Exhibit 99.3
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share data)
June 30, 2023 | December 31, 2022 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 99,368 | $ | 98,584 | ||||
Short-term investments | — | 17,914 | ||||||
Accounts receivable, net | 181,729 | 168,783 | ||||||
Inventories | 67,240 | 65,406 | ||||||
Prepaids and other current assets | 18,083 | 16,375 | ||||||
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Total current assets | 366,420 | 367,062 | ||||||
Property and equipment, net | 464,565 | 425,313 | ||||||
Intangible assets, net | 1,909,124 | 1,920,880 | ||||||
Goodwill | 706,615 | 706,615 | ||||||
Other assets, net | 70,688 | 72,329 | ||||||
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Total assets | $ | 3,517,412 | $ | 3,492,199 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Long-term debt and lease obligations payable within one year | $ | 12,543 | $ | 3,917 | ||||
Tax receivable agreement payments payable within one year | 7,400 | 12,600 | ||||||
Accounts payable | 87,502 | 85,667 | ||||||
Customer trade allowances | 67,952 | 62,194 | ||||||
Accrued expenses and other current liabilities | 27,837 | 59,933 | ||||||
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Total current liabilities | 203,234 | 224,311 | ||||||
Long-term debt and lease obligations | 982,046 | 999,089 | ||||||
Tax receivable agreement obligations | 117,157 | 123,092 | ||||||
Deferred tax liability | 361,928 | 347,030 | ||||||
Other long-term liabilities | 1,302 | 1,593 | ||||||
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Total liabilities | 1,665,667 | 1,695,115 | ||||||
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Commitments and Contingencies (Note 9) | ||||||||
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 143,184,870 shares issued and 132,859,461 shares outstanding as of June 30, 2023 and 142,650,344 shares issued and 133,117,224 shares outstanding as of December 31, 2022 | 14 | 14 | ||||||
Additional paid in capital | 1,315,418 | 1,311,629 | ||||||
Accumulated other comprehensive income | 34,602 | 35,078 | ||||||
Retained earnings | 710,370 | 639,595 | ||||||
Treasury stock | (208,659 | ) | (189,232 | ) | ||||
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Stockholders’ equity | 1,851,745 | 1,797,084 | ||||||
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Total liabilities and stockholders’ equity | $ | 3,517,412 | $ | 3,492,199 | ||||
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See accompanying notes to the unaudited condensed consolidated financial statements.
1
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||
Net revenue | $ | 352,360 | $ | 340,472 | $ | 697,763 | $ | 672,523 | ||||||||
Cost of goods sold | 226,366 | 227,772 | 451,052 | 444,199 | ||||||||||||
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Gross profit | 125,994 | 112,700 | 246,711 | 228,324 | ||||||||||||
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Operating costs and expenses: | ||||||||||||||||
Advertising and marketing | 20,176 | 15,587 | 34,075 | 27,537 | ||||||||||||
Selling | 10,025 | 10,137 | 20,674 | 19,914 | ||||||||||||
General and administrative | 28,196 | 30,127 | 56,394 | 59,799 | ||||||||||||
Amortization of customer relationships | 5,878 | 5,878 | 11,756 | 11,756 | ||||||||||||
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Total operating costs and expenses | 64,275 | 61,729 | 122,899 | 119,006 | ||||||||||||
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Operating income | 61,719 | 50,971 | 123,812 | 109,318 | ||||||||||||
Other (income) expense | ||||||||||||||||
Interest expense, net | 10,283 | 9,741 | 20,468 | 19,407 | ||||||||||||
Loss on modification and extinguishment of debt | 7,472 | — | 7,472 | — | ||||||||||||
Other (income) expense | 68 | (507 | ) | 249 | (71 | ) | ||||||||||
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Total other (income) expense | 17,823 | 9,234 | 28,189 | 19,336 | ||||||||||||
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Income before income taxes | 43,896 | 41,737 | 95,623 | 89,982 | ||||||||||||
Income tax expense | 11,410 | 11,261 | 24,848 | 24,948 | ||||||||||||
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Net income | $ | 32,486 | $ | 30,476 | $ | 70,775 | $ | 65,034 | ||||||||
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Earnings per Class A share: | ||||||||||||||||
Basic | $ | 0.24 | $ | 0.22 | $ | 0.53 | $ | 0.47 | ||||||||
Diluted | $ | 0.24 | $ | 0.22 | $ | 0.53 | $ | 0.47 | ||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 133,076,763 | 137,909,156 | 133,298,117 | 138,255,803 | ||||||||||||
Diluted | 134,211,771 | 138,958,242 | 134,371,034 | 139,263,303 |
See accompanying notes to the unaudited condensed consolidated financial statements.
