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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 |
| September 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 - 138,377,187 shares at November 8, 2021
HOSTESS BRANDS, INC.
FORM 10-Q
For the Three Months Ended September 30, 2021
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Item 4. | | |
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Item 1A. | | |
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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.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share data) | | | | | | | | | | | | | | | |
| September 30, | | | December 31, | |
| 2021 | | | 2020 | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 228,096 | | | | $ | 173,034 | | |
Accounts receivable, net | 156,720 | | | | 125,550 | | |
Inventories | 49,309 | | | | 49,348 | | |
| | | | | |
Prepaids and other current assets | 7,624 | | | | 21,614 | | |
Total current assets | 441,749 | | | | 369,546 | | |
Property and equipment, net | 318,492 | | | | 303,959 | | |
Intangible assets, net | 1,950,270 | | | | 1,967,903 | | |
Goodwill | 706,615 | | | | 706,615 | | |
Other assets, net | 17,861 | | | | 17,446 | | |
Total assets | $ | 3,434,987 | | | | $ | 3,365,469 | | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
| | | | | |
Current liabilities: | | | | | |
Long-term debt and lease obligations payable within one year | $ | 14,171 | | | | $ | 13,811 | | |
Tax receivable agreement payments payable within one year | 10,000 | | | | 11,800 | | |
Accounts payable | 71,139 | | | | 61,428 | | |
Customer trade allowances | 55,157 | | | | 46,779 | | |
Warrant liabilities | 1,249 | | | | 861 | | |
Accrued expenses and other current liabilities | 46,541 | | | | 55,715 | | |
| | | | | |
Total current liabilities | 198,257 | | | | 190,394 | | |
Long-term debt and lease obligations | 1,103,327 | | | | 1,113,037 | | |
Tax receivable agreement obligations | 137,274 | | | | 144,744 | | |
Deferred tax liability | 315,544 | | | | 295,009 | | |
Other long-term liabilities | 1,595 | | | | 1,560 | | |
Total liabilities | 1,755,997 | | | | 1,744,744 | | |
| | | | | |
Commitments and Contingencies (Note 9) | | | | | |
| | | | | |
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 132,741,603 shares issued and 129,170,487 shares outstanding as of September 30, 2021 and 130,791,908 shares issued and 130,347,464 shares outstanding as of December 31, 2020 | 13 | | | | 13 | | |
| | | | | |
Additional paid in capital | 1,300,329 | | | | 1,281,018 | | |
Accumulated other comprehensive loss | (4,161) | | | | (10,407) | | |
Retained earnings | 438,872 | | | | 356,101 | | |
Treasury stock | (56,063) | | | | (6,000) | | |
Stockholders’ equity | 1,678,990 | | | | 1,620,725 | | |
| | | | | |
Total liabilities and stockholders’ equity | $ | 3,434,987 | | | | $ | 3,365,469 | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | | September 30, 2020 | | September 30, 2021 | | | September 30, 2020 |
| | | | | | | | | |
Net revenue | $ | 287,969 | | | | $ | 260,855 | | | $ | 844,875 | | | | $ | 760,566 | |
Cost of goods sold | 188,990 | | | | 169,700 | | | 545,271 | | | | 500,700 | |
Gross profit | 98,979 | | | | 91,155 | | | 299,604 | | | | 259,866 | |
Operating costs and expenses: | | | | | | | | | |
Advertising and marketing | 14,767 | | | | 11,762 | | | 39,692 | | | | 32,983 | |
Selling expense | 8,166 | | | | 8,675 | | | 26,250 | | | | 39,173 | |
General and administrative | 23,565 | | | | 21,913 | | | 69,254 | | | | 71,261 | |
Amortization of customer relationships | 5,877 | | | | 6,739 | | | 17,633 | | | | 20,333 | |
Business combination transaction costs | — | | | | — | | | — | | | | 4,282 | |
Other operating expense | — | | | | 729 | | | — | | | | 756 | |
Total operating costs and expenses | 52,375 | | | | 49,818 | | | 152,829 | | | | 168,788 | |
Operating income | 46,604 | | | | 41,337 | | | 146,775 | | | | 91,078 | |
Other expense (income): | | | | | | | | | |
Interest expense, net | 9,928 | | | | 10,265 | | | 29,899 | | | | 32,570 | |
| | | | | | | | | |
| | | | | | | | | |
Change in fair value of warrant liabilities | 228 | | | | (2,260) | | | 683 | | | | (64,978) | |
