Hostess Brands, Inc. Announces Fourth Quarter and Full Year 2017 Financial Results

Fourth Quarter Net Revenue Increased 9.7% from the Pro Forma Combined Prior Year

Full Year 2017 Net Revenue Increased 6.7% from the Pro Forma Combined Prior Year

Introduces Full Year 2018 Outlook

KANSAS CITY, Mo.--()--Hostess Brands, Inc. (NASDAQ: TWNK) (NASDAQ: TWNKW) (“Hostess” or the “Company”), today reported its financial results for the fourth quarter and full year ended December 31, 2017.

“These key strategic initiatives are focused on further core distribution expansion, innovation, expansion of white space and serving as a platform for future acquisitions. We plan to grow well above the sweet baked goods category in 2018.”

Fourth Quarter 2017 Summary (Compared to Pro Forma Combined Fourth Quarter 2016)1:

  • Net revenue increased 9.7% to $196.2 million, representing the Company's best organic growth rate for the year. The Company's strong performance was led by the introduction of the Hostess Bakery PetitesTM, a premium snacking platform made with no artificial flavors or colors, and no high fructose corn syrup, which contributed 3.1% of the net revenue increase.
  • Net income was $189.6 million (includes $163.1 million of one-time gains relating to the recently enacted tax law referred to as "Tax Reform"), compared to $22.0 million. Diluted EPS was $1.74 per share compared to $0.14 per share.
  • Adjusted EPS increased 13.3% to $0.17 per share.
  • Adjusted EBITDA increased 9.4% to $57.8 million, or 29.5% of net revenue.
  • Point of sale increased 4.3%. Point of sale for the top seven brands increased 8.2% (which comprise 74% of total net revenue).

Full 2017 Summary (Compared to Pro Forma Combined Full Year 2016)1:

  • Net revenue increased 6.7% to $776.2 million led by current year product innovations of $62.5 million.
  • Net income was $258.1 million (includes $163.1 million of one-time gains relating to Tax Reform) compared to $82.4 million. Diluted EPS was $2.13 per share compared to $0.54 per share.
  • Adjusted EPS increased 5.0% to $0.63 per share.
  • Adjusted EBITDA increased 6.9% to $230.2 million, or 29.7% of net revenue.
  • Hostess' year-to-date market share through December 30, 2017 was 17.2%, increasing 72 basis points from the prior year.
  • Cash and cash equivalents at December 31, 2017 of $135.7 million with a leverage ratio of 3.73x both driven by operating cash flows of $163.7 million for the year.

“We are pleased with our strong finish to the year,” commented Bill Toler, President and Chief Executive Officer of Hostess. “We were able to capitalize on the momentum provided by our robust product innovation and continued distribution gains to increase our market share. We are optimistic about the continued growth opportunity from our product innovation, including our Hostess Bakery PetitesTM platform and the new breakfast opportunities from our acquisition of the Big Texas® and Cloverhill® brands.”

 

1This press release contains certain non-GAAP financial measures, including adjusted net income attributed to Class A shareholders, adjusted EPS and adjusted EBITDA. Please refer to the schedules in this press release for reconciliations of non-GAAP financial measures to the comparable GAAP measure. In addition, for comparative purposes, the Company has also presented supplemental pro forma combined financial information for the three months and year ended December 31, 2016, giving effect to the Business Combination (as defined below), as if it had occurred on January 1, 2016.

 

Fourth Quarter 2017 (Comparisons to the Pro Forma Combined Fourth Quarter 2016)

Net revenue was $196.2 million, an increase of 9.7%, or $17.4 million, compared to $178.8 million. New product initiatives contributed $22.2 million of growth, led by Bakery PetitesTM, Chocolate Cake Twinkies®, White Fudge Ding Dongs® and Golden CupCakes. This growth was partially offset by a decrease in net revenue from 2016 product innovations and discontinued items.

Gross profit was $80.8 million, or 41.2% of net revenue, compared to $77.0 million, or 43.0% of net revenue. Higher transportation costs resulting from a tightening of shipping capacity caused a 120 basis point decrease in gross margin. Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types.

Advertising, selling, general and administrative (“SG&A”) expenses were $25.9 million, or 13.2% of net revenue, compared to $26.4 million, or 14.8% of net revenue. This decrease was primarily due to forfeitures of stock based compensation. The decrease was offset by increased display rack deployment and additional professional fees related to public company compliance.

The income tax benefit of $98.8 million for the quarter ended December 31, 2017 includes a benefit of approximately $126.4 million due to the remeasurement of deferred tax items due to Tax Reform partially offset by a tax expense of $15.1 million due to the remeasurement of the tax receivable agreement also due to Tax Reform. The remaining tax expense of $12.5 million represents an effective tax rate of 32.2%, giving effect to the non-controlling interest, a partnership for income tax purposes and excluding the impact of the tax receivable agreement remeasurement.

Net income was $189.6 million, compared to $22.0 million. Net income attributed to Class A stockholders was $179.7 million, or $1.74 per share, compared to $14.4 million, or $0.14 per share. This increase was primarily attributed to a $111.3 million tax benefit recognized due to the remeasurement of certain deferred tax items and a gain of $51.8 million on the remeasurement of the tax receivable agreement, both due to Tax Reform. Earnings attributed to Class A stockholders were $1.74 per share, compared to $0.14 per share.

Adjusted net income attributed to Class A stockholders, or adjusted EPS, increased to $17.6 million, or $0.17 per share, compared to $15.0 million, or $0.15 per share. The increase was due to increased sales volume, lower interest expense in 2017 due to the repricing of the Company's First Lien Term Loan, and forfeitures of stock-based compensation.

Adjusted EBITDA increased 9.4% to $57.8 million, or 29.5% of net revenue, compared to $52.9 million, or 29.6% of net revenue.

The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. The Sweet Baked Goods segment consists of fresh and frozen retail sweet baked goods as well as Hostess® branded bread products. The In-Store Bakery segment consists of products sold in the bakery section of grocery and club stores. During the fourth quarter, the Company reassessed its segment presentation. Previously, the “Other” category included In-Store Bakery as well as bread and frozen retail products. The 2017 fourth quarter, full year reporting and comparable prior periods presented below reflect bread and frozen retail products within the Sweet Baked Goods segment and discrete presentation for In-Store Bakery. The Company expects to file a Current Report on Form 8-K on March 1, 2018 to provide additional historical financial information reflecting the new segment presentation.

Sweet Baked Goods Segment: Net revenue was $185.3 million, an increase of $16.7 million, or 9.9%, compared to $168.6 million. The increase was driven primarily by net revenue from current year product innovations of $21.7 million. Gross profit was $78.4 million, or 42.3% of net revenue, compared to $74.0 million, or 43.9% of net revenue. Higher transportation costs caused a 120 basis point decrease in gross margin. Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types.

In-Store Bakery Segment: Net revenue was $10.9 million, an increase of $0.7 million, or 6.5%, compared to $10.2 million primarily due to product innovation. Gross profit was $2.4 million, or 22.4% of net revenue, compared to $2.9 million, or 28.8% of net revenue. Higher transportation costs caused a 250 basis point decrease in gross margin. The decrease in margin was also attributed to increased ingredient and storage costs.

Full Year 2017 (Comparisons to Pro Forma Combined Full Year 2016)

Net revenue was $776.2 million, an increase of $48.6 million, or 6.7%, compared to $727.6 million. The increase was driven primarily by current year product initiatives of $62.5 million, and white space opportunities growth led by In-Store Bakery and other developing sales channels, partially offset by a decrease in net revenue from 2016 innovations and discontinued items. The acquisition of Superior Cake Products, Inc. in May 2016 provided approximately $11.9 million of growth in 2017.

Net income was $258.1 million compared to $82.4 million. Net income attributed to Class A shareholders was $223.9 million or $2.13 per share, compared to $53.7 million or $0.54 per share. This increase was primarily due to a $111.3 million tax benefit recognized due to the remeasurement of certain deferred tax items and a gain of $51.8 million on the remeasurement of the tax receivable agreement, both due to Tax Reform.

Adjusted net income attributed to Class A common stockholders, or adjusted EPS, increased to $66.7 million or $0.63 per share compared to $58.3 million or $0.60 per share. The increase was attributed to lower interest expense, higher sales volume and 2016 impairment charges not incurred in 2017.

Adjusted EBITDA increased 6.9% to $230.2 million, or 29.7% of net revenue, compared to $215.3 million, or 29.6% of net revenue.

Sweet Baked Goods Segment: Net revenue was $733.8 million, an increase of $33.0 million, or 4.7%, compared to $700.9 million. Gross profit was $316.9 million, or 43.2% of net revenue, compared to $310.5 million, or 44.3% of net revenue. Gross profit increased primarily due to increased net revenue. Higher transportation costs caused a 70 basis point decrease in gross margin. Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types.

