Second Quarter 2017 Net Revenue Increased
5.6% to $203.2 million from Pro Forma Second Quarter 2016
Company Reaffirms Full Year 2017 Outlook for
Revenue and Adjusted EBITDA
Hostess Brands, Inc. (NASDAQ: TWNK) (NASDAQ: TWNKW) (the
“Company”), a leading manufacturer and marketer in the United
States of sweet baked goods, including Hostess®, Twinkies®, Ding
Dongs®, Ho Hos®, Donettes® and a variety of other new and classic
treats, today reported financial results for the second quarter and
six months ended June 30, 2017.
Hostess® is the second leading brand by market share within the
Sweet Baked Goods (“SBG”) category. For the 52-week period ended
July 15, 2017 the Company's market share was 17.1% per Nielsen’s
U.S. SBG category data. The Company has a #1 leading market
position within the two largest SBG Segments: Donut Segment and
Snack Cake Segment, and has a #2 leading market position in total
Sweet Baked Goods, according to Nielsen U.S. total universe for the
52 weeks ended July 15, 2017. The Donut and Snack Cake Segments
together account for 50.4% of the Sweet Baked Goods category's
total dollar sales.
The Company's results include those of Superior Cake Products,
Inc. (“Superior”), which was acquired on May 10, 2016. Through
Superior, the Company competes in the in-store bakery section of
retailers.
On November 4, 2016, the Company completed the acquisition of a
controlling interest in Hostess Holdings, L.P. (“Hostess Holdings”)
and changed its name from Gores Holdings, Inc. to Hostess Brands,
Inc. (the “Business Combination”). Hostess Holdings is the
Company's "Predecessor" for accounting purposes. As a result, the
Company's consolidated financial results are presented: (i) as of
June 30, 2017 and December 31, 2016 (Successor); (ii) for the three
and six months ended June 30, 2017 (Successor); and (iii) for the
three and six months ended June 30, 2016 (Predecessor).
The Company has also presented supplemental unaudited pro forma
financial information for the three and six months ended June 30,
2016, giving effect to the Business Combination as if it had
occurred on January 1, 2016. The pro forma financial information
does not include the operations of Superior prior to the May 10,
2016 acquisition date. All references in this press release to
results for the three and six months ended June 30, 2016, refer to
such unaudited pro forma results. The Company believes this
unaudited pro forma information provides helpful supplemental
information with respect to the performance of the Hostess business
during this period.
The Company has also supplemented its discussion with a
presentation of adjusted EBITDA, a non-GAAP financial measure.
Please refer to the schedules in this press release for
explanations and reconciliations of this and other non-GAAP
financial measures.
Second Quarter 2017 Financial Highlights
- Net revenue of $203.2 million increased
5.6%, or $10.8 million from pro forma second quarter 2016
- Net income was $28.2 million, an
increase of $6.3 million, compared to $21.9 million for the pro
forma second quarter 2016
- EPS on a fully diluted basis was $0.18
per share, compared to $0.15 for the pro forma second quarter
2016
- Adjusted EBITDA increased 7.7%, or $4.5
million, to $63.2 million from $58.7 million for the pro forma
second quarter 2016
Year-To-Date 2017 Financial Highlights
- Net revenue of $387.7 million increased
10.0%, or $35.2 million from the pro forma six months ended June
30, 2016
- Net income was $52.4 million, an
increase of $18.2 million, compared to $34.2 million for the pro
forma six months ended June 30, 2016
- EPS on a fully diluted basis was $0.33
per share, compared to $0.23 for the pro forma six months ended
June 30, 2016
- Adjusted EBITDA increased 10.2%, or
$10.9 million, to $117.7 million from $106.8 million for the pro
forma six months ended June 30, 2016
“We are pleased with our continued ability to gain market share,
achieve mid-single digit net sales growth and drive profitability
in a challenging retail environment, particularly as we cycled very
strong results in the prior-year period,” commented Bill Toler,
President and Chief Executive Officer of Hostess. “Our second
quarter results were driven by new product initiatives and growing
traction of white space opportunities, led by In-Store Bakery, Food
Service, and International channel expansion. We are on-track to
achieve our annual revenue and adjusted EBITDA outlook and remain
focused on the execution of our three growth drivers: to further
rebuild our core business, deliver compelling product innovation
and line extensions, and pursue significant white space
opportunities. These efforts will fuel future increases in net
sales and profitability as well as enhance shareholder value.”
Second Quarter 2017
Net revenue was $203.2 million, an increase of $10.8 million, or
5.6%, compared to pro forma net revenue of $192.3 million for the
second quarter of 2016. The increase was primarily due to the
Company's 2017 new product initiatives, including Chocolate Cake
Twinkies®, White Fudge Ding Dongs®, and Golden Cupcakes, among
others, along with growth from the Company's white space
opportunities, led by In-Store Bakery (which contributed $4.7
million of growth due to the acquisition of Superior and In-Store
Bakery product innovation), Food Service and International
channels. These amounts were partially offset by declines in the
Company's prior year innovations and discontinued items.
Gross profit was $88.4 million, an increase of $2.3 million, or
2.7%, compared to pro forma gross profit of $86.2 million for the
second quarter of 2016, driven by the increase in revenue.
Gross margin was 43.5%, compared to 44.8% for the pro forma
second quarter of 2016. The decrease in gross margin was primarily
due to a shift in product mix to include a full quarter of the
Company's In-Store Bakery operations and growth in multi-pack and
club-pack product sales as a percentage of total growth.