Other expense | 378 | | | | 818 | | | 1,808 | | | | 2,503 | |
Total other expense (income) | 10,534 | | | | 8,823 | | | 32,390 | | | | (29,905) | |
Income before income taxes | 36,070 | | | | 32,514 | | | 114,385 | | | | 120,983 | |
Income tax expense | 9,878 | | | | 6,281 | | | 31,614 | | | | 12,022 | |
Net income | 26,192 | | | | 26,233 | | | 82,771 | | | | 108,961 | |
Less: Net income attributable to the non-controlling interest | — | | | | 1,368 | | | — | | | | 2,860 | |
Net income attributable to Class A stockholders | $ | 26,192 | | | | $ | 24,865 | | | $ | 82,771 | | | | $ | 106,101 | |
| | | | | | | | | |
Earnings per Class A share: | | | | | | | | | |
Basic | $ | 0.20 | | | | $ | 0.20 | | | $ | 0.63 | | | | $ | 0.86 | |
Diluted | $ | 0.19 | | | | $ | 0.18 | | | $ | 0.60 | | | | $ | 0.33 | |
Weighted-average shares outstanding: | | | | | | | | | |
Basic | 129,846,551 | | | | 124,905,538 | | | 130,679,974 | | | | 123,889,306 | |
Diluted | 138,058,866 | | | | 127,586,881 | | | 138,036,371 | | | | 126,079,472 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
| | | | | | | |
Net income | $ | 26,192 | | | $ | 26,233 | | | $ | 82,771 | | | $ | 108,961 | |
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on interest rate swap and foreign currency contracts designated as a cash flow hedge | (192) | | | (1,197) | | | 5,058 | | | (16,992) | |
Reclassification into net income | 962 | | | 1,352 | | | 3,441 | | | 2,530 | |
Income tax benefit (expense) | (203) | | | (39) | | | (2,253) | | | 3,611 | |
Comprehensive income (loss) | 26,759 | | | 26,349 | | | 89,017 | | | 98,110 | |
Less: Comprehensive loss attributed to non-controlling interest | — | | | 1,375 | | | — | | | 2,034 | |
Comprehensive income (loss) attributed to Class A stockholders | $ | 26,759 | | | $ | 24,974 | | | $ | 89,017 | | | $ | 96,076 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands)
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| 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 | | | |
Comprehensive income (loss) | — | | | — | | | | | | | — | | | 567 | | | 26,192 | | | — | | | — | | | 26,759 | | | |
Share-based compensation | — | | | — | | | | | | | 2,642 | | | — | | | — | | | — | | | — | | | 2,642 | | | |
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Exercise of employee stock options | 19 | | | — | | | | | | | 255 | | | — | | | — | | | — | | | — | | | 255 | | | |
Exercise of public warrants, net of fees of $500 | 643 | | | — | | | | | | | (494) | | | — | | | — | | | — | | | — | | | (494) | | | |
Payment of taxes for employee stock awards | — | | | — | | | | | | | (42) | | | — | | | — | | | — | | | — | | | (42) | | | |
Reclassification of warrants | — | | | — | | | | | | | 298 | | | — | | | — | | | — | | | — | | | 298 | | | |
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Repurchase of common stock | (1,952) | | | — | | | | | | | — | | | — | | | — | | | 1,952 | | | (33,372) | | | (33,372) | | | |
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Balance–September 30, 2021 | 129,170 | | | $ | 13 | | | | | | | $ | 1,300,329 | | | $ | (4,161) | | | $ | 438,872 | | | 3,572 | | | $ | (56,063) | | | $ | 1,678,990 | | | |
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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, including 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 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 109 | | | 24,865 | | | 24,974 | | | 1,375 | |
Share-based compensation, net of income taxes of $361 | 60 | | | — | | | — | | | — | | | 1,720 | | | — | | | — | | | 1,720 | | | — | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,445) | |
Exercise of employee stock options and warrants | 1 | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | | | — | |
Exchanges | 680 | | | — | | | (680) | | | — | | | 8,244 | | | (79) | | | — | | | 8,165 | | | (8,165) | |
Payment of taxes for employee stock awards | — | | | — | | | — | | | — | | | (347) | | | — | | | — | | | (347) | | | — | |
Tax receivable agreement arising from exchanges, net of income taxes of $754 | — | | | — | | | — | | | — | | | (1,431) | | | — | | | — | | | (1,431) | | | — | |
