NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Descr
i
ption 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 wholly owned 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 Hostess brand dates to 1919 when the Hostess CupCake was introduced to the public, followed by Twinkies in 1930. In 2013, the Legacy Hostess Equityholders (as defined below) acquired the Hostess brand out of the bankruptcy liquidation proceedings of its prior owners, free and clear of all past liabilities. After a brief hiatus in production, the Company began providing Hostess products to consumers and retailers across the nation in July 2013. Today, the Company produces a variety of new and classic treats under the Hostess® and Dolly Madison® group of brands, including Twinkies®, CupCakes, Ding Dongs®, HoHos®, Donettes® and Fruit Pies.
On November 4, 2016 (the “Closing Date”), in a transaction referred to as the “Business Combination,” Gores Holdings, Inc. acquired a controlling interest in Hostess Holdings, L.P. (“Hostess Holdings”), an entity owned indirectly by C. Dean Metropoulos and certain equity funds managed by affiliates of Apollo Global Management, LLC (the “Apollo Funds”, and together with entities controlled by Mr. Metropoulos, the “Legacy Hostess Equityholders”). Our “Sponsor” refers to Gores Sponsor, LLC, a Delaware limited liability company and the principal stockholder of Gores Holdings, Inc. prior to the Business Combination, and the “The Gores Group” refers to The Gores Group LLC, an affiliate of our Sponsor. In connection with the closing of the Business Combination, Gores Holdings, Inc. changed its name to “Hostess Brands, Inc.” and its trading symbols on NASDAQ from “GRSH,” and “GRSHW,” to “TWNK” and “TWNKW”.
As a result of the Business Combination, for accounting purposes, Hostess Brands, Inc. is the acquirer and Hostess Holdings is the acquired party and accounting predecessor. Our financial statement presentation includes the financial statements of Hostess Holdings and its subsidiaries as “Predecessor” for periods prior to the completion of the Business Combination and of Hostess Brands, Inc., including the consolidation of Hostess Holdings and its subsidiaries, for periods from and after the Closing Date (referred to as the “Successor”).
On May 10, 2016, the Predecessor purchased the stock of Superior Cake Products, Inc. (“Superior”) located in Southbridge, Massachusetts. Superior manufactures and distributes eclairs, madeleines, brownies, and iced cookies sold in the “In-Store Bakery” section of retailers.
In the Consolidated Statements of Operations, amortization of customer relationships (previously within general and administrative) have been presented separately from general and administrative in the current period presentation, with conforming reclassifications made for the prior period presentation. In the Consolidated Balance Sheets, customer trade allowances (previously netted as an allowance against trade accounts receivable) are presented in current liabilities, with conforming reclassifications made for the prior period presentation.
The Company has
two
reportable segments: Sweet Baked Goods and Other.
Basis of Presentation
In the opinion of management, the unaudited consolidated financial statements include all adjustments that are of a normal and recurring nature that are necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. 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, 2016.
Principles of Consolidation
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 Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries, collectively referred to as either Hostess or the Company. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
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 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, reserves for trade and promotional allowances, workers’ compensation and self-insured medical claims. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with current year presentation.
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for goods that have been received by the customer. As of March 31, 2017 and December 31, 2016, the Company’s accounts receivable were
$96.1 million
and
$89.2 million
, respectively, which have been reduced by allowances for damages occurring during shipment, quality claims and doubtful accounts in the amount of
$2.2 million
and
$1.9 million
, respectively. In addition, there are customer trade allowances of
$36.4 million
and
$36.7 million
as of March 31, 2017 and December 31, 2016, respectively, in current liabilities in the Consolidated Balance Sheets.
Inventories
Inventories are stated at the lower of cost or market on a first-in first-out basis. The Company estimates its costs for ingredients, packaging, direct labor and overhead prior to the beginning of each period for the Company’s expected production costs for its various products.
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)
|
March 31,
2017
|
|
December 31, 2016
|
|
(Successor)
|
|
(Successor)
|
Ingredients and packaging
|
$
|
13,855
|
|
|
$
|
12,712
|
|
Finished goods
|
15,363
|
|
|
14,229
|
|
Inventory in transit to customers
|
2,871
|
|
|
3,503
|
|
|
$
|
32,089
|
|
|
$
|
30,444
|
|
Impairment of Property and Equipment
For the three months ended March 31, 2017 (Successor), the Company did not have any impairments. For the three months ended March 31, 2016 (Predecessor), the Company closed multiple production lines at the Indianapolis, Indiana bakery and transitioned production to other facilities. The Company recorded an impairment loss of
$7.3 million
, related to equipment that the Company had idled, or which otherwise qualified for impairment. The measurement of this loss was considered to be based on Level 3 inputs within the fair value measurement hierarchy as defined in the accounting guidance.
Software Costs
Included in the caption “Other assets” in the Consolidated Balance Sheets is capitalized software in the amount of approximately
$7.3 million
and
$7.4 million
at March 31, 2017 and December 31, 2016, respectively. Capitalized software costs are amortized over their estimated useful life of
five years
commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative was
$0.6 million
and
$0.4 million
for the three months ended March 31, 2017 (Successor) and 2016 (Predecessor), respectively.
Bakery Shutdown Costs
On October 17, 2014 (Predecessor), the Company closed its Schiller Park, Illinois bakery and completed the sale of the bakery in May 2016. For the three months ended March 31, 2016 (Predecessor), the Company incurred
$0.2 million
in bakery shutdown costs associated with utilities, insurance, maintenance, and taxes related to the assets that were held for sale.
Concentrations
The Company has one customer 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:
|
|
|
|
|
|
|
|
|
(% of Consolidated Net Revenues)
|
Three Months
Ended March 31,
2017
|
|
|
Three Months
Ended March 31,
2016
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
Sweet Baked Goods
|
18.3
|
%
|
|
|
22.0
|
%
|
|
Other
|
0.7
|
%
|
|
|
—
|
|
|
Total
|
19.0
|
%
|
|
|
22.0
|
%
|
|
Advertising Costs
Advertising costs, through both national and regional media, are expensed in the period in which the advertisements are run. These costs totaled
$0.8 million
and
$1.1 million
for the three months ended March 31, 2017 (Successor), and 2016 (Predecessor), respectively. These costs are recorded within advertising and marketing expense on the consolidated statement of operations.
New Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update No. 2017-4 (“ASU 2017-4”), Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-4 eliminates Step 2 from the goodwill impairment test. Step 2 required an entity to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in a business combination. Instead, an entity should perform its goodwill impairment test and recognize an impairment charge by comparing the fair value of a reporting unit with its carrying amount. ASU 2017-4 will become effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company has early adopted ASU 2017-4 as of March 31, 2017 and does not expect the adoption of ASU 2017-4 to have a material impact on its consolidated financial position, results of operations or cash flows. Our goodwill impairment tests have not proceeded to Step 2 in any measurement period.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. This standard 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. This standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2019. Companies may elect to adopt this application as of the original effective date for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. In March 2016 and April 2016, the FASB issued ASU No. 2016-08 and ASU No. 2016-10, respectively, which clarifies the implementation guidance on principal versus agent considerations and also identifies performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Based on the analysis conducted to date, the Company does not believe the impact upon adoption will be material to its consolidated financial statements. The Company plans to adopt the standard in the first quarter of 2019 under the cumulative effect transition method.
The planned adoption dates for all standards not yet implemented are based on the Company’s current classification as an Emerging Growth Company as defined in the Jumpstart Our Business Startups Act (JOBS Act). If this classification changes, we will reevaluate our timeline for implementing these standards.
2
.
Stock-Based Compensation
Hostess Brands, Inc. 2016 Equity Incentive Plan (Successor)
The Hostess Brands, Inc. 2016 Equity Incentive Plan (the 2016 Plan) provides for the grant of various equity-based incentive awards to directors of the Company, certain members of Company management, and service providers to the Company. The types of equity-based awards that may be granted under the 2016 Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. There are
7,150,000
registered shares of Class A common stock reserved for issuance under the 2016 Plan. All awards issued under the 2016 Plan may only be settled in shares of Class A common stock.
