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Hostess Brands, Inc. - Quarter Report: 2023 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, 2023
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
Updated Logo.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 - 132,850,224 shares at May 5, 2023



HOSTESS BRANDS, INC.
FORM 10-Q
For the Three Months Ended March 31, 2023

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, 2022, 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, except to the extent required by law.






3

PART I
Item 1. Financial Statements (Unaudited)

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

March 31,December 31,
20232022
ASSETS
Current assets:
Cash and cash equivalents$101,666 $98,584 
Short-term investments— 17,914 
Accounts receivable, net189,952 168,783 
Inventories67,498 65,406 
Prepaids and other current assets11,952 16,375 
Total current assets371,068 367,062 
Property and equipment, net442,963 425,313 
Intangible assets, net1,915,002 1,920,880 
Goodwill706,615 706,615 
Other assets, net63,382 72,329 
Total assets$3,499,030 $3,492,199 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and lease obligations payable within one year$4,176 $3,917 
Tax receivable agreement payments payable within one year11,200 12,600 
Accounts payable91,771 85,667 
Customer trade allowances66,058 62,194 
Accrued expenses and other current liabilities33,679 59,933 
Total current liabilities206,884 224,311 
Long-term debt and lease obligations998,226 999,089 
Tax receivable agreement obligations123,134 123,092 
Deferred tax liability353,376 347,030 
Other long-term liabilities1,623 1,593 
Total liabilities1,683,243 1,695,115 
Commitments and Contingencies (Note 9)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 143,099,217 shares issued and 133,005,487 shares outstanding as of March 31, 2023 and 142,650,344 shares issued and 133,117,224 shares outstanding as of December 31, 2022
14 14 
Additional paid in capital1,311,291 1,311,629 
Accumulated other comprehensive income 29,499 35,078 
Retained earnings677,884 639,595 
Treasury stock(202,901)(189,232)
Stockholders’ equity1,815,787 1,797,084 
Total liabilities and stockholders’ equity$3,499,030 $3,492,199 
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, 2023March 31, 2022
Net revenue$345,403 $332,051 
Cost of goods sold224,686 216,427 
Gross profit120,717 115,624 
Operating costs and expenses:
Advertising and marketing
13,899 11,950 
Selling10,649 9,777 
General and administrative
28,198 29,672 
Amortization of customer relationships
5,878 5,878 
Total operating costs and expenses58,624 57,277 
Operating income 62,093 58,347 
Other expense
Interest expense, net10,185 9,666 
Other expense181 436 
Total other expense10,366 10,102 
Income before income taxes51,727 48,245 
Income tax expense13,438 13,687 
Net income $38,289 $34,558 
Earnings per Class A share:
Basic$0.29 $0.25 
Diluted$0.28 $0.25 
Weighted-average shares outstanding:
Basic133,551,603 138,602,451 
Diluted134,553,122 139,565,136 


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, 2023March 31, 2022
Net income$38,289 $34,558 
Other comprehensive income:
Unrealized gain (loss) on interest rate swap and foreign currency contracts designated as a cash flow hedge(3,013)23,656 
Reclassification into net income(4,532)1,062 
Income tax benefit (expense)1,966 (6,492)
Comprehensive income$32,710 $52,784 


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, 2022133,117 $14 $1,311,629 $35,078 $639,595 9,533 $(189,232)$1,797,084 
Comprehensive income— — — (5,579)38,289 — — 32,710 
Share-based compensation
324 — 3,011 — — — — 3,011 
Exercise of employee stock options125 — 2,112 — — — — 2,112 
Payment of taxes for employee stock awards— — (5,461)— — — — (5,461)
Repurchase of common stock(561)— — — — 561 (13,669)(13,669)
Balance–March 31, 2023133,005 $14 $1,311,291 $29,499 $677,884 10,094 $(202,901)$1,815,787 

