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 | |
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(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 |
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.:
☒ | 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 - 120,947,081 shares at November 5, 2019
Shares of Class B common stock outstanding - 9,455,184 shares at November 5, 2019
HOSTESS BRANDS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2019
INDEX
Page | ||
Item 1. | ||
Consolidated Balance Sheets (Unaudited) | ||
Consolidated Statements of Operations (Unaudited) | ||
Consolidated Statements of Comprehensive Income (Unaudited) | ||
Consolidated Statements of Stockholders’ Equity (Unaudited) | ||
Consolidated Statements of Cash Flows (Unaudited) | ||
Notes to Consolidated Financial Statements (Unaudited) | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
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 our future operating performance and 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, 2018, 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.
3
HOSTESS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share data)
September 30, | December 31, | |||||||
ASSETS | 2019 | 2018 | ||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Inventories | ||||||||
Prepaids and other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Other assets, net | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Long-term debt and lease obligations payable within one year | $ | $ | ||||||
Tax receivable agreement payments payable within one year | ||||||||
Accounts payable | ||||||||
Customer trade allowances | ||||||||
Accrued expenses and other current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt and lease obligations | ||||||||
Tax receivable agreement obligations | ||||||||
Deferred tax liability | ||||||||
Total liabilities | ||||||||
Commitments and Contingencies (Note 12) | ||||||||
Class A common stock, $0.0001 par value, 200,000,000 shares authorized,120,947,081 and 100,046,392 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | ||||||||
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 9,455,184 and 30,255,184 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | ||||||||
Additional paid in capital | ||||||||
Accumulated other comprehensive income (loss) | ( | ) | ||||||
Retained earnings | ||||||||
Stockholders’ equity | ||||||||
Non-controlling interest | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
4
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||||
Net revenue | $ | $ | $ | $ | |||||||||||||
Cost of goods sold | |||||||||||||||||
Gross profit | |||||||||||||||||
Operating costs and expenses: | |||||||||||||||||
Advertising and marketing | |||||||||||||||||
Selling expense | |||||||||||||||||
General and administrative | |||||||||||||||||
Amortization of customer relationships | |||||||||||||||||
Other operating expense (income) | ( | ) | |||||||||||||||
Total operating costs and expenses | |||||||||||||||||
Operating income | |||||||||||||||||
Other expense: | |||||||||||||||||
Interest expense, net | |||||||||||||||||
Gain on buyout of tax receivable agreement | ( | ) | |||||||||||||||
Other expense (income) | ( | ) | |||||||||||||||
Total other expense | |||||||||||||||||
Income before income taxes | |||||||||||||||||
Income tax expense | |||||||||||||||||
Net income | |||||||||||||||||
Less: Net income attributable to the non-controlling interest | |||||||||||||||||
Net income attributable to Class A stockholders | $ | $ | $ | $ | |||||||||||||
Earnings per Class A share: | |||||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||||
Diluted | $ | $ | $ | $ | |||||||||||||
Weighted-average shares outstanding: | |||||||||||||||||
Basic | |||||||||||||||||
Diluted | |||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
5
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Other comprehensive income (loss): | |||||||||||||||
Unrealized gain (loss) on interest rate swap contract designated as a cash flow hedge | ( | ) | ( | ) | |||||||||||
Tax benefit (expense) | ( | ) | ( | ) | |||||||||||
Comprehensive income | |||||||||||||||
Less: Comprehensive income attributed to non-controlling interest | |||||||||||||||
Comprehensive income attributed to Class A stockholders | $ | $ | $ | $ | |||||||||||
See accompanying notes to the unaudited consolidated financial statements.
