HOSTESS BRANDS, INC. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources ofHostess Brands, Inc. This discussion should be read in conjunction with our unaudited 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 endedDecember 31, 2019 . The terms "our", "we," "us," and "Company" as used herein refer toHostess Brands, Inc. and its consolidated subsidiaries.
Overview
We are a leadingNorth America packaged food company, currently operating in one reportable segment: Snacking, which includes sweet baked goods ("SBG") as well as our cookie and wafer products. 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 NielsenU.S. total universe. For the 13-week period endedJune 27, 2020 , our branded SBG products (which include Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was 19.3% per Nielsen'sU.S. SBG category data. Historically, we operated in two reportable segments:SBG and In-Store Bakery ("ISB"), which we sold in August of 2019. Factors Impacting Recent Results Acquisition OnJanuary 3, 2020 , we completed the acquisition of all of the shares of the parent company ofVoortman Cookies Limited ("Voortman"), a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies. By adding the Voortman® brand, we expect to have greater growth opportunities provided by a more diverse portfolio of brands and products. Our consolidated statement of operations includes the operation of these assets fromJanuary 3, 2020 throughJune 30, 2020 . During the year, we transitioned Voortman from its legacy direct-store-delivery distribution model into our centralized DTW model. Divestiture OnAugust 30, 2019 , the Company sold the ISB operations, including relevant trademarks and licensing agreements, to an unrelated party. The ISB operations provided products that were primarily sold in the in-store bakery section ofU.S. retail channels. The Company divested the operations to focus on areas of our business that better leverage our core competencies. COVID-19 The acute and far-reaching impact of the COVID-19 pandemic and actions taken by governments to contain the spread of the virus have impacted our operations during the three and six months endedJune 30, 2020 . As consumers prepared for extended stays at home, we experienced an increase in consumption in the last few weeks of the first quarter, particularly in our multi-pack products sold through grocery and mass retailer channels. Conversely, we experienced lower consumption of single-serve products, often consumed away from home. This trend has moderated somewhat during the second quarter, however, we cannot predict if these trends will sustain or reverse in future periods. We have established a task force to monitor the rapidly evolving situation and recommend risk mitigation actions as deemed necessary. To date, we have experienced minimal disruption to our supply chain or distribution network, including the supply of our ingredients, packaging or other sourced materials, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world. We are also working closely with all of our contract manufacturers, distributors and other external business partners. As a food producer, we are an essential service and the majority of our employees continue to work within our production and distribution facilities. To protect our employees and ensure continuity of operations, we have 20 -------------------------------------------------------------------------------- implemented additional security and sanitation measures in all of our facilities. We are monitoring our employees' health and providing additional resources and protocols to enable effective social distancing and adherence to our stringent internal food safety guidelines, industry best practices and evolving CDC guidelines. Many non-production team members, including sales, marketing and corporate associates, are adhering to social distancing guidelines by working from home and reducing person-to-person contact while supporting our ability to bring product to consumers. We have adequate liquidity to pay for the additional costs associated with these programs while servicing our on-going operating and capital needs. However, we continue to actively monitor and will take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate in this dynamic environment. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. Apart from their impact on the general economy, including the labor market and consumer demand, neither the CARES Act nor any other government program intended to address COVID-19 had any material impact on our consolidated financial statements for the three and six months endedJune 30, 2020 . We continue to monitor any effects that may result from the CARES Act and other stimulus programs. Operating Results Three Months Ended Six Months Ended
(In thousands, except per share data)
June 30, 2019
Net revenue $ 256,226 $
241,060
89,374 83,450 168,711 158,638
As a % of net revenue 34.9 % 34.6 % 33.8 % 34.2 %
Operating costs and expenses 54,799 46,569 118,970 85,647
Operating income 34,575 36,881 49,741 72,991
Other expense 11,712 11,148 23,990 21,824
Income tax expense 5,493 9,064 5,741 7,886
Net income 17,370 16,669 20,010 43,281
Net income attributable to Class A
stockholders $ 16,170 $ 11,483 $ 18,518 $ 32,609
Earnings per Class A share:
Basic $ 0.13 $ 0.11 $ 0.15 $ 0.32
Diluted $ 0.13 $ 0.10 $ 0.15 $ 0.31
Results of Operations
Net Revenue
Net revenue for the three months ended June 30, 2020 was $256.2 million , an
increase of 6.3%, or $15.1 million , compared to $241.1 million for the three
months ended June 30, 2019 . Excluding ISB, net revenue increased $26.9 million
or 11.7%. The increase was driven primarily by the acquisition of Voortman which
contributed $23.6 million of net revenue, which is net of $6.8 million of
slotting fees incurred to obtain warehouse space during the transition. Sweet
baked goods net revenue increased $3.3 million , primarily driven by higher
volume of core Hostess® branded multi-pack products partially offset by lower
sales of private label and non-Hostess branded products and lower sales of
Hostess® branded single-serve products due to impacts of COVID-19 on consumer
shopping habits. During the three months ended June 30, 2020 , we also
established a reserve for expected customer credits related to the recall of
certain Raspberry Zinger® products.
