HOSTESS BRANDS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Item 1A "Risk Factors" of this Annual Report on Form 10-K.
Overview
We are a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing snack products inNorth America , providing a wide range of snack cakes, donuts, sweet rolls, breakfast pastries, cookies, snack pies and related products. As ofDecember 31, 2020 , we operate five baking facilities and utilize distribution centers and third-party warehouses to distribute our products. Our DTW product distribution system allows us to deliver to our customers' warehouses. Our customers in turn distribute to their retail stores and/or distributors. The Company has one reportable segment: Snacking (formerly referred to as Sweet Baked Goods, or "SBG"). The Snacking segment consists of sweet baked goods, cookies, bread and buns and frozen retail products that are sold under the Hostess®, Dolly Madison®, Cloverhill®, Big Texas®, and Voortman® brands. ThroughAugust 30, 2019 , we operated in two reportable segments:SBG and In-Store Bakery ("ISB").The In-Store Bakery segment consisted of Superior on Main® and private label products sold through the in-store bakery section of grocery and club stores. The Company divested itsIn-Store Bakery segment's operations onAugust 30, 2019 . Hostess® is the second leading brand by market share within the Sweet Baked Goods ("SBG") category, according to NielsenU.S. total universe. For the 52-week period endedDecember 26, 2020 our branded SBG products (which include Hostess®, Dolly Madison®, Cloverhill®, and Big Texas®) market share was 19.5% per Nielsen'sU.S. SBG category data. Our Voortman® branded products include the #1 creme wafer and sugar-free cookie products within the larger cookie category. Principal Components of Operating Results Net Revenue We generate revenue through selling packaged snacks under the Hostess® group of brands, which includes iconic products such as CupCakes, Twinkies®, Donettes®, Ding Dongs®, Zingers®, Danishes, Honey Buns and Coffee Cakes, as well as cookies, wafers and sugar-free products under the Voortman® brand. We also sell products under the Dolly Madison®, Cloverhill® and Big Texas® brands along with private label products. Our product assortment is sold to customers' warehouses and distribution centers by the case or in display-ready corrugate units. Retailers display and sell our products to the end consumer in single-serve, multi-pack or club-pack formats. We sell our products primarily to supermarket chains, national mass merchandisers and convenience and dollar stores, along with a smaller portion of our product sales going to club stores, vending, drug, and other retail outlets. Our revenues are driven by average net price and total volume of products sold. Factors that impact unit pricing and sales volume include product mix, the cost of ingredients, promotional activities, industry capacity, new product initiatives and quality and consumer preferences. We do not keep a significant backlog of finished goods inventory, as our baked products are promptly shipped to our distribution centers after being produced and then distributed to customers. Cost of Goods Sold Cost of goods sold consists of ingredients, packaging, labor, energy, other production costs, warehousing and transportation costs including in-bound freight, inter-plant transportation and distribution of our products to customers. The cost of ingredients and packaging represent the majority of our total costs of goods sold. All costs that are incurred at the bakeries, including the depreciation of bakery facilities and equipment, are included in cost of goods sold. We do not allocate any corporate functions into cost of goods sold. Our cost of ingredients consists principally of flour, sweeteners, edible oils and compound coating, which are subject to substantial price fluctuations, as is the cost of paper, corrugate, films and plastics used to package our products. The prices for raw materials are influenced by a number of factors, including the weather, crop production, transportation and processing costs, government regulation and policies and worldwide market supply and demand. We also rely on fuel products, such as natural gas, diesel, propane and electricity, to operate our bakeries and produce our products. Fluctuations in the prices of the 29 -------------------------------------------------------------------------------- raw materials or fuel products used in the production, packaging or transportation of our products affect the cost of products sold and our product pricing strategy. We utilize forward buying strategies through short-term and long-term advance purchase contracts to lock in prices for certain high-volume raw materials, packaged components and certain fuel inputs. Through these initiatives, we believe we are able to obtain competitive pricing. Advertising and Marketing