twnk-20210331

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
			March 31, 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 - 131,294,192 shares at May 10, 2021

HOSTESS BRANDS, INC.

FORM 10-Q

For the Three Months Ended March 31, 2021

INDEX


		Page
PART I - Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets (Unaudited)	4
	Consolidated Statements of Operations (Unaudited)	5
	Consolidated Statements of Comprehensive Income (Unaudited)	6
	Consolidated Statements of Stockholders’ Equity (Unaudited)	7
	Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	20
PART II - Other Information
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Default Upon Senior Securities	21
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	21
Item 6.	Exhibits	22

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 and herein, 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)


	March 31,		December 31,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	197,846	$	173,034
Accounts receivable, net	159,492		125,550
Inventories	52,144		49,348

Prepaids and other current assets	8,468		21,614
Total current assets	417,950		369,546
Property and equipment, net	306,995		303,959
Intangible assets, net	1,962,025		1,967,903
Goodwill	706,615		706,615
Other assets, net	17,166		17,446
Total assets	$	3,410,751	$	3,365,469

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Long-term debt and lease obligations payable within one year	$	13,508	$	13,811
Tax receivable agreement payments payable within one year	10,200		11,800
Accounts payable	76,106		61,428
Customer trade allowances	47,514		46,779
Warrant liabilities	785		861
Accrued expenses and other current liabilities	38,855		55,715

Total current liabilities	186,968		190,394
Long-term debt and lease obligations	1,110,101		1,113,037
Tax receivable agreement obligations	144,744		144,744
Deferred tax liability	303,880		295,009
Other long-term liabilities	1,575		1,560
Total liabilities	1,747,268		1,744,744

Commitments and Contingencies (Note 10)

Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 131,184,826 and 130,347,464 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	13		13

Additional paid in capital	1,290,882		1,281,018
Accumulated other comprehensive loss	(4,245)		(10,407)
Retained earnings	382,833		356,101
Treasury stock	(6,000)		(6,000)
Stockholders’ equity	1,663,483		1,620,725

Total liabilities and stockholders’ equity	$	3,410,751	$	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
	March 31, 2021		March 31, 2020

Net revenue	$	265,421	$	243,485
Cost of goods sold	169,902		164,148
Gross profit	95,519		79,337
Operating costs and expenses:
Advertising and marketing	11,781		10,063
Selling expense	8,630		18,120
General and administrative	22,185		25,195
Amortization of customer relationships	5,878		6,484
Business combination transaction costs	—		4,282
Other operating expense	—		27
Total operating costs and expenses	48,474		64,171
Operating income	47,045		15,166
Other expense (income):
Interest expense, net	10,017		11,725


Change in fair value of warrant liabilities	(76)		(79,100)
Other expense	363		553
Total other expense (income)	10,304		(66,822)
Income before income taxes	36,741		81,988
Income tax expense	10,009		248
Net income	26,732		81,740
Less: Net income attributable to the non-controlling interest	—		292
Net income attributable to Class A stockholders	$	26,732	$	81,448

Earnings per Class A share:
Basic	$	0.20	$	0.66
Diluted	$	0.19	$	0.02
Weighted-average shares outstanding:
Basic	130,839,313		123,123,656
Diluted	137,186,889		126,075,126

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
	March 31, 2021		March 31, 2020

Net income	$	26,732	$	81,740
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap designated as a cash flow hedge	7,060		(12,789)
Reclassification into net income	1,327		81
Income tax benefit (expense)	(2,225)		3,169
Comprehensive income	32,894		72,201
Less: Comprehensive loss attributed to non-controlling interest	—		(437)
Comprehensive income attributed to Class A stockholders	$	32,894	$	72,638

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			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


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)
Reclassification of public warrants	—	—			—		—		—		—	—		—

Balance–March 31, 2021	131,185	$	13		$	1,290,882	$	(4,245)	$	382,833	444	$	(6,000)	$	1,663,483


	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

See accompanying notes to the unaudited consolidated financial statements.

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)



			Three Months Ended
			March 31, 2021		March 31, 2020

Operating activities
	Net income		26,732		$	81,740
	Depreciation and amortization		12,691		12,821

	Debt discount amortization		311		338
	Change in fair value of warrant liabilities		(76)		(79,100)


	Unrealized foreign exchange losses		123		286
	Non-cash lease expense		329		590
	Share-based compensation		2,723		2,077

	Deferred taxes		6,646		(649)
	Loss on sale of assets		—		27
	Change in operating assets and liabilities, net of acquisitions and dispositions:
		Accounts receivable	(34,204)		(17,463)
		Inventories	(2,796)		5,180
		Prepaids and other current assets	13,112		3,270

		Accounts payable and accrued expenses	6,582		864
		Customer trade allowances	680		3,161

