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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


						(Mark One)
			☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
						For the three months ended
						June 30, 2023
						OR
			☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to

Commission file number 001-37540

HOSTESS BRANDS, INC.

(Exact name of registrant as specified in its charter)


Delaware		47-4168492
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
7905 Quivira Road		66215
Lenexa,	KS	(Zip Code)
(Address of principal executive offices)

(816) 701-4600

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each Class	Ticker Symbol	Name of each exchange on which registered
Class A Common Stock, Par Value of $0.0001 per share	TWNK	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.:

Large accelerated filer

☒

Accelerated
filer

☐

Non‑accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐ No ☒

Shares of Class A common stock outstanding - 132,859,633 shares at August 4, 2023

HOSTESS BRANDS, INC.

FORM 10-Q

For the Three Months Ended June 30, 2023

INDEX


		Page
PART I - Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Operations (Unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	20
PART II - Other Information
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Default Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Statements that constitute forward-looking statements are generally identified through the inclusion of words such as “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language. Statements addressing events and developments that we expect or anticipate will occur are also considered forward-looking statements. All forward-looking statements included herein are made only as of the date hereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by subsequent filings. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise, except to the extent required by law.

PART I

Item 1. Financial Statements (Unaudited)

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except shares and per share data)


	June 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	99,368	$	98,584
Short-term investments	—		17,914
Accounts receivable, net	181,729		168,783
Inventories	67,240		65,406

Prepaids and other current assets	18,083		16,375
Total current assets	366,420		367,062
Property and equipment, net	464,565		425,313
Intangible assets, net	1,909,124		1,920,880
Goodwill	706,615		706,615
Other assets, net	70,688		72,329
Total assets	$	3,517,412	$	3,492,199

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Long-term debt and lease obligations payable within one year	$	12,543	$	3,917
Tax receivable agreement payments payable within one year	7,400		12,600
Accounts payable	87,502		85,667
Customer trade allowances	67,952		62,194
Accrued expenses and other current liabilities	27,837		59,933

Total current liabilities	203,234		224,311
Long-term debt and lease obligations	982,046		999,089
Tax receivable agreement obligations	117,157		123,092
Deferred tax liability	361,928		347,030
Other long-term liabilities	1,302		1,593
Total liabilities	1,665,667		1,695,115

Commitments and Contingencies (Note 9)

Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 143,184,870 shares issued and 132,859,461 shares outstanding as of June 30, 2023 and 142,650,344 shares issued and 133,117,224 shares outstanding as of December 31, 2022	14		14

Additional paid in capital	1,315,418		1,311,629
Accumulated other comprehensive income	34,602		35,078
Retained earnings	710,370		639,595
Treasury stock	(208,659)		(189,232)
Stockholders’ equity	1,851,745		1,797,084

Total liabilities and stockholders’ equity	$	3,517,412	$	3,492,199

See accompanying notes to the unaudited condensed consolidated financial statements.

`HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except shares and per share data)


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

Net revenue	$	352,360	$	340,472	$	697,763	$	672,523
Cost of goods sold	226,366		227,772		451,052		444,199
Gross profit	125,994		112,700		246,711		228,324
Operating costs and expenses:
Advertising and marketing	20,176		15,587		34,075		27,537
Selling	10,025		10,137		20,674		19,914
General and administrative	28,196		30,127		56,394		59,799
Amortization of customer relationships	5,878		5,878		11,756		11,756


Total operating costs and expenses	64,275		61,729		122,899		119,006
Operating income	61,719		50,971		123,812		109,318
Other (income) expense
Interest expense, net	10,283		9,741		20,468		19,407
Loss on modification and extinguishment of debt	7,472		—		7,472		—


Other (income) expense	68		(507)		249		(71)
Total other (income) expense	17,823		9,234		28,189		19,336
Income before income taxes	43,896		41,737		95,623		89,982
Income tax expense	11,410		11,261		24,848		24,948
Net income	$	32,486	$	30,476	$	70,775	$	65,034

Earnings per Class A share:
Basic	$	0.24	$	0.22	$	0.53	$	0.47
Diluted	$	0.24	$	0.22	$	0.53	$	0.47
Weighted-average shares outstanding:
Basic	133,076,763		137,909,156		133,298,117		138,255,803
Diluted	134,211,771		138,958,242		134,371,034		139,263,303

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, amounts in thousands)


