Hostess Brands, Inc. Announces Third Quarter 2016 Financial Results for Hostess Holdings, L.P.

KANSAS CITY, Mo.--(BUSINESS WIRE)--Hostess Brands, Inc. (NASDAQ: TWNK, TWNKW)(the “Company”), one of the largest manufacturers and marketers of sweet baked goods including Twinkies®, Ding Dongs®, Ho Hos®, Donettes® and a variety of new and classic treats, today reported third quarter ended September 30, 2016 financial results for its subsidiary Hostess Holdings, L.P. (“Hostess”).
Third quarter 2016 financial results for Hostess reflect the three months ended September 30, 2016, prior to the closing of the recent business combination (the “Business Combination”) between Hostess and the Company (f.k.a.Gores Holding, Inc.) which occurred on November 4, 2016. In connection with the closing of the Business Combination, the Company acquired a controlling interest in Hostess Holdings, L.P. and changed its name to Hostess Brands, Inc.
Third Quarter Financial Highlights

• Net revenues increased 24.0% to $196.2 million
  • Sweet Baked Goods (sweet baked products) net revenues increased 12.6% to $174.0 million
  • Other (bread, buns and in-store bakery products) net revenues increased 502.6% to $22.2 million
• Gross margin improved 640 basis points to 44.1%
  • Sweet Baked Goods gross margin was 45.8%
  • Other gross margin was 31.0%
• GAAP net income was $33.5 million, up from a net loss of $4.1 million
• Adjusted EBITDA grew 36.7% year-over-year to $55.6 million

(All comparisons above are with respect to the third quarter of 2015)
“We are very pleased with Hostess’s third quarter financial results which are evidence of the successful execution of our strategy to continue to build out our whitespace distribution opportunities and enhance our product assortment through innovation and new product development,” commented Bill Toler, President and Chief Executive Officer of the Company. “The completion of our merger with the Gores team marks an exciting milestone in Hostess’s history as we take another meaningful step forward in our business evolution. We believe Hostess has significant potential to leverage our well-established sweet baked goods brand portfolio to drive continued sales growth, profitability and value for our shareholders.”
Third Quarter 2016 Financial Results
Net revenues were $196.2 million, an increase of $38.0 million or 24.0%, compared to net revenues of $158.2 million for the third quarter of 2015 primarily due to an increase in the number of cases sold as a result of increased distribution in convenience and drug channels and expanded product offerings. Superior Cake Products, Inc. (“Superior”) acquired by Hostess on May 10, 2016, contributed $9.7 million in net revenues for third quarter of 2016. Sweet Baked Goods represented 88.7% and Other represented 11.3% of net revenues, respectively.
Gross profit was $86.6 million, or 44.1% of net revenues, compared to gross profit of $59.6 million, or 37.7% of net revenues, for the third quarter of 2015. After excluding a $4.0 million credit to recall costs related to flour and $2.6 million of incentive compensation third quarter of 2016 gross profit was $85.2 million, or 43.4% of net revenues. Ingredient costs were higher as a percentage of net revenues for the third quarter of 2015, primarily due to the reduced available egg supplies, which increased the egg ingredient prices to record highs.
Selling, general and administrative (“SG&A”) expenses were $29.1 million, an increase of $5.4 million, as compared to SG&A of $23.7 million for the third quarter of 2015. The increase in SG&A expenses were primarily attributable to increases in field marketing, increases in annual incentive compensation related to increases in operating performance, professional fees and the addition of Superior.
GAAP net income was $33.5 million compared to a net loss of $4.1 million in the third quarter of 2015.
Adjusted EBITDA was $55.6 million, an increase of $14.9 million, or 36.6%, compared to adjusted EBITDA of $40.7 million for the third quarter of 2015. Adjusted EBITDA for the third quarter of 2016 was 28.4% of net revenues, compared to adjusted EBITDA of 25.7% of net revenues in the same period last year. Adjusted EBITDA is non-GAAP financial measure. Please refer to the tables in this press release for a reconciliation of non-GAAP financial measures.
Segment Review
Hostess 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, buns and in-store bakery products. Please refer to the tables in this press release for segment financial disclosures.
Sweet Baked Goods Segment: Net revenues for quarter were $174.0 million, an increase of $19.6 million, or 12.7%, compared to net revenues of $154.4 million for the third quarter of 2015. Gross profit was $79.7 million, or 45.8% of net revenues, compared to gross profit of $58.4 million, or 37.8% of net revenues for the third quarter of 2015.
Other Segment: Net revenues for quarter were $22.2 million, an increase of $18.5 million, or 502.6%, compared to net revenues of $3.7 million for the third quarter of 2015. Gross profit was $6.9 million, or 31.1% of net revenues, compared to gross profit of $1.2 million, or 32.4% of net revenues for the third quarter of 2015.
Balance Sheet and Cash Flow
As of September 30, 2016, Hostess had cash and cash equivalents of $64.2 million and approximately $97.2 million available for borrowing, net of letters of credit, under its revolving line of credit. Following the completion of the Business Combination on November 4, 2016, the Company had cash and cash equivalents of approximately $7.5 million and net debt of $991.8 million.