6
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands except share data)
Class A Voting Common Stock | Class B Voting Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total Stockholders’ Equity | Non-controlling Interest | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balance–December 31, 2017 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||
Share-based compensation, including income taxes of $98 | — | — | — | — | — | ||||||||||||||||||||||||||||
Adoption of new accounting standards, net of income taxes of $83 | — | — | — | — | — | ||||||||||||||||||||||||||||
Exchanges | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | — | — | ( | ) | — | — | ( | ) | — | ||||||||||||||||||||||
Tax receivable agreement arising from exchanges, net of income taxes of $50 | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||
Balance–March 31, 2018 | |||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||
Share-based compensation, net of income taxes of $287 | — | — | — | — | — | ||||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | — | — | ( | ) | — | — | ( | ) | — | ||||||||||||||||||||||
Balance-June 30, 2018 | |||||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||
Share-based compensation, net of income taxes of $537 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||
Balance-September 30, 2018 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
7
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands except share data)
Class A Voting Common Stock | Class B Voting Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Stockholders’ Equity | Non-controlling Interest | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
Balance–December 31, 2018 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||
Share-based compensation, net of income taxes of $613 | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||
Exercise of public warrants | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Balance–March 31, 2019 | ||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||
Share-based compensation, net of income taxes of $563 | — | — | — | — | — | |||||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||
Exercise of employee stock options | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | — | — | ( | ) | — | — | ( | ) | — | |||||||||||||||||||||||
Exchanges | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||
Tax receivable agreement arising from exchanges, net of income taxes of $10,109 | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||
Balance-June 30, 2019 | — | ( | ) | |||||||||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||
Share-based compensation, net of income taxes of $228 | — | — | — | — | — | |||||||||||||||||||||||||||||
Distributions | — | — | — | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | — | — | ( | ) | — | — | ( | ) | — | |||||||||||||||||||||||
Exchanges | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||
Tax receivable agreement arising from exchanges, net of income taxes of $17,185 | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||
Balance-September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
8
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Nine Months Ended | |||||||||
September 30, 2019 | September 30, 2018 | ||||||||
Operating activities | |||||||||
Net income | $ | $ | |||||||
Depreciation and amortization | |||||||||
Impairment of property, goodwill and intangibles | |||||||||
Debt premium amortization | ( | ) | ( | ) | |||||
Tax receivable agreement remeasurement and gain on buyout | ( | ) | |||||||
Non-cash fees on disposal of assets | |||||||||
Share-based compensation | |||||||||
Deferred taxes | |||||||||
Loss on sale of assets | |||||||||
Change in operating assets and liabilities, net of acquisitions and dispositions: | |||||||||
Accounts receivable | ( | ) | ( | ) | |||||
Inventories | ( | ) | |||||||
Prepaids and other current assets | ( | ) | ( | ) | |||||
Accounts payable and accrued expenses | |||||||||
Customer trade allowances | ( | ) | |||||||
Net cash provided by operating activities | |||||||||
Investing activities | |||||||||
Purchases of property and equipment | ( | ) | ( | ) | |||||
Acquisition of business, net of cash | ( | ) | |||||||
Proceeds from sale of business, net of cash | |||||||||
Acquisition and development of software assets | ( | ) | ( | ) | |||||
Net cash used provided by (used in) investing activities | ( | ) | |||||||
Financing activities | |||||||||
Repayments of long-term debt and lease obligations | ( | ) | ( | ) | |||||
Distributions to non-controlling interest | ( | ) | ( | ) | |||||
Tax payments related to issuance of shares to employees | ( | ) | ( | ) | |||||
Cash received from exercise of options | |||||||||
Payments on tax receivable agreement | ( | ) | ( | ) | |||||
Net cash used in financing activities | ( | ) | ( | ) | |||||
Net increase (decrease) in cash and cash equivalents | ( | ) | |||||||
Cash and cash equivalents at beginning of period | |||||||||
Cash and cash equivalents at end of period | $ | $ | |||||||
Supplemental Disclosures of Cash Flow Information: | |||||||||
Cash paid during the period for: | |||||||||
Interest | $ | $ | |||||||
Net taxes paid | $ | $ | |||||||
Supplemental disclosure of non-cash investing: | |||||||||
Accrued capital expenditures | $ | $ | ( | ) | |||||
9
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Hostess Brands, Inc. is a Delaware corporation headquartered in Kansas City, Missouri. The consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing fresh sweet baked goods in the United States.
The Company’s operations are conducted through indirect operating subsidiaries that are wholly-owned by Hostess Holdings, L.P. (“Hostess Holdings”), a direct subsidiary of Hostess Brands, Inc. Hostess Brands, Inc. holds 100 % of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests therein and consolidates Hostess Holdings in the Company’s consolidated financial statements. The remaining limited partnership interests in Hostess Holdings are held by the holders of the outstanding shares of Class B common stock of Hostess Brands, Inc. These limited partnership interests in Hostess Holdings are reflected in the consolidated financial statements as a non-controlling interest.
Basis of Presentation
The 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”). In the opinion of management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented, and all such adjustments were of a normal and recurring nature. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018.
Adoption of New Accounting Standards
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, along with the related ASUs 2018-01, 2018-10 and 2018-11 (collectively, “Topic 842”). Topic 842 requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. To adopt this standard, the Company utilized a modified retrospective transition method. Under this approach, the results for reporting periods beginning January 1, 2019 are presented under Topic 842. Prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting standards. There was no cumulative effect of applying Topic 842 to the opening balance of retained earnings. The Company has elected to apply the practical expedients under Topic 842 which allow entities to not reassess the lease classification for expired or existing leases and to not reassess if expired or existing contracts contain leases under the Topic 842 definition. The Company has also elected to use hindsight when determining the lease term of existing leases. As a result of the adoption, on January 1, 2019, the Company recognized right of use assets of $8.2 million, offset by associated accumulated amortization of $5.2 million and corresponding lease liabilities of $3.0 million. The recognition of leases subsequent to the adoption of Topic 842 is further described in the Leases section of this footnote.