Balance–September 30, 2020 | 125,149 | | | $ | 12 | | | 5,622 | | | $ | 1 | | | $ | 1,156,753 | | | $ | (11,004) | | | $ | 357,526 | | | $ | 1,503,288 | | | $ | 59,400 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands) | | | | | | | | | | | | | | | | | | |
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| | | Nine Months Ended | |
| September 30, 2021 | | September 30, 2020 | |
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Operating activities | | | | |
| Net income | $ | 82,771 | | | $ | 108,961 | | |
| Depreciation and amortization | 37,992 | | | 40,999 | | |
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| Debt discount amortization | 931 | | | 977 | | |
| Change in fair value of warrant liabilities | 683 | | | (64,978) | | |
| Tax receivable agreement remeasurement | — | | | 610 | | |
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| Unrealized foreign exchange losses | (177) | | | 1,392 | | |
| Non-cash lease expense | 971 | | | 358 | | |
| Share-based compensation | 7,005 | | | 6,583 | | |
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| Deferred taxes | 18,280 | | | 8,575 | | |
| Loss on sale of assets | — | | | 317 | | |
| Change in operating assets and liabilities, net of acquisitions and dispositions: | | | | |
| | Accounts receivable | (31,240) | | | (7,106) | | |
| | Inventories | 39 | | | 7,462 | | |
| | Prepaids and other current assets | 13,991 | | | (4,334) | | |
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| | Accounts payable and accrued expenses | 7,949 | | | 2,186 | | |
| | Customer trade allowances | 8,441 | | | 5,989 | | |
| | | | | | |
| Net cash provided by operating activities | 147,636 | | | 107,991 | | |
| | | | | | |
Investing activities | | | | |
| Purchases of property and equipment | (33,360) | | | (33,382) | | |
| Acquisition of business, net of cash acquired | — | | | (316,013) | | |
| | | | | |
| Acquisition and development of software assets | (3,330) | | | (4,994) | | |
| Net cash used in investing activities | (36,690) | | | (354,389) | | |
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Financing activities | | | | |
| Repayments of long-term debt and lease obligations | (8,375) | | | (8,375) | | |
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| Proceeds from long-term debt origination, net of fees paid | — | | | 136,888 | | |
| Distributions to non-controlling interest | — | | | (3,423) | | |
| Repurchase of common stock | (50,063) | | | — | | |
| Tax payments related to issuance of shares to employees | (1,277) | | | (1,383) | | |
| Cash received from exercise of options and warrants, net of fees | 13,285 | | | 565 | | |
| Payments on tax receivable agreement | (9,270) | | | (10,327) | | |
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| Net cash provided by (used in) financing activities | (55,700) | | | 113,945 | | |
| Effect of exchange rate changes on cash and cash equivalents | (184) | | | (337) | | |
Net increase (decrease) in cash and cash equivalents | 55,062 | | | (132,790) | | |
Cash and cash equivalents at beginning of period | 173,034 | | | 285,087 | | |
Cash and cash equivalents at end of period | $ | 228,096 | | | $ | 152,297 | | |
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Supplemental Disclosures of Cash Flow Information: | | | |
Cash paid during the period for: | | | |
| Interest | $ | 29,019 | | | $ | 31,883 | |
| Net taxes paid | $ | 1,568 | | | $ | 5,403 | |
Supplemental disclosure of non-cash investing: | | | |
| Accrued capital expenditures | $ | 5,603 | | | $ | 3,124 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Hostess Brands, Inc. is a Delaware corporation headquartered in Lenexa, Kansas. The condensed consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading sweet snacks company focused on developing, manufacturing, marketing, selling and distributing snacks in North America under the Hostess® and Voortman® brands. The Company produces a variety of new and classic treats including iconic Hostess® Donettes®, Twinkies®, CupCakes, Ding Dongs® and Zingers® as well as a variety of Voortman® cookies and wafers.
