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HOSTESS BRANDS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/17/2021 | 07:24am EDT

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 consolidated financial statements and notes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2020. The terms "our", "we," "us," and "Company" as used herein refer to Hostess Brands, Inc. and its consolidated subsidiaries.


We are a leading North America packaged food company which produces several types of sweet baked goods ("SBG") as well as cookie and wafer products. 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 April 3, 2021, our branded SBG products (which include Hostess®, Dolly Madison®, Cloverhill® and Big Texas®) market share was 20.7% per Nielsen's U.S. SBG category data.



Factors Impacting Recent Results
On January 3, 2020, we completed the acquisition of all of the shares of the
parent company of Voortman Cookies Limited ("Voortman"), a manufacturer of
premium, branded wafers as well as sugar-free and specialty cookies. By adding
the Voortman® brand, we expect to have greater growth opportunities provided by
a more diverse portfolio of brands and products. Our consolidated statement of
operations includes the operation of these assets from January 3, 2020 through
March 31, 2021.
The acute and far-reaching impact of the COVID-19 pandemic and actions taken by
governments to contain the spread of the virus have impacted our operations
during the three months ended March 31, 2021 and 2020. As consumers prepared for
extended stays at home, we experienced an increase in consumption during the
first and second quarter, particularly in our multi-pack products sold through
grocery and mass retailer channels. Conversely, we experienced lower consumption
of single-serve products, which are often consumed away from home. This trend
moderated during the remainder of 2020, and in the first quarter of 2021 we have
experienced continued strong demand in our multi-pack products as well as an
increase in our immediate consumption single-serve business as mobility
increases. However, we cannot predict if these trends will sustain or reverse in
future periods.
At the start of the pandemic, we established a task force to monitor the rapidly
evolving situation and recommend risk mitigation actions as deemed necessary. To
date, we have experienced minimal disruption to our supply chain or distribution
network, including the supply of our ingredients, packaging or other sourced
materials, though it is possible that more significant disruptions could occur
if the COVID-19 pandemic continues to impact markets around the world. We are
also working closely with all of our contract manufacturers, distributors and
other external business partners. As a food producer, we are an essential
service and our production and distribution facilities have continued to
operate. To protect our employees and ensure continuity of operations, we have
implemented additional security and sanitation measures in all of our
facilities. We are monitoring our employees' health and providing additional
resources and protocols to enable effective social distancing and adherence to
our stringent internal food safety guidelines, industry best practices and
evolving CDC guidelines. Many non-production team members, including sales,
marketing and corporate employees, are adhering to social distancing guidelines
by working from home and reducing person-to-person contact while supporting our
ability to bring products to consumers.
Starting in late 2020, several vaccines have been authorized for use against
COVID-19 in the United States and internationally. As a result of the
distribution of these vaccines, various federal state and local governments have
begun to ease the movement restrictions and initiatives while continuing to
require social distancing and face mask protocols. However, uncertainty
continues to exist regarding the severity and duration of the pandemic, the
speed and effectiveness of vaccine and treatment developments and deployment,
potential variants of COVID-19, and the effect of actions taken and that will be
taken to contain COVID-19 or treat its effect, among others.
Under the provisions of the Coronavirus Aid, Relief, and Economic Security
("CARES") Act, we were able to defer the payment of $5.6 million of 2020
employer payroll taxes until the second quarter of 2021. Apart from this
deferral and their impact on the general economy, including the labor market and
consumer demand, neither the CARES Act, the American Rescue Plan enacted in the
first quarter of 2021, nor any other government program intended to address
COVID-19 had any material impact on our consolidated financial statements for
the three months ended March 31, 2021 or 2020. We continue to monitor any
effects that may result from the CARES Act and other stimulus programs.



                               Operating Results
                                                              Three Months Ended
 (In thousands, except per share data)               March 31, 2021       March 31, 2020
 Net revenue                                        $      265,421$      243,485
 Gross profit                                               95,519               79,337
 As a % of net revenue                                        36.0  %              32.6  %

 Operating costs and expenses                       $       48,474$       64,171
 Operating income                                           47,045               15,166

 Other (income) expense                                     10,304              (66,822)

 Income tax expense                                         10,009                  248
 Net income                                                 26,732               81,740

 Net income attributable to Class A stockholders            26,732               81,448

 Earnings per Class A share:
 Basic                                                        0.20                 0.66
 Diluted                                                      0.19                 0.02

Results of Operations
Net Revenue
Net revenue for the three months ended March 31, 2021 was $265.4 million, an
increase of 9.0%, or $21.9 million, compared to $243.5 million for the three
months ended March 31, 2020. Sweet baked goods net revenue increased $11.3
million, primarily driven by higher volume of core Hostess® branded products
partially offset by lower sales of private label and non-Hostess® branded
products. Cookies net revenue increased $10.6 million due to the strong demand
and expanded distribution of Voortman® branded products following the transition
of the Voortman business to the warehouse distribution model during the first
quarter of 2020.