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022

Net income	$	32,486	$	30,476	$	70,775	$	65,034
Other comprehensive income:
Unrealized gain on interest rate swap and foreign currency contracts designated as a cash flow hedge	12,308		6,327		9,295		29,983
Reclassification into net income	(5,407)		823		(9,939)		1,885
Income tax benefit (expense)	(1,798)		(1,877)		168		(8,369)
Comprehensive income	$	37,589	$	35,749	$	70,299	$	88,533

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, amounts in thousands)


	Class A Voting Common Stock			Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount									Shares	Amount
Balance–December 31, 2022	133,117	$	14		$	1,311,629	$	35,078	$	639,595	9,533	$	(189,232)	$	1,797,084
Comprehensive income	—	—			—		(5,579)		38,289		—	—		32,710
Share-based compensation	324	—			3,011		—		—		—	—		3,011


Exercise of employee stock options	125	—			2,112		—		—		—	—		2,112

Payment of taxes for employee stock awards	—	—			(5,461)		—		—		—	—		(5,461)
Repurchase of common stock	(561)	—			—		—		—		561	(13,669)		(13,669)

Balance–March 31, 2023	133,005	$	14		$	1,311,291	$	29,499	$	677,884	10,094	$	(202,901)	$	1,815,787
Comprehensive income	—	—			—		5,103		32,486		—	—		37,589
Share-based compensation	19	—			3,527		—		—		—	—		3,527


Exercise of employee stock options and ESPP awards	67	—			1,053		—		—		—	—		1,053

Payment of taxes for employee stock awards	—	—			(453)		—		—		—	—		(453)
Repurchase of common stock, including excise tax	(232)	—			—		—		—		232	(5,758)		(5,758)

Balance–June 30, 2023	132,859	$	14		$	1,315,418	$	34,602	$	710,370	10,326	$	(208,659)	$	1,851,745


	Class A Voting Common Stock			Additional Paid-in Capital	Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount									Shares	Amount
Balance–December 31, 2021	138,279	$	14		$	1,303,254	$	(506)	$	475,400	3,753	$	(59,172)	$	1,718,990
Comprehensive income	—	—			—		18,226		34,558		—	—		52,784
Share-based compensation	350	—			2,339		—		—		—	—		2,339
Exercise of employee stock options	105	—			1,662		—		—		—	—		1,662
Payment of taxes for employee stock awards	—	—			(5,216)		—		—		—	—		(5,216)

Repurchase of common stock	(459)	—			—		—		—		459	(9,680)		(9,680)
Balance–March 31, 2022	138,275	$	14		$	1,302,039	$	17,720	$	509,958	4,212	$	(68,852)	$	1,760,879
Comprehensive income (loss)	—	—			—		5,273		30,476		—	—		35,749
Share-based compensation	23	—			2,648		—		—		—	—		2,648
Exercise of employee stock options	37	—			579		—		—		—	—		579

Payment of taxes for employee stock awards	—	—			(296)		—		—		—	—		(296)
Repurchase of common stock	(1,848)	—			—		—		—		1,848	(38,826)		(38,826)
Balance–June 30, 2022	136,487	$	14		$	1,304,970	$	22,993	$	540,434	6,060	$	(107,678)	$	1,760,733

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)


			Six Months Ended
			June 30, 2023		June 30, 2022
Operating activities
	Net income		$	70,775	$	65,034
	Depreciation and amortization		30,054		27,951

	Debt discount amortization		530		615

	Unrealized foreign exchange gains		(153)		(217)
	Loss on debt extinguishment		721		—
	Non-cash lease expense		129		247
	Share-based compensation		6,538		4,987
	Realized and unrealized gains on short-term investments		(86)		—
	Deferred taxes		15,066		10,374
	Change in operating assets and liabilities:
		Accounts receivable	(12,863)		(30,600)
		Inventories	(1,834)		(7,996)
		Prepaids and other current assets	5,243		(131)
		Accounts payable and accrued expenses	(31,489)		8,967
		Customer trade allowances	5,717		7,934
	Net cash provided by operating activities		88,348		87,165
Investing activities
	Purchases of property and equipment		(55,161)		(36,302)