2
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||
Net income | $ | 32,486 | $ | 30,476 | $ | 70,775 | $ | 65,034 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gain on interest rate swap and foreign currency contracts designated as a cash flow hedge | 12,308 | 6,327 | 9,295 | 29,983 | ||||||||||||
Reclassification into net income | (5,407 | ) | 823 | (9,939 | ) | 1,885 | ||||||||||
Income tax benefit (expense) | (1,798 | ) | (1,877 | ) | 168 | (8,369 | ) | |||||||||
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Comprehensive income | $ | 37,589 | $ | 35,749 | $ | 70,299 | $ | 88,533 | ||||||||
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Class A Voting | Paid-in | Comprehensive | Retained | Stockholders’ | ||||||||||||||||||||||||||||
Common Stock | Capital | Income (Loss) | Earnings | Treasury Stock | Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance-December 31, 2022 | 133,117 | $ | 14 | $ | 1,311,629 | $ | 35,078 | $ | 639,595 | 9,533 | $ | (189,232 | ) | $ | 1,797,084 | |||||||||||||||||
Comprehensive income | — | — | — | (5,579 | ) | 38,289 | — | — | 32,710 | |||||||||||||||||||||||
Share-based compensation | 324 | — | 3,011 | — | — | — | — | 3,011 | ||||||||||||||||||||||||
Exercise of employee stock options | 125 | — | 2,112 | — | — | — | — | 2,112 | ||||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | (5,461 | ) | — | — | — | — | (5,461 | ) | ||||||||||||||||||||||
Repurchase of common stock | (561 | ) | — | — | — | — | 561 | (13,669 | ) | (13,669 | ) | |||||||||||||||||||||
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Balance-March 31, 2023 | 133,005 | $ | 14 | $ | 1,311,291 | $ | 29,499 | $ | 677,884 | 10,094 | $ | (202,901 | ) | $ | 1,815,787 | |||||||||||||||||
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Comprehensive income | — | — | — | 5,103 | 32,486 | — | — | 37,589 | ||||||||||||||||||||||||
Share-based compensation | 19 | — | 3,527 | — | — | — | — | 3,527 | ||||||||||||||||||||||||
Exercise of employee stock options and ESPP awards | 67 | — | 1,053 | — | — | — | — | 1,053 | ||||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | (453 | ) | — | — | — | — | (453 | ) | ||||||||||||||||||||||
Repurchase of common stock, including excise tax | (232 | ) | — | — | — | — | 232 | (5,758 | ) | (5,758 | ) | |||||||||||||||||||||
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Balance-June 30, 2023 | 132,859 | $ | 14 | $ | 1,315,418 | $ | 34,602 | $ | 710,370 | 10,326 | $ | (208,659 | ) | $ | 1,851,745 | |||||||||||||||||
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Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Class A Voting | Paid-in | Comprehensive | Retained | Stockholders’ | ||||||||||||||||||||||||||||
Common Stock | Capital | Income (Loss) | Earnings | Treasury Stock | Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance-December 31, 2021 | 138,279 | $ | 14 | $ | 1,303,254 | $ | (506 | ) | $ | 475,400 | 3,753 | $ | (59,172 | ) | $ | 1,718,990 | ||||||||||||||||
Comprehensive income | — | — | — | 18,226 | 34,558 | — | — | 52,784 | ||||||||||||||||||||||||
Share-based compensation | 350 | — | 2,339 | — | — | — | — | 2,339 | ||||||||||||||||||||||||
Exercise of employee stock options | 105 | — | 1,662 | — | — | — | — | 1,662 | ||||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | (5,216 | ) | — | — | — | — | (5,216 | ) | ||||||||||||||||||||||
Repurchase of common stock | (459 | ) | — | — | — | — | 459 | (9,680 | ) | (9,680 | ) | |||||||||||||||||||||
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Balance-March 31, 2022 | 138,275 | $ | 14 | $ | 1,302,039 | $ | 17,720 | $ | 509,958 | 4,212 | $ | (68,852 | ) | $ | 1,760,879 | |||||||||||||||||
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Comprehensive income (loss) | — | — | — | 5,273 | 30,476 | — | — | 35,749 | ||||||||||||||||||||||||