HOSTESS HOLDINGS, L.P.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

		September 30,				December 31,
ASSETS		2016				2015
		(Unaudited)
Current assets:
Cash and cash equivalents		$	64,220			$	64,473
Restricted cash			8,215				4,655
Accounts receivable, net			58,853				38,860
Inventories			29,280				25,130
Assets held for sale			—				4,000
Prepaids and other current assets			11,550				2,041
Total current assets			172,118				139,159
Property and equipment, net			147,025				128,078
Restricted cash			9,010				17,225
Intangible assets, net			291,947				263,579
Goodwill			81,575				56,992
Deferred finance charges			1,422				1,696
Other assets, net			7,569				7,142
Total assets		$	710,666			$	613,871
LIABILITIES AND PARTNERS’ DEFICIT
Current liabilities:
Long-term debt and capital lease obligation payable within one year		$	9,401			$	9,250
Accounts payable			46,660				28,053
Accrued expenses			24,880				20,577
Deferred distributions to partners			8,215				4,655
Other liabilities			538				565
Total current liabilities			89,694				63,100
Long-term debt and capital lease obligation			1,189,542				1,193,667
Deferred distributions to partners			9,010				17,225
Deferred tax liability			11,457				—
Total liabilities			1,299,703				1,273,992
Commitments and contingencies
Partners’ deficit			(554,601	)			(622,130	)
Noncontrolling interest			(34,436	)			(37,991	)
Total liabilities and partners’ deficit		$	710,666			$	613,871

HOSTESS HOLDINGS, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited)
			Three Months Ended								Nine Months Ended
			September 30, 2016				September 30, 2015				September 30, 2016			September 30, 2015
Net revenue		$	196,197			$	158,213			$	548,758		$	473,789
Cost of goods sold			113,618				95,942				309,461			269,997
Recall costs related to flour			(4,000	)			—				—			—
Special employee incentive compensation			—				2,649				—			2,649
Gross profit			86,579				59,622				239,297			201,143
Operating costs and expenses:
Advertising and marketing			10,381				9,096				27,529			25,101
Selling expense			8,271				7,242				23,175			22,783
General and administrative			10,437				7,367				31,442			24,250
Amortization of customer relationships			503				155				1,003			467
Special employee incentive compensation			—				1,274				—			1,274
Impairment of property and equipment			—				1,525				7,300			1,950
Loss on sale/abandonment of property and equipment and bakery shutdown costs			213				90				440			1,005
Related party expenses			1,058				1,236				3,432			3,700
Total operating costs and expenses			30,863				27,985				94,321			80,530
Operating income			55,716				31,637				144,976			120,613
Other expense:
Interest expense, net			18,004				14,136				53,748			31,806
Loss on debt extinguishment			—				18,121				—			25,880
Other (income) expense			4,222				3,444				9,411			(8,680	)
Total other expense			22,226				35,701				63,159			49,006
Income (loss) before income taxes			33,490				(4,064	)			81,817			71,607
Income tax provision (benefit)			(23	)			—				294			—
Net income (loss)			33,513				(4,064	)			81,523			71,607
Less: Net income (loss) attributable to the noncontrolling interest			2,329				(204	)			4,110			3,580
Net income (loss) attributable to Hostess Holdings, L.P.		$	31,184			$	(3,860	)		$	77,413		$	68,027