Restricted Stock Units
During the three months ended March 31, 2017, the following RSUs have been granted under the 2016 Plan:
|
|
•
|
On January 25, 2017, the Company granted
22,732
RSUs to directors of the Company. The units vest on November 4, 2017. These awards only contain service conditions.
|
|
|
•
|
On March 23, 2017, the Company granted
297,500
RSUs to certain members of management. One-third of the units vest at each of the following dates; January 1, 2018, November 4, 2018, and 2019. Vesting is dependent upon positive earnings per share for the fiscal year ending immediately prior to the vesting date. Management has determined it is probable that these performance conditions will be met.
|
|
|
•
|
On March 23, 2017, the Company granted
352,680
RSUs to certain members of management. One-third of the units vest at each of the following dates; November 4, 2017, 2018, and 2019. These awards only contain service conditions.
|
|
|
•
|
On March 23, 2017 the Company granted
688,313
RSUs to certain members of management. The units vest on December 31, 2019. At the end of each of
three
annual performance periods, ending December 31, 2017, 2018 and 2019, a portion of the units will be banked if the Company achieves certain EBITDA targets. Banked shares continue to be subject to the December 31, 2019 vesting date. Management has determined it is probable that a portion of the EBITDA target will be met for the 2017 annual performance period. Depending on actual performance during each performance period, awardees have the opportunity to bank up to
225%
of the granted units.
|
For the three months ended March 31, 2017 (Successor),
$0.3 million
of compensation expense related to the RSUs was recognized within general and administrative expenses on the consolidated statement of operations. If the vesting requirements of the RSUs are not satisfied, or the performance conditions are not attained, the award will be forfeited. The fair value of the RSUs was calculated based on the closing market value of the Company’s common stock on the date of grant and management’s assumption that there will be no forfeitures.
The following table summarizes the activity of the Company’s unvested RSUs for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Units
|
|
Weighted Average
Grant Date
Fair Value
|
Granted January 25, 2017
|
$
|
22,732
|
|
|
$
|
14.72
|
|
Granted March 23, 2017
|
1,338,493
|
|
|
15.78
|
|
Total Granted
|
1,361,225
|
|
|
15.76
|
|
Forfeited
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Unvested as of March 31, 2017
|
$
|
1,361,225
|
|
|
$
|
15.76
|
|
As of March 31, 2017, there was
$20.7 million
of total unrecognized compensation cost related to non-vested RSUs granted under the 2016 Plan; that cost is expected to be recognized over the vesting periods as described above.
Restricted Stock Awards
On March 23, 2017, the Company granted
435,000
shares of restricted stock to a Company executive under the 2016 Plan. One-third of the shares vest on each of the following dates: January 1, 2018, November 4, 2018, and 2019. Vesting at each date is dependent upon positive earnings per share for the fiscal year ending immediately prior to the vesting date. Each restricted stock award had a grant date fair value based on the closing price of the Company’s common stock on the grant date and management’s assumption that there will be no forfeitures.
Management has determined that the shares of restricted stock are unvested stock awards as defined by ASC 718. If the vesting requirements of a restricted stock award are not satisfied, or the performance conditions not attained, the award will be forfeited and the shares of Class A common stock subject to the award shall be returned to the Company.
As of March 31, 2017, there was
$6.7 million
of total unrecognized compensation cost related to the non-vested restricted stock; that cost is expected to be recognized over the vesting periods described above. For the three months ended March 31, 2017 (Successor), the Company recognized expense of
$0.2 million
related to the restricted stock awards within general and administrative expenses on the consolidated statement of operations.
The following table summarizes the activity of the Company’s restricted stock awards for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Shares of
Restricted Stock
|
|
Weighted Average Grant Date Fair Value
|
Granted March 23, 2017
|
|
435,000
|
|
|
$
|
15.78
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Vested
|
|
—
|
|
|
—
|
|
Unvested as of March 31, 2017
|
|
435,000
|
|
|
$
|
15.78
|
|
Stock Options
On March 23, 2017, the Company granted
1,004,050
stock options to certain members of management under the Plan. The stock options vest in
four
equal installments on November 4, 2017, 2018, 2019 and 2020. The stock options expire on March 22, 2027. If the vesting requirements of a stock option are not satisfied, the stock option will be forfeited.