Share-based compensation | 23 | — | 2,648 | — | — | — | — | 2,648 | ||||||||||||||||||||||||
Exercise of employee stock options | 37 | — | 579 | — | — | — | — | 579 | ||||||||||||||||||||||||
Payment of taxes for employee stock awards | — | — | (296 | ) | — | — | — | — | (296 | ) | ||||||||||||||||||||||
Repurchase of common stock | (1,848 | ) | — | — | — | — | 1,848 | (38,826 | ) | (38,826 | ) | |||||||||||||||||||||
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Balance-June 30, 2022 | 136,487 | $ | 14 | $ | 1,304,970 | $ | 22,993 | $ | 540,434 | 6,060 | $ | (107,678 | ) | $ | 1,760,733 | |||||||||||||||||
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Six Months Ended | ||||||||
June 30, 2023 | June 30, 2022 | |||||||
Operating activities | ||||||||
Net income | $ | 70,775 | $ | 65,034 | ||||
Depreciation and amortization | 30,054 | 27,951 | ||||||
Debt discount amortization | 530 | 615 | ||||||
Unrealized foreign exchange gains | (153 | ) | (217 | ) | ||||
Loss on debt extinguishment | 721 | — | ||||||
Non-cash lease expense | 129 | 247 | ||||||
Share-based compensation | 6,538 | 4,987 | ||||||
Realized and unrealized gains on short-term investments | (86 | ) | — | |||||
Deferred taxes | 15,066 | 10,374 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (12,863 | ) | (30,600 | ) | ||||
Inventories | (1,834 | ) | (7,996 | ) | ||||
Prepaids and other current assets | 5,243 | (131 | ) | |||||
Accounts payable and accrued expenses | (31,489 | ) | 8,967 | |||||
Customer trade allowances | 5,717 | 7,934 | ||||||
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Net cash provided by operating activities | 88,348 | 87,165 | ||||||
Investing activities | ||||||||
Purchases of property and equipment | (55,161 | ) | (36,302 | ) | ||||
Acquisition of short-term investments | — | (20,918 | ) | |||||
Proceeds from maturity of short-term investments | 18,000 | — | ||||||
Acquisition and development of software assets | (3,005 | ) | (5,607 | ) | ||||
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Net cash used in investing activities | (40,166 | ) | (62,827 | ) | ||||
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Financing activities | ||||||||
Repayments of long-term debt and lease obligations | — | (5,584 | ) | |||||
Debt fees paid | (10,306 | ) | — | |||||
Proceeds from origination of long-term debt | 336,663 | — | ||||||
Payments related to settlement of long-term debt | (334,883 | ) | — | |||||
Collateral payments | (5,980 | ) | — | |||||
Repurchase of common stock | (19,427 | ) | (48,506 | ) | ||||
Tax payments related to issuance of shares to employees | (5,914 | ) | (5,512 | ) | ||||
Cash received from exercise of options and warrants | 3,165 | 2,241 | ||||||
Payments on tax receivable agreement | (11,135 | ) | (9,313 | ) | ||||
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Net cash used in financing activities | (47,817 | ) | (66,674 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents | 419 | 8 | ||||||
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Net increase (decrease) in cash and cash equivalents | 784 | (42,328 | ) | |||||
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Cash and cash equivalents at beginning of period | 98,584 | 249,159 | ||||||
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Cash and cash equivalents at end of period | $ | 99,368 | $ | 206,831 | ||||
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Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest, net of amounts capitalized | $ | 28,077 | $ | 18,599 | ||||
Net taxes paid | $ | 11,496 | $ | 11,489 | ||||
Supplemental disclosure of non-cash investing: | ||||||||
Accrued capital expenditures | $ | 9,421 | $ | 6,358 |
See accompanying notes to the unaudited condensed consolidated financial statements.