In-Store Bakery Segment: Net revenue was $42.4 million, an increase of $15.6 million, or 58.5%, compared to $26.7 million. This increase is primarily due to the Superior acquisition and subsequent growth in In-Store Bakery products. Gross profit was $10.0 million, or 23.6% of net revenue, compared to $5.4 million, or 20.3% of net revenue. Gross profit increased primarily due to increased net revenue.

Balance Sheet and Cash Flow

As of December 31, 2017, the Company had cash and cash equivalents of $135.7 million and approximately $96.1 million available for borrowing, net of letters of credit, under its revolving line of credit. The Company had outstanding term loan debt of $993.8 million and net debt of $858.1 million as of December 31, 2017, resulting in a leverage ratio of 3.73x. See the schedules in the press release for the calculation of the leverage ratio.

Outlook

“We are well positioned to grow and enhance stockholder value in 2018 through the execution of our strategic initiatives,” commented Dean Metropoulos, Executive Chairman of Hostess. “These key strategic initiatives are focused on further core distribution expansion, innovation, expansion of white space and serving as a platform for future acquisitions. We plan to grow well above the sweet baked goods category in 2018.”

In an effort to enable and drive growth in its breakfast product portfolio1 and bring important co-manufacturing capabilities in-house, during the first quarter of 2018 the Company acquired certain US breakfast assets from Aryzta, LLC (referred to below as the “Acquisition”). The Acquisition included the Chicago Cloverhill bakery facility and the Big Texas® and Cloverhill® brands. The Acquisition is expected to provide $60 million to $70 million of net revenue for 2018. The Company expects short-term EBITDA losses of $15 million to $20 million, and corresponding adjusted EPS dilution of $0.10 to $0.12 as a result of anticipated operating losses from the acquired business through the second half of 2018 as the Company improves the sales and operating performance of the facility. The Company expects the acquired business to be EBITDA positive in the first half of 2019. By 2020, the Company expects the Acquisition to contribute approximately $20 million to $25 million in EBITDA.

The Company expects adjusted EBITDA of $220 million to $230 million for the year ended December 31, 2018. See the schedules in the press release for a reconciliation of anticipated 2018 adjusted EBITDA to anticipated net income of $98 million to $106 million for 2018.

The Company expects adjusted EPS of $0.65 to $0.70, an increase of 3% to 11% from adjusted EPS of $0.63 for 2017. The impact of Tax Reform is expected to provide a benefit to adjusted EPS of approximately $0.12. Please refer to the schedule in this press release for the calculation of expected basic, diluted, and adjusted EPS. The Company's expected tax rate for 2018 is approximately 21% giving effect to the non-controlling interest, a partnership for income tax purposes.

The Company anticipates cash provided by operations of $175 million to $180 million in 2018. Significant anticipated cash outflows from investing and financing activities include $50 million to $60 million of total capital expenditures, $34 million to buy out a portion of the tax receivable agreement and $24 million to fund the Acquisition. The net increase in cash for 2018 of $35 million to $40 million would result in a leverage ratio of 3.60x to 3.80x at year end, prior to any additional acquisitions or optional debt reductions.

 
1 For the 52-week period ended December 30, 2017, Breakfast represented 51% of the SBG category (as defined below) and Hostess has a 15% share compared to All Day Snacking, which represents 49% of the SBG category, where Hostess has a 20% share per Nielsen’s U.S. SBG category data.
 

Conference Call and Webcast

The Company will host a conference call and webcast today, February 28, 2018 at 4:30 p.m. EST to discuss the results for the fourth quarter and year.

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 Wednesday, March 14, 2018, by dialing 844-512-2921 from the U.S., or 412-317-6671 from international locations, and entering confirmation code 13676521.

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.

Hostess® is the second leading brand by market share within the Sweet Baked Goods (“SBG”) category. For the 52-week period ended December 30, 2017 the Company's market share was 17.2% 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, according to Nielsen U.S. total universe for the 52 weeks ended December 30, 2017.

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 Bakery Petites™ and Fruit Pies, in addition to Twinkies® and CupCakes.

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 December 31, 2017 and for the year ended December 31, 2017 (successor); (ii) as of December 31, 2016 and for the period November 4, 2016 to December 31, 2016 (Successor); and (iii) for the period January 1, 2016 to November 3, 2016 (Predecessor).

The Company has also presented supplemental unaudited pro forma combined financial information for the three months and year ended December 31, 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 months and year ended December 31, 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.