Basis of Presentation
The Company’s operations are conducted through wholly-owned operating subsidiaries. The condensed 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 results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. 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 condensed 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 condensed 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 condensed consolidated financial statements.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of condensed 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, 2021 and December 31, 2020, the Company’s accounts receivable were $156.7 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 $2.6 million and $3.5 million for the periods ending September 30, 2021 and December 31, 2020, 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) | September 30, 2021 | | December 31, 2020 |
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Ingredients and packaging | $ | 22,785 | | | $ | 22,965 | |
Finished goods | 23,798 | | | 23,583 | |
Inventory in transit to customers | 2,726 | | | 2,800 | |
| $ | 49,309 | | | $ | 49,348 | |
Software Costs
Capitalized software is included in “other assets, net” in the condensed consolidated balance sheets in the amount of $15.1 million and $14.7 million as of September 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 $2.9 million for the three and nine months ended September 30, 2021, compared to $1.4 million and $4.0 million for the three and nine months ended September 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables disaggregate revenue by geographical market and category. | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
(In thousands) | Sweet Baked Goods | | | | Cookies | | Total |
United States | $ | 258,818 | | | | | $ | 25,185 | | | $ | 284,003 | |
Canada | — | | | | | 3,966 | | | 3,966 | |
| $ | 258,818 | | | | | $ | 29,151 | | | $ | 287,969 | |
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| Three Months Ended September 30, 2020 |
(In thousands) | Sweet Baked Goods | | | | Cookies | | Total |
United States | $ | 234,103 | | | | | $ | 22,328 | | | $ | 256,431 | |
Canada | — | | | | | 4,424 | | | 4,424 | |
| $ | 234,103 | | | | | $ | 26,752 | | | $ | 260,855 | |
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| Nine Months Ended September 30, 2021 |
(In thousands) | Sweet Baked Goods | | Cookies | | Total |
United States | $ | 759,010 | | | $ | 73,394 | | | $ | 832,404 | |
Canada | — | | | 12,471 | | | 12,471 | |
| $ | 759,010 | | | $ | 85,865 | | | $ | 844,875 | |
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| Nine Months Ended September 30, 2020 |
(In thousands) | Sweet Baked Goods | | Cookies | | Total |
United States | $ | 693,085 | | | $ | 56,094 | | | $ | 749,179 | |
Canada | — | | | 11,387 | | | 11,387 | |
| $ | 693,085 | | | $ | 67,481 | | | $ | 760,566 | |
Concentrations
For the three months ended September 30, 2021 and 2020, the Company has one customer (together with its affiliates) that accounted for 18.0% and 19.7% of total net revenue, and for the nine months ended September 30, 2021 and 2020, 18.8% and 21.0% 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 condensed 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 condensed consolidated balance sheet using the exchange rate at the end of the period. During both the three and nine months ended September 30, 2021, the Company recognized a gain on remeasurement of $0.2 million, which is reported within other expense on the condensed consolidated statement of operations. During the three and nine months ended September 30, 2020, the Company recognized losses on remeasurement of $0.4 million and $1.1 million, respectively, reported within other expense on the condensed consolidated statement of operations.
