| Summary of Significant Accounting Policies | 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. Hostess Brands, Inc. holds 100% of the general partnership interest in Hostess Holdings and a majority of the limited partnership interests therein and consolidates Hostess Holdings in the Company’s consolidated financial statements. The remaining limited partnership interests in Hostess Holdings are held by the holders of the outstanding shares of Class B common stock of Hostess Brands, Inc. These limited partnership interests in Hostess Holdings are reflected in the consolidated financial statements as a non-controlling interest. Basis of Presentation The consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented, and all such adjustments were of a normal and recurring nature. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018 . The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. The Company sold its In-Store Bakery operations on August 30, 2019. Adoption of New Accounting Standards On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, along with the related ASUs 2018-01, 2018-10 and 2018-11 (collectively, “Topic 842”). Topic 842 requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. To adopt this standard, the Company utilized a modified retrospective transition method. Under this approach, the results for reporting periods beginning January 1, 2019 are presented under Topic 842. Prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting standards. There was no cumulative effect of applying Topic 842 to the opening balance of retained earnings. The Company has elected to apply the practical expedients under Topic 842 which allow entities to not reassess the lease classification for expired or existing leases and to not reassess if expired or existing contracts contain leases under the Topic 842 definition. The Company has also elected to use hindsight when determining the lease term of existing leases. As a result of the adoption, on January 1, 2019, the Company recognized right of use assets of $8.2 million , offset by associated accumulated amortization of $5.2 million and corresponding lease liabilities of $3.0 million . The recognition of leases subsequent to the adoption of Topic 842 is further described in the Leases section of this footnote. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries (including those for which the Company is the primary beneficiary of a variable interest entity). All intercompany balances and transactions have been eliminated in consolidation. 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, valuation of expected future payments under the tax receivable agreement, and reserves for trade and promotional allowances. Actual results could differ from these estimates. Accounts Receivable Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of September 30, 2019 and December 31, 2018 , the Company’s accounts receivable were $115.9 million and $105.7 million , respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $2.7 million and $2.6 million , respectively. In addition, there were customer trade allowances of $44.6 million and $42.0 million as of September 30, 2019 and December 31, 2018 , 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) September 30, December 31, Ingredients and packaging $ 19,527 $ 18,865 Finished goods 16,654 16,446 Inventory in transit to customers 2,401 3,269 $ 38,582 $ 38,580 Impairment of Property and Equipment For the nine months ended September 30, 2018 , the Company recorded an impairment loss of $1.4 million related to the plann ed disposition of certain production equipment before the end of its useful life. This loss is included in other operating expenses on the consolidated statement of operations. The measurement of this loss was based on Level 3 inputs within the fair value measurement hierarchy. Software Costs Included in “Other assets, net” in the consolidated balance sheets is capitalized software in the amount of $10.9 million and $8.5 million at September 30, 2019 and December 31, 2018 , 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 $0.7 million and $2.1 million for the three and nine months ended September 30, 2019 , respectively, compared to $0.6 million and $2.0 million for the three and nine months ended September 30, 2018 , respectively. Concentrations The Company has one customer (together with its affiliates) that accounted for 10% or more of the Company’s total net revenue. The percentage of total net revenues for this customer is presented below by segment: Three Months Ended Nine Months Ended (% of Consolidated Net Revenues) September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018 Sweet Baked Goods 22.3 % 20.0 % 23.0 % 18.7 % In-Store Bakery 0.3 % 0.5 % 0.5 % 0.6 % Total 22.6 % 20.5 % 23.5 % 19.3 % Leases Subsequent to its adoption of Topic 842, the Company recognizes a right of use asset and corresponding lease liability on the consolidated balance sheet for all lease transactions with terms of more than 12 months. Agreements are determined to contain a lease if they convey the use and control of an underlying physical asset. Based on the nature of the lease transaction, leases are either classified as financing or operating. Under both classifications, the right of use asset and liability are initially valued based on the present value of the future minimum lease payments using an effective borrowing rate at the inception of the lease. The Company determined the effective borrowing rate based on its expected incremental borrowing rate on collateralized debt. At September 30, 2019 , the weighted average effective borrowing rates for outstanding operating leases was 4.5% . Under a financing lease, interest expense related to the lease liability is recognized over the lease term using an effective interest rate method and right of use assets are amortized straight-line over the term of the lease. Under an operating lease, minimum lease payments are expensed straight-line over the lease term. Lease liabilities are amortized using an effective interest rate method and right of use assets are reduced based on the excess of the sum of the straight-line lease expense and the reduction of the lease liability over the actual lease payments. At September 30, 2019 , the average remaining terms on operating leases were approximately one year . Variable lease payments, such as taxes and insurance, are expensed as incurred. Expenses related to leases with original terms less than 12 months (short-term leases) are expensed as incurred. For all leases related to distribution, bakery and corporate facilities, the Company has elected not to separate non-lease components from lease components. The table below shows the composition of lease expenses for the period subsequent to the adoption of Topic 842: Three Months Ended Nine Months Ended (In thousands) September 30, 2019 September 30, 2019 Amortization of right of use asset, financing lease $ 33 $ 133 Interest, financing lease 4 16 Operating lease expense 752 2,009 Short-term lease expense 202 884 Variable lease expense 188 565 $ 1,179 $ 3,607 At September 30, 2019 , right of use assets related to operating leases are included in property and equipment, net on the consolidated balance sheet (see Note 3. Property and Equipment ). As of September 30, 2019 , the Company has no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease on the consolidated balance sheet (see Note 7. Debt and Lease Obligations ). |