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 compensation350 — 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 
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, 2023March 31, 2022
Operating activities
Net income$38,289 $34,558 
Depreciation and amortization15,327 13,297 
Debt discount amortization264 308 
Unrealized foreign exchange losses52 317 
Non-cash lease expense73 125 
Share-based compensation3,011 2,339 
Realized and unrealized gains on short-term investments(86)— 
 Deferred taxes8,312 7,322 
Change in operating assets and liabilities:
Accounts receivable(21,167)(44,848)
Inventories(2,092)(7,054)
Prepaids and other current assets5,092 3,735 
Accounts payable and accrued expenses(23,016)10,866 
Customer trade allowances3,869 10,561 
Net cash provided by operating activities27,928 31,526 
Investing activities
Purchases of property and equipment(23,463)(23,034)
Proceeds from maturity of short-term investments18,000 — 
Acquisition and development of software assets(964)(1,825)
Net cash used in investing activities(6,427)(24,859)
Financing activities
Repayments of long-term debt and lease obligations— (2,792)
Repurchase of common stock(13,669)(9,680)
Tax payments related to issuance of shares to employees(5,461)(5,216)
Cash received from exercise of options and warrants2,112 1,662 
Payments on tax receivable agreement(1,358)(1,443)
Net cash used in financing activities(18,376)(17,469)
Effect of exchange rate changes on cash and cash equivalents(43)74 
Net increase (decrease) in cash and cash equivalents3,082 (10,728)
Cash and cash equivalents at beginning of period98,584 249,159 
Cash and cash equivalents at end of period$101,666 $238,431 
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized$10,096 $9,678 
Net taxes paid (refunded)$6,416 $(514)
Supplemental disclosure of non-cash investing:
Accrued capital expenditures$11,778 $5,433 
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 primarily 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. The Hostess® brand dates back to 1919 when the Hostess® CupCake was introduced to the public, followed by Twinkies® in 1930.
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 Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. In December 2022, the FASB issued ASU No 2022-06, “Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848”, which extends the optional transition relief to ease the potential burden in accounting for reference rate reform on financial reporting. The transition relief is provided through December 31, 2024 based on the expectation that the London Interbank Offered Rate (LIBOR) will cease to be published as of June 30, 2023. The Company is evaluating the impact the new standard will have on the consolidated financial statements and related disclosures but does not anticipate a material impact.
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, 2023 and December 31, 2022, the Company’s accounts receivable were $190.0 million and $168.8 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $5.8 million for both periods ended March 31, 2023 and December 31, 2022.
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.
9

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The components of inventories are as follows:
(In thousands)
March 31,
2023		December 31,
2022
Ingredients and packaging$33,459 $35,410 
Finished goods31,253 26,133 
Inventory in transit to customers2,786 3,863 
$67,498 $65,406 
Capitalized Interest
The Company capitalizes a portion of the interest on its term loan (see Note 4. Debt and Lease Obligations) related to certain property and equipment during its construction period. The capitalized interest is recorded as part of the asset to which it relates and depreciated over the asset’s estimated useful life. The Company capitalized interest of $1.7 million during the three months ended March 31, 2023. No interest was capitalized during the three months ended March 31, 2022. Capitalized interest is included in property and equipment, net on the condensed consolidated balance sheets.
Software Costs
Capitalized software is included in other assets on the condensed consolidated balance sheets in the amount of $21.0 million and $21.4 million, net of accumulated amortization of $24.0 million and $22.6 million as of March 31, 2023 and December 31, 2022, 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 expense on the condensed consolidated statements of operations was $1.4 million for the three months ended March 31, 2023, compared to $1.0 million for the three months ended March 31, 2022, respectively.
Disaggregation of Revenue
Net revenue consists of sales of packaged food products primarily within the Sweet Baked Goods (“SBG”) 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, 2023
(In thousands)
Sweet Baked GoodsCookiesTotal
United States$308,430 $32,714 $341,144 
Canada— 4,259 4,259 
$308,430 $36,973 $345,403 
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 
Concentrations
The Company had one customer (together with its affiliates) that accounted for 18.3% and 20.7% of total net revenue for the three months ended March 31, 2023 and 2022, respectively.

