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Hostess Brands, Inc. - Quarter Report: 2022 March (Form 10-Q)


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, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37540
twnk-20220331_g1.jpg
HOSTESS BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
47-4168492
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)
7905 Quivira Road
66215
Lenexa,
KS
(Zip Code)
(Address of principal executive offices)
(816) 701-4600
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTicker Symbol Name of each exchange on which registered
Class A Common Stock, Par Value of $0.0001 per shareTWNKThe Nasdaq Stock Market LLC

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 - 138,286,747 shares at May 2, 2022



HOSTESS BRANDS, INC.
FORM 10-Q
For the Three Months Ended March 31, 2022

INDEX
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.









Cautionary Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Statements that constitute forward-looking statements are generally identified through the inclusion of words such as “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language. Statements addressing events and developments that we expect or anticipate will occur are also considered forward-looking statements. All forward-looking statements included herein are made only as of the date hereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, 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.






3


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

March 31,December 31,
20222021
ASSETS
Current assets:
Cash and cash equivalents$238,431 $249,159 
Accounts receivable, net193,085 148,180 
Inventories59,867 52,813 
Prepaids and other current assets6,972 10,564 
Total current assets498,355 460,716 
Property and equipment, net354,055 335,305 
Intangible assets, net1,938,514 1,944,392 
Goodwill706,615 706,615 
Other assets, net42,821 19,283 
Total assets$3,540,360 $3,466,311 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and lease obligations payable within one year$14,126 $14,170 
Tax receivable agreement payments payable within one year10,200 11,600 
Accounts payable 90,591 68,104 
Customer trade allowances63,329 52,746 
Accrued expenses and other current liabilities36,873 47,009 
Total current liabilities215,119 193,629 
Long-term debt and lease obligations1,096,867 1,099,975 
Tax receivable agreement obligations134,222 134,265 
Deferred tax liability331,658 317,847 
Other long-term liabilities1,615 1,605 
Total liabilities1,779,481 1,747,321 
Commitments and Contingencies (Note 9)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 142,487,326 shares issued and 138,275,493 shares outstanding as of March 31, 2022 and 142,031,329 shares issued and 138,278,573 shares outstanding as of December 31, 2021
14 14 
Additional paid in capital1,302,039 1,303,254 
Accumulated other comprehensive income (loss)17,720 (506)
Retained earnings509,958 475,400 
Treasury stock(68,852)(59,172)
Stockholders’ equity1,760,879 1,718,990 
Total liabilities and stockholders’ equity$3,540,360 $3,466,311 
See accompanying notes to the unaudited condensed consolidated financial statements.
4

HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
Three Months Ended
March 31, 2022March 31, 2021
Net revenue$332,051 $265,421 
Cost of goods sold216,427 169,902 
Gross profit115,624 95,519 
Operating costs and expenses:
Advertising and marketing
11,950 11,781 
Selling expense
9,777 8,630 
General and administrative
29,672 22,185 
Amortization of customer relationships
5,878 5,878 
Total operating costs and expenses57,277 48,474 
Operating income 58,347 47,045 
Other expense (income):
Interest expense, net9,666 10,017 
Change in fair value of warrant liabilities— (76)
Other expense436 363 
Total other expense10,102 10,304 
Income before income taxes48,245 36,741 
Income tax expense13,687 10,009 
Net income $34,558 $26,732 
Earnings per Class A share:
Basic$0.25 $0.20 
Diluted$0.25 $0.19 
Weighted-average shares outstanding:
Basic138,602,451 130,839,313 
Diluted139,565,136 137,186,889 


See accompanying notes to the unaudited condensed consolidated financial statements.
5

HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)
Three Months Ended
March 31, 2022March 31, 2021
Net income$34,558 $26,732 
Other comprehensive income:
Unrealized gain on interest rate swap and foreign currency contracts designated as a cash flow hedge23,656 7,060 
Reclassification into net income1,062 1,327 
Income tax expense(6,492)(2,225)
Comprehensive income$52,784 $32,894 


See accompanying notes to the unaudited condensed consolidated financial statements.