Advertising, selling, general and administrative (“SG&A”)
expenses were $32.6 million, or 16.0% of net revenue, compared to
$29.4 million, or 15.3% of net revenue, for the pro forma second
quarter of 2016. This increase was primarily attributable to an
increase in non-cash share-based compensation.
Net income was $28.2 million, or $0.18 per share, compared to
net income of $21.9 million, or $0.15 per share, for the pro forma
second quarter of 2016. The increase in net income was attributed
to 2016 costs associated with a product recall (these costs were
subsequently recovered in the third quarter of 2016); a decrease in
interest expense due to the pay-down of outstanding term loans and
amendments to the Company's loan agreements resulting in a lower
effective interest rate; and revenue and gross profit growth. Net
income of $18.8 million was allocated to Class A common
stockholders, while the remaining $9.4 million was allocated to the
non-controlling interest.
Adjusted EBITDA was $63.2 million, an increase of $4.5 million,
or 7.7%, compared to adjusted EBITDA of $58.7 million for the pro
forma second quarter of 2016. As a percentage of net revenue,
adjusted EBITDA was 31.1%, compared to 30.5% in the same period
last year. Adjusted EBITDA is a non-GAAP financial measure. Please
refer to the schedules in this press release for reconciliations of
non-GAAP financial measures.
The Company has two reportable segments: Sweet Baked Goods and
Other. The Sweet Baked Goods segment consists of sweet baked goods
and the Other segment consists of branded bread and buns, in-store
bakery products, frozen retail and licensing.
Sweet Baked Goods Segment: Net revenue was $182.7
million, an increase of $3.7 million, or 2.0%, compared to pro
forma net revenue of $179.1 million for the second quarter of 2016.
Gross profit was $82.4 million, or 45.1% of net revenue, compared
to gross profit of $81.9 million, or 45.7% of net revenue, for the
pro forma second quarter 2016. Gross margin decreased due to growth
in multi-pack and club-pack product sales as a percentage of total
sales growth.
Other Segment: Net revenue was $20.4 million, an increase
of $7.2 million, or 54.3%, compared to net revenue of $13.3 million
for the pro forma second quarter 2016. This increase is primarily
due to the impact of the Superior acquisition completed May 10,
2016, and the result of white space growth initiatives. Gross
profit was $6.1 million, or 29.7% of net revenue, compared to gross
profit of $4.3 million, or 32.2%, of net revenue, for the pro forma
second quarter 2016. Gross margin decreased due to the proportion
of In-Store Bakery sales.
Year-To-Date 2017
Net revenue was $387.7 million, an increase of $35.2 million, or
10.0%, compared to pro forma net revenue of $352.6 million for the
six months ended June 30, 2016. The increase was primarily due to
the Company's continued growth from 2017 new product initiatives,
including Chocolate Cake Twinkies®, White Fudge Ding Dongs®, and
Golden Cupcakes, among others along with growth from the Company's
white space opportunities led by In-Store Bakery (which contributed
$14.4 million of growth due to the acquisition of Superior and
In-Store Bakery product innovation), Food Service and International
channels. These amounts were partially offset by declines in prior
year innovations and discontinued items.
Gross profit was $167.7 million, an increase of $11.5 million,
or 7.4%, compared to pro forma gross profit of $156.3 million for
the six months ended June 30, 2016, driven by the increase in
revenue.
Gross margin was 43.3%, compared to 44.3% for the pro forma six
months ended June 30, 2016. The decrease in gross margin was
primarily due to a shift in product mix to include the Company's
In-Store Bakery operations and growth in multi-pack and club-pack
product sales as a percentage of total growth.
SG&A expenses were $61.2 million, or 15.8% of net revenue,
compared to $53.0 million, or 15.0% of net revenue, for the pro
forma six months ended June 30, 2016. This increase was primarily
attributable to increased non-cash share-based compensation,
increased professional service expenses and increased staffing
levels to support growth.
Net income was $52.4 million, or $0.33 per share, compared to
net income of $34.2 million, or $0.23 per share, for the pro forma
six months ended June 30, 2016. The increase in net income was
attributed to the $7.3 million impairment loss recognized during
the six months ended June 30, 2016; a decrease in interest expense
for the six months ended June 30, 2017; 2016 costs associated with
a product recall (these costs were subsequently recovered in the
third quarter of 2016); and revenue and gross profit growth. Net
income of $34.7 million was allocated to Class A common
stockholders, while the remaining $17.7 million was allocated to
the non-controlling interest.
Adjusted EBITDA was $117.7 million, an increase of $10.9
million, or 10.2%, compared to adjusted EBITDA of $106.8 million
for the pro forma six months ended June 30, 2016. As a percentage
of net revenue, adjusted EBITDA was 30.4%, compared to 30.3% in the
same period last year. Adjusted EBITDA is a non-GAAP financial
measure. Please refer to the schedules in this press release for
reconciliations of non-GAAP financial measures.
The Company has two reportable segments: Sweet Baked Goods and
Other. The Sweet Baked Goods segment consists of sweet baked goods
and the Other segment consists of branded bread and buns, in-store
bakery products, frozen retail and licensing.
Sweet Baked Goods Segment: Net revenue was $351.2
million, an increase of $17.4 million, or 5.2%, compared to pro
forma net revenue of $333.8 million for the six months ended June
30, 2016. Gross profit was $157.3 million, or 44.8% of net revenue,
compared to gross profit of $150.0 million, or 44.9% of net
revenue, for the pro forma six months ended June 30, 2016. Gross
margin decreased due to growth in multi-pack and club-pack product
sales as a percentage of total sales growth.