10
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries (including those for which the Company is the primary beneficiary of a variable interest entity). All intercompany balances and transactions have been eliminated in consolidation.
The preparation of 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. Management utilizes estimates, including, but not limited to, valuation and useful lives of tangible and intangible assets, valuation of expected future payments under the tax receivable agreement, and reserves for trade and promotional allowances. Actual results could differ from these estimates.
Accounts Receivable
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, 2019 | December 31, 2018 | |||||
Ingredients and packaging | $ | $ | |||||
Finished goods | |||||||
Inventory in transit to customers | |||||||
$ | $ | ||||||
Impairment of Property and Equipment
For the nine months ended September 30, 2018, the Company recorded an impairment loss of $1.4 million related to the planned disposition of certain production equipment before the end of its useful life. This loss is included in other operating expenses on the consolidated statement of operations. The measurement of this loss was based on Level 3 inputs within the fair value measurement hierarchy.
11
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Software Costs
Concentrations
The Company has one customer (together with its affiliates) that accounted for 10% or more of the Company’s total net revenue. The percentage of total net revenues for this customer is presented below by segment:
Three Months Ended | Nine Months Ended | ||||||||||
(% of Consolidated Net Revenues) | September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||
Sweet Baked Goods | % | % | % | % | |||||||
In-Store Bakery | % | % | % | % | |||||||
Total | % | % | % | % | |||||||
Leases
Subsequent to its adoption of Topic 842, the Company recognizes a right of use asset and corresponding lease liability on the consolidated balance sheet for all lease transactions with terms of more than 12 months. Agreements are determined to contain a lease if they convey the use and control of an underlying physical asset. Based on the nature of the lease transaction, leases are either classified as financing or operating. Under both classifications, the right of use asset and liability are initially valued based on the present value of the future minimum lease payments using an effective borrowing rate at the inception of the lease. The Company determined the effective borrowing rate based on its expected incremental borrowing rate on collateralized debt. At September 30, 2019, the weighted average effective borrowing rates for outstanding operating leases was 4.5 %.
Under a financing lease, interest expense related to the lease liability is recognized over the lease term using an effective interest rate method and right of use assets are amortized straight-line over the term of the lease. Under an operating lease, minimum lease payments are expensed straight-line over the lease term. Lease liabilities are amortized using an effective interest rate method and right of use assets are reduced based on the excess of the sum of the straight-line lease expense and the reduction of the lease liability over the actual lease payments. At September 30, 2019, the average remaining terms on operating leases were approximately one year .
Variable lease payments, such as taxes and insurance, are expensed as incurred. Expenses related to leases with original terms less than 12 months (short-term leases) are expensed as incurred. For all leases related to distribution, bakery and corporate facilities, the Company has elected not to separate non-lease components from lease components.
12
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The table below shows the composition of lease expenses for the period subsequent to the adoption of Topic 842:
Three Months Ended | Nine Months Ended | ||||||
(In thousands) | September 30, 2019 | September 30, 2019 | |||||
Amortization of right of use asset, financing lease | $ | $ | |||||
Interest, financing lease | |||||||
Operating lease expense | |||||||
Short-term lease expense | |||||||
Variable lease expense | |||||||
$ | $ | ||||||
At September 30, 2019, right of use assets related to operating leases are included in property and equipment, net on the consolidated balance sheet (see Note 3. Property and Equipment). As of September 30, 2019, the Company has no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease on the consolidated balance sheet (see Note 7. Debt and Lease Obligations).
2. Divestiture of In-Store Bakery Operations
On August 30, 2019, the Company sold its In-Store Bakery operations, including relevant trademarks and licensing agreements, to an unrelated party. The operations included products that were primarily sold in the in-store bakery section of U.S. retail channels.The Company divested the operations to provide more focus on future investment in areas of its business that better leverage its core competencies.
The Company received proceeds from the divestiture of $65.0 million prior to transaction expenses and subject to certain post-closing adjustments. In connection with the sale, during the three and nine months ended 2019, the Company recognized transaction expenses of $2.1 million and a loss on disposal of $0.3 million within other operating expenses on the consolidated statement of operations.
3. Property and Equipment
Property and equipment consists of the following:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Land and buildings | $ | $ | ||||||
Right of use assets, operating | — | |||||||
Machinery and equipment | ||||||||
Construction in progress | ||||||||
Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
$ | $ | |||||||
Depreciation and amortization expense was $4.3 million and $12.9 million for the three and nine months ended September 30, 2019, respectively, compared to $4.1 million and $11.3 million for the three and nine months ended September 30, 2018, respectively.