Our advertising and marketing expenses relate to wire racks and corrugate displays delivered to customers to display our products off shelf, field marketing and merchandising services to reset and check our store inventory on a regular basis. We also invest in advertising campaigns, which include social media, print, online advertising, local promotional events, monthly agency fees and payroll costs. Selling Expense Selling expenses primarily include sales management, employment, travel, and related expenses, as well as broker fees. We utilize brokers for sales support, including managing promotional activities and order processing. General and Administrative General and administrative expenses primarily include employee and related expenses for the accounting, planning, customer service, legal, human resources, corporate operations, research and development, purchasing, logistics and executive functions. Also included are professional service fees related to audit and tax, legal, outsourced information technology functions, transportation planning, headquarters and other office sites and insurance costs, as well as the depreciation and amortization of corporate assets. Non-Controlling Interest During the years endedDecember 31, 2020 and 2019,Mr. Metropoulos and the Metropoulos Entities held equity investment in us primarily through Class B limited partnership units in the Company's subsidiary,Hostess Holdings ("ClassB Units "), and an equal number of shares of the Company's Class B common stock ("ClassB Stock "). Our ClassB Stock had voting, but no economic rights, whileHostess Holdings' ClassB Units had economic, but no voting rights. Each ClassB Unit , together with a share of ClassB Stock held by the Metropoulos Entities, was exchangeable for a share of the Company's Class A common stock (or at the option of the Company, the cash equivalent thereof). The Company holds 100% of the general partnership interest inHostess Holdings and, since the final exchange described below, all of the limited partnership interests and consolidatesHostess Holdings in the Company's consolidated financial statements. The interest of the Metropoulos Entities inHostess Holdings' ClassB Units prior to the final exchange is reflected in our consolidated financial statements as a non-controlling interest. The Metropoulos Entities have eliminated their ownership through a series of exchanges of shares of ClassB Stock and ClassB Units for an equal number of Class A shares. As part of the final exchange, we repurchased 0.4 million shares of Class A common stock from the Metropoulos Entities. The remaining shares were purchased by third parties. AtDecember 31, 2020 , there were no outstanding shares of Class B common stock. Factors Impacting Recent Results 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 year endedDecember 31, 2020 . As consumers prepared for extended stays at home, we experienced an increase in consumption during the first and second quarters, 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 during the remainder of the year; however, we cannot predict if these trends will sustain or reverse in future periods. We have established a COVID-19 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, and 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 our production and distribution facilities continue to operate. To protect our employees and ensure continuity of operations, we have implemented additional safety 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 and other governmental guidelines. Although our corporate headquarters and other offices have remained open with additional safety and sanitation protocols, many non-production and warehouse team members, including sales, marketing and corporate employees, are adhering to social distancing guidelines by working from home and reducing person-to-person contact while supporting our ability to bring products to consumers. 30 -------------------------------------------------------------------------------- We have adequate liquidity to pay for the costs associated with these additional measures 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 provided 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. Under the provisions of this act, we were able to defer the payment of$5.6 million of 2020 employer payroll taxes until 2021. Apart from this deferral and 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 year endedDecember 31, 2020 . We continue to monitor any effects that may result from the CARES Act and other stimulus programs. 