Other Segment: Net revenue was $36.5 million, an increase
of $17.8 million, or 94.9%, compared to net revenue of $18.7
million for the pro forma six months ended June 30, 2016. This
increase is primarily due to the impact of the Superior acquisition
completed May 10, 2016. Gross profit was $10.5 million, or 28.7% of
net revenue, compared to gross profit of $6.2 million, or 33.1% of
net revenue for the pro forma six months ended June 30, 2016. Gross
margin decreased due to the proportion of In-Store Bakery
sales.
Balance Sheet and Cash Flow
As of June 30, 2017, the Company had cash and cash equivalents
of $66.2 million and approximately $97.3 million available for
borrowing, net of letters of credit, under its revolving line of
credit. The Company had outstanding term loan debt of $996.3
million and net debt of $930.0 million as of June 30, 2017,
resulting in a total pro forma combined leverage ratio of 4.11x
based on pro forma combined adjusted EBITDA of $226.2 million for
the twelve months ended June 30, 2017. (See the schedules in the
press release for the calculation of the pro forma combined
leverage ratio and a reconciliation of pro forma combined adjusted
EBITDA to pro forma combined net income of $100.7 million for the
twelve months ended June 30, 2017.)
Outlook
The Company expects to continue to grow above the sweet baked
goods category in 2017. The Company reaffirms its expectation of
anticipated net revenue of $781 million and adjusted EBITDA of $235
million for the year ended December 31, 2017. (See the schedules in
the press release for a reconciliation of anticipated 2017 adjusted
EBITDA to anticipated net income of $96.0 million for 2017).
During the third quarter of 2017, the Company expects the impact
of a recent change in a state tax law will cause an increase to the
Company's income tax expense of $2.5 million to $3.0 million, and
an increase to the amount payable under the tax receivable
agreement resulting in an additional expense of $1.5 million to
$2.0 million.
Based upon the Company's anticipated net income of $96.0 million
for 2017, $34.0 million is expected to be allocated to the
non-controlling interest based on the current ownership percentage
in Hostess Holdings. The remaining $62.0 million allocated to Class
A Common stockholders is expected to result in $0.63 basic earnings
per share and $0.58 diluted earnings per share for the full year
based on expected basic and diluted shares outstanding of
approximately 99.1 million and 107.2 million, respectively.
Income tax related payments expected to be made by the Company
relating to 2017 activity include: (i) tax payments between $17
million and $20 million during 2017 to cover the Company's current
federal and state income tax liabilities, (ii) between $15 million
and $18 million of distributions to the holders of the
non-controlling interest (a partnership for tax purposes) in
respect of their income tax liability, and (iii) between $13
million and $15 million of payments to the selling equityholders of
Hostess Holdings for 2017 activity under the terms of the tax
receivable agreement. The tax receivable agreement payment is
expected to be made in 2018.
The Company believes that it is well positioned to grow and
enhance shareholder value through the execution of its strategic
initiatives. These key strategic initiatives are focused on further
core distribution expansion, continued new product initiatives and
line extensions, the pursuit of white space opportunities and
serving as a platform for future acquisitions.
Conference Call and Webcast
The Company will host a conference call and webcast today,
August 8, 2017 at 4:30 p.m. EDT to discuss the results for the
second quarter.
Investors interested in participating in the live call can dial
877-451-6152 from the U.S. and 201-389-0879 internationally. A
telephone replay will be available approximately two hours after
the call concludes through Tuesday, August 22, 2017, by dialing
844-512-2921 from the U.S., or 412-317-6671 from international
locations, and entering confirmation code 13666802.
There will also be a simultaneous, live webcast available on the
Investor Relations section of the Company’s website at www.hostessbrands.com. The webcast will be
archived for 30 days.
About Hostess Brands, Inc.
The Company is one of the leading packaged food companies
focused on developing, manufacturing, marketing, selling and
distributing fresh baked sweet goods in the United States. The
brand's history dates back to 1919, when the Hostess® CupCake was
introduced to the public, followed by Twinkies® in 1930. Today, the
Company produces a variety of new and classic treats including Ding
Dongs®, Ho Hos®, Donettes®, Hostess SweetShop™ and Fruit Pies, in
addition to Twinkies® and CupCakes.
For more information about Hostess products and Hostess Brands,
please visit hostesscakes.com. Follow Hostess on Twitter:
@Hostess_Snacks; on Facebook: facebook.com/Hostess; on Instagram:
Hostess_Snacks; and on Pinterest: pinterest.com/hostesscakes.
Forward-Looking Statements
This press release 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 and Section 21E of the Securities Exchange Act
of 1934, as amended, that involve substantial risks and
uncertainties. 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 as forward-looking statements. All forward-looking
statements included herein are made only as of the date hereof. The
Company undertakes no obligation to update any forward-looking
statement, whether as a result of new information, future events,
or otherwise.
These statements inherently involve risks and uncertainties that
could cause actual results to differ materially from those
anticipated in such forward-looking statements. These risks and
uncertainties include, but are not limited to, maintaining,
extending and expanding our reputation and brand image; protecting
our intellectual property rights; leveraging our brand value to
compete against lower-priced alternative brands; correctly
predicting, identifying and interpreting changes in consumer
preferences and demand and offering new products to meet those
changes; operating in a highly competitive industry; our continued
ability to produce and successfully market products with extended
shelf life; our ability to drive revenue growth in our key products
or add products that are faster-growing and more profitable;
volatility in commodity, energy, and other input prices; our
dependence on our major customers; our geographic focus could make
us particularly vulnerable to economic and other events and trends
in North America; increased costs in order to comply with
governmental regulation; general political, social and economic
conditions; a portion of our workforce belongs to unions and
strikes or work stoppages could cause our business to suffer;
product liability claims, product recalls, or regulatory
enforcement actions; unanticipated business disruptions; dependence
on third parties for significant services; our insurance may not
provide adequate levels of coverage against claims; failures,
unavailability, or disruptions of our information technology
systems; our ability to achieve expected synergies and benefits and
performance from our strategic acquisitions; dependence on key
personnel or a highly skilled and diverse workforce; and our
ability to finance our indebtedness on terms favorable to us; and
other risks as set forth from time to time in our Securities and
Exchange Commission filings.