21
--------------------------------------------------------------------------------
Net revenue for the six months ended June 30, 2020 was $499.7 million , an
increase of 7.7%, or $35.9 million , compared to $463.8 million for the six
months ended June 30, 2019 . Excluding ISB, net revenue increased $57.5 million
or 13.0%. The acquisition of Voortman contributed $40.7 million of net revenue.
The remaining increase was attributed to higher volume of Hostess® branded
multi-pack products due to strong demand, particularly in the grocery and dollar
channels, partially offset by lower sales of private label and non-Hostess
branded products and lower sales of Hostess® branded single-serve products.
Gross Profit
Gross profit for the three months ended June 30, 2020 was $89.4 million , or
34.9% of net revenue, compared to $83.5 million , or 34.6% of net revenue for the
three months ended June 30, 2019 . Excluding ISB, gross profit increased 10.5%
resulting from the accretion from Voortman supported by achievement of synergies
and higher operating efficiencies gained with increased volume, partially offset
by higher operating costs due to COVID-19.
Gross profit for the six months ended June 30, 2020 was $168.7 million , or 33.8%
of net revenue, compared to $158.6 million , or 34.2% of net revenue for the six
months ended June 30, 2019 . Excluding ISB, gross profit increased 9.5%. The
accretion from Voortman and efficiencies from higher sales volume was partially
offset by the turnover of inventory acquired through the Voortman acquisition,
which was recorded at fair value and higher operating costs due to COVID-19.
Operating Costs and Expenses
Operating costs and expenses for the three months ended June 30, 2020 were $54.8
million , compared to $46.6 million for the three months ended June 30, 2019 . The
increase was attributed to costs incurred to transition Voortman to our
warehouse distribution model as well as Voortman's on-going operating costs,
partially offset by a prior year nonrecurring payment under the Company's
long-term incentive plan, prior year remeasurement of the tax receivable
agreement and prior year impairment charge related to the In-store Bakery
business.
Operating costs and expenses for the six months ended June 30, 2020 were
$119.0 million , compared to $85.6 million for the six months ended June 30,
2019 . The increase was attributed to costs related to the transition of
Voortman's operations as well as Voortman's on-going operating costs, partially
offset by a prior year nonrecurring payment under the Company's long-term
incentive plan and a prior year impairment charge related to the In-store Bakery
business.
Other Expense
Other expense for the three months ended June 30, 2020 was $11.7 million
compared to $11.1 million for the three months ended June 30, 2019 , in each case
consisting primarily of interest expense. Interest expense on our term loans was
$10.4 million and $11.1 million for the three months ended June 30, 2020 and
2019, respectively. The three months ended June 30, 2020 also included a loss on
remeasurement of Canadian dollar denominated balances attributed to Voortman.
Other expense for the six months ended June 30, 2020 was $24.0 million compared
to $21.8 million for the six months ended June 30, 2019 , in each case consisting
primarily of interest expense. Interest expense on our term loans was $21.9
million and $22.1 million for the six months ended June 30, 2020 and 2019,
respectively.