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 and cookies as well as sugar-free products. By adding the Voortman® brand, we believe we 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 throughDecember 31, 2020 . InDecember 2020 , we asserted claims for indemnification against the sellers under the terms of the Share Purchase Agreement pursuant to which we acquired Voortman for an aggregate of approximately$90 million Canadian Dollar ("CAD") in 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. We have also submitted claims relating to these alleged breaches under the representation and warranty insurance policy we purchased in connection with the acquisition. Such insurance policy has a coverage limit of$42.5 million CAD. Although we strongly believe that our claims are meritorious, no assurance can be given as to whether we will recover all, or any part, of the amounts for which we have made such claims. No gains or receivables have been recognized related to these claims as ofDecember 31, 2020 . Disposition OnAugust 30, 2019 , we sold theIn-Store Bakery operations, including relevant trademarks and licensing agreements, to an unrelated party.The In-Store Bakery operations provided products that were primarily sold in the in-store bakery section of theU.S. retail channels under the Superior on Main® brand or store-branded. We divested the operations to focus more on future investment in areas of our business that better leverage our core competencies. 31 --------------------------------------------------------------------------------
Results of Operations
Year Ended Year Ended
December 31, December 31,
(In thousands, except per share data) 2020 2019
Net revenue $ 1,016,609 $ 907,675
Gross profit 355,639 299,834
As a % of net revenue 35.0 % 33.0 %
Operating costs and expenses $ 220,329 $ 163,738
Operating income 135,310 136,096
Other expense 46,549 41,639
Income tax expense 20,405 16,892
Net income 68,356 77,565
Net income attributable to Class A shareholders 64,735 63,115
Earnings per Class A share:
Basic 0.52 0.57
Diluted 0.51 0.55
Results for the Year Ended December 31, 2020 Compared to Results for the Year
Ended December 31, 2019
Net Revenue
Net revenue for the year ended December 31, 2020 increased $108.9 million , or
12.0%, compared to the year ended December 31, 2019 . Excluding In-Store Bakery,
net revenue increased $137.6 million or 15.7%. The acquisition of Voortman
contributed $96.2 million of net revenue. The remaining increase was attributed
to higher volume of Hostess® branded multi-pack and bagged-donut products due to
strong demand partially offset by lower sales of private label and non-Hostess®
branded products. From a sales channel perspective, strong growth in the
grocery, convenience and dollar channels was offset by lower sales in the mass
channel.
Gross Profit
Gross profit was 35.0% of net revenue for the year ended December 31, 2020 , an
increase of 195 basis points from a gross margin of 33.0% for the year ended
December 31, 2019 . The increase resulted primarily from the accretion from
Voortman and efficiencies from higher sales volume as well as lower promotional
activity. These benefits were partially offset by higher operating costs due to
COVID-19.
Operating Costs and Expenses
Operating costs and expenses for the year ended December 31, 2020 increased by
34.6% from the year ended December 31, 2019 . These costs increased primarily due
to transition costs incurred to shift Voortman from a direct-to-store delivery
operating model to a direct-to-warehouse model including contract termination
costs for the independent distributors and severance costs, as well as normal
costs of Voortman's continuing operations. 2020 operating costs also increased
due to higher employee incentive compensation and an impairment charge related
to the planned disposition of production equipment. 2019 operating costs reflect
a $7.1 million gain on the valuation of a foreign currency contract originated
to hedge the January 2020 purchase of Voortman in Canadian dollars.
Operating Income
Operating income for the year ended December 31, 2020 was $135.3 million
compared to $136.1 million for the year ended December 31, 2019 . The additional
profits from Voortman's operations and higher Hostess® branded sales volume were
offset by transition costs to shift Voortman to a warehouse model and lapping
the prior year gain on remeasurement of the foreign currency contract.
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Other Expense
For the years ended December 31, 2020 and 2019, interest expense related to our
term loan was $41.8 million and $43.3 million , respectively. During the year
ended December 31, 2020 we also recognized unrealized losses related to the
remeasurement of certain CAD denominated liabilities.
Income Taxes
Our effective tax rate was 23.0% for the year ended December 31, 2020 compared
to 17.9% for the year ended December 31, 2019 . The increase in the effective tax
rate was primarily due to the Class B for Class A share exchanges during 2019
and 2020. Subsequent to these exchanges, more income from Hostess Holdings , L.P
was allocated to Hostess Brands, Inc. This increase was partially offset by
state tax credits generated in 2020.