HOSTESS BRANDS, INC. CONSOLIDATED BALANCE
SHEETS
(Unaudited, amounts in thousands,
except shares and per share data)
June 30, December 31,
ASSETS 2017 2016
(Successor) (Successor) Current assets: Cash and cash
equivalents $ 66,224 $ 26,855 Accounts receivable, net 100,120
89,237 Inventories 33,797 30,444 Prepaids and other current assets
6,035 4,827 Total current assets
206,176 151,363 Property and equipment, net 162,586 153,224
Intangible assets, net 1,935,076 1,946,943 Goodwill 580,349 588,460
Other assets, net 7,580 7,902 Total
assets $ 2,891,767 $ 2,847,892
LIABILITIES
AND STOCKHOLDERS’ EQUITY Current liabilities: Long-term debt
and capital lease obligation payable within one year $ 11,357 $
11,496 Accounts payable 36,316 34,083 Customer trade allowances
38,018 36,691 Accrued expenses and other current liabilities
15,206 21,656 Total current liabilities
100,897 103,926 Long-term debt and capital lease obligation 989,062
993,374 Tax receivable agreement 173,898 165,384 Deferred tax
liability 358,797 353,797 Total
liabilities 1,622,654 1,616,481 Class A common stock, $0.0001 par
value, 200,000,000 shares authorized, 99,992,183 and 98,250,917
shares issued and outstanding at June 30, 2017 and December 31,
2016, respectively 10 10 Class B common stock, $0.0001 par value,
50,000,000 shares authorized, 30,398,777 and 31,704,988 issued and
outstanding at June 30, 2017 and December 31, 2016, respectively 3
3 Additional paid in capital 920,109 912,824 Accumulated other
comprehensive loss (304 ) — Retained earnings (accumulated deficit)
19,044 (15,618 ) Stockholders’ equity 938,862
897,219 Non-controlling interest 330,251
334,192 Total liabilities and stockholders’ equity $
2,891,767 $ 2,847,892
HOSTESS BRANDS,
INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands,
except shares and per share data)
Three Months Ended Six Months
Ended June 30, June 30, June 30,
June 30, 2017 2016
2017 2016 (Successor)
(Predecessor) (Successor) (Predecessor)
Net revenue $ 203,178 $ 192,343 $ 387,716 $ 352,560 Cost of goods
sold 114,734 105,917 219,976
195,809 Gross profit 88,444 86,426
167,740 156,751 Operating costs and
expenses: Advertising and marketing 8,111 9,949 15,433 17,148
Selling expense 8,700 8,109 16,812 14,904 General and
administrative 15,739 11,593 28,921 21,231 Amortization of customer
relationships 5,994 156 11,867 312 Impairment of property and
equipment — — — 7,267 Business combination transaction costs —
2,801 — 3,016 Related party expenses 108 1,138 192 2,373 Recall and
other costs — 4,080 —
4,260 Total operating costs and expenses 38,652
37,826 73,225 70,511 Operating income
49,792 48,600 94,515 86,240 Other expense: Interest expense, net
10,035 17,893 19,865 35,742 Gain on debt modification (174 ) — (174
) — Other expense 413 918 1,127
2,172 Total other expense 10,274 18,811
20,818 37,914 Income before income taxes
39,518 29,789 73,697 48,326 Income tax expense 11,311
317 21,291 317 Net income 28,207 29,472
52,406 48,009 Less: Net income attributable to the non-controlling
interest 9,377 852 17,744
1,780 Net income attributable to Class A shareholders/partners $
18,830 $ 28,620 $ 34,662 $ 46,229 Earnings per Class
A share: Basic $ 0.19 $ 0.35 Diluted $ 0.18 $ 0.33 Weighted-average
shares outstanding: Basic 98,943,690 98,600,075 Diluted 107,184,341
106,004,898
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in
thousands)
Six Months Ended June 30,
June 30, 2017 2016
(Successor) (Predecessor) Operating activities
Net income $ 52,406 $ 48,009 Depreciation and amortization 18,854
5,628 Impairment of property and equipment/bakery shutdown costs —
7,267 Non-cash gain on debt modification (394 ) — Debt discount
(premium) amortization (470 ) 1,659 Stock-based compensation 4,360
413 Gain on sale/abandonment of property and equipment (15 ) (341 )
Deferred taxes 12,505 — Change in operating assets and liabilities
Accounts receivable (10,883 ) (14,747 ) Inventories (3,353 ) (2,784
) Prepaids and other current assets (140 ) (2,315 ) Accounts
payable and accrued expenses (6,418 ) 16,112 Customer trade
allowances 1,327 (5,089 ) Other — 381
Net cash provided by operating activities 67,779
54,193
Investing activities Purchases
of property and equipment (15,101 ) (15,664 ) Acquisition of
Superior — (49,941 ) Proceeds from sale of assets 54 4,350
Acquisition and development of software assets (859 )
(775 ) Net cash used in investing activities (15,906 )
(62,030 )
Financing activities Repayments of
long-term debt and capital lease obligation (2,570 ) (4,636 ) Debt
fees (1,017 ) — Distributions to partners — (4,986 ) Distributions
to non-controlling interest (8,918 ) (240 ) Proceeds from the
exercise of warrants 1 — Net cash used
in financing activities (12,504 ) (9,862 )
Net
increase in cash and cash equivalents 39,369 (17,699 ) Cash and
cash equivalents at beginning of period 26,855
64,473
Cash and cash equivalents at end of period $
66,224 $ 46,774
Supplemental Disclosures of
Cash Flow Information: Cash paid during the period for:
Interest $ 24,958 $ 33,892 Taxes paid $ 9,930 $ — Supplemental
disclosure of non-cash investing: Purchases of property and
equipment funded by accounts payable $ 123 $ 695
SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL
INFORMATION
The unaudited pro forma statements of operations for the three
and six months ended June 30, 2016 present our consolidated results
of operations giving pro forma effect as if the Business
Combination (as defined below) had occurred as of January 1, 2016.