6

HOSTESS BRANDS, INC.
CONDENSED 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 StockTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance–December 31, 2021138,279 $14 $1,303,254 $(506)$475,400 3,753 $(59,172)$1,718,990 
Comprehensive income— — — 18,226 34,558 — — 52,784 
Share-based compensation
350 — 2,339 — — — — 2,339 
Exercise of employee stock options105 — 1,662 — — — — 1,662 
Payment of taxes for employee stock awards— — (5,216)— — — — (5,216)
Repurchase of Common Stock(459)— — — — 459 (9,680)(9,680)
Balance–March 31, 2022138,275 $14 $1,302,039 $17,720 $509,958 4,212 $(68,852)$1,760,879 

Class A Voting
Common Stock		Additional
Paid-in Capital		Accumulated
Other Comprehensive Income (Loss)		Retained
 Earnings		Treasury StockTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance–December 31, 2020130,347 $13 $1,281,018 $(10,407)$356,101 444 $(6,000)$1,620,725 
Comprehensive income — — — 6,162 26,732 — — 32,894 
Share-based compensation146 — 2,723 — — — — 2,723 
Exercise of employee stock options20 — 262 — — — — 262 
Payment of taxes for employee stock awards— — (843)— — — — (843)
Exercise of public warrants672 — 7,722 — — — — 7,722 
Balance–March 31, 2021131,185 $13 $1,290,882 $(4,245)$382,833 444 $(6,000)$1,663,483 
See accompanying notes to the unaudited condensed consolidated financial statements.
7

HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Three Months Ended
March 31, 2022March 31, 2021
Operating activities
Net income$34,558 $26,732 
Depreciation and amortization13,297 12,691 
Debt discount amortization308 311 
Change in fair value of warrant liabilities— (76)
Unrealized foreign exchange losses317 123 
Non-cash lease expense125 329 
Share-based compensation2,339 2,723 
Deferred taxes7,322 6,646 
Change in operating assets and liabilities:
Accounts receivable(44,848)(34,204)
Inventories(7,054)(2,796)
Prepaids and other current assets 3,735 13,112 
Accounts payable and accrued expenses10,866 6,582 
Customer trade allowances10,561 680 
Net cash provided by operating activities31,526 32,853 
Investing activities
Purchases of property and equipment(23,034)(10,251)
Acquisition and development of software assets(1,825)(634)
Net cash used in investing activities(24,859)(10,885)
Financing activities
Repayments of long-term debt and lease obligations(2,792)(2,792)
Repurchase of common stock(9,680)— 
Tax payments related to issuance of shares to employees(5,216)(843)
Cash received from exercise of options and warrants1,662 7,984 
Payments on tax receivable agreement(1,443)(1,600)
Net cash provided by (used in) financing activities(17,469)2,749 
Effect of exchange rate changes on cash and cash equivalents74 95 
Net increase (decrease) in cash and cash equivalents(10,728)24,812 
Cash and cash equivalents at beginning of period249,159 173,034 
Cash and cash equivalents at end of period$238,431 $197,846 
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest$9,678 $9,807 
Net taxes paid (refunded)$(514)$(8,191)
Supplemental disclosure of non-cash investing:
Accrued capital expenditures$5,433 $4,026 
See accompanying notes to the unaudited condensed consolidated financial statements.
8

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® branded 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. 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. 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.
Principles of Consolidation
All intercompany balances and transactions related to activity between the Company and its wholly-owned subsidiaries have been eliminated in consolidation.    
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.
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of March 31, 2022 and December 31, 2021, the Company’s accounts receivable were $193.1 million and $148.2 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $4.4 million and $3.0 million for the periods ending March 31, 2022 and December 31, 2021, respectively.
The allowance for doubtful accounts represents the Company’s estimate of expected credit losses related to trade receivables. To estimate the allowance for doubtful accounts, the Company leverages information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when the Company deems the amount is uncollectible.
9

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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,
2022		December 31,
2021
Ingredients and packaging$27,369 $22,607 
Finished goods28,825 26,988 
Inventory in transit to customers3,673 3,218 
$59,867 $52,813 
Software Costs
Capitalized software is included in other assets in the condensed consolidated balance sheets in the amount of $15.6 million and $14.7 million as of March 31, 2022 and December 31, 2021, respectively. Capitalized software costs are amortized over their estimated useful life of up to 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 for the three months ended March 31, 2022, compared to $0.9 million for the three months ended March 31, 2021.
Disaggregation of Revenue
Net revenue consists of sales of packaged food products primarily within the Sweet Baked Goods category in the United States, as well as in the Cookie category in the United States and Canada.
The following tables disaggregate revenue by geographical market and category.
Three Months Ended March 31, 2022
(In thousands)
Sweet Baked GoodsCookiesTotal
United States$296,372 $30,916 $327,288 
Canada— 4,763 4,763 
$296,372 $35,679 $332,051 
Three Months Ended March 31, 2021
(In thousands)
Sweet Baked GoodsCookiesTotal
United States$237,700 $23,803 $261,503 
Canada— 3,918 3,918 
$237,700 $27,721 $265,421 
Concentrations
For the three months ended March 31, 2022 and 2021, the Company had one customer (together with its affiliates) that accounted for 20.7% and 20.5% 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 U.S. dollars (“USD”) on the condensed consolidated statements 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 sheets using the exchange rate at the end of the
10

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
period. During the three months ended March 31, 2022 and 2021, the Company recognized losses on remeasurement of $0.3 million and $0.1 million, respectively, which is reported within other expense on the condensed consolidated statement of operations.