13
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Segment Reporting
The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. The Company’s Sweet Baked Goods segment consists of fresh and frozen baked goods and bread products that are sold under the Hostess®, Dolly Madison®, Cloverhill® and Big Texas® brands. The In-Store Bakery segment consists primarily of Superior on Main® branded and private label products sold through the in-store bakery section of grocery and club stores. The Company divested its In-Store Bakery operations on August 30, 2019. (See Note 2. Divestiture of In-Store Bakery Operations).
The Company evaluates performance and allocates resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands) | September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||
Net revenue: | |||||||||||||||
Sweet Baked Goods | $ | $ | $ | $ | |||||||||||
In-Store Bakery | |||||||||||||||
Net revenue | $ | $ | $ | $ | |||||||||||
Depreciation and amortization: | |||||||||||||||
Sweet Baked Goods | $ | $ | $ | $ | |||||||||||
In-Store Bakery | |||||||||||||||
Depreciation and amortization | $ | $ | $ | $ | |||||||||||
Gross profit: | |||||||||||||||
Sweet Baked Goods | $ | $ | $ | $ | |||||||||||
In-Store Bakery | |||||||||||||||
Gross profit | $ | $ | $ | $ | |||||||||||
Capital expenditures (1): | |||||||||||||||
Sweet Baked Goods | $ | $ | $ | $ | |||||||||||
In-Store Bakery | |||||||||||||||
Capital expenditures | $ | $ | $ | $ | |||||||||||
(1) | Capital expenditures consists of purchases of property and equipment and acquisition and development of software assets paid in cash or acquired through accounts payable. For the nine months ended September 30, 2019, capital expenditures in accounts payable decreased by $ |
Total assets by reportable segment are as follows:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Total segment assets: | ||||||||
Sweet Baked Goods | $ | $ | ||||||
In-Store Bakery | ||||||||
Total segment assets | $ | $ | ||||||
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HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
After the August 30, 2019 divestiture of the In-Store Bakery operations, the Company retained no assets related to the In-Store Bakery segment.
5. Goodwill and Intangible Assets
In the second quarter of 2019, the Company recognized an impairment charge of $1.0 million in other operating expense on the consolidated statement of operations related to the In-Store Bakery reporting unit. This charge reflects a change in certain market assumptions since the last time the reporting unit was valued in the fourth quarter of 2018 (Level 1 input). In the third quarter of 2019, the Company divested its In-Store Bakery reporting unit (See Note 2. Divestiture of In-Store Bakery Operations). Goodwill activity is presented below by reportable segment:
(In thousands) | Sweet Baked Goods | In-Store Bakery | Total | ||||||||
Balance as of December 31, 2018 | $ | $ | $ | ||||||||
Impairment | ( | ) | ( | ) | |||||||
Divestiture | ( | ) | ( | ) | |||||||
Balance as of September 30, 2019 | $ | $ | $ | ||||||||
Intangible assets consist of the following:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
Intangible assets with indefinite lives (Trademarks and Trade Names) | $ | $ | |||||
Intangible assets with definite lives (Customer Relationships) | |||||||
Less accumulated amortization (Customer Relationships) | ( | ) | ( | ) | |||
Less accumulated impairment charges (Trademarks and Trade Names) | ( | ) | |||||
Intangible assets, net | $ | $ | |||||
Amortization expense was $5.8 million and $17.7 million for the three and nine months ended September 30, 2019, respectively, and $6.0 million and $18.0 million for the three and nine months ended September 30, 2018, respectively. The unamortized portion of customer relationships will be expensed over their remaining useful lives, from 19 to 23 years. The weighted-average amortization period as of September 30, 2019 for customer relationships was 20.0 years. The divestiture of the In-Store Bakery operations during the three months ended September 30, 2019 resulted in a $24.5 million reduction of intangible assets.