Income Taxes
Our effective tax rate for the three months ended June 30, 2020 was 24.0%
compared to 35.2% for the three months ended June 30, 2019 . Our prior year
effective tax rate was impacted by a discrete tax expense of $2.8 million
related to the remeasurement of deferred tax balances arising from changes in
estimated state apportionment factors and rates.
Our effective tax rate for the six months ended June 30, 2020 was 22.3% compared
to 15.4% for the six months ended June 30, 2019 . The current year effective tax
rate was impacted by an adjustment to deferred taxes related to Voortman, which
resulted in a discrete tax benefit of $0.5 million . Our prior year effective tax
rate was impacted by a discrete tax benefit of $3.2 million related to the
remeasurement of deferred tax balances arising from changes in estimated state
apportionment factors and rates.
22
--------------------------------------------------------------------------------Segments
For the reporting periods presented, we had two reportable segments:Snacking and In-Store Bakery . Our Snacking segment consists of baked goods, cookies, wafers and bread products that are sold under the Hostess®, Dolly Madison®, Cloverhill®, Big Texas® and Voortman® brands. In January of 2020, we added the newly acquired Voortman operations into the reportable segment previously known as Sweet Baked Goods and renamed the segment as "Snacking".The In-Store Bakery segment consists primarily of Superior on Main® branded and private label products sold through the in-store bakery section of grocery and club stores. We divested ourIn-Store Bakery operations onAugust 30, 2019 . We evaluate performance and allocate resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows: Unaudited Segment Financial Data Three Months Ended Six Months Ended (In thousands) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Net revenue: Snacking$ 256,226 $ 229,273 $ 499,711 $ 442,151 In-Store Bakery - 11,787 - 21,647 Net revenue$ 256,226 $ 241,060 $ 499,711 $ 463,798 Gross profit: Snacking$ 89,374 $ 80,925 $ 168,711 $ 154,069 In-Store Bakery - 2,525 - 4,569 Gross profit$ 89,374 $ 83,450 $ 168,711 $ 158,638 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 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, our future acquisitions and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we undertake, including 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 ofJune 30, 2020 andDecember 31, 2019 of$6.5 million and$8.1 million , respectively. We have the ability to borrow under the Revolver to meet obligations as they come due. As ofJune 30, 2020 , we had approximately$95.9 million available for borrowing, net of letters of credit, under the Revolver. Cash Flows from Operating Activities Cash flows provided by operating activities for the six months endedJune 30, 2020 and 2019 were$60.7 million and$74.1 million , respectively. During the six months endedJune 30, 2020 , we used cash to fund transaction expenses related to the purchase of Voortman and certain non-capitalizable costs related to the transition of Voortman into our warehouse distribution model. We also made certain non-capitalizable investments in the transition of our centralized distribution center toKansas . 23
--------------------------------------------------------------------------------
Cash Flows from Investing Activities Cash used in investing activities for the six months endedJune 30, 2020 and 2019 were$345.2 million and$18.3 million , respectively. During the six months endedJune 30, 2020 , we funded the CAD$423 million purchase price of Voortman with cash on hand and the proceeds from an incremental term loan on our existing credit facility. We also invested in our bakeries and new centralized distribution center. Cash Flows from Financing Activities Cash flows from financing activities were an inflow of$127.6 million for the six months endedJune 30, 2020 and an outflow of$12.9 million for the six months endedJune 30, 2019 . During 2020, cash proceeds of$140.0 million from the incremental term loan used to finance the purchase of Voortman were offset by related charges of$3.1 million . Long-Term Debt We had no outstanding borrowings under our Revolver as ofJune 30, 2020 . InJanuary 2020 , we entered into$140.0 million of incremental term loans through an amendment to our existing credit agreement. The proceeds, together with cash on hand were used to settle a forward purchase contract for Canadian Dollars utilized to finance the CAD$425 million purchase of Voortman. As ofJune 30, 2020 ,$1,108.3 million aggregate principal amount of the Term Loan was outstanding and letters of credit worth up to$4.1 million aggregate principal amount were available, reducing the amount available under the Revolver. As ofJune 30, 2020 , 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 endedDecember 31, 2019 .
© Edgar Online, source