Net Income
For the year ended December 31, 2020 , net income was $68.4 million compared to
$77.6 million for the year ended December 31, 2019 . Higher gross margin due to
the accretion of Voortman and the benefit of higher Hostess® branded sales
volume was offset by costs incurred to transition Voortman DSD to warehouse
distribution. In 2020, we also lapped the $7.1 million foreign currency contract
remeasurement gain in 2019.
Earnings Per Share
Our earnings per Class A share was $0.52 (basic) and $0.51 (dilutive) for the
year ended December 31, 2020 , compared to $0.57 (basic) and $0.55 (dilutive) for
the year ended December 31, 2019 . The decrease in basic and diluted earnings per
share was due to the net income impacts noted above.
For a discussion of our results for the year ended December 31, 2019 compared to
our results for the year ended December 31, 2018 , please see Item 7 of our
Annual Report on Form 10-K for the year ended December 31, 2019 , filed with the
SEC on February 26, 2020 .
Segments
We have one reportable segment: Snacking (formerly referred to as Sweet Baked
Goods, or "SBG"). The Snacking segment consists of sweet baked goods, cookies,
bread and buns retail products that are sold under the Hostess®, Dolly Madison®,
Cloverhill®, Big Texas®, and Voortman® brands. Through August 30, 2019 , we
operated in two reportable segments: SBG and In-Store Bakery . The In-Store
Bakery segment consisted of Superior on Main® and private label products sold
through the in-store bakery section of grocery and club stores. The Company
divested its In-Store Bakery segment's operations on August 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:
Year Ended Year Ended
December 31, December 31,
(In thousands) 2020 2019
Net revenue:
Snacking $ 1,016,609 $ 878,973
In-Store Bakery - 28,702
Net revenue $ 1,016,609 $ 907,675
Gross profit:
Snacking $ 355,639 $ 293,648
In-Store Bakery - 6,186
Gross profit $ 355,639 $ 299,834
Capital expenditures (1):
Snacking $ 58,953 $ 35,354
In-Store Bakery - 182
Capital expenditures $ 58,953 $ 35,536 (1)For all periods presented, capital expenditures consists of purchases of property and equipment and acquisition and development of software assets paid in cash or acquired through accounts payable.
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Adjusted net revenue, adjusted gross profit, adjusted operating income, adjusted
net income, adjusted Class A net income, adjusted EBITDA and adjusted EPS
collectively referred to as "Non-GAAP Financial Measures," are commonly used in
our industry and should not be construed as an alternative to net revenue, gross
profit, operating income, net income, net income attributed to Class A
stockholders or earnings per share as indicators of operating performance (as
determined in accordance with GAAP). These Non-GAAP Financial Measures may not
be comparable to similarly titled measures reported by other companies. We
included these Non-GAAP Financial Measures because we believe the measures
provide management and investors with additional information to measure the
Company's performance, estimate the Company's value and evaluate the Company's
ability to service debt.
Non-GAAP Financial Measures are adjusted to exclude certain items that affect
comparability. The adjustments are itemized in the tables below. You are
encouraged to evaluate these adjustments and the reason we consider them
appropriate for supplemental analysis. In evaluating adjustments, you should be
aware that in the future the Company may incur expenses that are the same as or
similar to some of the adjustments set forth below. The presentation of Non-GAAP
Financial Measures should not be construed as an inference that future results
will be unaffected by unusual or recurring items.
For example, we define adjusted EBITDA as net income adjusted to exclude (i)
interest expense, net, (ii) depreciation and amortization (iii) income taxes and
(iv) share-based compensation, as further adjusted to eliminate the impact of
certain items that the Company does not consider indicative of its ongoing
operating performance. Adjusted EBITDA has limitations as an analytical tool,
and you should not consider it in isolation, or as a substitute for analysis of
the Company's results as reported under GAAP. For example, adjusted EBITDA:
•does not reflect the Company's capital expenditures, future requirements for
capital expenditures or contractual commitments;
•does not reflect changes in, or cash requirements for, the Company's working
capital needs;
•does not reflect the significant interest expense, or the cash requirements
necessary to service interest or principal payments, on the Company's debt; and
•does not reflect payments related to income taxes, the Tax Receivable Agreement
or distributions to the non-controlling interest to reimburse its tax liability.
