Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2023

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 (the “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. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 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 September 30, 2023 and December 31, 2022, the Company’s accounts receivable were $188.2 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 $6.2 million and $5.8 million as of September 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.

The components of inventories are as follows:


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

Ingredients and packaging	$	30,076	$	35,410
Finished goods	27,592		26,133
Inventory in transit to customers	4,383		3,863
	$	62,051	$	65,406

Capitalized Interest

The Company capitalizes a portion of the interest on its term loan (see Note 5. 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 $2.3 million and $5.9 million during the three and nine months ended September 30, 2023, respectively, compared to $0.3 million and $0.5 million capitalized during the three and nine months ended September 30, 2022, respectively. 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 $23.6 million and $21.4 million, net of accumulated amortization of $26.8 million and $22.6 million as of September 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 $4.3 million for the three and nine months ended September 30, 2023, respectively, compared to $1.1 million and $3.2 million for the three and nine months ended September 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 September 30, 2023
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	315,366	$	33,049	$	348,415
Canada	—		4,383		4,383
	$	315,366	$	37,432	$	352,798


	Three Months Ended September 30, 2022
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	307,332	$	33,573	$	340,905
Canada	—		5,321		5,321
	$	307,332	$	38,894	$	346,226


	Nine Months Ended September 30, 2023
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	941,334	$	96,830	$	1,038,164
Canada	—		12,397		12,397
	$	941,334	$	109,227	$	1,050,561


	Nine Months Ended September 30, 2022
(In thousands)	Sweet Baked Goods		Cookies		Total
United States	$	907,141	$	96,837	$	1,003,978
Canada	—		14,771		14,771
	$	907,141	$	111,608	$	1,018,749

Concentrations

The Company had one customer (together with its affiliates) that accounted for 20.3% and 19.7% of total net revenue for the three and nine months ended September 30, 2023, respectively, compared to 19.7% and 20.2% for the three and nine months ended September 30, 2022, respectively.

Hostess Brands, Inc. 10-Q