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 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 endedDecember 31, 2021 . The terms "our", "we," "us," and "Company" as used herein refer toHostess Brands, Inc. and its consolidated subsidiaries.
Overview
We are a leading sweet snacks company focused on developing, manufacturing, marketing, selling and distributing snacks in theU.S. under the Hostess® and inNorth America under the 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 NielsenU.S. total universe. For the 13-week period endedJuly 2, 2022 , our branded SBG (which includes Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was 21.7% per Nielsen'sU.S. SBG category data.
Factors Impacting Recent Results
We believe volatility in certain aspects of the global supply chain have had a continued impact on our operations, including the cost and availability of labor, transportation and raw materials. Various macro factors, including, but not limited to, the COVID-19 pandemic, labor market trends, rising fuel and transportation costs, the conflict inUkraine , the Avian Influenza and overall elevated demand for goods, have led to fragility in the supply chain. We have attempted to mitigate the impact of these cost increases on our business, to the extent possible, by locking in prices on certain raw materials and through pricing actions implemented with customers in 2021 and the first half of 2022. Given the fragility of the global supply-chain environment, our ability to source raw materials for our production facilities or 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 maintain availability of our products for our customers and consumers. 17
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Operating Results
Three Months Ended Six Months Ended
(In thousands, except per share data)
$ 340,472 $
291,485
112,700 105,106 228,324 200,625
As a % of net revenue 33.1 % 36.1 % 34.0 % 36.0 %
Operating costs and expenses 61,729 51,980 119,006 100,454
Operating income 50,971 53,126 109,318 100,171
Other expense 9,234 11,552 19,336 21,856
Income tax expense 11,261 11,727 24,948 21,736
Net income 30,476 29,847 65,034 56,579
Earnings per Class A share:
Basic $ 0.22 $ 0.23 $ 0.47 $ 0.43
Diluted $ 0.22 $ 0.21 $ 0.47 $ 0.41
Results of Operations
Net Revenue
Net revenue for the three months ended June 30, 2022 increased $49.0 million , or
16.8%, compared to the three months ended June 30, 2021 . Contribution from
previously taken pricing actions and product mix provided 13.8% of the growth,
while higher volumes accounted for 3.0% of the quarterly growth. Compared to the
same period last year, SBG net revenue increased $41.0 million or 15.6%, while
cookies net revenue increased $8.0 million or 27.6%.
Net revenue for the six months ended June 30, 2022 increased $115.6 million , or
20.8%, compared to the six months ended June 30, 2021 . Contribution from
previously taken pricing actions and favorable product mix provided nearly 12.1%
of the growth, while higher volumes accounted for 8.7% of the year-to-date
growth. Compared to the same period last year, SBG net revenue increased $99.6
million or 19.9%, while cookies net revenue increased $16.0 million or 28.2%.
Gross Profit
Gross profit increased 7.2% and was 33.1% of net revenue for the three months endedJune 30, 2022 , a decrease of 295 basis points from a gross margin of 36.1% for the three months endedJune 30, 2021 . The decrease in gross margin was due to inflation and inefficiencies caused by supply-chain fragility, partially offset by favorable price/mix and productivity benefits. The increase in gross profit was attributed to pricing actions and higher volume. Gross profit increased 13.8% and was 34.0% of net revenue for the six months endedJune 30, 2022 , a decrease of 207 basis points from a gross margin of 36.0% for the six months endedJune 30, 2021 . The decrease in gross margin was attributed to inflationary pressures, partially offset by favorable price/mix. Gross profit increased from the benefit of pricing actions and higher volume.
Operating Costs and Expenses
Operating costs and expenses for the three months endedJune 30, 2022 were$61.7 million , compared to$52.0 million for the three months endedJune 30, 2021 . The increase was primarily attributed to higher advertising expense as well as higher investments in our workforce, depreciation expense and share-based compensation expense. Operating costs and expenses for the six months endedJune 30, 2022 were$119.0 million , compared to$100.5 million for the six months endedJune 30, 2021 . The increase was primarily attributed to higher investments in our workforce as well as project consulting costs, higher advertising expense and depreciation expense. 18 --------------------------------------------------------------------------------
Other Expense
Other expense for the three months endedJune 30, 2022 was$9.2 million compared to$11.6 million for the three months endedJune 30, 2021 . The decrease in other expense was due to lapping costs related to certain corporate initiatives in the prior year period and favorable remeasurement of foreign currency in the current year period. Interest expense on our term loan was$9.7 million and$9.6 million for the three months endedJune 30, 2022 and 2021, respectively. Other expense for the six months endedJune 30, 2022 was$19.3 million compared to$21.9 million for the six months endedJune 30, 2021 . The decrease in other expense was due to lapping costs related to certain corporate initiative in the prior year period. Interest expense on our term loan was$19.1 million and$19.3 million for the six months endedJune 30, 2022 and 2021, respectively.
Income Taxes
Our effective tax rate for the three months ended
Our effective tax rate for the six months endedJune 30, 2022 was 27.7% compared to 27.8% for the six months endedJune 30, 2021 . The tax rates in both current and prior-year periods reflect certain immaterial discrete tax items. Absent these items, the Company's effective tax rate would have been approximately 27.0% in both periods.
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 and short-term investments 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
Cash Flows from Operating Activities
Cash flows provided by operating activities for the six months endedJune 30, 2022 and 2021 were$87.2 million and$87.3 million , respectively. Despite an increase in earnings, operating cash flow remained relatively the same due to tax refunds of$7.7 million received in the prior-year period.
Cash Flows from Investing Activities
Investing activities used$62.8 million and$22.2 million of cash for the six months endedJune 30, 2022 and 2021, respectively. OnFebruary 22, 2022 , we purchased a facility inArkadelphia, Arkansas for a total purchase price of$11.5 million . Additional capital expenditures were incurred on this project during the six months endedJune 30, 2022 , and we expect elevated capital expenditures due to this project throughout the remainder of 2022. Additionally, during the six months endedJune 30, 2022 , we invested in short-term marketable securities of$20.9 million . 19
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Cash Flows from Financing Activities
Financing activities used$66.7 million and$19.3 million for the six months endedJune 30, 2022 and 2021. The net outflow in the current-year period consisted of cash used to repurchase 2.3 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 outflow in the prior-year period reflects proceeds on exercise of employee stock options and proceeds from the exercise of public warrants, offset by cash used to repurchase 1.2 million shares of our common stock under existing securities repurchase authorizations and scheduled payments under the tax receivable agreement and term loan.
Long-Term Debt
As ofJune 30, 2022 ,$1,086.0 million aggregate principal amount of the term loan was outstanding and letters of credit worth up to$6.1 million aggregate principal amount were available, reducing the amount available under the Revolver. We had no outstanding borrowings under our Revolver as ofJune 30, 2022 , with a remaining borrowing capacity of$93.9 million . As ofJune 30, 2022 , we were in compliance with the covenants under the term loan and the Revolver.
Contractual Obligations, Commitments and Contingencies
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, 2021 . During the three months endedJune 30, 2022 , we reached an agreement with the insurers of the representations and warranty insurance policy related to the acquisition of Voortman. Under the terms of this agreement, we expect to receive$42.5 million CAD in the third quarter of 2022. We expect to recognize this nonrecurring gain as a component of other income within our condensed consolidated statement of operations.
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