15
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Payroll, vacation and other compensation | $ | $ | ||||||
Incentive compensation | ||||||||
Accrued interest | ||||||||
Workers compensation reserve | ||||||||
Self-insurance reserves | ||||||||
Current income taxes payable | ||||||||
Interest rate swap | ||||||||
$ | $ | |||||||
7. Debt and Lease Obligations
A summary of the carrying value of the debt and lease obligations is as follows:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Third Term Loan (4.4% as of September 30, 2019) | ||||||||
Principal | $ | $ | ||||||
Unamortized debt premium and issuance costs | ||||||||
Total Third Term Loan | ||||||||
Financing lease obligations | ||||||||
Operating lease obligations | — | |||||||
Total debt and lease obligations | ||||||||
Less: Current portion of long term debt and lease obligations | ( | ) | ( | ) | ||||
Long-term portion | $ | $ | ||||||
8. Interest Rate Swap
To reduce the effect of interest rate fluctuations, the Company entered into an interest rate swap contract with a counter party to make a series of payments based on a fixed interest rate of 1.78 % and receive a series of payments based on the greater of LIBOR or 0.75 %. Both the fixed and floating payment streams are based on a notional amount of $500 million at the inception of the contract and will be reduced by $100 million each year of the five-year contract. As of September 30, 2019 and September 30, 2018, the notional amount is $300 million and $400 million, respectively. The Company entered into this transaction to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated this derivative as a cash flow hedge. At September 30, 2019, the effective interest rate on the long-term debt hedged by this contract was 4.03 %.
As of September 30, 2019 the fair value of the interest rate swap contract was a liability of $0.8 million reported within accrued expenses and other liabilities on the consolidated balance sheet. As of December 31, 2018 the fair value of the interest rate swap contract was an asset of $5.1 million reported within other assets, net on the consolidated balance sheet.The fair value of the interest rate swap contract is measured on a recurring basis by netting the discounted future
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HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 observable market interest rate curves (Level 2).
9. Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to the Company’s Class A stockholders 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 public and private placement warrants, restricted stock units and stock options.
Below are basic and diluted net income per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to Class A stockholders (in thousands) | $ | $ | $ | $ | ||||||||||||
Denominator: | ||||||||||||||||
Weighted-average Class A shares outstanding - basic | ||||||||||||||||
Dilutive effect of warrants | ||||||||||||||||
Dilutive effect of restricted stock units | ||||||||||||||||
Weighted-average shares outstanding - diluted | ||||||||||||||||
Net income per Class A share - basic | $ | $ | $ | $ | ||||||||||||
Net income per Class A share - diluted | $ | $ | $ | $ | ||||||||||||
For the three and nine months ended September 30, 2019 and 2018, stock options were excluded from the computation of diluted net income per share because the sum of the assumed proceeds from the awards’ exercise and unrecognized compensation expense was greater than the average market price of Class A common stock issuable upon exercise thereof.
Weighted average Class A shares outstanding reflect the weighted impact of the exchange of 11.5 million and 20.8 million Class B shares for Class A shares during the three and nine months ended September 30, 2019, respectively.
10. Income Taxes
The Company is subject to U.S. federal, state and local taxes on its allocable portion of the income of Hostess Holdings, a partnership for U.S. federal and most applicable state and local taxes. As a partnership, Hostess Holdings is itself not subject to U.S. federal and certain state and local income taxes. The operations of Hostess Holdings include those of its C Corporation subsidiaries.
The Company’s estimated annual effective tax rate is 22.6 % prior to taking into account any discrete items. The effective tax rate was 22.0 % and 18.9 % for the three months ended September 30, 2019 and 2018, respectively, and 16.8 % and 12.5 % for the nine months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate is primarily driven by Hostess Brands, Inc.’s increased ownership in Hostess Holdings.
17
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Tax Receivable Agreement Obligations
The following table summarizes activity related to the Tax Receivable Agreement for the nine months ended September 30, 2019:
(In thousands) | |||
Balance December 31, 2018 | $ | ||
Exchange of Class B units for Class A shares | |||
Remeasurement due to change in estimated tax rate | ( | ) | |
Remeasurement due to change in estimated holding period of In-Store Bakery | |||
Payments | ( | ) | |
Balance September 30, 2019 | $ | ||
As of September 30, 2019 the future expected payments under the tax receivable agreement are as follows:
2019 | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
12. Commitments and Contingencies
In April 2019, the Company entered into a 6.5 year lease, with the option to renew for two additional five-year periods, for a distribution facility in Edgerton, Kansas. The lease term will commence upon completion of construction of the facility, which is expected to occur during the fourth quarter of 2019. During the initial lease term, average annual minimum lease payments are expected to be $2.3 million.
In June 2019, the Company entered into a nine year lease for office space for its marketing and category management groups in Chicago, Illinois. The lease can be terminated, at the Company’s option, after five years. The Company took possession of the property in the third quarter of 2019. Average annual minimum lease payments are expected to be $0.3 million.
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.
13. Subsequent Events
On October 1, 2019, the Company refinanced its $976.4 million outstanding term loan and its $100 million revolving credit agreement extending the maturities to August 3, 2025 and August 3, 2024, respectively. Additionally, the interest rate margin on the Revolver was reduced from 3.00 % - 3.50 % per annum to 2.25 % per annum. All other terms under the Third Term Loan and Revolver, including variable interest rates, required principal payments, collateralization and financial covenants, remain unchanged. The Company incurred costs of approximately $8 million in connection with the refinancing.
