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.






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                               Operating Results

                                                         Three Months Ended
     (In thousands, except per share data)      March 31, 2022       March 31, 2021
     Net revenue                               $      332,051       $      265,421
     Gross profit                                     115,624               95,519
     As a % of net revenue                               34.8  %              36.0  %

     Operating costs and expenses                      57,277               48,474
     Operating income                                  58,347               47,045

     Other expense                                     10,102               10,304

     Income tax expense                                13,687               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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