	Net cash provided by operating activities		32,853		13,142

Investing activities
	Purchases of property and equipment		(10,251)		(11,323)
	Acquisition of business, net of cash acquired		—		(318,427)

	Acquisition and development of software assets		(634)		(1,793)
	Net cash used in investing activities		(10,885)		(331,543)

Financing activities
	Repayments of long-term debt and lease obligations		(2,792)		(2,792)


	Proceeds from long-term debt origination, net of fees paid		—		136,888
	Distributions to non-controlling interest		—		(1,614)

	Tax payments related to issuance of shares to employees		(843)		(1,004)
	Cash received from exercise of options and warrants		7,984		155
	Payments on tax receivable agreement		(1,600)		(1,279)

	Net cash used in financing activities		2,749		130,354
	Effect of exchange rate changes on cash and cash equivalents		95		(873)
Net increase (decrease) in cash and cash equivalents			24,812		(188,920)
Cash and cash equivalents at beginning of period			173,034		285,087
Cash and cash equivalents at end of period			$	197,846	$	96,167








































Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
	Interest	$	9,807	$	10,758
	Net taxes paid (refunded)	$	(8,191)	$	(586)
Supplemental disclosure of non-cash investing:
	Accrued capital expenditures	$	4,026	$	2,014

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® CupCake was introduced to the public, followed by Twinkies® in 1930.

Basis of Presentation

The Company’s operations are conducted through operating subsidiaries that are wholly-owned by the Company. 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 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. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is elective and effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. Once elected, this ASU must be applied prospectively for all eligible contract modifications. We will adopt Topic 848 when our relevant contracts are modified upon transition to alternative reference rates. We do not expect our adoption of Topic 848 to have a material impact on our consolidated financial statements.

In December 2019, ASU 2019-12 “Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740)” was issued. 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 March 31, 2021 and December 31, 2020, the Company’s accounts receivable were $159.5 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 March 31, 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)	March 31, 2021		December 31, 2020

Ingredients and packaging	$	24,557	$	22,965
Finished goods	23,483		23,583
Inventory in transit to customers	4,104		2,800
	$	52,144	$	49,348

Software Costs

Capitalized software is included in “Other assets, net” in the consolidated balance sheets in the amount of $14.4 million and $14.7 million at March 31, 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 $0.9 million for the three months ended March 31, 2021, compared to $1.3 million for the three months ended March 31, 2020.

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 March 31, 2021
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	237,700	$	23,803	$	261,503
Canada	—		3,918		3,918
	$	237,700	$	27,721	$	265,421


	Three Months Ended March 31, 2020
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	226,361	$	13,307	$	239,668
Canada	—		3,817		3,817
	$	226,361	$	17,124	$	243,485

Concentrations

The Company has one customer (together with its affiliates) that accounted 20.5% and 21.1% of total net revenue for the three months ended March 31, 2021 and 2020, 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 U.S. 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. The Company recognized losses on remeasurement of less than $0.1 million during both the three months ended March 31, 2021 and 2020, reported within other expense on the consolidated statement of operations.

2. Property and Equipment

Property and equipment consists of the following:


(In thousands)	March 31, 2021		December 31, 2020

Land and buildings	$	61,594	$	59,774
Right of use assets, operating	31,169		31,354
Machinery and equipment	265,615		255,821
Construction in progress	20,385		25,041
	378,763		371,990
Less accumulated depreciation and amortization	(71,768)		(68,031)
	$	306,995	$	303,959

Depreciation expense was $5.8 million for the three months ended March 31, 2021, compared to $5.0 million for the three months ended March 31, 2020.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Accrued Expenses and Other Current Liabilities

Included in accrued expenses and other current liabilities are the following:


(In thousands)	March 31, 2021		December 31, 2020

Payroll, vacation and other compensation	$	12,606	$	9,886
Interest rate swap contract	5,307		13,694
Incentive compensation	5,216		16,199
Accrued interest	4,724		4,815
Other	11,002		11,121





	$	38,855	$	55,715

4. Debt and Lease Obligations

A summary of the carrying value of the debt and lease obligations is as follows:


(In thousands)	March 31, 2021		December 31, 2020

Term Loan (3.0% as of March 31, 2021)
Principal	$	1,099,972	$	1,102,763
Unamortized debt premium and issuance costs	(4,607)		(4,917)
	1,095,365		1,097,846
Lease obligations	28,244		29,002
Total debt and lease obligations	1,123,609		1,126,848
Less: Current portion of long term debt and lease obligations	(13,508)		(13,811)
Long-term portion	$	1,110,101	$	1,113,037

At March 31, 2021, minimum debt repayments under the term loan are due as follows:


(In thousands)
2021						$

SEC Form 10-Q filed by Hostess Brands, Inc.