The pro forma adjustments are based on available information and
upon assumptions that our management believes are reasonable in
order to reflect, on a pro forma basis, the impact of these
transactions on the historical financial information of our
Predecessor entity.
On November 4, 2016 (the “Closing Date”), in a transaction
referred to as the “Business Combination,” the Company, then known
as 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”). Hostess
Holdings had acquired the Hostess brand and certain strategic
assets out of the bankruptcy liquidation proceedings of its prior
owner (“Old Hostess”), free and clear of all past liabilities, in
April 2013, and relaunched the Hostess brand later that year.
The Business Combination was accounted for using the acquisition
method of accounting. The initial estimated fair values of the
acquired assets and assumed liabilities as of the Closing Date,
which are based on the consideration paid and our estimates and
assumptions, are reflected herein. The total purchase price of
approximately $2.4 billion to acquire Hostess Holdings, has been
allocated to the assets acquired and assumed liabilities of Hostess
Holdings based upon estimated fair values at the date of
acquisition. Third party valuation specialists conducted analyses
in order to assist our management in determining the fair values of
the acquired assets and liabilities assumed. The Company has
estimated the fair value of assets acquired and liabilities assumed
at the date of acquisition. The unaudited pro forma consolidated
financial information is included for informational purposes only
and does not purport to reflect the results of operations of
Hostess Brands, Inc. that would have occurred had the Business
Combination occurred as of January 1, 2016.
The unaudited pro forma financial information contains a variety
of adjustments, assumptions and estimates, is subject to the
assumptions and adjustments as described in the accompanying notes
hereto and numerous other uncertainties, and should not be relied
upon as being indicative of our results of operations had the
Business Combination occurred on January 1, 2016. The
unaudited pro forma financial information also does not project our
results of operations for any future period or date. The
acquisition of Superior Cake Products, Inc. (“Superior”) occurred
in May 2016. The unaudited pro forma consolidated financial
information for the three and six months ended June 30, 2016 does
not include the results of the Superior acquisition and its related
operations prior to the acquisition. We evaluated the impact of the
Superior acquisition on the Company’s financial statements and
concluded that the impact was not significant and therefore pro
forma financial results assuming the acquisition of Superior at
January 1, 2016 are not included.
On November 18, 2016, we refinanced our first and second lien
term loans (the “Former First and Second Lien Term Loans”) into one
new first lien term loan in the aggregate principal amount of
$998.8 million and with a maturity date of August 3, 2022 (the “New
First Lien Term Loan”). We evaluated the impact of the refinancing
of existing debt pursuant to the New First Lien Term Loan,
completed on November 18, 2016, and concluded that the impact was
not significant and did not require nor separately warrant the
inclusion of pro forma financial results assuming the completion of
the refinancing on January 1, 2016.
The pro forma adjustments give effect to the items identified in
the pro forma table below in connection with the Business
Combination.
Unaudited Pro Forma Statement of Operations Three
Months Ended Six Months Ended
Historical(i)
Historical(i) (Successor)*
(Predecessor) Pro Forma (Successor)*
(Predecessor) Pro Forma
(In thousands,
except share and per share data)
June 30,
2017
June 30,
2016
Pro Forma
Adjustments
June 30,
2016
June 30,
2017
June 30,
2016
Pro Forma
Adjustments
June 30,
2016
Net revenue $ 203,178 $ 192,343 $ — $ 192,343 $ 387,716 $
352,560 $ — $ 352,560 Cost of goods sold 114,734
105,917 242 ii 106,159 219,976
195,809 500 ii 196,309 Gross
profit 88,444 86,426 (242 )
86,184 167,740 156,751 (500 )
156,251 — Operating costs and expenses: Advertising and marketing
8,111 9,949 — 9,949 15,433 17,148 — 17,148 Selling expense 8,700
8,109 — 8,109 16,812 14,904 — 14,904 General and administrative
15,739 11,593 (251 ) ii 11,342 28,921 21,231 (307 ) ii 20,924
Amortization of customer relationships 5,994 156 5,979 iii 6,135
11,867 312 12,012 iii 12,324 Impairment of property and equipment —
— — — — 7,267 — 7,267 Business combination transaction costs —
2,801 (2,226 ) 575 — 3,016 (2,441 ) 575 Related party expenses 108
1,138 — iv 1,138 192 2,373 — iv 2,373 Recall and other costs
— 4,080 — 4,080 —
4,260 — 4,260 Total operating costs and
expenses 38,652 37,826 3,502
41,328 73,225 70,511 9,264
79,775 Operating income 49,792 48,600 (3,744 ) 44,856
94,515 86,240 (9,764 ) 76,476 Other expense: — Interest expense,
net 10,035 17,893 (4,624 ) v 13,269 19,865 35,742 (9,248 ) v 26,494