5
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Hostess Brands, Inc. is a Delaware corporation headquartered in Lenexa, Kansas. The condensed consolidated financial statements include the accounts of Hostess Brands, Inc. and its subsidiaries (collectively, the “Company”). The Company is a leading sweet snacks company focused on developing, manufacturing, marketing, selling and distributing snacks in North America primarily under the Hostess® and Voortman® brands. The Company produces a variety of new and classic treats, including iconic Hostess® Donettes®, Twinkies®, CupCakes, Ding Dongs® and Zingers®, as well as a variety of Voortman® branded cookies and wafers. The Hostess® brand dates back to 1919 when the Hostess® CupCake was introduced to the public, followed by Twinkies® in 1930.
Basis of Presentation
The Company’s operations are conducted through wholly-owned operating subsidiaries. The condensed 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”). The results of operations for any quarter or a partial fiscal year period are not necessarily indicative of the results to be expected for other periods or the full fiscal year. For the periods presented, the Company has one reportable segment.
Principles of Consolidation
All intercompany balances and transactions related to activity between Hostess Brands, Inc. and its wholly-owned subsidiaries have been eliminated in consolidation.
Use of Estimates
The preparation of condensed 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.
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of June 30, 2023 and December 31, 2022, the Company’s accounts receivable were $181.7 million and $168.8 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $5.6 million and $5.8 million for the periods ended June 30, 2023 and December 31, 2022, respectively.
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.
6
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The components of inventories are as follows:
(In thousands) | June 30, 2023 | December 31, 2022 | ||||||
Ingredients and packaging | $ | 34,167 | $ | 35,410 | ||||
Finished goods | 29,340 | 26,133 | ||||||
Inventory in transit to customers | 3,733 | 3,863 | ||||||
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$ | 67,240 | $ | 65,406 | |||||
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Capitalized Interest
The Company capitalizes a portion of the interest on its term loan (see Note 4. Debt and Lease Obligations) related to certain property and equipment during its construction period. The capitalized interest is recorded as part of the asset to which it relates and depreciated over the asset’s estimated useful life. The Company capitalized interest of $1.9 million and $3.6 million during the three and six months ended June 30, 2023, respectively, compared to $0.2 million capitalized during each of the three and six months ended June 30, 2022. Capitalized interest is included in property and equipment, net on the condensed consolidated balance sheets.
Software Costs
Capitalized software is included in other assets on the condensed consolidated balance sheets in the amount of $21.6 million and $21.4 million, net of accumulated amortization of $25.4 million and $22.6 million as of June 30, 2023 and December 31, 2022, respectively. Capitalized software costs are amortized over their estimated useful life of up to five years commencing when such assets are ready for their intended use. Software amortization expense included in general and administrative expense on the condensed consolidated statements of operations was $1.4 million and $2.8 million for the three and six months ended June 30, 2023, respectively, compared to $1.0 million and $2.1 million for the three and six months ended June 30, 2022, respectively.
Disaggregation of Revenue
Net revenue consists of sales of packaged food products primarily within the Sweet Baked Goods (“SBG”) category in the United States, as well as in the Cookie category in the United States and Canada.
The following tables disaggregate revenue by geographical market and category.
Three Months Ended June 30, 2023 | ||||||||||||
(In thousands) | Sweet Baked Goods | Cookies | Total | |||||||||
United States | $ | 317,539 | $ | 31,066 | $ | 348,605 | ||||||
Canada | — | 3,755 | 3,755 | |||||||||
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$ | 317,539 | $ | 34,821 | $ | 352,360 | |||||||
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7
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended June 30, 2022 | ||||||||||||
(In thousands) | Sweet Baked Goods | Cookies | Total | |||||||||
United States | $ | 303,437 | $ | 32,348 | $ | 335,785 | ||||||
Canada | — | 4,687 | 4,687 | |||||||||
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$ | 303,437 | $ | 37,035 | $ | 340,472 | |||||||
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Six Months Ended June 30, 2023 | ||||||||||||
(In thousands) | Sweet Baked Goods | Cookies | Total | |||||||||
United States | $ | 625,969 | $ | 63,780 | $ | 689,749 | ||||||
Canada | — | 8,014 | 8,014 | |||||||||
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$ | 625,969 | $ | 71,794 | $ | 697,763 | |||||||
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Six Months Ended June 30, 2022 | ||||||||||||
(In thousands) | Sweet Baked Goods | Cookies | Total | |||||||||
United States | $ | 599,809 | $ | 63,264 | $ | 663,073 | ||||||
Canada | — | 9,450 | 9,450 | |||||||||
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$ | 599,809 | $ | 72,714 | $ | 672,523 | |||||||
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Concentrations
The Company had one customer (together with its affiliates) that accounted for 20.4% and 19.4% of total net revenue for the three and six months ended June 30, 2023, respectively, compared to 20.1% and 20.4% for the three and six months ended June 30, 2022, respectively.