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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 consolidated financial statements and notes thereto included herein, and our audited Annual Report on Form 10-K for the year ended December 31, 2018. The terms “our”, “we,” “us,” and “Company” as used herein refer to Hostess Brands, Inc. and its consolidated subsidiaries.
Overview
We are a leading United States packaged food company historically operating in two reportable segments: Sweet Baked Goods (“SBG”) and In-Store Bakery (“ISB”). Our direct-to-warehouse (“DTW”) product distribution system allows us to deliver to our customers’ warehouses. Our customers in turn distribute to the retail stores.
Hostess® is the second leading brand by market share within the SBG category, according to Nielsen U.S. total universe. For the 13-week period ended September 28, 2019, our branded SBG products (which include Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was 19.2% per Nielsen’s U.S. SBG category data.
Factors Impacting Recent Results
Acquisition
On February 1, 2018, we acquired certain U.S. breakfast assets of Aryzta, LLC (Aryzta), which primarily included a bakery facility, inventory, and the Big Texas® and Cloverhill® brand names (collectively known as the “Cloverhill Business”). We acquired these assets to expand our product portfolio and to gain previously outsourced manufacturing capabilities for our existing product portfolio. Our consolidated statement of operations includes the operation of these assets from February 1, 2018 through September 30, 2019.
Divestiture
On August 30, 2019, the Company sold the In-Store Bakery (“ISB”) operations, including relevant trademarks and licensing agreements, to an unrelated party. The ISB operations provided products that were primarily sold in the in-store bakery section of U.S. retail channels. The Company divested the operations to focus more on future investment in areas of our business that better leverage our core competencies.
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Operating Results
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands, except per share data) | September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||
Net revenue | $ | 227,211 | $ | 210,982 | $ | 691,009 | $ | 635,574 | |||||||
Gross profit | 70,420 | 60,378 | 229,058 | 198,476 | |||||||||||
As a % of net revenue | 31.0 | % | 28.6 | % | 33.1 | % | 31.2 | % | |||||||
Operating costs and expenses | $ | 46,849 | $ | 36,685 | $ | 132,496 | $ | 107,263 | |||||||
Operating income | 23,571 | 23,693 | 96,562 | 91,213 | |||||||||||
As a % of net revenue | 10.4 | % | 11.2 | % | 14.0 | % | 14.4 | % | |||||||
Other expense | $ | 9,813 | $ | 9,938 | $ | 31,637 | $ | 16,824 | |||||||
Income tax expense | 3,029 | 2,603 | 10,915 | 9,315 | |||||||||||
Net income | 10,729 | 11,152 | 54,010 | 65,074 | |||||||||||
Net income attributable to Class A stockholders | 8,785 | 7,941 | 41,395 | 51,064 | |||||||||||
Earnings per Class A share: | |||||||||||||||
Basic | $ | 0.08 | $ | 0.08 | $ | 0.39 | $ | 0.51 | |||||||
Diluted | $ | 0.07 | $ | 0.08 | $ | 0.37 | $ | 0.49 | |||||||
Results of Operations
Net Revenue
Net revenue for the three months ended September 30, 2019 was $227.2 million, an increase of 7.7%, or $16.2 million, compared to $211.0 million for the three months ended September 30, 2018. Excluding the ISB operations sold during the quarter, net revenue increased 9.2%. Sales of core Hostess® branded products, including Donettes® and CupCakes, continued to increase due to strong distribution and merchandising support across multiple sales channels. Sales of new Hostess® branded items, including Danishes, provided revenue growth, along with increased sales of Dolly Madison® branded products, leveraging the customer relationships from the Cloverhill Business acquisition. Net revenue also benefited from pricing actions implemented in late 2018. Consistent with our expectations, revenue growth was negatively impacted by the temporary shutdown of certain production lines to perform maintenance and operating enhancements.
Net revenue for the nine months ended September 30, 2019 increased 8.7%, or $55.4 million, compared to the nine months ended September 30, 2018. The increase was driven by sales volume in both our Hostess® and Dolly Madison® products and new breakfast products across multiple channels, including club and convenience. Net revenue also benefited from pricing actions implemented in late 2018.
Gross Profit
Gross profit for the three months ended September 30, 2019 was $70.4 million, or 31.0% of net revenue, compared to $60.4 million, or 28.6% of net revenue for the three months ended September 30, 2018. Gross margin increased as a result of previously announced favorable pricing actions, increased sales volume and operating cost efficiencies, partially offset by a shift in product mix.
Gross profit was $229.1 million, or 33.1% of net revenue, for the nine months ended September 30, 2019 compared to $198.5 million, or 31.2% of net revenue, for the nine months ended September 30, 2018. The increase was primarily attributable to increased sales volume and operating efficiencies.
