxable gains of $62.7 million from the change in fair value
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
of warrant liabilities. As of June 30, 2021, and December 31, 2020, income taxes receivable were $3.5 million and 12.3 million, respectively.
8. Tax Receivable Agreement Obligations
The following table summarizes activity related to the Tax Receivable Agreement for the six months ended June 30, 2021: