NOTES TO UNAUDITED 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 subsidiaries (collectively, the “Company”). The Company is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing fresh sweet baked goods in the United States.
The Company’s operations are conducted through indirect operating subsidiaries that are wholly-owned by Hostess Holdings, L.P. (“Hostess Holdings”), a direct subsidiary of Hostess Brands, Inc. The Company holds
100%
of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests therein and consolidates Hostess Holdings in the Company’s consolidated financial statements. The remaining limited partnership interests in Hostess Holdings are held by the holders of the outstanding shares of Class B common stock of Hostess Brands, Inc. These limited partnership interests in Hostess Holdings are reflected in our consolidated financial statements as a non-controlling interest.
On November 4, 2016 (the “Closing Date”), in a transaction referred to as the “Business Combination,” the Company, then known as Gores Holdings, Inc. (“Gores Holdings”), acquired a controlling interest in Hostess Holdings, an entity owned indirectly by C. Dean Metropoulos (the “Metropoulos Entities”) 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”).
Basis of Presentation
The consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented, all such adjustments were of a normal and recurring nature. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2017.
Mr. Metropoulos and the Metropoulos Entities hold their equity investment in the Company primarily through Class B limited partnership units in the Company’s subsidiary, Hostess Holdings (“Class B Units”) and an equal number of shares of the Company’s Class B common stock (“Class B Stock”). The Company’s Class B Stock has voting, but no economic rights, while Hostess Holdings’ Class B Units have economic, but no voting rights. Each Class B Unit, together with a share of Class B Stock held by the Metropoulos Entities, is exchangeable for a share of the Company’s Class A common stock (or at the option of the Company, the cash equivalent thereof). The interest of the Metropoulos Entities in Hostess Holdings’ Class B Units is reflected in the Company’s consolidated financial statements as a non-controlling interest.
The Company has
two
reportable segments: Sweet Baked Goods and In-Store Bakery. Previously, the Company’s reportable segments were Sweet Baked Goods and Other. A change in the Company’s internal reporting structure during the fourth quarter of 2017 caused the Company to reassess its reportable segments. Prior period segment disclosures have been reclassified to conform with the current period presentation.
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), using the modified retrospective transition method. Under this method, results for reporting periods beginning January 1, 2018 are presented under Topic 606. Prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under Topic 605, with the cumulative effect of applying Topic 606 to prior period amounts recognized as an adjustment to opening retained earnings.The Company has elected to apply the new standard to contracts that are not complete as of January 1, 2018. Under this transition method, the Company deemed contracts to be not complete if, as of the date of transition, the Company had not fulfilled its performance obligations. The impact of the adoption of Topic 606 is further described in the Revenue Recognition section of this footnote.
On January 1, 2018, the Company adopted ASU No. 2017-12,
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12). The adoption of this standard did not have a material impact on the consolidated financial statements.
In March 2018, the Company adopted ASU 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118,
which updates the income tax accounting in U.S. GAAP to reflect the SEC’s interpretive guidance released on December 22, 2017, when the legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform”) was signed into law. Additional information regarding the adoption of this standard is contained in Note 10-Income Taxes.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries (including those for which the Company is the primary beneficiary of a variable interest entity), collectively referred to as 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 and for the reported amounts of revenues and expenses during the reporting period. Management utilizes estimates, including, but not limited to, valuation and useful lives of tangible and intangible assets, reserves for trade and promotional allowances and valuation of expected future payments under the tax receivable agreement. Actual results could differ from these estimates.
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of June 30, 2018 and December 31, 2017, the Company’s accounts receivable were
$110.5 million
and
$101.0 million
, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of
$2.5 million
and
$2.1 million
, respectively. In addition, there are customer trade allowances of
$42.0 million
and
$40.5 million
as of June 30, 2018 and December 31, 2017, respectively, in current liabilities in the consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost or net-realizable value on a first-in first-out basis.
Abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) are expensed in the period they are incurred.
The components of inventories are as follows
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30,
2018
|
|
December 31,
2017
|
|
|
|
|
Ingredients and packaging
|
$
|
16,892
|
|
|
$
|
14,826
|
|
Finished goods
|
19,823
|
|
|
15,471
|
|
Inventory in transit to customers
|
1,476
|
|
|
4,048
|
|
|
$
|
38,191
|
|
|
$
|
34,345
|
|
Impairment of Property and Equipment
For the six months ended June 30, 2018, the Company recorded an impairment loss of
$1.4 million
related to the planned disposition of certain production equipment before the end of its useful life. The measurement of this loss was based on Level 3 inputs within the fair value measurement hierarchy. The remaining net book value of the equipment is included in other assets, net on the consolidated balance sheet.
Software Costs
Included in the caption “other assets” in the consolidated balance sheets is capitalized software in the amount of
$7.5 million
and
$7.3 million
at June 30, 2018 and December 31, 2017, 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
$0.8 million
and
$1.4 million
for the three and six months ended June 30, 2018, respectively, compared to
$0.6 million
and
$1.2 million
for the three and six months ended June 30, 2017, respectively.
Revenue Recognition
Net revenue consists primarily of sales of packaged food products. The Company recognizes revenue when the obligations under the terms of its agreements with customers have been satisfied. The Company’s obligation is satisfied when control of the product is transferred to its customers along with the title, risk of loss and rewards of ownership. Depending on the arrangement with the customer, these criteria are met either at the time the product is shipped or when the product is received by such customer.
Customers are invoiced at the time of shipment or customer pickup based on credit terms established in accordance with industry practice. Invoices generally require payment within 30 days. Net revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to in exchange for that product. Amounts billed to customers related to shipping and handling are classified as net revenue. A provision for payment discounts and other allowances is estimated based on the Company’s historical performance or specific terms with the customer. The Company generally does not accept product returns and provides these allowances for anticipated expired or damaged products.
Trade promotions, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. A provision for estimated trade promotions is recorded as a reduction of revenue in the same period when the sale is recognized.
The Company also offers rebates based on purchase levels, product placement locations in retail stores and advertising placed by customers. The ultimate cost of these programs is dependent on certain factors such as actual purchase volumes or customer activities and is the subject of significant management estimates. The Company accounts for these programs as variable consideration and recognizes a reduction in revenue in the same period as the underlying program.
For product produced by third parties, management evaluates whether the Company is the principal (i.e., report revenue on a gross basis) or agent (i.e., report revenue on a net basis). Management has determined that it is the principal in all cases, since it establishes its own pricing for such product, generally assumes the credit risk for amounts billed to its customers, and often takes physical control of the product before it is shipped to customers.
The Company utilizes a practical expedient approach under Topic 606 and does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.
See Note 4 - Segment Reporting to the Company’s consolidated financial statements for a disaggregation of net revenue.
The adoption of Topic 606 had no significant impact on the Company’s consolidated statement of operations for the three or six months ended June 30, 2018 or the consolidated balance sheet as of June 30, 2018.
The cumulative effect of the changes made to the Company’s consolidated January 1, 2018 balance sheet for the adoption of Topic 606 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2017
|
|
Adjustments
Due to Topic 606
|
|
Balance at
January 1, 2018
|
Current assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
101,012
|
|
|
$
|
1,000
|
|
|
$
|
102,012
|
|
Inventories
|
|
34,345
|
|
|
(531
|
)
|
|
33,814
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
49,992
|
|
|
103
|
|
|
50,095
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
Deferred tax liability
|
|
267,771
|
|
|
83
|
|
|
267,854
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Retained earnings
|
|
208,279
|
|
|
198
|
|
|
208,477
|
|
Non-controlling interest
|
|
342,240
|
|
|
85
|
|
|
342,325
|
|
The adjustments shown above are primarily attributed to a change in the criteria used to determine when the Company’s performance obligation is satisfied. Prior to the adoption of Topic 606, the Company’s performance obligation was satisfied when risk of loss related to the product transferred to the customer. After implementing Topic 606, the Company’s performance obligation is satisfied based on a set of criteria including the customer’s obligation to pay, physical possession, transfer of legal title, transfer of risk and rewards of ownership and the customer’s acceptance of the product. Depending on the arrangement with the customer, the application of this new criteria changed the timing of revenue recognition for certain contracts.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(% of Consolidated Net Revenues)
|
June 30,
2018
|
|
June 30,
2017
|
|
June 30,
2018
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Sweet Baked Goods
|
18.4
|
%
|
|
19.9
|
%
|
|
18.1
|
%
|
|
19.1
|
%
|
In-Store Bakery
|
0.6
|
|
|
0.7
|
|
|
0.6
|
|
|
0.7
|
|
Total
|
19.0
|
%
|
|
20.6
|
%
|
|
18.7
|
%
|
|
19.8
|
%
|
Collective Bargaining Agreements
As of June 30, 2018, approximately
46.3%
, of the Company’s employees are covered by collective bargaining agreements, including
14.4%
subject to collective bargaining agreements which will expire before December 31, 2018.
Accounting Standards Issued but Not yet Adopted
In February 2016, ASU No. 2016-02,
Leases
(“ASU 2016-02”) was issued 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, 2018, 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 and cash flows.
2.
Aryzta Transaction
On February 1, 2018 (the “Purchase Date”), the Company acquired certain U.S. breakfast assets of Aryzta, LLC, including a bakery facility and certain brand names. The Company acquired the assets to expand its product portfolio and to gain previously outsourced manufacturing capabilities for its existing product portfolio. The assets acquired and liabilities assumed have preliminarily been determined to constitute a business and will be recorded at their estimated fair values as of the Purchase Date under the acquisition method of accounting.
Consideration for this acquisition included a
$23.9 million
cash payment. The Company is still finalizing the purchase price and the allocation of the purchase price to the individual assets acquired and liabilities assumed. The purchase price and allocation included in the June 30, 2018 consolidated balance sheet are based on management’s best estimate and are preliminary and subject to change. To assist management in the allocation, the Company has engaged a valuation specialist to prepare an appraisal. The Company will finalize the amounts recognized as the information necessary to complete the analysis is obtained.
The provisional amounts for the assets acquired and liabilities assumed as of the Purchase Date are as follows (in thousands):
|
|
|
|
|
Inventory
|
$
|
8,162
|
|
Property and equipment
|
16,838
|
|
Other liabilities
|
(1,090
|
)
|
Net assets acquired
|
$
|
23,910
|
|
Based on the preliminary assessment of the purchase allocation, no goodwill or other intangible assets have been recorded as a result of this transaction.
For the three and six months ended June 30, 2018, the Company incurred less t
han
$0.1 million
of expenses related to the acquisition. These expenses are classified as business combination transaction costs on the consolidated statement of operations.
For the three and six months ended June 30, 2018, the operations of the acquired assets provided net revenue of
$20.8 million
and
$35.4 million
, respectively, and negative gross profit of
$6.3 million
and
$10.7 million
, respectively. The negative gross profit does not reflect the allocation of shared costs incurred by the Company. Due to the nature of these costs, the Company determined it was impracticable to allocate to individual bakeries.
3.
Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
Land and buildings
|
$
|
37,415
|
|
|
|
$
|
32,088
|
|
Machinery and equipment
|
169,633
|
|
|
|
141,995
|
|
Construction in progress
|
13,330
|
|
|
|
13,489
|
|
|
220,378
|
|
|
|
187,572
|
|
Less accumulated depreciation
|
(20,539
|
)
|
|
|
(13,451
|
)
|
|
$
|
199,839
|
|
|
|
$
|
174,121
|
|
Depreciation expense was
$3.8 million
and
$7.2 million
for the three and six months ended June 30, 2018, respectively, compared to
$3.0 million
and
$5.8 million
for the three and six months ended June 30, 2017, respectively.
4.
Segment Reporting
The Company has
two
reportable segments: Sweet Baked Goods and In-Store Bakery. The Company’s Sweet Baked Goods segment consists of sweet baked goods that are sold under the Hostess® and Dolly Madison® brands, Hostess® branded bread and buns and frozen retail products. The operations attributed to assets acquired from Aryzta are included in the Sweet Baked Goods segment. The In-Store Bakery segment consists of Superior® and Hostess® branded products sold through the in-store bakery section of grocery and club stores.
We evaluate performance and allocate resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
June 30,
2018
|
|
Three Months Ended
June 30,
2017
|
|
Six Months Ended
June 30,
2018
|
|
Six Months Ended
June 30,
2017
|
|
|
|
|
|
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
204,237
|
|
|
$
|
191,695
|
|
|
$
|
403,529
|
|
|
$
|
366,488
|
|
In-Store Bakery
|
11,612
|
|
|
11,483
|
|
|
21,063
|
|
|
21,228
|
|
Net revenue
|
$
|
215,849
|
|
|
$
|
203,178
|
|
|
$
|
424,592
|
|
|
$
|
387,716
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
9,857
|
|
|
$
|
8,899
|
|
|
$
|
19,251
|
|
|
$
|
17,522
|
|
In-Store Bakery
|
700
|
|
|
689
|
|
|
1,397
|
|
|
1,332
|
|
Depreciation and amortization
|
$
|
10,557
|
|
|
$
|
9,588
|
|
|
$
|
20,648
|
|
|
$
|
18,854
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
64,359
|
|
|
$
|
85,486
|
|
|
$
|
133,797
|
|
|
$
|
162,268
|
|
In-Store Bakery
|
2,498
|
|
|
2,958
|
|
|
4,301
|
|
|
5,472
|
|
Gross profit
|
$
|
66,857
|
|
|
$
|
88,444
|
|
|
$
|
138,098
|
|
|
$
|
167,740
|
|
|
|
|
|
|
|
|
|
Capital expenditures (1):
|
|
|
|
|
|
|
|
Sweet Baked Goods
|
$
|
13,432
|
|
|
$
|
7,662
|
|
|
$
|
22,598
|
|
|
$
|
15,645
|
|
In-Store Bakery
|
164
|
|
|
167
|
|
|
217
|
|
|
438
|
|
Capital expenditures
|
$
|
13,596
|
|
|
$
|
7,829
|
|
|
$
|
22,815
|
|
|
$
|
16,083
|
|
|
|
(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 and six months ended June 30, 2018 and 2017.
|
Total assets by reportable segment are as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
Total segment assets:
|
|
|
|
|
Sweet Baked Goods
|
$
|
2,893,075
|
|
|
|
$
|
2,884,642
|
|
In-Store Bakery
|
89,554
|
|
|
|
81,633
|
|
Total segment assets
|
$
|
2,982,629
|
|
|
|
$
|
2,966,275
|
|
5.
Intangible Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30,
2018
|
|
December 31,
2017
|
|
|
|
|
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)
|
(39,760
|
)
|
|
(27,771
|
)
|
Intangible assets, net
|
$
|
1,911,099
|
|
|
$
|
1,923,088
|
|
Amortization expense was
$6.0 million
and
$12.0 million
for the three and six months ended June 30, 2018 and
$6.0 million
and
$11.9 million
for the three and six months ended June 30, 2017, 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 June 30, 2018 for customer relationships was
21.0
years.
6.
Accrued Expenses
Included in accrued expenses are the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
Payroll, vacation and other compensation
|
$
|
6,330
|
|
|
|
$
|
4,342
|
|
Annual incentive bonuses
|
1,136
|
|
|
|
4,259
|
|
Workers compensation reserve
|
1,666
|
|
|
|
1,650
|
|
Self-insurance reserves
|
1,338
|
|
|
|
1,192
|
|
Taxes
|
99
|
|
|
|
99
|
|
Accrued interest
|
241
|
|
|
|
338
|
|
|
$
|
10,810
|
|
|
|
$
|
11,880
|
|
7.
Debt
A summary of the carrying value of the debt and the capital lease obligation is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
Third First Lien Term Loan (4.2% as of June 30, 2018)
|
|
|
|
|
Principal
|
$
|
988,794
|
|
|
|
$
|
993,762
|
|
Unamortized debt premium and issuance costs
|
4,315
|
|
|
|
4,857
|
|
|
993,109
|
|
|
|
998,619
|
|
Capital lease obligation (6.8%)
|
487
|
|
|
|
569
|
|
Total debt and capital lease obligation
|
993,596
|
|
|
|
999,188
|
|
Less: Amounts due within one year
|
(11,268
|
)
|
|
|
(11,268
|
)
|
Long-term portion
|
$
|
982,328
|
|
|
|
$
|
987,920
|
|
At June 30, 2018, minimum debt repayments under the Third First Lien Term Loan are due as follows:
|
|
|
|
|
(In thousands)
|
|
Remainder of 2018
|
$
|
4,969
|
|
2019
|
9,938
|
|
2020
|
9,938
|
|
2021
|
9,938
|
|
2022
|
954,011
|
|
8.
Interest Rate Swap
To reduce the effect of interest rate fluctuations, the Company entered into an interest rate swap contract with a counter party to make a series of payments based on a fixed interest rate of
1.78%
and receive a series of payments based on the greater of LIBOR or
0.75%
. Both the fixed and floating payment streams are based on a notional amount of
$500 million
at the inception of the contract and will be reduced by
$100 million
each year of the
five
-year contract. As of June 30, 2018, the notional amount is
$400 million
. The Company entered into this transaction to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated this derivative as a cash flow hedge. At June 30, 2018, the effective interest rate on the long-term debt hedged by this contract was
4.03%
.
As of June 30, 2018 and December 31, 2017, the fair value of the interest rate swap contract of
$8.0 million
and
$2.9 million
was reported within other assets, net on the
consolidated balance sheet. The fair value of the interest rate swap contract is measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves (Level 2).
9.
Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to the Company’s Class A stockholders for the period by the weighted average number of Class A common shares outstanding for the period excluding non-vested restricted stock awards. In computing diluted earnings per share, basic earnings per share is adjusted for the assumed issuance of all applicable potentially dilutive share-based awards, including: public and private placement warrants, restricted stock awards, restricted stock units, and stock options.
Below are basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2018
|
|
Three Months Ended
June 30, 2017
|
|
Six Months
Ended
June 30, 2018
|
|
Six Months
Ended
June 30, 2017
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to Class A stockholders (in thousands)
|
|
$
|
19,283
|
|
|
$
|
18,830
|
|
|
$
|
43,123
|
|
|
$
|
34,662
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average Class A shares outstanding - basic
|
|
99,939,642
|
|
|
98,943,690
|
|
|
99,916,161
|
|
|
98,600,075
|
|
Dilutive effect of warrants
|
|
4,668,452
|
|
|
8,144,735
|
|
|
4,856,923
|
|
|
7,371,050
|
|
Dilutive effect of restricted stock and restricted stock units
|
|
165,000
|
|
|
95,916
|
|
|
138,390
|
|
|
33,773
|
|
Weighted-average shares outstanding - diluted
|
|
104,773,094
|
|
|
107,184,341
|
|
|
104,911,474
|
|
|
106,004,898
|
|
|
|
|
|
|
|
|
|
|
Net income per Class A share - basic
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
$
|
0.43
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Net income per Class A share - diluted
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.41
|
|
|
$
|
0.33
|
|
For the three and six months ended June 30, 2018 and 2017, stock options were 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, state and local taxes on its allocable portion of the income of Hostess Holdings, a partnership for U.S. federal and most applicable state and local taxes. As a partnership, Hostess Holdings is itself not subject to U.S. federal and certain state and local income taxes. The operations of Hostess Holdings include those of its C Corporation subsidiaries.