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Year Ended
Gross Operating Net Class A Net Diluted
Net Revenue Profit Income Income Income EPS
GAAP Results $ 1,016,609 $ 355,639
- - - 2,065 1,966 0.02
Acquisition, disposal and
integration related costs (1) 6,821 7,963 29,166 29,166 27,569 0.22
Facility transition costs (2) - 3,681 5,710 5,710 5,396 0.04
Impairment of property and equipment - - 3,009 3,009 2,909 0.02
Tax Receivable Agreement
remeasurement - - 760 760 760 -
COVID-19 costs (3) - 2,082 2,388 2,388 2,257 0.02
Other - - 100 1,766 1,681 0.01
Remeasurement of tax liabilities - - - (455) (455) -
Tax impact of adjustments - - - (10,961) (10,961) (0.09)
Adjusted Non-GAAP results $ 1,023,430 $ 369,365 $ 176,443 $ 101,804 $ 95,857 $ 0.75
Income tax 31,821
Interest expense 42,826
Depreciation and amortization 54,940
Share-based compensation 8,671
Adjusted EBITDA $ 240,062
(1) Adjustments to net revenue represent initial slotting fees paid to to
customers to obtain space in customer warehouses for the Voortman transition.
Adjustments to operating costs included $8.0 million of selling expense, $8.9
million of general and administrative expenses and $4.3 million of business
combination transaction costs on the consolidated statement of operations.
(2) Facility transition operating costs are included in general and
administrative expenses on the consolidated statement of operations.
(3) COVID-19 operating costs are included in general and administrative expenses
on the consolidated statement of operations. Total COVID-19 non-GAAP adjustments
primarily consist of costs of incremental cleaning and sanitation, personal
protective equipment and employee bonuses in the first half of 2020.
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Year Ended December 31, 2019
Gross Operating Net Class A Net Diluted
Net Revenue Profit Income Income Income EPS
GAAP Results $ 907,675 $ 299,834
- - (7,127) (7,127) (6,721) (0.07)
Acquisition, disposal and
integration related costs - 1,563 5,484 5,484 5,172 0.05
Special employee incentive
compensation (1) - 33 1,910 1,910 1,801 0.02
Facility transition costs (2) - 9,381 12,080 12,080 11,392 0.10
Tax Receivable Agreement
remeasurement - - 186 186 186 -
Impairment of property and
equipment, intangible assets and
goodwill - - 1,976 1,976 1,863 0.02
Loss on debt refinancing - - 1,487 2,023 1,908 0.02
Remeasurement of tax liabilities - - - (4,564) (4,564) (0.05)
Other - - - 1,233 1,163 0.01
Tax impact of adjustments - - - (3,918) (3,918) (0.04)
Adjusted Non-GAAP results $ 907,675 $ 310,811 $ 152,092 $ 86,848 $ 71,397 $ 0.61
Income tax 25,374
Interest expense 39,870
Depreciation and amortization 43,334
Share-based compensation 9,231
Adjusted EBITDA $ 204,657 (1) Special employee incentive compensation is included in general and administrative expenses on the consolidated statement of operations. (2) Facility transition costs are included in general and administrative expenses on the consolidated statement of operations.
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Adjusted EBITDA
Adjusted EBITDA was $240.1 million for the year ended December 31, 2020 ,
compared to $204.7 million for the year ended December 31, 2019 . The improvement
in adjusted EBITDA was driven by the contribution of Voortman and higher volume
of Hostess® branded products.
Adjusted EPS
Adjusted EPS was $0.75 for the year ended December 31, 2020 , compared to $0.61
for the year ended December 31, 2019 . The improvement in adjusted EPS was driven
by Voortman profitability and strong demand for Hostess® branded products.