Operating Costs and Expenses
Operating costs and expenses for the three months ended September 30, 2019 were $46.8 million, or 20.6% of net revenue, compared to $36.7 million, or 17.4% of net revenue for the three months ended September 30, 2018. These
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costs increased due to higher incentive compensation and additional corporate expenses incurred in connection with the relocation of our primary distribution facility and the category sales and marketing functions. Additionally, the sale of ISB resulted in higher operating costs related to transaction fees, a remeasurement of the tax receivable agreement and a loss on the sale. Professional service fees were also incurred in anticipation of refinancing of our term loan and revolver, which was finalized in October of 2019.
Operating costs and expenses for the nine months ended September 30, 2019 increased by 23.5% from $107.3 million to $132.5 million compared to the nine months ended September 30, 2018. In addition to the factors mentioned above, during the first quarter of 2019 we recognized a gain on the remeasurement of the tax receivable agreement of $1.8 million due to state apportionment changes.
Other Expense
Other expense for the three months ended September 30, 2019 was $9.8 million compared to $9.9 million for the three months ended September 30, 2018, in each case consisting primarily of interest expense. Interest expense on our Third Term Loan was $10.8 million and $10.0 million for the three months ended September 30, 2019 and 2018, respectively.
Other expense for the nine months ended September 30, 2019 was $31.6 million compared to $16.8 million for the nine months ended September 30, 2018, consisting of interest expense for each period and the gain on buyout of a portion of the tax receivable agreement in the nine months ended September 30, 2018. Interest expense on our Third Term Loan was $32.8 million and $29.1 million for the nine months ended September 30, 2019 and 2018, respectively.
Income Taxes
Our effective tax rate for the three months ended September 30, 2019 was 22.0% compared to 18.9% for the three months ended September 30, 2018. The increase in the effective tax rate is due to the Class B for Class A share exchanges in the second and third quarters of 2019. Subsequent to these exchanges, more income from Hostess Holdings, L.P. was allocated to Hostess Brands, Inc.
Our effective tax rate was an expense of 16.8% for the nine months ended September 30, 2019 compared to an expense of 12.5% for the nine months ended September 30, 2018. The increase in the effective tax rate is primarily driven by Hostess Brands, Inc.’s increased ownership in Hostess Holdings during 2019 as well as the tax impact of the $12.4 million gain on the buyout of a portion of the tax receivable agreement during 2018.
Segments
We have historically had two reportable segments: Sweet Baked Goods and In-Store Bakery. Sweet Baked Goods consists of fresh and frozen baked goods and bread products that are sold under the Hostess®, Dolly Madison®, Cloverhill® and Big Texas® brands. The In-Store Bakery segment consists of products, including Superior on Main® branded and private label products, sold through the in-store bakery section of grocery and club stores. We sold our In-Store Bakery operations on August 30, 2019.
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We evaluate performance and allocate resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:
Unaudited Segment Financial Data | Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands) | September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
Net revenue: | ||||||||||||||||
Sweet Baked Goods | $ | 220,156 | $ | 201,693 | $ | 662,307 | $ | 605,223 | ||||||||
In-Store Bakery | 7,055 | 9,289 | 28,702 | 30,351 | ||||||||||||
Net revenue | $ | 227,211 | $ | 210,982 | $ | 691,009 | $ | 635,574 | ||||||||
Gross profit: | ||||||||||||||||
Sweet Baked Goods | $ | 68,804 | $ | 58,886 | $ | 222,872 | $ | 192,683 | ||||||||
In-Store Bakery | 1,616 | 1,492 | 6,186 | 5,793 | ||||||||||||
Gross profit | $ | 70,420 | $ | 60,378 | $ | 229,058 | $ | 198,476 | ||||||||
Sweet Baked Goods net revenue for the three months ended September 30, 2019 grew $18.5 million, or 9.2%, from the three months ended September 30, 2018, driven by additional volume as well as price increases.
Sweet Baked Goods net revenue for the nine months ended September 30, 2019 increased $57.1 million, or 9.4%, from the nine months ended September 30, 2018. The increase in net revenue was primarily attributable to pricing actions and increases in sales volume.
Sweet Baked Goods gross profit for the three months ended September 30, 2019 was $68.8 million, or 31.3% of net revenue, compared to $58.9 million, or 29.2% of net revenue, for the three months ended September 30, 2018. The increase in gross profit was primarily the result of increased sales volumes and pricing actions and operating efficiencies.
Sweet Baked Goods gross profit for the nine months ended September 30, 2019 was $222.9 million, or 33.7% of net revenue compared to $192.7 million, or 31.8% of net revenue, for the nine months ended September 30, 2018. The increase was primarily attributed to increased sales volume, pricing actions and operating efficiencies.