The grant date fair value of
$5.04
per option was estimated using the Black-Scholes option-pricing model (level 3) with the following assumptions:
|
|
|
|
Three Months
Ended March 31,
2017
|
Expected volatility
(1)
|
27.57%
|
Expected dividend yield
(2)
|
—%
|
Expected option term
(3)
|
6.25 years
|
Risk-free rate
(4)
|
2.13%
|
|
|
(1)
|
The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a
6.25
year look back period ending on the grant date.
|
|
|
(2)
|
As of March 31, 2017, we have not paid any dividends on our common stock. As of the stock option grant date, we did not anticipate paying any dividends on our common stock over the term of the stock options. Option holders have no right to dividends prior to the exercise of the options.
|
|
|
(3)
|
We utilized the simplified method to determine the expected term of the stock options since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
|
|
|
(4)
|
The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant which corresponds to the expected term of the stock options.
|
As of March 31, 2017, there was
$5.1 million
of total unrecognized compensation cost related to non-vested stock options outstanding under the 2016 Plan; that cost is expected to be recognized over the vesting periods described above. For the three months ended March 31, 2017 (Successor), there was
$8.0 thousand
of expense related to the stock options recognized within general and administrative costs on the consolidated statement of operations.
The following table summarizes the activity of the Company’s unvested stock options for the three months ended March 31, 2017 (Successor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Options
|
|
Weighted Average
Remaining
Contractual Life
(years)
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average Grant
Date Fair Value
|
Outstanding as of January 1, 2017
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Granted March 23, 2017
|
1,004,050
|
|
|
6.25
|
|
|
$
|
15.78
|
|
|
$
|
5.04
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding as of March 31, 2017
|
1,004,050
|
|
|
6.25
|
|
|
$
|
15.78
|
|
|
$
|
5.04
|
|
Exercisable as of March 31, 2017
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Related Party Stock Awards
See note
13
for information regarding additional equity awards not issued under the 2016 or 2013 Plans.
Hostess Management, LLC Equity Interest Plan (Predecessor)
The Predecessor established a profits interest plan under the 2013 Hostess Management, LLC Equity Incentive Plan (“2013 Plan”) to allow members of the management team to participate in the success of the Predecessor. The 2013 Plan consisted of an approximate
9%
ownership interest in the Predecessor’s subsidiary, New Hostess Holdco, LLC. Hostess Management had
three
classes of units and required certain returns to ranking classes before other classes participated in subsequent returns of Hostess Management.
The Predecessor recognized unit-based compensation expense of
$0.2 million
for the three months ended March 31, 2016 (Predecessor), within general and administrative expense on the consolidated statement of operations. All outstanding units under the 2013 Plan were redeemed and the 2013 Plan was terminated on November 4, 2016. As of December 31, 2016, there were
no
outstanding units.
3.
Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31,
2017
|
|
|
December 31,
2016
|
|
(Successor)
|
|
|
(Successor)
|
Land and buildings
|
$
|
30,712
|
|
|
|
$
|
30,275
|
|
Machinery and equipment
|
114,666
|
|
|
|
112,221
|
|
Construction in progress
|
17,239
|
|
|
|
12,334
|
|
|
162,617
|
|
|
|
154,830
|
|
Less accumulated depreciation
|
(4,444
|
)
|
|
|
(1,606
|
)
|
|
$
|
158,173
|
|
|
|
$
|
153,224
|
|
Depreciation expense was
$2.8 million
and
$2.1 million
for the three months ended March 31, 2017 (Successor), and 2016 (Predecessor), respectively.
4.
Segment Reporting
The Company has
two
reportable segments: Sweet Baked Goods and Other. The Company’s Sweet Baked Goods segment consists of sweet baked goods that are sold under the Hostess® and Dolly Madison® brands. Other consists of Hostess® branded bread and buns, frozen retail (which consists of deep-fried Twinkies®, launched in August 2016), “In-Store Bakery,” or “ISB” (which includes Superior, which we purchased in May 2016, and manufactures and distributes eclairs, madeleines, brownies, and iced cookies in the ISB section of retailers) and licensing.