2. Property and Equipment
Property and equipment consists of the following:
(In thousands)
March 31,
2022		December 31,
2021
Land and buildings$72,110 $70,692 
Right of use assets, operating32,192 32,192 
Machinery and equipment300,658 299,071 
Construction in progress49,024 26,027 
453,984 427,982 
Less accumulated depreciation and amortization(99,929)(92,677)
$354,055 $335,305 
Depreciation expense was $6.4 million for the three months ended March 31, 2022, compared to $5.8 million for the three months ended March 31, 2021.

3. Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following:
(In thousands)March 31,
2022		December 31,
2021
Payroll, vacation and other compensation$10,575 $7,791 
Incentive compensation7,041 21,172 
Accrued interest4,528 4,828 
Interest rate swap and foreign currency contracts185 2,042 
Other14,544 11,176 
$36,873 $47,009 
11

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Debt and Lease Obligations
A summary of the carrying value of the debt and lease obligations are as follows:
(In thousands)March 31,
2022		December 31,
2021
Term loan (3.0% as of March 31, 2022)
Principal$1,088,804 $1,091,596 
Unamortized debt premium and issuance costs(3,371)(3,679)
1,085,433 1,087,917 
Lease obligations25,560 26,228 
Total debt and lease obligations1,110,993 1,114,145 
Less: Current portion of long term debt and lease obligations(14,126)(14,170)
Long-term portion$1,096,867 $1,099,975 
At March 31, 2022, minimum debt repayments under the term loan are due as follows:
(In thousands)
2022$8,375 
202311,167 
202411,167 
20251,058,095 
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 March 31, 2022 and December 31, 2021, right of use assets related to operating leases are included in property and equipment, net on the condensed consolidated balance sheets (see Note 2. Property and Equipment). As of March 31, 2022 and December 31 2021, 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 sheets.
The table below shows the composition of lease expense:
Three Months Ended
(In thousands)March 31, 2022March 31, 2021
Operating lease expense$1,603 $1,653 
Short-term lease expense373 203 
Variable lease expense382 357 
$2,358 $2,213 

12

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Derivative Instruments
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 2.06% in addition to the term loan margin of 2.25% 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 March 31, 2022 notional amount of $800 million which will reduce by $100 million in May 2022, with the remaining $700 million 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 March 31, 2022, the interest on the Company’s variable rate debt hedged by these contracts is effectively fixed at rates ranging from 3.36% to 4.31%.
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 $13.4 million USD for $16.8 million CAD at varying defined settlement dates through March 2023. The Company has designated these contracts as cash flow hedges.
A summary of the fair value of interest rate and foreign currency instruments is as follows:
(In thousands)March 31,
2022		December 31,
2021
Asset derivativesLocation
Interest rate swap contracts (1)Other non-current assets$24,516 $1,803 
Foreign currency contracts (2)Other current assets194 — 
$24,710 $1,803 
Liability derivativesLocation
Interest rate swap contracts (1)Accrued expenses$80 $1,798 
Foreign currency contracts (2)Accrued expenses105 244 
$185 $2,042 
(1) The fair values of interest rate swap 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 at each reporting period 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 condensed consolidated statements of operations is as follows:
Three Months Ended
(In thousands)March 31,
2022		March 31,
2021
Loss on derivative contracts designated as cash flow hedgesLocation
Interest rate swap contractsInterest expense, net$1,062 $1,327 

13

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings per Share
Basic earnings per share is calculated by dividing net income 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
March 31, 2022March 31, 2021
Numerator:
Net income (in thousands) - basic$34,558 $26,732 
Less: Change in fair value of warrant liabilities— (76)
Numerator - diluted34,558 26,656 
Denominator:
Weighted-average Class A shares outstanding - basic 138,602,451 130,839,313 
Dilutive effect of warrants— 5,830,238 
Dilutive effect of RSUs484,295 414,314 
Dilutive effect of stock options478,390 103,024 
Weighted-average shares outstanding - diluted139,565,136 137,186,889 
Net income per Class A share - basic$0.25 $0.20 
Net income per Class A share - diluted$0.25 $0.19 
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.
There were no stock options that were excluded from the computation of diluted weighted average shares for the three months ended March 31, 2022 compared to 123,998 excluded for the three months ended March 31, 2021, because their effect was anti-dilutive.