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Property and Equipment
Property and equipment consists of the following:
| | | | | | | | | | | |
(In thousands) | September 30, 2021 | | December 31, 2020 |
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Land and buildings | $ | 64,663 | | | $ | 59,774 | |
Right of use assets, operating | 32,192 | | | 31,354 | |
Machinery and equipment | 272,971 | | | 255,821 | |
Construction in progress | 34,071 | | | 25,041 | |
| 403,897 | | | 371,990 | |
Less accumulated depreciation and amortization | (85,405) | | | (68,031) | |
| $ | 318,492 | | | $ | 303,959 | |
Depreciation expense was $5.9 million and $17.4 million for the three and nine months ended September 30, 2021, compared to $6.3 million and $16.6 million for the three and nine months ended September 30, 2020, respectively.
3. Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following: | | | | | | | | | | | |
(In thousands) | September 30, 2021 | | December 31, 2020 |
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Incentive compensation | $ | 14,239 | | | $ | 16,199 | |
Payroll, vacation and other compensation | 10,447 | | | 9,886 | |
Interest rate swap and foreign currency contracts | 5,229 | | | 13,694 | |
Accrued interest | 4,768 | | | 4,815 | |
Other | 11,858 | | | 11,121 | |
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| $ | 46,541 | | | $ | 55,715 | |
4. Debt and Lease Obligations
A summary of the carrying value of the debt and lease obligations are as follows: | | | | | | | | | | | |
(In thousands) | September 30, 2021 | | December 31, 2020 |
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Term Loan (3.0% as of September 30, 2021) | | | |
Principal | $ | 1,094,388 | | | $ | 1,102,763 | |
Unamortized debt premium and issuance costs | (3,987) | | | (4,917) | |
| 1,090,401 | | | 1,097,846 | |
Lease obligations | 27,097 | | | 29,002 | |
Total debt and lease obligations | 1,117,498 | | | 1,126,848 | |
Less: Current portion of long term debt and lease obligations | (14,171) | | | (13,811) | |
Long-term portion | $ | 1,103,327 | | | $ | 1,113,037 | |
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2021, minimum debt repayments under the term loan are due as follows:
| | | | | | | | |
(In thousands) | | |
2021 | | $ | 2,792 | |
2022 | | 11,167 | |
2023 | | 11,167 | |
2024 | | 11,167 | |
2025 | | 1,058,095 | |
| | |
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 September 30, 2021 and 2020, right of use assets related to operating leases are included in property and equipment, net on the condensed consolidated balance sheet (see Note 2. Property and Equipment). As of September 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 condensed consolidated balance sheet.
The table below shows the composition of lease expense: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(In thousands) | September 30, 2021 | | September 30, 2020 | | September 30, 2021 | | September 30, 2020 |
| | | | | | | |
| | | | | | | |
Operating lease expense | $ | 1,504 | | | $ | 1,209 | | | $ | 4,928 | | | $ | 4,273 | |
Short-term lease expense | 501 | | | 456 | | | 1,083 | | | 2,014 | |
Variable lease expense | 367 | | | 445 | | | 1,109 | | | 1,466 | |
| $ | 2,372 | | | $ | 2,110 | | | $ | 7,120 | | | $ | 7,753 | |
5. Derivative Instruments
Warrants
As of September 30, 2021 and December 31, 2020, there were 40,866,087 and 53,936,776 public warrants outstanding, and 419,011 and 541,658 private placement warrants outstanding, respectively. 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 each share for purposes of calculating the number of shares issuable upon exercise of the warrants.