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:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
March 31,
2017
|
|
|
Three Months Ended
March 31,
2016
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
Net revenue:
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
168,432
|
|
|
|
$
|
154,727
|
|
|
Other
|
16,106
|
|
|
|
5,490
|
|
|
Net revenue
|
$
|
184,538
|
|
|
|
$
|
160,217
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
8,624
|
|
|
|
$
|
2,677
|
|
|
Other
|
642
|
|
|
|
—
|
|
|
Depreciation and amortization
|
$
|
9,266
|
|
|
|
$
|
2,677
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
74,876
|
|
|
|
$
|
68,393
|
|
|
Other
|
4,419
|
|
|
|
1,932
|
|
|
Gross profit
|
$
|
79,295
|
|
|
|
$
|
70,325
|
|
|
|
|
|
|
|
|
Capital expenditures (1):
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
7,916
|
|
|
|
$
|
6,427
|
|
|
Other
|
374
|
|
|
|
—
|
|
|
Capital expenditures
|
$
|
8,290
|
|
|
|
$
|
6,427
|
|
|
|
|
(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 during the three months ended March 31, 2017 (Successor) and 2016 (Predecessor).
|
Total assets by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31,
2017
|
|
|
December 31,
2016
|
|
(Successor)
|
|
|
(Successor)
|
Total segment assets:
|
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
2,662,118
|
|
|
|
$
|
2,633,758
|
|
Other
|
212,040
|
|
|
|
214,134
|
|
Total segment assets
|
$
|
2,874,158
|
|
|
|
$
|
2,847,892
|
|
5.
Goodwill and Intangible Assets
Goodwill and intangible assets as of March 31, 2017 and December 31, 2016 were recognized as part of preliminary purchase price allocation of the Business Combination as of the Closing Date. The amount allocated to goodwill and other intangible assets is subject to final valuation adjustments. These adjustments could have a material impact on goodwill and other intangible assets. For the three months ended March 31, 2017, there were no adjustments to the preliminary purchase price allocation.
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31,
2017
|
|
December 31,
2016
|
|
(Successor)
|
|
(Successor)
|
Intangible assets with indefinite lives (Trademarks and Trade Names)
|
$
|
1,408,848
|
|
|
$
|
1,408,848
|
|
Intangible assets with definite lives (Customer Relationships)
|
542,011
|
|
|
542,011
|
|
Less accumulated amortization (Customer Relationships)
|
(9,788
|
)
|
|
(3,916
|
)
|
Intangible assets, net
|
$
|
1,941,071
|
|
|
$
|
1,946,943
|
|
Amortization expense was
$5.9 million
and
$0.2 million
for the three months ended March 31, 2017 (Successor) and 2016 (Predecessor), respectively. The unamortized portion of customer relationships will be expensed over their remaining useful life, from
18
to
23 years
. The weighted-average amortization period as of March 31, 2017 for customer relationships was
22.3
years. Future expected amortization expense is as follows:
|
|
|
|
|
(In thousands)
|
|
Remainder of 2017
|
$
|
17,983
|
|
2018
|
23,977
|
|
2019
|
23,977
|
|
2020
|
23,977
|
|
2021
|
23,977
|
|
2022 and thereafter
|
$
|
418,332
|
|
6.
Accrued Expenses
Included in accrued expenses are the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31,
2017
|
|
|
December 31,
2016
|
|
(Successor)
|
|
|
(Successor)
|
Annual incentive bonuses
|
$
|
2,167
|
|
|
|
$
|
5,997
|
|
Payroll, vacation and other compensation
|
2,874
|
|
|
|
5,492
|
|
Self-insurance reserves
|
2,065
|
|
|
|
1,720
|
|
Accrued interest
|
112
|
|
|
|
4,885
|
|
Current income taxes payable
|
4,527
|
|
|
|
2
|
|
Workers compensation reserve
|
1,572
|
|
|
|
1,321
|
|
Other
|
2,277
|
|
|
|
2,239
|
|
|
$
|
15,594
|
|
|
|
$
|
21,656
|
|
7.