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 27.1% prior to taking into account any discrete items. As of March 31, 2022 income taxes payable were $3.5 million as compared to income taxes receivable as of December 31, 2021 were $3.1 million.
14

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Tax Receivable Agreement Obligations
The following table summarizes activity related to the tax receivable agreement for the three months ended March 31, 2022:
(In thousands)
Balance December 31, 2021$145,865 
Payments(1,443)
Balance March 31, 2022$144,422 

As of March 31, 2022 the future expected payments under the tax receivable agreement are as follows:
(In thousands)
2022$10,200 
20239,600 
202410,100 
20259,400 
20269,600 
Thereafter95,522 

9.     Commitments and Contingencies
Liabilities related to legal proceedings are recorded when it is probable that a liability has been incurred and the associated amount can be reasonably estimated. Where the estimated amount of loss is within a range of amounts and no amount within the range is a better estimate than any other amount, the minimum amount is accrued. As additional information becomes available, potential liabilities are reassessed and the estimates revised, if necessary. Any accrued liabilities are subject to change in the future based on new developments in each matter, or changes in circumstances, which could have a material effect on the Company’s financial condition and results of operations.

15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Hostess Brands, Inc. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein, and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. The terms “our”, “we,” “us,” and “Company” as used herein refer to Hostess Brands, Inc. and its consolidated subsidiaries.
Overview
We are a leading North America sweet snacks company that produces sweet baked goods (“SBG”) and cookie and wafer products, primarily under the Hostess® and Voortman® brands. Our direct-to-warehouse (“DTW”) product distribution system allows us to deliver to our customers’ warehouses. Our customers in turn distribute to the retail stores.
Hostess® is the second leading brand by market share within the SBG category, according to Nielsen U.S. total universe. For the 13-week period ended April 2, 2022, our branded SBG (which includes Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was 22.0% per Nielsen’s U.S. SBG category data.
Factors Impacting Recent Results
There have been constraints in certain aspects of the global supply chain that have and continue to impact our operations, including cost and availability of labor, transportation and raw materials. These constraints have resulted from various macro factors, including, but not limited to, the COVID-19 pandemic, trends in labor markets, the conflict in Ukraine, the Avian Influenza and overall elevated demand for goods. We manage the impact of cost increases, wherever possible, by locking in prices on ingredients and packaging. We expect to partially mitigate the inflationary cost increases through pricing actions implemented in 2021 and the first quarter of 2022, as well as those we plan to implement throughout the remainder of 2022.
While these constraints have not significantly disrupted our operations to date, it is possible that they could materially impact our ability to source ingredients and packaging for our production facilities or our ability to ship products to our customers. We continue to work closely with all of our vendors, distributors, contract manufacturers, and other external business partners to maintain availability of our products for our customers and consumers.



16

Operating Results
Three Months Ended
(In thousands, except per share data)
March 31, 2022March 31, 2021
Net revenue$332,051 $265,421 
Gross profit115,624 95,519 
As a % of net revenue34.8 %36.0 %
Operating costs and expenses57,277 48,474 
Operating income 58,347 47,045 
Other expense 10,102 10,304 
Income tax expense13,687 10,009 
Net income 34,558 26,732 
Earnings per Class A share:
Basic$0.25 $0.20 
Diluted$0.25 $0.19 