HOSTESS HOLDINGS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
					Nine Months Ended September 30, 2016			Nine Months Ended September 30, 2015
Operating activities
	Net income			$	81,523		$	71,607
	Depreciation and amortization				9,054			7,158
	Impairment of property and equipment				7,300			1,950
	Non-cash interest expense-debt fee amortization				2,486			2,547
	Non-cash loss on debt extinguishment				—			16,005
	Unit-based compensation				689			1,264
	Gain on sale/abandonment of property and equipment				(153	)		(21	)
	Change in operating assets and liabilities
		Accounts receivable			(17,871	)		(10,469	)
		Inventories			(1,850	)		(3,129	)
		Prepaids and other current assets			(9,397	)		(792	)
		Accounts payable and accrued expenses			17,335			25,941
		Other			397			316
	Net cash provided by operating activities				89,513			112,377
Investing activities
	Purchases of property and equipment				(23,995	)		(22,306	)
	Acquisition of Superior, net of cash				(50,091	)		—
	Proceeds from sale of assets				4,350			409
	Proceeds from sale of marketable securities				—			42,960
	Restricted cash release				—			1,762
	Acquisition and development of software assets				(1,917	)		(1,745	)
	Net cash provided by (used in) investing activities				(71,653	)		21,080
Financing activities
	Repayments of debt and capital lease obligation				(6,985	)		(496,250	)
	Proceeds from issuance of long-term debt				—			1,225,000
	Debt fees				—			(22,819	)
	Distributions to partners				(10,573	)		(952,875	)
	Distributions to noncontrolling interest				(555	)		(46,765	)
	Net cash used in financing activities				(18,113	)		(293,709	)
Net decrease in cash and cash equivalents					(253	)		(160,252	)
Cash and cash equivalents at beginning of period					64,473			209,623
Cash and cash equivalents at end of period				$	64,220		$	49,371
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
	Interest			$	50,799		$	18,284
Supplemental disclosure of non-cash investing:
	Accrual of purchases of property and equipment			$	2,072		$	228

Hostess has two reportable segments: Sweet Baked Goods and Other. The Sweet Baked Goods segment consists of sweet baked goods that are sold under the Hostess® and Dolly Madison brands. In April 2015, Hostess launched Hostess® branded bread and buns. As a result, Hostess added a reportable segment called Other, to include Hostess® branded bread and bun products. In May 2016, Hostess purchased Superior, which manufactures and distributes eclairs, madeleines, brownies, and iced cookies in the “In-Store Bakery” section of grocery and club retailers. The operations of Superior have been included in the reportable segment called Other. The Hostess® branded bread and buns operating segment, the In-Store Bakery operating segment, and other were aggregated and presented within Other as a result of not meeting the 10 percent quantitative threshold tests in accordance with FASB ASC 280-10-50-12.
Hostess evaluates performance and allocates resources based on net revenue and gross profit. Information regarding the operations of these reportable segments is as follows:

			Three Months Ended						Nine Months Ended
(In thousands)			September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Net revenue:
Sweet Baked Goods		$	173,997		$	154,529		$	507,813		$	467,140
Other			22,200			3,684			40,945			6,649
Net revenue		$	196,197		$	158,213		$	548,758		$	473,789
Gross profit:
Sweet Baked Goods		$	79,697		$	58,420		$	226,208		$	198,784
Other			6,882			1,202			13,089			2,359
Gross profit		$	86,579		$	59,622		$	239,297		$	201,143