Liquidity and Capital Resources
Our primary sources of liquidity are from the cash and cash equivalents on the
balance sheet, 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 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 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, our
future capital expenditures 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 of December 31, 2020 and 2019 of $7.0
million and $8.1 million , respectively. We have the ability to borrow under our
Revolver to meet obligations as they come due. As of December 31, 2020 , we had
approximately $94.5 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 years ended December 31,
2020 and 2019 were $159.2 million and $144.0 million , respectively. The increase
in operating cash flows was driven by an increase in net income after adjusting
for non-cash items such as the current year increase in depreciation and
amortization and prior year gain on the remeasurement of foreign currency
contracts. Our operating cash flow also benefited from the deferral of certain
employer payroll taxes allowed under the CARES Act.
Cash Flows provided by and used in Investing Activities
Investing activities used $374.3 million of cash for the year ended December 31,
2020 compared to providing $22.9 million of cash for the year ended December 31,
2019 . During 2020, we funded $316.0 million of the net cash required to purchase
Voortman from cash on hand and the proceeds from an incremental term loan on our
existing credit facility. During 2019, we received proceeds of $63.3 million
from the sale of our In-Store Bakery business. Cash used for the purchase of
property and equipment reflects planned investments in our bakeries, including
Voortman, and our centralized distribution center.
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Cash Flows provided by and used in Financing Activities
Financing activities provided $103.2 million of cash for the year ended
December 31, 2020 compared to using $28.1 million of cash for the year ended
December 31, 2019 . During 2020, cash proceeds of $140.0 million from the
incremental term loan used to finance the purchase of Voortman were partially
offset by related charges of $3.1 million . This incremental term loan increased
the amount of principal repayments during 2020. Also during 2020, we paid $8.0
million to repurchase 2.0 million warrants and 0.4 million shares from the
Metropoulos Entities as part of the exchange of their last remaining Class B
units in Hostess Holdings, LP . In 2019, we incurred costs to refinance our First
Lien Term Loan. Payments on the Tax Receivable Agreement increased in 2020 due
to additional taxable basis created by Metropoulos Entity exchanges in 2019,
which were monetized in 2020. These same exchanges decreased the amount of
distributions to the non-controlling interest to cover tax liabilities related
to net income allocated to Class B units.
Long-Term Debt
As of December 31, 2020 , $1,102.8 million aggregate principal amount of our term
loan and $5.5 million aggregate principal amount of letters of credit, reducing
the amount available under the Revolver, were outstanding. See Note 15.
Commitments and Contingencies to the consolidated financial statements in Part
II, Item 8 of this Annual Report on Form 10-K for information regarding the
letters of credit. We had no outstanding borrowings under our Revolver as of
December 31, 2020 . As of December 31, 2020 , we were in compliance with all
covenants under our term loan and the Revolver. The Revolver contains certain
restrictive financial covenants. Based on our current and projected financial
performance, we believe that we will comply with these covenants for the
foreseeable future.
Critical Accounting Policies
The preparation of financial statements in accordance with generally accepted
accounting principles in the United States requires the use of judgment,
estimates and assumptions. We make such subjective determinations after careful
consideration of our historical performance, management's experience, current
economic trends and events and information from outside sources. Inherent in
this process is the possibility that actual results could differ from these
estimates and assumptions for any particular period.
Our significant accounting policies are detailed in Note 1 to our consolidated
financial statements within Item 8. The following areas are the most important
and require the most difficult, subjective judgments.
Trade and consumer promotion programs
We offer various sales incentive programs to customers, such as feature price
discounts, in-store display incentives, cooperative advertising programs and new
product introduction fees. The mix between promotional programs, which are
classified as reductions in revenue in the statements of operations, and
advertising or other marketing activities, which are classified as marketing and
selling expenses in the consolidated statements of operations, fluctuates
between periods based on our overall marketing plans, and such fluctuations have
an impact on revenues. These trade programs also require management to make
estimates about the expected total cost of the programs and related allocations
amongst participants (who might have different levels of incentives based on
various program requirements). These estimates are inherently uncertain and are
generally based on historical experience, adjusted for any new facts or
circumstances that might impact the ultimate cost estimate for a particular
program or programs.