10

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

2. Property and Equipment
Property and equipment consists of the following:
(In thousands)
March 31,
2023		December 31,
2022
Land and buildings$81,631 $81,405 
Right of use assets, operating32,170 32,170 
Machinery and equipment328,110 315,149 
Construction in progress130,607 118,679 
572,518 547,403 
Less accumulated depreciation and amortization(129,555)(122,090)
$442,963 $425,313 
Depreciation expense was $8.0 million and $6.4 million for the three months ended March 31, 2023 and 2022, respectively.

3. Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following:
(In thousands)March 31,
2023		December 31,
2022
Payroll, vacation and other compensation$8,812 $6,195 
Accrued interest7,820 7,850 
Incentive compensation5,232 29,045 
Other11,815 16,843 
$33,679 $59,933 
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,
2023		December 31,
2022
Term loan (7.1% as of March 31, 2023)
Principal$983,221 $983,221 
Unamortized debt premium and issuance costs(2,323)(2,563)
980,898 980,658 
Lease obligations21,504 22,348 
Total debt and lease obligations1,002,402 1,003,006 
Less: Current portion of long term debt and lease obligations(4,176)(3,917)
Long-term portion$998,226 $999,089 
At March 31, 2023, there are no principal payments due under the Company’s aggregate term loans until maturity on August 3, 2025.
Including the impact of the interest rate swap contracts, at March 31, 2023, the Company's aggregate term loans had an effective interest rate of 4.8%.
Leases
The Company has entered into operating leases for certain properties that expire at various times through 2030. The Company determines if an arrangement is a lease at inception.
At March 31, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, the Company had 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, 2023March 31, 2022
Operating lease expense$1,663 $1,603 
Short-term lease expense505 373 
Variable lease expense402 382 
$2,570 $2,358 
5. Derivative Instruments
Interest Rate Swap and Foreign Currency Contracts
The Company entered into interest rate swap contracts with counterparties to make a series of payments based on fixed rates ranging from 1.11% to 2.06% 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, 2023 notional amount of $700 million, outstanding through the maturity date of the term loan in 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, 2023, 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%, which includes the term loan margin of 2.25%.
12

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
To reduce the effect of fluctuations in Canadian dollar (“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 $3.2 million USD for $4.1 million CAD at varying defined settlement dates through June 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,
2023		December 31,
2022
Asset derivativesLocation
Interest rate swap contracts (1)Other non-current assets$40,087 $48,539 
Liability derivativesLocation
Foreign currency contracts (2)Accrued expenses$183 $423 
(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 on the condensed consolidated statements of operations is as follows:
Three Months Ended
(In thousands)March 31,
2023		March 31,
2022
(Gain ) Loss on derivative contracts designated as cash flow hedgesLocation
Interest rate swap contractsInterest expense, net$(4,672)$1,062 
Foreign currency contractsCost of goods sold140 — 
$(4,532)$1,062 

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 restricted stock units (“RSUs”), stock options and Employee Stock Purchase Plan (“ESPP”) awards.
13

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Below are basic and diluted net income per share:
Three Months Ended
March 31, 2023March 31, 2022
Numerator:
Net income (in thousands)$38,289 $34,558 
Denominator:
Weighted-average Class A shares outstanding - basic 133,551,603 138,602,451 
Dilutive effect of RSUs499,273 484,295 
Dilutive effect of stock options and ESPP awards502,246 478,390 
Weighted-average shares outstanding - diluted134,553,122 139,565,136 
Net income per Class A share - basic$0.29 $0.25 
Net income per Class A share - diluted$0.28 $0.25 

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% prior to taking into account any discrete items.