Gain on debt modification (174 ) — — — (174 ) — — — Other expense
413 918 — 918
1,127 2,172 — 2,172 Total other
expense 10,274 18,811 (4,624 )
14,187 20,818 37,914 (9,248 )
28,666 Income before income taxes 39,518 29,789 880 30,669 73,697
48,326 (516 ) 47,810 Income tax expense 11,311
317 8,425 vi 8,742 21,291
317 13,308 vi 13,625 Net income 28,207 29,472
(7,545 ) 21,927 52,406 48,009 (13,824 ) 34,185 Less: Net income
attributable to the non-controlling interest 9,377
852 6,733 vii 7,585 17,744
1,780 10,102 vii 11,882 Net
income attributable to Class A shareholders $ 18,830 $
28,620 $ (14,278 ) $ 14,342 $ 34,662 $ 46,229 $ (23,926 ) $
22,303 Earnings per Class A share: Basic $ 0.19 $ 0.15 $ 0.35 $
0.23 Diluted $ 0.18 $ 0.15 $ 0.33 $ 0.23 Weighted-average shares
outstanding: Basic 98,943,690 97,589,217 viii 97,589,217 98,600,075
97,589,217 viii 97,589,217 Diluted 107,184,341 97,589,217 viii
97,589,217 106,004,898 97,589,217 viii 97,589,217
*Included for comparison purposes
i. Represents Hostess Holdings historical
results of operations. ii. Represents the adjustment to
depreciation expense associated with the allocation of purchase
price to property and equipment. iii. Represents additional
amortization expense associated with the fair value recognized for
customer relationships in connection with the Business Combination.
iv. This adjustment consists primarily of legal and professional
fees and other costs associated with the Business Combination. v.
Represents the reduction in interest expense due to the repayment
of Hostess Holdings debt pursuant to the terms of the Business
Combination. vi. Represents the effective income tax rate of 28.5%,
giving effect to the non-controlling interest, a partnership for
income tax purposes. vii. Represents the elimination of historical
income attributable to the non-controlling interest and attributes
a portion of the pro forma income to the non-controlling interest
created in the Business Combination. Income is allocated to the
non-controlling interest based on its pro rata share of the total
equity of Hostess Holdings. viii. Represents the basic and diluted
weighted average number of Class A shares that would have been
outstanding had the Business Combination occurred on January 1,
2016. The outstanding warrants were determined not to be dilutive.
Results of Operations by Segment—For
the Unaudited Three and Six Months Ended June 30, 2017 and Pro
Forma Three and Six Months Ended June 30, 2016
Three Months Ended Six Months
Ended (Successor) (Predecessor)
Pro Forma (Successor)
(Predecessor) Pro Forma
(In
thousands)
June 30,
2017
June 30,
2016
Pro Forma
Adjustments
June 30,
2016
June 30,
2017
June 30,
2016
Pro Forma
Adjustments
June 30,
2016
Net revenue $ 203,178 $ 192,343 $ — $ 192,343 $ 387,716 $ 352,560 $
— $ 352,560 Cost of goods sold 114,734 105,917
242 i 106,159 219,976 195,809
500
i
196,309 Gross profit $ 88,444 $ 86,426 $ (242 ) $ 86,184 $
167,740 $ 156,751 $ (500 ) $ 156,251
Segment
Net Revenue Sweet baked goods $ 182,746 $ 179,088 $ — $ 179,088 $
351,178 $ 333,815 $ — $ 333,815 Other 20,432 13,255
— 13,255 36,538 18,745 —
18,745 $ 203,178 $ 192,343 $ — $ 192,343 $
387,716 $ 352,560 $ — $ 352,560 Gross Profit Sweet baked
goods $ 82,373 $ 82,152 $ (242 ) i $ 81,910 $ 157,250 $ 150,545 $
(500 )
i
$ 150,045 Other 6,071 4,274 —
4,274 10,490 6,206 — 6,206 $
88,444 $ 86,426 $ (242 ) $ 86,184 $ 167,740 $ 156,751 $ (500 ) $
156,251 i. Represents the adjustment to
depreciation expense associated with the allocation of purchase
price to property and equipment.
Reconciliation of Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure commonly used in
the Company's industry and should not be construed as an
alternative to net income as an indicator of operating
performance or as an alternative to cash flow provided by operating
activities as a measure of liquidity (each as determined in
accordance with GAAP). Adjusted EBITDA may not be comparable to
similarly titled measures reported by other companies. The Company
has included adjusted EBITDA because it believes it provides
management and investors with additional information to measure the
Company's performance and liquidity, estimate the Company's value
and evaluate the Company's ability to service debt.
We define adjusted EBITDA as net income adjusted to exclude (i)
interest expense, net, (ii) depreciation and amortization, (iii)
income taxes and (iv) as further adjusted to eliminate the impact
of certain items that the Company does not consider indicative of
its ongoing operating performance. These further adjustments are
itemized below. You are encouraged to evaluate these adjustments
and the reasons the Company considers them appropriate for
supplemental analysis. In evaluating adjusted EBITDA, you should be
aware that in the future the Company may incur expenses that are
the same as or similar to some of the adjustments set forth below.
The Company's presentation of adjusted EBITDA should not be
construed as an inference that its future results will be
unaffected by unusual or non-recurring items.