Gross Profit
Gross profit for the three months ended March 31, 2021 was $95.5 million, or
36.0% of net revenue, compared to $79.3 million, or 32.6% of net revenue for the
three months ended March 31, 2020. The increase was driven primarily by higher
volume of Hostess® branded products and favorable mix. Additionally, the
increase was driven by the realization of Voortman synergies and productivity
efficiencies as the Voortman business was not yet transitioned to the warehouse
distribution model and fully integrated in the first quarter of 2020.
Operating Costs and Expenses
Operating costs and expenses for the three months ended March 31, 2021 were
$48.5 million, compared to $64.2 million for the three months ended March 31,
2020. The decrease was primarily attributed to prior year expenses incurred for
the integration and conversion of Voortman's operations and the realization of
operating cost synergies.
Other (Income) Expense
Other expense for the three months ended March 31, 2021 was $10.3 million
compared to other income of $66.8 million for the three months ended March 31,
2020 primarily as a result of the $79.1 million gain on change in fair value of
our liability-classified warrants in the three months ended March 31, 2020.
Interest expense on our term loans was $9.7 million and $11.5 million for the
three months ended March 31, 2021 and 2020, respectively. Interest expense on
our term loan decreased in the current year due to the fluctuations in LIBOR.



Income Taxes Our effective tax rate for the three months ended March 31, 2021 was 27.2% compared to 0.3% for the three months ended March 31, 2020. The increase in tax rate is primarily attributed to the $79.1 million change in fair value of warrant liabilities in the prior-year period, which is a non-taxable gain. The effective rate was also impacted by the removal of the non-controlling interest in the current-year period and a write-off of deferred taxes in the prior-year period related to Voortman.

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 the purchase
commitments for certain raw materials and packaging used in our productions
process, scheduled rent on leased facilities, scheduled debt service payments on
our term loan and settlements on related interest rate swap contracts, payments
on our Tax Receivable Agreement, settlements on our outstanding foreign currency
contracts and outstanding purchase orders on capital projects.
Our ability to generate sufficient cash from our operating activities depends on
our future performance, which is subject to general economic, political,
financial, competitive and other factors beyond our control. In addition, our
future 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 March 31, 2021 and December 31,
2020 of $33.1 million and $6.1 million, respectively. We have the ability to
borrow under the Revolver to meet obligations as they come due. As of March 31,
2021, we had approximately $94.5 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 three months ended March 31,
2021 and 2020 were $32.9 million and $13.1 million, respectively. Operating cash
flow increased primarily due to the Voortman transition costs paid in 2020,
partially offset by an increase in accounts receivable.
Cash Flows from Investing Activities
Cash used in investing activities for the three months ended March 31, 2021 and
2020 were $10.9 million and $331.5 million, respectively. During the three
months ended March 31, 2020, we funded the CAD $423 million purchase price of
Voortman with cash on hand and the proceeds from an incremental term loan on our
existing credit facility. Cash used for purchase of property and equipment
reflects continued innovation through investments in new bakery lines and


Cash Flows from Financing Activities
Cash flows from financing activities were $2.7 million and $130.4 million for
the three months ended March 31, 2021 and 2020, respectively. Financing activity
for the current year primarily consists of cash received from the exercise of
warrants partially offset by regular debt service payments. During 2020, cash
proceeds of $140.0 million from the incremental term loan used to finance the
purchase of Voortman were offset by related charges of $3.1 million.
Long-Term Debt
As of March 31, 2021, $1,100.0 million aggregate principal amount of the Term
Loan was outstanding and letters of credit worth up to $5.5 million aggregate
principal amount were available, reducing the amount available under the
Revolver. We had no outstanding borrowings under our Revolver as of March 31,
2021. As of March 31, 2021, we were in compliance with the covenants under the
Term Loan and the Revolver.
Contractual Obligations and Commitments
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/A for the year ended December 31, 2020.

© Edgar Online, source Glimpses

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