Debt
A summary of the carrying value of the debt and the capital lease obligation is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31, 2017
|
|
|
December 31,
2016
|
|
(Successor)
|
|
|
(Successor)
|
First Lien Term Loan (4.0% as of March 31, 2017)
|
|
|
|
|
Principal
|
$
|
996,253
|
|
|
|
$
|
998,750
|
|
Unamortized debt premium and issuance costs
|
5,146
|
|
|
|
5,396
|
|
|
1,001,399
|
|
|
|
1,004,146
|
|
Capital lease obligation (6.8%)
|
686
|
|
|
|
724
|
|
Total debt and capital lease obligation
|
1,002,085
|
|
|
|
1,004,870
|
|
Less: Amounts due within one year
|
(11,496
|
)
|
|
|
(11,496
|
)
|
Long-term portion
|
$
|
990,589
|
|
|
|
$
|
993,374
|
|
At March 31, 2017, minimum debt repayments under the First Lien Term Loan are due as follows:
|
|
|
|
|
(In thousands)
|
|
Remainder of 2017
|
$
|
7,491
|
|
2018
|
9,988
|
|
2019
|
9,988
|
|
2020
|
9,988
|
|
2021
|
9,988
|
|
2022 and thereafter
|
$
|
948,810
|
|
Revolving Credit Facility
The Company had no outstanding borrowings under its Revolving Credit Agreement (the “Revolver”) as of March 31, 2017. See Note
12.
Commitments and Contingencies for information regarding the letters of credits, which reduce the amount available for borrowing under the Revolver. Interest expense from the Revolver debt fee amortization was
$0.1 million
for the three months ended March 31, 2016 (Predecessor).
8.
Equity
The Company’s authorized common shares consist of
three
classes:
200,000,000
shares of Class A common stock,
50,000,000
shares of Class B common stock, and
10,000,000
shares of Class F common stock (
none
of which were issued and outstanding at March 31, 2017 or December 31, 2016). As of March 31, 2017 and December 31, 2016, there were
98,685,917
and
98,250,917
shares of Class A common stock issued and outstanding, respectively. At March 31, 2017 and December 31, 2016 there were
31,704,988
shares of Class B common stock issued and outstanding.
Shares of Class A common stock and Class B common stock have identical voting rights. However, shares of Class B common stock do not participate in earnings or dividends of the Company. Ownership of shares of Class B common stock is restricted to owners of Class B units in Hostess Holdings. Class B units in Hostess Holdings may be exchanged (together with the cancellation of an equivalent number of shares of Class B common stock) by the holders thereof for, at the election of the Company, shares of Class A common stock or the cash equivalent of such shares.
As of March 31, 2017 and December 31, 2016, there were
37,500,000
public warrants and
19,000,000
private placement warrants outstanding. Each warrant entitles its holder to purchase one half of one share of our Class A common stock at an exercise price of
$5.75
per half share, to be exercised only for a whole number of shares of our Class A common stock. The warrants became exercisable
30 days
after the completion of the Business Combination on November 4, 2016 and expire
five years
after that date, or earlier upon redemption or liquidation. Once the public warrants become exercisable, the Company may call the outstanding warrants for redemption at a price of
$0.01
per warrant, if the last sale price of the Company’s common stock equals or exceeds
$24.00
per share for any
20
trading days within a
30
trading day period ending on the third business day before the Company sends the notice of redemption to the warrant holders. The private placement warrants, however, are nonredeemable so long as they are held by our Sponsor or its permitted transferees.
9.
Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to the Company’s Class A shareholders for the period by the weighted average number of Class A common shares outstanding for the period excluding non-vested restricted stock awards. In computing dilutive 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, RSUs, restricted stock awards, and stock options.
Below are basic and diluted net loss per share for the three months ended March 31, 2017 (Successor):
|
|
|
|
|
|
Numerator:
|
|
|
Net income attributable to Class A shareholders (in thousands)
|
|
$
|
15,832
|
|
Denominator:
|
|
|
Weighted-average Class A shares outstanding - basic (excluding non-vested restricted stock awards)
|
|
98,250,917
|
|
Dilutive effect of warrants
|
|
6,521,341
|
|
Dilutive effect of restricted stock awards and RSUs
|
|
1,629
|
|
Weighted-average shares outstanding - diluted
|
|
104,773,887
|
|
|
|
|
Net income per Class A share - basic
|
|
$
|
0.16
|
|
|
|
|
Net income per Class A share - dilutive
|
|
$
|
0.15
|
|
The anti-dilutive effect of stock options was excluded from the computation of diluted net income per share because the assumed proceeds from the awards’ exercise was greater than the average market price of the common shares.
10.