Goodwill and Indefinite-lived trade names
When evaluating goodwill and indefinite-lived intangible assets for impairment
under U.S. GAAP, we may first perform an assessment of qualitative factors to
determine if the fair value of the reporting unit or the intangible asset is
more-likely-than-not greater than the carrying amount. Such qualitative factors
include, but are not limited to, macro-economic conditions, market and industry
conditions, cost considerations, competitive environment, share price
fluctuations, overall financial performance and results of past impairment
tests. Based on a review of the qualitative factors, if we determine it is not
more-likely-than-not that the fair value is less than the carrying value, we may
bypass the quantitative impairment test. We also may elect not to perform the
qualitative assessment for some or all reporting units and perform a
quantitative impairment test. For our 2020 and 2019 annual impairment testing,
we elected to perform qualitative assessments for our reporting units. No
indicators of impairment were noted.
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If a quantitative test were to be utilized for any reporting unit, it would estimate the fair value of the reporting units and compared it to its carrying value. To the extent the fair value was in excess of the carrying value, no impairment would be recognized. Otherwise, an impairment loss would be recognized for the amount that the carrying value of a reporting unit, including goodwill, exceeded its fair value. In performing the quantitative test of goodwill, fair value would be determined based on a calculation which would give consideration to an income approach utilizing the discounted cash flow method and the market approach using the market comparable and market transaction methods. During the year endedDecember 31, 2019 , we recognized an impairment charge to theIn-Store Bakery reporting segment goodwill of$1.0 million reflecting a change in certain market assumptions (level 1 inputs). Our indefinite-lived intangible assets consist of trademarks and trade names. The$1,538.6 million and$1,408.6 million balances atDecember 31, 2020 and 2019, respectively, were recognized as part of the Hostess Business Combination and the Voortman andCloverhill acquisitions. The trademarks and trade names are integral to the Company's identity and are expected to contribute indefinitely to our corporate cash flows. Fair value for trademarks and trade names was determined using the income approach. The application of the income approach was premised on a royalty savings method, whereby the trademark and trade names are valued by reference to the amount of royalty income they could generate if they were licensed, in an arm's-length transaction, to a third party. These assets have been assigned an indefinite life and therefore are not amortized but rather evaluated for impairment annually using the qualitative or quantitative methods similar to goodwill. For 2020 and 2019, we performed a qualitative test. No indicators of impairment were noted. Changes in certain significant assumptions could have a significant impact on the estimated fair value, and therefore, a future impairment or additional impairments could result for a portion of goodwill, long-lived assets or intangible assets. Business Combinations We account for business acquisitions using the purchase method of accounting. Assets acquired, liabilities assumed, and non-controlling interests are recorded at their estimated fair values at the acquisition date. The excess of purchase price over fair value of the net assets acquired, including the amount assigned to identifiable intangible assets, is recorded as goodwill. Given the time it takes to obtain pertinent information to finalize the acquired company's balance sheet, it may be multiple quarters before we are able to finalize those initial fair value estimates. Accordingly, it is not uncommon for the initial estimates to be subsequently revised. Tax Receivable Agreement We recognize a liability on the consolidated balance sheet based on the undiscounted estimated future payments under the Tax Receivable Agreement. See Note 9. Tax Receivable Agreement to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information on the Tax Receivable Agreement. The most significant estimates utilized by management to calculate the corresponding liability is the Company's increase in tax basis related to exchanges, future cash tax savings rates, which are projected based on current tax laws and the Company's historical and future tax profile, and the allocation of the liability between short-term and long-term based on when the Company realizes certain tax attributes. New Accounting Pronouncements Refer to Note 1. Summary of Significant Accounting Policies of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding recently issued accounting standards.
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