Results of Operations
Net Revenue
Net revenue for the three months ended March 31, 2022 increased $66.7 million, or 25.1%, compared to the three months ended March 31, 2021, with higher volumes accounting for approximately 15% of the quarterly growth and the remaining increase attributed to planned pricing action and favorable product mix. Compared to the same period last year, SBG net revenue increased $58.7 million or 24.7%, while Cookies net revenue increased $8.0 million or 28.9%.
Gross Profit
Gross profit was 34.8% of net revenue for the three months ended March 31, 2022, a decrease of 117 basis points from a gross margin of 36.0% for the three months ended March 31, 2021. The decrease in gross margin was attributed to increased transportation, labor and other input cost inflation, partially offset by pricing actions and productivity initiatives.
Operating Costs and Expenses
Operating costs and expenses for the three months ended March 31, 2022 were $57.3 million, compared to $48.5 million for the three months ended March 31, 2021. The increase was primarily attributed to higher incentive compensation and other investments in workforce as well as project consulting costs.
Other (Income) Expense
Other expense for the three months ended March 31, 2022 was $10.1 million compared to other expense of $10.3 million for the three months ended March 31, 2021. The decrease in other expense was primarily due to interest expense on our term loans, which was $9.4 million and $9.7 million for the three months ended March 31, 2022 and 2021, respectively.
Income Taxes
Our effective tax rate for the three months ended March 31, 2022 was 28.4% compared to 27.2% for the three months ended March 31, 2021. The increase in the tax rate is attributed to a discrete expense of $0.6 million recognized during the three months ended March 31, 2022, related to share-based compensation..
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Liquidity and Capital Resources
Our primary sources of liquidity are from cash on hand, future cash flow generated from operations, and availability under our revolving credit agreement (“Revolver”). We believe that cash flows from operations and the current cash and cash equivalents on the balance sheet will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next 12 months. Our future cash requirements include, but are not limited to, the purchase commitments for certain raw materials and packaging used in our productions process, scheduled rent on leased facilities, scheduled debt service payments on our term loan and settlements on related interest rate swap contracts, payments on our tax receivable agreement, settlements on our outstanding foreign currency contracts and outstanding purchase orders on capital projects.
Our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive and other factors beyond our control. In addition, future cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we undertake, such as acquisitions. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
We had working capital, excluding cash, as of March 31, 2022 and December 31, 2021 of $44.8 million and $17.9 million, respectively. We have the ability to borrow under the Revolver to meet obligations as they come due. As of March 31, 2022, we had approximately $94.0 million available for borrowing, net of letters of credit, under our Revolver.
Cash Flows from Operating Activities
Cash flows provided by operating activities for the three months ended March 31, 2022 and 2021 were $31.5 million and $32.9 million, respectively. Despite an increase in earnings, operating cash flow decreased slightly due to an increase in working capital in the current year and additional tax refunds of $7.7 million received in the prior-year period.
Cash Flows from Investing Activities
Investing activities used $24.9 million and $10.9 million of cash for the three months ended March 31, 2022 and 2021, respectively. On February 22, 2022, we purchased a facility in Arkadelphia, Arkansas for a total purchase price of $11.5 million. Additional capital expenditures were incurred on this project during the three months ended March 31, 2022, and we expect elevated capital expenditures due to this project throughout the remainder of 2022.
Cash Flows from Financing Activities
Financing activities used $17.5 million for the three months ended March 31, 2022 and provided $2.7 million for the three months ended March 31, 2021. The net outflow for the current-year period consisted of cash used to repurchase 0.5 million shares of our common stock under existing securities repurchase authorizations as well as scheduled payments under the tax receivable agreement and term loan. The net inflow in the prior-year period reflects proceeds on exercise of employee stock options and proceeds from the exercise of public warrants, offset by scheduled payments under the tax receivable agreement and term loan.
Long-Term Debt
As of March 31, 2022, $1,088.8 million aggregate principal amount of the term loan was outstanding and letters of credit worth up to $6.0 million aggregate principal amount were available, reducing the amount available under the Revolver. We had no outstanding borrowings under our Revolver as of March 31, 2022. As of March 31, 2022, we were in compliance with the covenants under the term loan and the Revolver.
Contractual Obligations and Commitments
There were no material changes, outside the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2021. Our exposures to market risk have not changed materially since December 31, 2021.

Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities and Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, 2022, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the three months ended March 31, 2022, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II

Item 1. Legal Proceedings
We are involved from time to time in lawsuits, claims and proceedings arising in the ordinary course of business. These matters typically involve personnel and employment issues, personal injury claims, contract matters and other proceedings arising in the ordinary course of business. Although we do not expect the outcome of these matters to have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments, enter into settlements or be subject to claims that could materially impact our results.

Item 1A. Risk Factors
Our risk factors are set forth in the “Risk Factors” section of our Annual Report on Form 10-K filed on March 1, 2022. There have been no material changes to our risk factors since the filing of the Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. Description
   
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL




Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 4, 2022.
HOSTESS BRANDS, INC.
By:/s/ Michael J. Gernigin
Michael J. Gernigin
Senior Vice President, Chief Accounting Officer and Interim Chief Financial Officer (Principal Financial Officer)