	Acquisition of short-term investments		—		(20,918)
	Proceeds from maturity of short-term investments		18,000		—
	Acquisition and development of software assets		(3,005)		(5,607)
	Net cash used in investing activities		(40,166)		(62,827)
Financing activities
	Repayments of long-term debt and lease obligations		—		(5,584)
	Debt fees paid		(10,306)		—
	Proceeds from origination of long-term debt		336,663		—
	Payments related to settlement of long-term debt		(334,883)		—
	Collateral payments		(5,980)		—
	Repurchase of common stock		(19,427)		(48,506)
	Tax payments related to issuance of shares to employees		(5,914)		(5,512)
	Cash received from exercise of options and warrants		3,165		2,241
	Payments on tax receivable agreement		(11,135)		(9,313)
	Net cash used in financing activities		(47,817)		(66,674)
	Effect of exchange rate changes on cash and cash equivalents		419		8
Net increase (decrease) in cash and cash equivalents			784		(42,328)
Cash and cash equivalents at beginning of period			98,584		249,159
Cash and cash equivalents at end of period			$	99,368	$	206,831








































Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
	Interest, net of amounts capitalized	$	28,077	$	18,599
	Net taxes paid	$	11,496	$	11,489
Supplemental disclosure of non-cash investing:
	Accrued capital expenditures	$	9,421	$	6,358

See accompanying notes to the unaudited condensed consolidated financial statements.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

Hostess Brands, Inc. is a Delaware corporation headquartered in Lenexa, Kansas. The condensed consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading sweet snacks company focused on developing, manufacturing, marketing, selling and distributing snacks in North America primarily under the Hostess® and Voortman® brands. The Company produces a variety of new and classic treats, including iconic Hostess® Donettes®, Twinkies®, CupCakes, Ding Dongs® and Zingers®, as well as a variety of Voortman® branded cookies and wafers. The Hostess® brand dates back to 1919 when the Hostess® CupCake was introduced to the public, followed by Twinkies® in 1930.

Basis of Presentation

The Company’s operations are conducted through wholly-owned operating subsidiaries. The condensed consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year. For the periods presented, the Company has one reportable segment.

Principles of Consolidation

All intercompany balances and transactions related to activity between Hostess Brands, Inc. and its wholly-owned subsidiaries have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and for the reported amounts of revenues and expenses during the reporting period.

Accounts Receivable

Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of June 30, 2023 and December 31, 2022, the Company’s accounts receivable were $181.7 million and $168.8 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $5.6 million and $5.8 million for the periods ended June 30, 2023 and December 31, 2022, respectively.

Inventories

Inventories are stated at the lower of cost or net-realizable value on a first-in first-out basis. Abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) are expensed in the period they are incurred.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of inventories are as follows:


(In thousands)	June 30, 2023		December 31, 2022

Ingredients and packaging	$	34,167	$	35,410
Finished goods	29,340		26,133
Inventory in transit to customers	3,733		3,863
	$	67,240	$	65,406

Capitalized Interest

The Company capitalizes a portion of the interest on its term loan (see Note 4. Debt and Lease Obligations) related to certain property and equipment during its construction period. The capitalized interest is recorded as part of the asset to which it relates and depreciated over the asset’s estimated useful life. The Company capitalized interest of $1.9 million and $3.6 million during the three and six months ended June 30, 2023, respectively, compared to $0.2 million capitalized during each of the three and six months ended June 30, 2022. Capitalized interest is included in property and equipment, net on the condensed consolidated balance sheets.

Software Costs

Capitalized software is included in other assets on the condensed consolidated balance sheets in the amount of $21.6 million and $21.4 million, net of accumulated amortization of $25.4 million and $22.6 million as of June 30, 2023 and December 31, 2022, respectively. Capitalized software costs are amortized over their estimated useful life of up to five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative expense on the condensed consolidated statements of operations was $1.4 million and $2.8 million for the three and six months ended June 30, 2023, respectively, compared to $1.0 million and $2.1 million for the three and six months ended June 30, 2022, respectively.

Disaggregation of Revenue

Net revenue consists of sales of packaged food products primarily within the Sweet Baked Goods (“SBG”) category in the United States, as well as in the Cookie category in the United States and Canada.

The following tables disaggregate revenue by geographical market and category.