2. Property and Equipment
Property and equipment consists of the following:
(In thousands) | June 30, 2023 | December 31, 2022 | ||||||
Land and buildings | $ | 82,845 | $ | 81,405 | ||||
Right of use assets, operating | 32,170 | 32,170 | ||||||
Machinery and equipment | 341,015 | 315,149 | ||||||
Construction in progress | 146,482 | 118,679 | ||||||
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602,512 | 547,403 | |||||||
Less accumulated depreciation and amortization | (137,947 | ) | (122,090 | ) | ||||
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$ | 464,565 | $ | 425,313 | |||||
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Depreciation expense was $7.4 million and $15.5 million for the three and six months ended June 30, 2023, respectively, and $7.7 million and $14.1 million for the three and six months ended June 30, 2022, respectively.
8
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following:
(In thousands) | June 30, 2023 | December 31, 2022 | ||||||
Incentive compensation | $ | 9,534 | $ | 29,045 | ||||
Payroll, vacation and other compensation | 6,282 | 6,195 | ||||||
Accrued interest | 139 | 7,850 | ||||||
Interest rate swap and foreign currency contracts | — | 423 | ||||||
Other | 11,882 | 16,420 | ||||||
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$ | 27,837 | $ | 59,933 | |||||
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4. Debt and Lease Obligations
On June 30, 2023 (the “Closing Date”), through Hostess Brands, LLC, a wholly-owned subsidiary, the Company entered into a senior secured first lien credit agreement (the “Credit Agreement”), which included a $985 million term loan (the “Term Loan”). The Term Loan bears interest, at the Company’s option, at a variable rate per annum equal to either (x) the Term Secured Overnight Financing Rate (“Term SOFR”) (as defined in the Credit Agreement) plus an applicable margin of 2.50% or (y) an alternative base rate (“ABR”) plus an applicable margin of 1.50%. The Credit Agreement is secured on a first priority basis on substantially all of the Company’s assets and is guaranteed by certain of its subsidiaries. It is prepayable without premium or penalty at any time, except for prepayment from the proceeds of a similar term loan within six months after the Closing Date, which requires a 1% premium. The principal shall be paid at 1% of the aggregate principal amount ($9.85 million) per year, with the balance due at maturity on June 30, 2030. The proceeds from the Term Loan were used to repay, in full the $983.2 million principal balance on the prior term loan and fund a portion of the loan fees.
The Term Loan consists of a syndicate of lenders which for accounting purposes are evaluated as individual lenders. For certain lenders, a portion of the refinancing was considered a modification of the prior term loan and related fees paid to third parties of $6.8 million were expensed as costs of the modification. The total loss on the modification and extinguishment of debt was $7.5 million, which includes $0.7 million of unamortized debt premium and issuance costs. Fees of $10.8 million associated with the new borrowings were capitalized. Of the total $985.0 million Term Loan, there was $336.7 million of cash proceeds attributed to new syndicate members or existing members increasing their positions. Of the total $983.2 million prior term loan, $334.9 million of cash payments were attributed to exiting syndicate members or members decreasing their positions.
A summary of the carrying value of the debt and lease obligations are as follows:
(In thousands) | June 30, 2023 | December 31, 2022 | ||||||
Term loan (7.7% as of June 30, 2023) | ||||||||
2023 Term Loan principal | $ | 985,000 | $ | — | ||||
2020 Term Loan principal | — | 983,221 | ||||||
Unamortized debt premium and issuance costs | (11,257 | ) | (2,563 | ) | ||||
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973,743 | 980,658 | |||||||
Lease obligations | 20,846 | 22,348 | ||||||
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Total debt and lease obligations | 994,589 | 1,003,006 | ||||||
Less: Current portion of long term debt and lease obligations | (12,543 | ) | (3,917 | ) | ||||
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Long-term portion | $ | 982,046 | $ | 999,089 | ||||
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9
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2023, minimum Term Loan repayments under the Credit Agreement are due as follows:
(In thousands) | ||||
2023 | $ | 4,925 | ||
2024 | 9,850 | |||
2025 | 9,850 | |||
2026 | 9,850 | |||
2027 | 9,850 | |||
Thereafter | 940,675 |
Including the impact of the interest rate swap contracts, at June 30, 2023, the Company’s aggregate term loans had an effective interest rate of 5.0%.
Also included in the Credit Agreement is a $200 million revolving credit facility (the “Revolving Credit Facility”), which replaced the $100 million revolving credit facility previously outstanding. Interest on the Revolving Credit Facility accrues at Term SOFR plus 2.25% on the outstanding balance, with all principal due in June 2028. At June 30, 2023, there was no amount drawn on the Revolving Credit Facility. The Revolving Credit Facility contains certain restrictive financial covenants. As of June 30, 2023, the Company was in compliance with all such covenants.
Leases
The Company has entered into operating leases for certain properties that expire at various times through 2030. The Company determines if an arrangement is a lease at inception.
At June 30, 2023 and December 31, 2022, right of use assets related to operating leases are included in property and equipment, net on the condensed consolidated balance sheets (see Note 2. Property and Equipment). As of June 30, 2023 and December 31, 2022, the Company had no outstanding financing leases. Lease liabilities for operating leases are included in the current and non-current portions of long-term debt and lease obligations on the condensed consolidated balance sheets.
The table below shows the composition of lease expense:
Three Months Ended | Six Months Ended | |||||||||||||||
(In thousands) | June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||
Operating lease expense | $ | 1,593 | $ | 1,585 | $ | 3,256 | $ | 3,188 | ||||||||
Short-term lease expense | 611 | 461 | 1,116 | 834 | ||||||||||||
Variable lease expense | 387 | 391 | 789 | 773 | ||||||||||||
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$ | 2,591 | $ | 2,437 | $ | 5,161 | $ | 4,795 | |||||||||
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5. Derivative Instruments
Interest Rate Swap and Foreign Currency Contracts
The Company has entered into interest rate swap contracts with counterparties to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated these derivatives as cash flow hedges. In June 2023, the Company amended these contracts to coincide with the origination of the Credit Agreement and to replace LIBOR as a reference rate with Term SOFR. The Company utilized an expedient under Accounting Standards Codification Topic 848, Reference Rate Reform, to conclude that these amendments should be accounted for as a continuation of the existing swap agreements, resulting in no impact on the Company’s financial statements.
10
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Under the amended interest rate swap contracts, the Company receives three-month Term SOFR subject to a 0.0% floor and pays a fixed rate ranging from 0.89% to 1.84%. Both the fixed and floating payment streams are based on a notional amount of $700 million, outstanding through August 2025. At June 30, 2023, the interest on the Company’s variable rate debt hedged by these contracts is effectively fixed at rates ranging from 3.39% to 4.34%, which includes the Term Loan margin of 2.50%.
To reduce the effect of fluctuations in Canadian dollar (“CAD”) denominated expenses relative to their U.S. dollar equivalents originating from its Canadian operations, the Company enters into CAD purchase contracts. The Company designated these contracts as cash flow hedges. As of June 30, 2023, the Company had no CAD purchase contracts outstanding.