8. Tax Receivable Agreement Obligations
The following table summarizes activity related to the tax receivable agreement for the three months ended March 31, 2023:
(In thousands)
Balance December 31, 2022$135,692 
Payments(1,358)
Balance March 31, 2023$134,334 


14

HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
In December 2020, the Company asserted claims for indemnification against the sellers under the terms of the Share Purchase Agreement pursuant to which the Company acquired Voortman (the “Agreement”) for damages arising out of alleged breaches by the sellers of certain representations, warranties and covenants contained in such agreement relating to periods prior to the closing of the acquisition. The Company also submitted claims relating to these alleged breaches under the representation and warranty insurance policy (“RWI”) it purchased in connection with the acquisition. In the third quarter of 2022, the RWI insurers paid the Company $42.5 million CAD (the RWI coverage limit) (the “Proceeds”) related to these breaches. Per agreement with the RWI insurers, under no circumstances will the Company be required to return the Proceeds.
On November 3, 2022, pursuant to the agreement with the RWI insurer, Voortman brought claims in the Ontario (Canada) Superior Court of Justice (the “Claim”), related to the breaches against certain of the sellers from whom Voortman was acquired. The Claim alleges the seller defendants made certain non-disclosures and misrepresentations to induce the Company to overpay for Voortman. The Company is seeking damages of $109 million CAD representing the amount of the aggregate liability of the sellers for indemnification under the Agreement, $5.0 million CAD in punitive or aggravated damages, interest, proceedings fees and any other relief the presiding court deems appropriate. A portion of any recovery will be shared with the RWI insurers. Although the Company strongly believes that its Claim against the sellers is meritorious, no assurance can be given as to whether the Company will recover all, or any part, of the amounts it is pursuing.



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, 2022. The terms “our”, “we,” “us,” and “Company” as used herein refer to Hostess Brands, Inc. and its consolidated subsidiaries.
Overview
We are a leading sweet snacks company focused on developing, manufacturing, marketing, selling and distributing snacks in North America, 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 Sweet Baked Goods (SBG) category, according to Nielsen U.S. total universe. For the 13-week period ended April 1, 2023, our branded SBG (which includes Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was 20.3% per Nielsen’s U.S. SBG category data.
Factors Impacting Recent Results
We continue to experience increased labor, raw materials, and transportation costs in the current economic climate. Given the volatility of the global supply-chain environment, our ability to source raw materials and produce and ship products to meet the needs of our customers may be materially impacted. We continue to work closely with all of our vendors, distributors, contract manufacturers, and other external business partners to ensure availability of our products for our customers and consumers.