	Three Months Ended June 30, 2023
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	317,539	$	31,066	$	348,605
Canada	—		3,755		3,755
	$	317,539	$	34,821	$	352,360

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Three Months Ended June 30, 2022
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	303,437	$	32,348	$	335,785
Canada	—		4,687		4,687
	$	303,437	$	37,035	$	340,472


	Six Months Ended June 30, 2023
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	625,969	$	63,780	$	689,749
Canada	—		8,014		8,014
	$	625,969	$	71,794	$	697,763


	Six Months Ended June 30, 2022
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	599,809	$	63,264	$	663,073
Canada	—		9,450		9,450
	$	599,809	$	72,714	$	672,523

Concentrations

The Company had one customer (together with its affiliates) that accounted for 20.4% and 19.4% of total net revenue for the three and six months ended June 30, 2023, respectively, compared to 20.1% and 20.4% for the three and six months ended June 30, 2022, respectively.

2. Property and Equipment

Property and equipment consists of the following:


(In thousands)	June 30, 2023		December 31, 2022

Land and buildings	$	82,845	$	81,405
Right of use assets, operating	32,170		32,170
Machinery and equipment	341,015		315,149
Construction in progress	146,482		118,679
	602,512		547,403
Less accumulated depreciation and amortization	(137,947)		(122,090)
	$	464,565	$	425,313

Depreciation expense was $7.4 million and $15.5 million for the three and six months ended June 30, 2023, respectively, and $7.7 million and $14.1 million for the three and six months ended June 30, 2022, respectively.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Accrued Expenses and Other Current Liabilities

Included in accrued expenses and other current liabilities are the following:


(In thousands)	June 30, 2023		December 31, 2022

Incentive compensation	$	9,534	$	29,045
Payroll, vacation and other compensation	6,282		6,195
Accrued interest	139		7,850
Interest rate swap and foreign currency contracts	—		423
Other	11,882		16,420
	$	27,837	$	59,933

4. Debt and Lease Obligations

On June 30, 2023 (the “Closing Date”), through Hostess Brands, LLC, a wholly-owned subsidiary, the Company entered into a senior secured first lien credit agreement (the “Credit Agreement”), which included a $985 million term loan (the “Term Loan”). The Term Loan bears interest, at the Company’s option, at a variable rate per annum equal to either (x) the Term Secured Overnight Financing Rate (“Term SOFR”) (as defined in the Credit Agreement) plus an applicable margin of 2.50% or (y) an alternative base rate (“ABR”) plus an applicable margin of 1.50%. The Credit Agreement is secured on a first priority basis on substantially all of the Company’s assets and is guaranteed by certain of its subsidiaries. It is prepayable without premium or penalty at any time, except for prepayment from the proceeds of a similar term loan within six months after the Closing Date, which requires a 1% premium. The principal shall be paid at 1% of the aggregate principal amount ($9.85 million) per year, with the balance due at maturity on June 30, 2030. The proceeds from the Term Loan were used to repay, in full the $983.2 million principal balance on the prior term loan and fund a portion of the loan fees.

The Term Loan consists of a syndicate of lenders which for accounting purposes are evaluated as individual lenders. For certain lenders, a portion of the refinancing was considered a modification of the prior term loan and related fees paid to third parties of $6.8 million were expensed as costs of the modification. The total loss on the modification and extinguishment of debt was $7.5 million, which includes $0.7 million of unamortized debt premium and issuance costs. Fees of $10.8 million associated with the new borrowings were capitalized. Of the total $985.0 million Term Loan, there was $336.7 million of cash proceeds attributed to new syndicate members or existing members increasing their positions. Of the total $983.2 million prior term loan, $334.9 million of cash payments were attributed to exiting syndicate members or members decreasing their positions.

A summary of the carrying value of the debt and lease obligations are as follows:


(In thousands)	June 30, 2023		December 31, 2022

Term loan (7.7% as of June 30, 2023)
2023 Term Loan principal	$	985,000	$	—
2020 Term Loan principal	—		983,221
Unamortized debt premium and issuance costs	(11,257)		(2,563)
	973,743		980,658
Lease obligations	20,846		22,348
Total debt and lease obligations	994,589		1,003,006
Less: Current portion of long term debt and lease obligations	(12,543)		(3,917)
Long-term portion	$	982,046	$	999,089

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At June 30, 2023, minimum Term Loan repayments under the Credit Agreement are due as follows:


(In thousands)
2023			$4,925
2024			9,850
2025			9,850
2026			9,850
2027			9,850
Thereafter			940,675

Including the impact of the interest rate swap contracts, at June 30, 2023, the Company's aggregate term loans had an effective interest rate of 5.0%.