In-Store Bakery net revenue for the three months ended September 30, 2019 decreased by $2.2 million, or 24.0% from the three months ended September 30, 2018 due to the August 2019 divestiture. Gross profit was $1.6 million, or 22.9% of net revenue for the three months ended September 30, 2019, compared to gross profit of $1.5 million, or 16.1% of net revenue for the three months ended September 30, 2018.
In-Store Bakery net revenue for the nine months ended September 30, 2019 decreased by $1.6 million, or 5.4% from the nine months ended September 30, 2018 due to the August 2019 divestiture. Gross profit was $6.2 million, or 21.6% of net revenue for the nine months ended September 30, 2019, compared to gross profit of $5.8 million, or 19.1% of net revenue for the nine months ended September 30, 2018.
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Liquidity and Capital Resources
Our primary sources of liquidity are from cash on hand, future cash flow generated from operations, and availability under our revolving credit agreement (“Revolver”). We believe that cash flows from operations and the current cash and cash equivalents on the balance sheet will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next 12 months. Our 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 acquisitions 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 September 30, 2019 and December 31, 2018 of $8.0 million and $12.0 million, respectively. We have the ability to borrow under the Revolver to meet obligations as they come due. As of September 30, 2019, we had approximately $96.4 million available for borrowing, net of letters of credit, under the Revolver.
Cash Flows from Operating Activities
Cash flows provided by operating activities for the nine months ended September 30, 2019 and 2018 were $107.4 million and $109.9 million, respectively. The decrease was attributable to the timing of customer receipts, partially offset by the timing of vendor payments and payments to customers related to trade programs.
Cash Flows from Investing Activities
Investing cash flows for the nine months ended September 30, 2019 were an inflow of $30.6 million as compared to an outflow for the nine months ended September 30, 2018 of $59.3 million. Cash flows from investing activities increased in 2019 due to the cash received from the divestiture of ISB in the third quarter of 2019 and the cash paid for the acquisition of the Cloverhill Business in 2018.
Cash Flows from Financing Activities
Cash flows used in financing activities were $17.5 million and $58.9 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease is primarily due to the $34.0 million payment to buy out a portion of the tax receivable agreement in 2018. We also paid lower distributions to the non-controlling interest, a partnership for income tax purposes, to cover income tax payments during 2019.
Long-Term Debt
We had no outstanding borrowings under our Revolver as of September 30, 2019.
As of September 30, 2019, $976.4 million aggregate principal amount of the Third Term Loan was outstanding and letters of credit worth up to $3.6 million aggregate principal amount were available, reducing the amount available under the Revolver. As of September 30, 2019, we were in compliance with the covenants under the Third Term Loan and the Revolver.
On October 1, 2019, the Company refinanced its $976.4 million outstanding term loan and its $100 million revolving credit agreement extending the maturities to August 3, 2025 and August 3, 2024, respectively. The maturities of the term loan and revolver were extended to August 3, 2025 and August 3, 2024, respectively. Additionally, the interest rate margin on the revolver was reduced from between 3.00% and 3.50% per annum to 2.25% per annum. All other terms under the term loan and revolver, including variable interest rates, required principal payment, collateralization and financial covenants, remain unchanged.
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Contractual Obligations and Commitments
In April 2019, we entered into a 6.5 year lease, with the option to renew for two additional five-year periods, for a distribution facility in Kansas. The lease term will commence upon completion of construction of the facility, which is expected to occur in the fourth quarter of 2019. During the initial lease term, average annual minimum lease payments are expected to be $2.3 million.
In June 2019, we entered into a nine year lease for space to house our new hub for marketing and category management in Chicago, IL. The lease can be terminated, at the option of the lessee, after five years.We took possession of the property in the third quarter. Average annual minimum lease payments are expected to be $0.3 million.
Otherwise, there were no material changes, outside the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018.
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, 2018. Our exposures to market risk have not changed materially since December 31, 2018.
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 September 30, 2019, 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 September 30, 2019 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 September 30, 2019, 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, contract 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 or enter into settlements or claims that could materially impact our results.
Item 1A. Risk Factors
Our risk factors are set forth in the “Risk Factors” section of our Annual Report on Form 10-K filed on February 27, 2019. There have been no material changes to our risk factors since the filing of the Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. | Description | |||
31.1 | ||||
31.2 | ||||
32.1 | ||||
32.2 | ||||
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 September 30, 2019, 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, in Kansas City, Missouri on November 6, 2019.
HOSTESS BRANDS, INC. | |
By | /s/ Thomas Peterson |
Thomas Peterson Executive Vice President, Chief Financial Officer | |