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Operating Results
Three Months Ended
(In thousands, except per share data)
March 31, 2023March 31, 2022
Net revenue$345,403 $332,051 
Gross profit120,717 115,624 
As a % of net revenue34.9 %34.8 %
Operating costs and expenses58,624 57,277 
Operating income 62,093 58,347 
Other expense (income)10,366 10,102 
Income tax expense13,438 13,687 
Net income 38,289 34,558 
Earnings per Class A share:
Basic$0.29 $0.25 
Diluted$0.28 $0.25 
Results of Operations
Net Revenue
Net revenue for the three months ended March 31, 2023 increased $13.3 million, or 4.0%, compared to the three months ended March 31, 2022. Contribution from previously taken pricing actions and product mix provided 14.6% of the growth, offset by a 10.6% decline from volume. Compared to the same period last year, SBG net revenue increased $12.0 million or 4.0%, while cookies net revenue increased $1.3 million or 3.6%.
Gross Profit
Gross profit increased 4.4% and was 34.9% of net revenue for the three months ended March 31, 2023, an increase of 13 basis points from a gross margin of 34.8% for the three months ended March 31, 2022. The increase in gross margin was due to favorable price/mix and productivity benefits which more than offset higher supply chain costs, including inflation. The increase in gross profit was primarily attributed to favorable price/mix and productivity, partially offset by inflation.
Operating Costs and Expenses
Operating costs and expenses for the three months ended March 31, 2023 were $58.6 million, compared to $57.3 million for the three months ended March 31, 2022. The increase was primarily attributed to the planned increase in advertising investments, higher depreciation and higher share-based compensation expense, partially offset by project consulting costs included in the prior-year period.
Other Expense
Other expense for the three months ended March 31, 2023 was $10.4 million compared to $10.1 million for the three months ended March 31, 2022. The increase in other expense was primarily due to interest expense on our term loans which was $11.1 million and $9.6 million for the three months ended March 31, 2023 and 2022, respectively, partially offset by a decrease in foreign currency remeasurement.
Income Taxes
Our effective tax rate for the three months ended March 31, 2023 was 26.0% compared to 28.4% for the three months ended March 31, 2022. The decrease in the tax rate is attributed to a discrete tax benefit of $0.5 million during the three months ended March 31, 2023 as compared to a discrete tax expense of $0.6 million during the three months ended March 31, 2022, both 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 production process, scheduled rent on leased facilities, scheduled debt service payments on our term loan, 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 or bringing new production facilities on line. 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 and short-term investments, as of March 31, 2023 and December 31, 2022 of $62.5 million and $44.2 million, respectively. We have the ability to borrow under the Revolver to meet obligations as they come due. As of March 31, 2023, we had approximately $94.1 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, 2023 and 2022 were $27.9 million and $31.5 million, respectively. Operating cash flows were lower due to higher tax and incentive compensation payments partially offset by favorable working capital fluctuations and increased profitability in the current year period.
Cash Flows from Investing Activities
Investing activities used $6.4 million and $24.9 million of cash for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, we received proceeds from maturity of short-term marketable securities of $18.0 million. We did not have any proceeds from maturity of short-term investments during the three months ended March 31, 2022.
Cash Flows from Financing Activities
Financing activities used $18.4 million and $17.5 million for the three months ended March 31, 2023 and 2022, respectively. The net outflow in the current year period consisted of cash used to repurchase 0.6 million shares of our common stock under existing share repurchase authorizations for an amount of $13.7 million and an average price per share of $24.38, as well as tax payments related to issuance of shares to employees and scheduled payments under the tax receivable agreement, offset by cash inflows from the proceeds on exercise of employee stock options. The net outflow in the prior-year period reflects proceeds on exercise of employee stock options, offset by cash used to repurchase 0.5 million shares of our common stock for an amount of $9.7 million and an average price per share of $21.09 and scheduled payments under the tax receivable agreement and term loan.
Long-Term Debt
As of March 31, 2023, $983.2 million aggregate principal amount of the term loan was outstanding and letters of credit worth up to $5.9 million aggregate principal amount were outstanding, reducing the amount available under the Revolver. We had no outstanding borrowings under our Revolver as of March 31, 2023, with a remaining borrowing capacity of $94.1 million. As of March 31, 2023, we were in compliance with the covenants under the term loan and the Revolver.

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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, 2022. Our exposures to market risk have not changed materially since December 31, 2022.

Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our 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, 2023, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023 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 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the three months ended March 31, 2023, 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.

The information required to be furnished by us under this Part II, Item 1 (Legal Proceedings) is incorporated by reference to the information contained in Note 9. Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.

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 February 21, 2023. 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
Issuer Purchase of Equity Securities
PeriodTotal number of securities repurchasedAverage price paid per shareTotal number of securities purchased as part of publicly announced plans or programs
Approximate dollar value of securities that may yet be purchased under the program (in millions) (1)
January 1 - 31, 2023— $— — $21.7 
February 1 - 28, 2023— — — 21.7 
March 1 - 31, 2023560,610 24.38 560,610 8.0 
560,610 560,610 
(1)In February 2022, our Board of Directors approved a securities repurchase program of up to $150 million of our outstanding securities. As of March 31, 2023, there was $8.0 million remaining under this program. The program has no expiration date. The program may be amended, suspended or discontinued at any time at our discretion and does not commit us to repurchase our securities.
(2)Repurchase of shares of Class A common stock

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

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Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. Description
   
10.1
10.2
10.3
10.4
10.5
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, 2023, 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 9, 2023.
HOSTESS BRANDS, INC.
By:/s/ Travis E. Leonard
Travis E. Leonard
Executive Vice President, Chief Financial Officer