Adjusted EBITDA has important limitations as an analytical tool,
and you should not consider it in isolation, or as a substitute for
analysis of the Company's results as reported under GAAP. For
example, adjusted EBITDA:
- does not reflect the Company's capital
expenditures, future requirements for capital expenditures or
contractual commitments;
- does not reflect changes in, or cash
requirements for, the Company's working capital needs;
- does not reflect the significant
interest expenses, or the cash requirements necessary to service
interest or principal payments, on the Company's debt;
- does not reflect any cash requirements
for the assets being depreciated and amortized that may have to be
replaced in the future; and
- does not reflect payments related to
income taxes, the tax receivable agreement or distributions to the
non-controlling interest to reimburse its tax liability.
The Company's presentation of adjusted EBITDA does not exclude
the normal annual cash payments associated with its employment
agreement with Mr. Metropoulos as the Chief Executive Officer
and/or Executive Chairman. These amounts were $0.1 million and $0.2
million for the three and six months ended June 30, 2017 and $1.2
million and $2.4 million for the three and six months ended June
30, 2016. Following completion of the Business Combination, these
expenses will be approximately $0.3 million annually.
Reconciliation of Adjusted EBITDA—For
the Unaudited Three and Six Months Ended June 30, 2017 compared to
Pro Forma Three and Six Months Ended June 30, 2016.
Reconciliation of Adjusted
EBITDA
(Unaudited)
Three Months Ended Six Months
Ended
(In
thousands)
June 30,
2017
(Successor)
June 30,
2016
Pro Forma
June 30,
2017
(Successor)
June 30,
2016
Pro Forma
Net income $ 28,207 $ 21,927 $ 52,406 $ 34,185 Plus
non-GAAP adjustments: Income tax provision 11,311 8,742 21,291
13,625 Interest expense, net 10,035 13,269 19,865 26,494
Depreciation and amortization 9,588 9,184 18,854 18,249 Share-based
compensation i. 3,839 — 4,360 — Recall and other costs ii. — 4,080
— 4,260 Other expense iii. 239 915 953 2,169 Impairment of property
and equipment iv. — — — 7,267 Business Combination Transaction
Costs
v.
— 575 — 575 Adjusted EBITDA $ 63,219 $
58,692 $ 117,729 $ 106,824 i. For the three
and six months ended June 30, 2017, we recorded expenses of $3.8
million and $4.4 million related to units awarded under the Hostess
Brands, Inc. 2016 Equity Incentive Plan. ii. For the pro forma
three months ended June 30, 2016, the Company incurred costs
associated with a Hostess voluntary recall. The recall loss was
recovered during the third quarter of 2016. For the three and six
months ended June 30, 2016, other costs included loss on a
sale/abandonment of property and bakery shutdown costs, primarily
due to utilities, insurance, taxes and maintenance expenses related
to the Schiller Park, Illinois bakery. In addition we incurred
losses related to the equipment that we no longer intended to use
or had idled. iii. For the pro forma six months ended June 30,
2016, other expense primarily consisted of professional fees
attributable to the pursuit of a potential acquisition that has
since been abandoned, and other special projects. For the three and
six months ended June 30, 2017, other expense primarily included
professional fees incurred related to the secondary public offering
of common stock and the registration of certain privately held
warrants offset by a gain recognized related to the modification of
our long-term debt. iv. During the first quarter of 2016, we closed
multiple production lines at the Indianapolis, Indiana bakery and
transitioned production to other facilities resulting in a loss of
$7.3 million. v. For the three and six months ended June 30, 2016,
business combination transaction costs consisted of professional
and legal costs for the acquisition of Superior.
Reconciliation of Adjusted EBITDA-Guidance for the year ended
December 31, 2017
Reconciliation of our 2017 adjusted EBITDA guidance to net
income presents inherent difficulty in forecasting certain amounts
that are necessary for a full reconciliation to net income. Our
outlook for 2017 adjusted EBITDA is based on the same methodology
used to present adjusted EBITDA for completed historical and pro
forma periods. However, the amounts, if any, of the
non-recurring items that are excluded from adjusted EBITDA are
highly uncertain and incapable of estimation, and have not been
included in the table below. Such non-recurring items may include
non-cash expenses for earn out liabilities under the terms of the
Business Combination, non-cash expense relating to the tax
receivable agreement and/or other items. As such items are excluded
from adjusted EBITDA, the occurrence and magnitude thereof, while
impacting net income and the reconciliation of adjusted EBITDA to
net income, would have no impact on adjusted EBITDA for 2017. In
addition, the below reconciliation assumes that the overall capital
structure of the Company and effective income tax rates are
consistent with the structure at June 30, 2017. Changes to these
assumptions could significantly impact our net income for 2017 and
accordingly, the reconciliation of adjusted EBITDA to net income,
but not adjusted EBITDA itself. For additional information
regarding our adjusted EBITDA, refer to the related explanations
presented above under “Reconciliation of Adjusted EBITDA”.
2017 Guidance
Adjusted EBITDA Reconciliation
Estimated
Year Ended
December 31, 2017
Amounts in
millions, except shares and per share data
Net income attributed to common shareholders $ 62 Net income
attributed to the non-controlling interest i. 34 Net income
96 Plus non-GAAP adjustments: Income tax provision ii. 44
Interest expense, net 40 Depreciation and amortization 37 Share
based compensation iii. 14 Other expenses iv. 4 Adjusted
EBITDA $ 235 Earnings per Class A share: Basic $ 0.63
Diluted $ 0.58 Weighted-average shares outstanding: Basic v.