Also included in the Credit Agreement is a $200 million revolving credit facility (the “Revolving Credit Facility”), which replaced the $100 million revolving credit facility previously outstanding. Interest on the Revolving Credit Facility accrues at Term SOFR plus 2.25% on the outstanding balance, with all principal due in June 2028. At June 30, 2023, there was no amount drawn on the Revolving Credit Facility. The Revolving Credit Facility contains certain restrictive financial covenants. As of June 30, 2023, the Company was in compliance with all such covenants.

Leases

The Company has entered into operating leases for certain properties that expire at various times through 2030. The Company determines if an arrangement is a lease at inception.

At June 30, 2023 and December 31, 2022, right of use assets related to operating leases are included in property and equipment, net on the condensed consolidated balance sheets (see Note 2. Property and Equipment). As of June 30, 2023 and December 31, 2022, the Company had no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease obligations on the condensed consolidated balance sheets.

The table below shows the composition of lease expense:


	Three Months Ended				Six Months Ended
(In thousands)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022


Operating lease expense	$	1,593	$	1,585	$	3,256	$	3,188
Short-term lease expense	611		461		1,116		834
Variable lease expense	387		391		789		773
	$	2,591	$	2,437	$	5,161	$	4,795

5. Derivative Instruments

Interest Rate Swap and Foreign Currency Contracts

The Company has entered into interest rate swap contracts with counterparties to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated these derivatives as cash flow hedges. In June 2023, the Company amended these contracts to coincide with the origination of the Credit Agreement and to replace LIBOR as a reference rate with Term SOFR. The Company utilized an expedient under Accounting Standards Codification Topic 848, Reference Rate Reform, to conclude that these amendments should be accounted for as a continuation of the existing swap agreements, resulting in no impact on the Company’s financial statements.

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Under the amended interest rate swap contracts, the Company receives three-month Term SOFR subject to a 0.0% floor and pays a fixed rate ranging from 0.89% to 1.84%. Both the fixed and floating payment streams are based on a notional amount of $700 million, outstanding through August 2025. At June 30, 2023, the interest on the Company’s variable rate debt hedged by these contracts is effectively fixed at rates ranging from 3.39% to 4.34%, which includes the Term Loan margin of 2.50%.

To reduce the effect of fluctuations in Canadian dollar (“CAD”) denominated expenses relative to their U.S. dollar equivalents originating from its Canadian operations, the Company enters into CAD purchase contracts. The Company designated these contracts as cash flow hedges. As of June 30, 2023, the Company had no CAD purchase contracts outstanding.

A summary of the fair value of interest rate and foreign currency instruments is as follows:


(In thousands)		June 30, 2023		December 31, 2022
Asset derivatives	Location
Interest rate swap contracts (1)	Other assets, net	$	46,115	$	48,539



Liability derivatives	Location

Foreign currency contracts (2)	Accrued expenses	$	—	$	423

(1) The fair values of interest rate swap contracts are measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).

(2) The fair values of foreign currency contracts are measured at each reporting period by comparison to available market information on similar contracts (Level 2).

A summary of the gains and losses related to interest rate and foreign currency instruments on the condensed consolidated statements of operations is as follows:


		Three Months Ended				Six Months Ended
(In thousands)		June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
(Gain ) Loss on derivative contracts designated as cash flow hedges	Location
Interest rate swap contracts	Interest expense, net	$	(5,629)	$	823	$	(10,301)	$	1,885
Foreign currency contracts	Cost of goods sold	222		—		362		—
		$	(5,407)	$	823	$	(9,939)	$	1,885

6. Earnings per Share

Basic earnings per share is calculated by dividing net income for the period by the weighted average number of shares of Class A common stock outstanding for the period excluding non-vested share-based awards. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including restricted stock unit (“RSUs”) awards, stock option awards and shares purchased under the Employee Stock Purchase Plan (“ESPP”).

