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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