99,078,629 Diluted vi. 107,178,629 i. The net
income of Hostess Holdings is allocated to owners pro rata based on
ownership percentage. As of June 30, 2017, the Company owned
approximately 99.6 million of Hostess Holdings' 130.0 million total
partnership units. The remaining approximately 30.4 million
partnership units are owned by a non-controlling interest. ii.
Represents the corporate income tax expense generated from the
Company's interest in Hostess Holdings. The non-controlling
interest represents an ownership interest in Hostess Holdings,
which is a partnership for tax purposes. We expect that the Company
will make tax payments between $17 million and $20 million during
2017 to cover its income tax liability, while Hostess Holdings will
make distributions between $15 million and $18 million to the
non-controlling interest to reimburse its income tax liability.
Additionally, we expect that the payment due to the selling
equityholders of Hostess Holdings for 2017 activity under the terms
of the tax receivable agreement will be between $13 million and $15
million. This payment is expected to be made in 2018. Neither the
non-controlling interest tax distributions nor the tax receivable
agreement payment are included in the income tax provision. The
projected income tax provision also includes a $3.0 million loss
resulting from a change in state tax rates. iii. Represents amounts
associated with the March 2017 issuance of stock options,
restricted stock units, or performance share units and restricted
stock to employees of the Company. iv. Other expenses primarily
consist of professional fees incurred for the secondary offering of
common stock which closed on April 19, 2017, and the registration
of certain privately held warrants. Also included in other expenses
is the expected loss associated with a change to the valuation of
the Company's tax receivable agreement due to a change in state tax
rates. v. Weighted-average basic common shares outstanding for 2017
includes 99,557,183 Class A common shares outstanding as of June
30, 2017 and the annualized impact of the conversion of 1,306,261
Class B common shares to Class A common shares during the second
quarter of 2017. vi. Reflects the dilutive impact of 7.9 million
Class A common shares due to outstanding warrants (based on a range
of 7.2 million to 8.5 million) and 0.2 million Class A common
shares due to outstanding unvested equity awards to employees
(based on a range of 0.1 million to 0.3 million).
Reconciliation of Pro Forma Combined
Adjusted EBITDA
For the Trailing Twelve Months Ended
June 30, 2017
(Unaudited)
Pro Forma (i) Less: Pro Forma
Plus: Pro Forma Combined
Six Months Six Months Combined Year
Ended Ended Ended Trailing Twelve
December 31, June 30, June 30, Months
Ended
(In
thousands)
2016 2016 2017 June 30, 2017 Net income
$ 82,442 $ (34,185 ) $ 52,406 $ 100,663 Plus non-GAAP adjustments:
ii. Income tax provision 32,862 (13,625 ) 21,291 40,528 Interest
expense, net 51,441 (26,494 ) 19,865 44,812 Depreciation and
amortization 36,520 (18,249 ) 18,854 37,125 Gain on debt
extinguishment (763 ) — — iii. (763 ) Share-based compensation — —
4,360 iv. 4,360 Other (income) expense 2,375 (2,169 ) 953 v. 1,159
Impairment of property and equipment 7,300 (7,267 ) — vi. 33 Recall
and other costs 2,551 (4,260 ) — vii. (1,709 ) Business combination
transaction costs 575 (575 ) — viii.
— Adjusted EBITDA $ 215,303 $ (106,824 ) $
117,729 $ 226,208 i. Pro forma combined
net income as reported on the Company's 2016 annual report on Form
10-K filing. ii. Non-GAAP adjustments include a combination of
historical adjustments from the six months ended June 30, 2017 as
well as pro forma combined adjustments for the six months ended
December 31, 2016. iii. As part of the refinancing of the First
Lien Term Loan, the Company recognized a gain on extinguishment of
debt of $0.8 million, which consisted of penalties of $3.0 million,
the write-off of deferred financing costs of $0.2 million, net of
debt premium write-offs of approximately $4.0 million. iv. The
Company recognized $4.4 million of expense related to awards
granted under the Hostess Brands, Inc. 2016 Equity Incentive Plan.
v. Other income consists of legal and professional fees for
securities filings related to the Business Combination and related
to the secondary offering of common stock and registration of
certain privately held warrants in the second quarter of 2017. vi.
The Company closed multiple production lines at the Indianapolis,
Indiana bakery and transitioned production to other facilities
resulting in a loss. vii. The Company recovered $4.0 million of
expenses in the third quarter of 2016 associated with a voluntary
recall in the second quarter 2016. For the six months ended June
30, 2016, other costs included loss on a sale/abandonment of
property and bakery shutdown costs, primarily due to utilities,
insurance, taxes and maintenance expenses related to the Schiller
Park, Illinois bakery. In addition we incurred losses related to
the equipment that we no longer intended to use or had idled. viii.
Business combination transaction costs consisted primarily of
professional and legal fees related to the acquisition of Superior.
Pro Forma Combined Leverage
Ratio
(Unaudited)
Twelve Months Ended
(In
thousands)
June 30, 2017 Long-term debt and capital lease obligations,
including current maturities $ 1,000,419 Less: capital lease
obligation (648 ) Less: Unamortized debt premium and issuance costs
(3,518 ) Term loan debt 996,253 Less: cash and cash
equivalents (66,224 ) Net term loan debt $ 930,029
Pro forma combined adjusted EBITDA $ 226,208 Pro
forma combined leverage ratio 4.11
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version on businesswire.com: http://www.businesswire.com/news/home/20170808006424/en/
Investors, please contact:ICRKatie
Turner646-277-1228katie.turner@icrinc.comorMedia, please
contact:LAK Public Relations, Inc.Hannah
Arnold212-329-1417harnold@lakpr.comorMarie
Espinel212-899-4744mespinel@lakpr.com
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