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Below are basic and diluted net income per share:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Numerator:
Net income (in thousands)	$	32,486	$	30,476	$	70,775	$	65,034


Denominator:
Weighted-average Class A shares outstanding - basic	133,076,763		137,909,156		133,298,117		138,255,803

Dilutive effect of RSUs	615,619		559,426		559,612		522,424
Dilutive effect of stock options and ESPP shares	519,389		489,660		513,305		485,076
Weighted-average shares outstanding - diluted	134,211,771		138,958,242		134,371,034		139,263,303

Net income per Class A share - basic	$	0.24	$	0.22	$	0.53	$	0.47

Net income per Class A share - diluted	$	0.24	$	0.22	$	0.53	$	0.47

7. Income Taxes

The Company is subject to U.S. federal, state and local income taxes as well as Canadian income tax on its controlled foreign subsidiary. The income tax provision is determined based on the estimated full year effective tax rate, adjusted for infrequent or unusual items, which are recognized on a discrete basis in the period they occur. The Company’s estimated annual effective tax rate is 27% prior to taking into account any discrete items.

8. Tax Receivable Agreement Obligations

The following table summarizes activity related to the tax receivable agreement for the six months ended June 30, 2023:


(In thousands)
Balance December 31, 2022	$	135,692



Payments	(11,135)
Balance June 30, 2023	$	124,557

HOSTESS BRANDS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. Commitments and Contingencies

Liabilities related to legal proceedings are recorded when it is probable that a liability has been incurred and the associated amount can be reasonably estimated. Where the estimated amount of loss is within a range of amounts and no amount within the range is a better estimate than any other amount, the minimum amount is accrued. As additional information becomes available, potential liabilities are reassessed and the estimates revised, if necessary. Any accrued liabilities are subject to change in the future based on new developments in each matter, or changes in circumstances, which could have a material effect on the Company’s financial condition and results of operations.

In December 2020, the Company asserted claims for indemnification against the sellers (the “Sellers”) under the terms of the Share Purchase Agreement pursuant to which the Company acquired Voortman (the “Agreement”). The claims were for damages arising out of alleged breaches by the Sellers of certain representations, warranties and covenants contained in the Agreement relating to periods prior to the closing of the acquisition. The Company also submitted claims relating to these alleged breaches under the representation and warranty insurance policy (“RWI”) it purchased in connection with the acquisition. In the third quarter of 2022, the RWI insurers paid the Company $42.5 million CAD (the RWI coverage limit) (the “Proceeds”) related to these breaches. Per agreement with the RWI insurers, under no circumstances will the Company be required to return the Proceeds.

On November 3, 2022, pursuant to the agreement with the RWI insurer, Voortman brought claims in the Ontario (Canada) Superior Court of Justice (the “Claim”), related to the breaches against certain of the Sellers. The Claim alleges the seller defendants made certain non-disclosures and misrepresentations to induce the Company to overpay for Voortman. The Company is seeking damages of $109 million CAD representing the amount of the aggregate liability of the Sellers for indemnification under the Agreement, $5.0 million CAD in punitive or aggravated damages, interest, proceedings fees and any other relief the presiding court deems appropriate. A portion of any recovery will be shared with the RWI insurers. Although the Company strongly believes that its Claim is meritorious, no assurance can be given as to whether the Company will recover all, or any part, of the amounts it is pursuing.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2022. The terms “our,” “we,” “us,” and “Company” as used herein refer to Hostess Brands, Inc. and its consolidated subsidiaries.

Overview

We are a leading sweet snacks company focused on developing, manufacturing, marketing, selling and distributing snacks in North America, 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 Sweet Baked Goods (“SBG”) category, according to Nielsen U.S. total universe. For the 13-week period ended July 1, 2023, our branded SBG (which includes Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was 20.8% per Nielsen’s U.S. SBG category data.

Factors Impacting Recent Results

We continue to experience volatility in labor, raw materials and transportation costs in the current economic climate. Specifically, in the prior-year period, we experienced supply chain fragility brought on by certain macro-economic factors, which is beginning to normalize. Additionally, we continue to experience elevated inflation. We work closely with all of our vendors, distributors, contract manufacturers and other external business partners to ensure availability of our products for our customers and consumers.