Income Taxes
The Company is subject to U.S. federal and 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 not itself 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 income tax expense in the accompanying consolidated statement of operations is based on an estimate of the Company’s annualized effective income tax rate. The effective tax rate is estimated at
29.2%
. The Company’s effective tax rate differs from the statutory rate primarily due to the portion of net income attributed to the non-controlling interest which represents an ownership interest in a partnership for income tax purposes.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying consolidated balance sheets. The recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefits associated with temporary differences, net operating loss carryforwards and tax credits will be utilized. The Company is in an overall net deferred tax liability position of
$359.3 million
and
$353.8 million
as of March 31, 2017 and December 31, 2016, respectively, primarily due to temporary differences in the book basis as compared to the tax basis of its investment in Hostess Holdings.
The Company does not believe it has any significant uncertain tax positions and therefore has no unrecognized tax benefits at March 31, 2017, that if recognized, would affect the annual effective tax rate. Interest and penalties related to income tax liabilities, if incurred, are included in income tax expense in the consolidated statement of operations.
11.
Tax Receivable Agreement
The tax receivable agreement was entered into by the Company in connection with the Business Combination (the “Tax Receivable Agreement”) and generally provides for the payment by the Company to the Legacy Hostess Equityholders of
85%
of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the closing of the Business Combination (which periods may extend, unless the Tax Receivable Agreement is terminated early in accordance with its terms, for more than
15 years
following any exchange of Class B Units of Hostess Holdings for shares of the Company’s Class A common stock or the cash equivalent thereof) as a result of (i) certain increases in tax basis resulting from the Business Combination; (ii) certain tax attributes of Hostess Holdings and its subsidiaries existing prior to the Business Combination and prior to subsequent exchanges of Class B Units; (iii) certain increases in tax basis resulting from exchanges of Class B Units; (iv) imputed interest deemed to be paid by the Company as a result of payments it makes under the Tax Receivable Agreement; and (v) certain increases in tax basis resulting from payments the Company makes under the Tax Receivable Agreement. The Company will retain the benefit of the remaining
15%
of these cash savings. Certain payments under the Tax Receivable Agreement will be made to Legacy Hostess Equityholders in accordance with specified percentages, regardless of the source of the applicable tax attribute. Significant inputs used to preliminarily estimate the future expected payments include a tax savings rate of approximately
40%
.
As of March 31, 2017 the future expected payments under the Tax Receivable Agreement are as follows:
|
|
|
|
|
(In thousands)
|
|
Remainder of 2017
|
$
|
—
|
|
2018
|
13,838
|
|
2019
|
9,744
|
|
2020
|
9,475
|
|
2021
|
9,236
|
|
Thereafter
|
$
|
123,091
|
|
12.
Commitments and Contingencies
Accruals and the Potential Effect of Litigation
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, the potential liabilities related to these matters are reassessed and the estimates revised, if necessary. These 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 the fourth quarter of 2015, the Company gave notice of termination of its broker agreement with National Frozen Distribution Consultants, LLC (“NFDC”) for cause under the terms of the agreement. Thereafter, the Company received a demand for arbitration from NFDC claiming damages of approximately
$15.0 million
plus attorney’s fees and costs for breach of a confidentiality agreement, violation of the Missouri Uniform Trade Secrets Act, breach of contract, breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty and seeking a permanent injunction. Since that time, NFDC has dropped the Missouri Uniform Trade Secrets Act and breach of fiduciary duty claims and is now seeking damages of approximately
$12.0 million
plus attorney’s fees and costs. The Company initially filed counterclaims for negligent misrepresentation and unjust enrichment but has since dropped the unjust enrichment claim. The Company continues to vigorously defend this action.
From time to time, the Company is subject to various other legal actions, lawsuits, claims and proceedings related to products, employment, environmental regulations, and other matters incidental to its businesses.
Based upon information presently known, the Company does not believe that the ultimate resolution of such matters will have a material effect on the Company’s financial position, although the final resolution of such matters could have a material effect on its results of operations or cash flows in the period of settlement.
Contractual Commitments
The Company has entered into various long-term arrangements through advance purchase contracts to lock in prices for certain high-volume raw materials, packaging components and fuel for normal product production requirements. These advance purchase arrangements are contractual agreements and can only be canceled with a termination penalty that is based upon the current market price of the commodity at the time of cancellation. These agreements qualify for the “normal purchase” exception under ASC 815; therefore, the purchases under these contracts are included as a component of cost of goods sold.