A summary of the fair value of interest rate and foreign currency instruments is as follows:
(In thousands) | June 30, 2023 | December 31, 2022 | ||||||||
Asset derivatives | Location | |||||||||
Interest rate swap contracts (1) | Other assets, net | $ | 46,115 | $ | 48,539 | |||||
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Liability derivatives | Location | |||||||||
Foreign currency contracts (2) | Accrued expenses | $ | — | $ | 423 | |||||
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(1) | The fair values of interest rate swap contracts are 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). |
(2) | The fair values of foreign currency contracts are measured at each reporting period by comparison to available market information on similar contracts (Level 2). |
A summary of the gains and losses related to interest rate and foreign currency instruments on the condensed consolidated statements of operations is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||
(In thousands) | June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||
(Gain ) Loss on derivative contracts designated as cash flow hedges | Location | |||||||||||||||||
Interest rate swap contracts | Interest expense, net | $ | (5,629 | ) | $ | 823 | $ | (10,301 | ) | $ | 1,885 | |||||||
Foreign currency contracts | Cost of goods sold | 222 | — | 362 | — | |||||||||||||
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$ | (5,407 | ) | $ | 823 | $ | (9,939 | ) | $ | 1,885 | |||||||||
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6. Earnings per Share
Basic earnings per share is calculated by dividing net income for the period by the weighted average number of shares of Class A common stock outstanding for the period excluding non-vested share-based 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 restricted stock unit (“RSUs”) awards, stock option awards and shares purchased under the Employee Stock Purchase Plan (“ESPP”).
11
HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Below are basic and diluted net income per share:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (in thousands) | $ | 32,486 | $ | 30,476 | $ | 70,775 | $ | 65,034 | ||||||||
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Denominator: | ||||||||||||||||
Weighted-average Class A shares outstanding - basic | 133,076,763 | 137,909,156 | 133,298,117 | 138,255,803 | ||||||||||||
Dilutive effect of RSUs | 615,619 | 559,426 | 559,612 | 522,424 | ||||||||||||
Dilutive effect of stock options and ESPP shares | 519,389 | 489,660 | 513,305 | 485,076 | ||||||||||||
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Weighted-average shares outstanding - diluted | 134,211,771 | 138,958,242 | 134,371,034 | 139,263,303 | ||||||||||||
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Net income per Class A share - basic | $ | 0.24 | $ | 0.22 | $ | 0.53 | $ | 0.47 | ||||||||
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Net income per Class A share - diluted | $ | 0.24 | $ | 0.22 | $ | 0.53 | $ | 0.47 | ||||||||
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7. Income Taxes
The Company is subject to U.S. federal, state and local income taxes as well as Canadian income tax on its controlled foreign subsidiary. The income tax provision is determined based on the estimated full year effective tax rate, adjusted for infrequent or unusual items, which are recognized on a discrete basis in the period they occur. The Company’s estimated annual effective tax rate is 27% prior to taking into account any discrete items.
8. Tax Receivable Agreement Obligations
The following table summarizes activity related to the tax receivable agreement for the six months ended June 30, 2023:
(In thousands) | ||||
Balance December 31, 2022 | $ | 135,692 | ||
Payments | (11,135 | ) | ||
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Balance June 30, 2023 | $ | 124,557 | ||
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HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. 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, potential liabilities are reassessed and the estimates revised, if necessary. Any 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 December 2020, the Company asserted claims for indemnification against the sellers (the “Sellers”) under the terms of the Share Purchase Agreement pursuant to which the Company acquired Voortman (the “Agreement”). The claims were for damages arising out of alleged breaches by the Sellers of certain representations, warranties and covenants contained in the Agreement relating to periods prior to the closing of the acquisition. The Company also submitted claims relating to these alleged breaches under the representation and warranty insurance policy (“RWI”) it purchased in connection with the acquisition. In the third quarter of 2022, the RWI insurers paid the Company $42.5 million CAD (the RWI coverage limit) (the “Proceeds”) related to these breaches. Per agreement with the RWI insurers, under no circumstances will the Company be required to return the Proceeds.
On November 3, 2022, pursuant to the agreement with the RWI insurer, Voortman brought claims in the Ontario (Canada) Superior Court of Justice (the “Claim”), related to the breaches against certain of the Sellers. The Claim alleges the seller defendants made certain non-disclosures and misrepresentations to induce the Company to overpay for Voortman. The Company is seeking damages of $109 million CAD representing the amount of the aggregate liability of the Sellers for indemnification under the Agreement, $5.0 million CAD in punitive or aggravated damages, interest, proceedings fees and any other relief the presiding court deems appropriate. A portion of any recovery will be shared with the RWI insurers. Although the Company strongly believes that its Claim is meritorious, no assurance can be given as to whether the Company will recover all, or any part, of the amounts it is pursuing.
13