Operating Results


	Three Months Ended						Six Months Ended
(In thousands, except per share data)	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Net revenue	$	352,360		$	340,472		$	697,763		$	672,523
Gross profit	125,994			112,700			246,711			228,324
As a % of net revenue	35.8		%	33.1		%	35.4		%	34.0		%

Operating costs and expenses	64,275			61,729			122,899			119,006
Operating income	61,719			50,971			123,812			109,318


Other expense (income)	17,823			9,234			28,189			19,336

Income tax expense	11,410			11,261			24,848			24,948
Net income	32,486			30,476			70,775			65,034


Earnings per Class A share:
Basic	$	0.24		$	0.22		$	0.53		$	0.47
Diluted	$	0.24		$	0.22		$	0.53		$	0.47

Results of Operations

Net Revenue

Net revenue for the three months ended June 30, 2023 increased $11.9 million, or 3.5%, compared to the three months ended June 30, 2022. Favorable price/mix provided 10.4% of the net revenue growth driven by net price realization, offset by a 6.9% decline from volume. Compared to the same period last year, SBG net revenue increased $14.1 million, or 4.6%, while cookies net revenue decreased $2.2 million, or 5.9%.

Net revenue for the six months ended June 30, 2023 increased $25.3 million, or 3.8%, compared to the six months ended June 30, 2022. Favorable price/mix driven by previously taken pricing actions and product mix provided 12.5% of the net revenue growth, offset by a 8.7% decline from volume. Compared to the same period last year, SBG net revenue increased $26.2 million, or 4.4%, while cookies net revenue decreased $0.9 million, or 1.2%.

Gross Profit

Gross profit increased 11.8% and was 35.8% of net revenue for the three months ended June 30, 2023, an increase of 265 basis points from a gross margin of 33.1% for the three months ended June 30, 2022. The increase in gross profit was due to favorable net price realization, normalizing supply-chain, and productivity, which more than offset inflation and lower volume.

Gross profit increased 8.1% and was 35.4% of net revenue for the six months ended June 30, 2023, an increase of 140 basis points from a gross margin of 34.0% for the six months ended June 30, 2022. The increase in gross profit was due to favorable price/mix and productivity benefits, which more than offset higher supply chain costs, including inflation.

Operating Costs and Expenses

Operating costs and expenses for the three months ended June 30, 2023 were $64.3 million, compared to $61.7 million for the three months ended June 30, 2022. The increase was primarily attributed to the planned increase in advertising investments and higher share-based compensation expense, partially offset by lower incentive compensation.

Operating costs and expenses for the six months ended June 30, 2023 were $122.9 million, compared to $119.0 million for the six months ended June 30, 2022. The increase was primarily attributed to the planned increase in advertising investments and higher share-based compensation expense, partially offset by lower incentive compensation.

Other Expense

Other expense for the three months ended June 30, 2023 was $17.8 million compared to $9.2 million for the three months ended June 30, 2022. The increase in other expense was primarily due to the loss on debt modification and extinguishment of $7.5 million during the three months ended June 30, 2023. Additionally, the increase in other expense was due to interest expense on our term loan which was $11.2 million and $9.7 million for the three months ended June 30, 2023 and 2022, respectively, partially offset by a decrease in foreign currency remeasurement.

Other expense for the six months ended June 30, 2023 was $28.2 million compared to $19.3 million for the six months ended June 30, 2022. The increase in other expense was primarily due to the loss on debt modification and extinguishment, as well as interest expense on our term loans, which was $22.2 million and $19.1 million for the six months ended June 30, 2023 and 2022, respectively, partially offset by a decrease in foreign currency remeasurement.

Income Taxes

Our effective tax rate for the three months ended June 30, 2023 was 26.0% compared to 27.0% for the three months ended June 30, 2022. The decrease in the tax rate is attributed to a discrete tax benefit of $0.7 million recognized during the three months ended June 30, 2023.

Our effective tax rate for the six months ended June 30, 2023 was 26.0% compared to 27.7% for the six months ended June 30, 2022. The decrease in the tax rate is attributed to a discrete tax benefit of $1.1 million during the six months ended June 30, 2023, as compared to a discrete tax expense of $0.5 million during the six months ended June 30, 2022.

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 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 June 30, 2023 and December 31, 2022 of $63.8 million and $26.3 million, respectively. We have the ability to borrow under the Revolver to meet obligations as they come due. As of June 30, 2023, we had approximately $200.0 million available for borrowing under our Revolver.

Cash Flows from Operating Activities

Cash flows provided by operating activities for the six months ended June 30, 2023 and 2022 were $88.3 million and $87.2 million, respectively. Operating cash flows were higher due to favorable operating income, partially offset by higher incentive compensation payments and an accelerated payment of accrued interest due to the June 2023 debt refinancing.