Contractual commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Total Committed
|
Commitments
within 1 year
|
Commitments
beyond 1 year
|
Ingredients
|
$
|
83.6
|
|
$
|
63.0
|
|
$
|
20.6
|
|
Packaging
|
$
|
12.3
|
|
$
|
9.9
|
|
$
|
2.4
|
|
Letters of Credit
In April 2016 and April 2013, the Company entered into Letter of Credit arrangements to provide for the issuance of standby letters of credit in the amount of $
1.0 million
and $
1.8 million
, respectively. The arrangements support the collateral requirements for insurance. The Letters of Credit are
100%
secured through our Revolver.
13.
Related Party Transactions
Prior to the Business Combination, the Company was party to an agreement to employ Mr. Metropoulos as the Executive Chairman. The agreement, dated April 2013, included payment of an annual salary, a performance bonus at the discretion of the board of directors, and expenses related to the use of his personal aircraft. For the three months ended March 31, 2016 (Predecessor),
$1.2 million
was expensed by the Company for this compensation agreement. The agreement with Mr. Metropoulos was terminated in connection with the Business Combination.
For periods prior to the Business Combination, related party expenses consisted of the normal annual cash payments associated with our employment arrangements with Mr. Metropoulos as Chief Executive Officer and/or Executive Chairman. In connection with the Business Combination Mr. Metropoulos became party to new employment arrangements with the Company and its subsidiaries. For the Successor, related party expenses consisted of a grant of Class B units of Hostess Holdings and equivalent shares of Class B common stock of the Company awarded to Mr. Metropoulos under such new employment arrangements. Following the consummation of the Business Combination, the expense associated with Mr. Metropoulos’s employment arrangements are estimated to be approximately
$0.3 million
annually.
As part of the Business Combination, the Company agreed to grant future shares of Class A common stock or Class B units of Hostess Holdings and equivalent shares of Class B common stock of the Company to an entity owned by Mr. Metropoulos if certain EBITDA thresholds are met for the year ended December 31, 2017. The potential grants under this arrangement are between
zero
and
5.5 million
shares. Based on the nature of the arrangement, for U.S. GAAP purposes the potential grants are considered to be compensation for future services to be provided by Mr. Metropoulos. In order to receive
2.75 million
shares under this agreement, adjusted EBITDA (as calculated pursuant to the terms of the Master Transaction Agreement entered into in connection with the Business Combination referred to below as “MTA EBITDA”), for the year ended December 31, 2017 must be greater than
$240.5 million
. If MTA EBITDA is greater than
$245.5 million
, an additional
2.75 million
shares will be awarded. As of March 31, 2017, Management determined it was not probable that the Company would meet the 2017 MTA EBITDA thresholds.
Under the terms of Mr. Metropoulos’ employment agreement, the Company is obligated to grant additional equity (in the form of either shares of Class A common stock of the Company, or Class B units of Hostess Holdings and equivalent shares of Class B common stock of the Company) to Mr. Metropoulos if MTA EBITDA thresholds are met for the year ended December 31, 2018. The potential grants range from
zero
to
2.75 million
shares. In order to receive
1.375 million
shares under this agreement, MTA EBITDA for the year ended December 31, 2018 must be greater than
$257.8 million
. If MTA EBITDA is greater than
$262.8 million
, an additional
1.375 million
shares will be awarded. As of March 31, 2017, management determined it was not probable that the Company would meet the 2018 MTA EBITDA thresholds.
14.
Subsequent Events
On April 7, 2017, 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. The Company entered into the contract to hedge the variable rate on the First Lien Term Loan.
On April 19, 2017, certain equity holders of the Company sold
23.1 million
shares of the Company’s Class A common through an underwritten public offering. The Company paid the expenses, other than underwriting discounts, associated with the sale of shares, but did not receive any proceeds from the sale. In connection with this public offering,
600,000
Class B units of Hostess Holdings and the equivalent shares of Class B common stock of the Company were exchanged for
600,000
shares of Class A common stock (which were sold to the public).