The income tax expense in the accompanying consolidated statement of operations is based on an estimate of the Company’s annual effective income tax rate and adjusted for discrete items, if any. The Company’s estimated annual effective tax rate based on annual projected earnings for the year ending December 31, 2018 is
20.4%
prior to taking into account any discrete items. During the three and six months ended June 30, 2018, the Company recorded a discrete income tax benefit of
$5.0 million
related to a change in the Company’s estimated state tax rate. During the six months ended June 30, 2018, the Company also recorded a discrete income tax expense of
$1.6 million
related to the buyout of the tax receivable agreement entered into in connection with the Business Combination (the “Tax Receivable Agreement”).
At December 31, 2017, the Company recorded provisional amounts for the impact of re-measurement on its deferred taxes related to Tax Reform as set forth under SAB No. 118 guidance. Through June 30, 2018, no adjustments were made to the provisional amounts. These provisional amounts are subject to refinement during the measurement period under SAB 118.
11.
Tax Receivable Agreement
On January 26, 2018, the Company entered into an agreement to terminate all future payments payable under the Tax Receivable Agreement to the Apollo Funds in exchange for a payment of
$34.0 million
(the “Buyout”). Subsequent to the Buyout, the Company will retain a greater portion of the future cash tax savings subject to the Tax Receivable
Agreement. The Buyout did not affect the portion of the rights under the Tax Receivable Agreement payable to Metropoulos Entities, including those previously assigned by the Apollo Funds. If the Company enters into a definitive agreement on or before January 26, 2019 and that agreement results in a change in control (as defined in the Tax Receivable Agreement), the Company will be required to make an additional payment of
$10.0 million
to the Apollo Funds. As of June 30, 2018, no amounts have been paid and there are no amounts reflected in the consolidated financial statements related to the change in control provision, based on management’s estimate of the fair value of the potential obligation.
During the three and six months ended June 30, 2018, the Company recognized a gain on the remeasurement of the future expected payments under the Tax Receivable Agreement due to a change in the Company’s estimated state tax rate. As of June 30, 2018, the expected cash tax savings rate was
26.9%
.
The following table summarizes activity related to the Tax Receivable Agreement for the six months ended June 30, 2018:
|
|
|
|
|
|
(In thousands)
|
|
|
Balance December 31, 2017
|
|
$
|
124,360
|
|
Exchange of Class B units for Class A shares
|
|
400
|
|
Reduction of future payments due to the Buyout
|
|
(46,371
|
)
|
Remeasurement due to change in estimated state tax rate
|
|
(1,752
|
)
|
Payments
|
|
(7,353
|
)
|
Balance June 30, 2018
|
|
$
|
69,284
|
|
As of June 30, 2018 the future expected payments under the Tax Receivable Agreement are as follows:
|
|
|
|
|
(In thousands)
|
|
Remainder of 2018
|
$
|
700
|
|
2019
|
4,300
|
|
2020
|
4,300
|
|
2021
|
4,200
|
|
2022
|
4,200
|
|
Thereafter
|
51,584
|
|
12.
Commitments and Contingencies
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.
13.
Related Party Transactions
Under the terms of an employment agreement with the Company’s Executive Chairman, C. Dean Metropoulos, the Company is obligated to issue 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 certain EBITDA thresholds (as adjusted to reflect acquisitions) are met for the year ended December 31, 2018. Under this agreement, up to
2.75 million
shares could be issued.
As of June 30, 2018, the Company determined it was not probable that the EBITDA thresholds would be met.