Cash Flows from Investing Activities

Investing activities used $40.2 million and $62.8 million of cash for the six months ended June 30, 2023 and 2022, respectively. During the six months ended June 30, 2023, we received proceeds from maturity of short-term marketable securities of $18.0 million compared to $20.9 million used for acquisition of short-term investments in the prior-year period. During the six months ended June 30, 2023, our purchase of property, plant and equipment increased from $36.3 million as of June 30, 2022, to $55.2 million due to our continued elevated capital expenditures related to the Arkadelphia, Arkansas facility.

Cash Flows from Financing Activities

Financing activities used $47.8 million and $66.7 million for the six months ended June 30, 2023 and 2022, respectively. In the current-year period, the long-term debt proceeds received of $336.7 million and long-term debt settlement of $334.9 million related to the refinancing of our $983.2 million term loan. Financing outflows also reflect $10.3 million of fees paid related to the refinancing. Additionally, we repurchased 0.8 million shares of our common stock under the existing share repurchase authorizations for an aggregate purchase price of $19.4 million and an average price per share of $24.50 during the six months ended June 30, 2023. The cash outflow in the current-year period also included a $6.0 million payment to provide temporary collateral related to the transition of our outstanding letters of credit to our new Revolving Credit Facility administrator. The net outflow in the prior-year period reflects proceeds on exercise of employee stock options, offset by cash used to repurchase 2.3 million shares of our common stock for an amount of $48.5 million and an average price per share of $21.03 and scheduled payments under the tax receivable agreement and term loan.

Long-Term Debt

On June 30, 2023, we entered into a new $985.0 million Term Loan with the proceeds used to directly repay, in full, the remaining $983.2 million then-outstanding on the prior term loan. Our effective interest rate on our new Term Loan, including the impact of our interest rate swaps, was effectively unchanged at 5.0% from the old term loan. Concurrent to the new Term Loan, we entered into a $200 million Revolver, which replaced our previous $100 million revolver. We had no outstanding borrowings under the Revolver as of June 30, 2023, and maintain a borrowing capacity of $200.0 million. As of June 30, 2023, we had letters of credit worth up to $5.9 million aggregate principal amount outstanding. As of June 30, 2023, we were in compliance with all covenants under our term loan and the Revolver.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2022. Our exposures to market risk have not changed materially since December 31, 2022.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2023, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the three months ended June 30, 2023, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

We are involved from time to time in lawsuits, claims and proceedings arising in the ordinary course of business. These matters typically involve personnel and employment issues, personal injury claims, contract matters and other proceedings arising in the ordinary course of business. Although we do not expect the outcome of these matters to have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable. Therefore, we could incur judgments enter into settlements or be subject to claims that could materially impact our results.

The information furnished by us under this Part II, Item 1 (Legal Proceedings) is incorporated by reference to the information contained in Note 9. Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

Our risk factors are set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed on February 21, 2023. There have been no material changes to our risk factors since the filing of the Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchase of Equity Securities


Period	Total number of securities repurchased (1)	Average price paid per share		Total number of securities purchased as part of publicly announced plans or programs	Approximate dollar value of securities that may yet be purchased under the program (in millions) (2)
April 1 - 30, 2023	231,679	$	24.50	231,679	$	2.3
May 1 - 31, 2023	—	—		—	150.0
June 1 - 30, 2023	—	—		—	150.0
	231,679			231,679

(1)Repurchase of shares of Class A common stock

(2)In February 2022, our Board of Directors approved a securities repurchase program of up to $150 million of our outstanding securities. There was $2.3 million remaining under this program at the end of April 2023. In May of 2023 our Board of Directors approved a securities repurchase program of up to $150 million of our outstanding securities. As of June 30, 2023, there was $150.0 million remaining under this program. The program has no expiration date. The program may be amended, suspended or discontinued at any time at our discretion and does not commit us to repurchase our securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

During the three months ended June 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the Company’s securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408 (c) of Regulation S-K).

Item 6. Exhibits

Exhibit No.

Description

10.1

First Lien Credit Agreement, dated as of June 30, 2023, by and amo ng HB Holdings, LLC, Hostes s Brands, LLC, the lenders party thereto from time to time, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Current Report on F orm 8-K filed with the SEC on June 30, 2023)

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 8, 2023.


HOSTESS BRANDS, INC.

By:			/s/ Travis E. Leonard
			Travis E. Leonard Executive Vice President, Chief Financial Officer

Hostess Brands, Inc. 10-Q