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 the Company's views about its 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 the Company's future operating performance and statements addressing events and developments that the Company expects 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 the Company's reputation and brand image; protecting intellectual property rights; leveraging the Company's 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; the continued ability to produce and successfully market products with extended shelf life; the ability to drive revenue growth in key products or add products that are faster-growing and more profitable; volatility in commodity, energy, and other input prices; dependence on major customers; geographic focus could make the Company 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 the workforce belongs to unions and strikes or work stoppages could cause the business to suffer; product liability claims, product recalls, or regulatory enforcement actions; unanticipated business disruptions; dependence on third parties for significant services; insurance may not provide adequate levels of coverage against claims; failures, unavailability, or disruptions of the Company's information technology systems; the Company's ability to achieve expected synergies and benefits and performance from the Company's strategic acquisitions; dependence on key personnel or a highly skilled and diverse workforce; and the Company's ability to finance indebtedness on terms favorable to the Company; and other risks as set forth from time to time in the Company's Securities and Exchange Commission filings.

As a result of a number of known and unknown risks and uncertainties, the Company's actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified and discussed in Item 1A-Risk Factors in the Company's Annual Report on Form 10-K and its subsequent Securities and Exchange Commission filings. All subsequent written or oral forward-looking statements attributable to us or persons acting on the Company's behalf are expressly qualified in their entirety by these risk factors. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

     
HOSTESS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except shares and per share data)

 
December 31, December 31,
ASSETS 2017 2016
 
Current assets:
Cash and cash equivalents $ 135,701 $ 26,855
Accounts receivable, net 101,012 89,237
Inventories 34,345 30,444
Prepaids and other current assets 7,970     4,827  
Total current assets 279,028 151,363
Property and equipment, net 174,121 153,224
Intangible assets, net 1,923,088 1,946,943
Goodwill 579,446 588,460
Other assets, net 10,592   7,902  
Total assets $ 2,966,275   $ 2,847,892  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and capital lease obligation payable within one year $ 11,268 $ 11,496
Tax receivable agreement payments payable within one year 14,200
Accounts payable 49,992 34,083
Customer trade allowances 40,511 36,691
Accrued expenses and other current liabilities 11,880   21,656  
Total current liabilities 127,851 103,926
Long-term debt and capital lease obligation 987,920 993,374
Tax receivable agreement 110,160 165,384
Deferred tax liability 267,771   353,797  
Total liabilities 1,493,702   1,616,481  
 
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 99,791,245 and 98,250,917 shares issued and outstanding at December 31, 2017 and 2016, respectively 10 10
Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 30,319,564 and 31,704,988 shares issued and outstanding at December 31, 2017 and 2016, respectively 3 3
Additional paid in capital 920,723 912,824
Accumulated other comprehensive income 1,318
Retained earnings (accumulated deficit) 208,279   (15,618 )
Stockholders’ equity 1,130,333 897,219
Non-controlling interest 342,240   334,192  
Total liabilities, stockholders’ equity and non-controlling interest $ 2,966,275   $ 2,847,892  
 
 
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except shares and per share data)

       

 

Year Ended
December 31, 2017
From
November 4, 2016
through
December 31, 2016
From
January 1, 2016
through
November 3, 2016
(Successor) (Successor) (Predecessor)
Net revenue $ 776,188 $ 111,998 $ 615,588
Cost of goods sold 449,290 73,284 346,864
Special employee incentive compensation     2,195
Gross profit 326,898 38,714 266,529
 
Operating costs and expenses:
Advertising and marketing 33,004 5,245 30,626
Selling expense 32,086 5,033 25,730
General and administrative 52,943 7,322 38,391
Special employee incentive compensation 2,503
Amortization of customer relationships 23,855 3,922 1,185
Impairment of property and equipment 1,003 7,300
Loss on sale/abandonment of property and equipment, and bakery shutdown costs (recoveries) (144 ) 2,551
Business combination transaction costs 31,832
Related party expenses 381 26,799 3,539
Tax receivable agreement liability remeasurement (50,222 )  
Total operating costs and expenses 92,906   48,321   143,657
Operating income (loss) 233,992 (9,607 ) 122,872
Other (income) expense:
Interest expense, net 39,174 6,649 60,384
Loss (gain) on modification of debt 2,554 (763 )
Other expense (income) 1,360   754   1,624
Total other expense 43,088   6,640   62,008
Income (loss) before income taxes 190,904 (16,247 ) 60,864
Income tax expense (benefit) (67,204 ) (7,762 ) 439
Net income (loss) 258,108 (8,485 ) 60,425
Less: Net income (loss) attributable to the non-controlling interest 34,211   (4,081 ) 3,214
Net income (loss) attributable to Class A shareholders/partners $ 223,897   $ (4,404 ) $ 57,211
Earnings (loss) per Class A share:
Basic $ 2.26 $ (0.05 )
Diluted $ 2.13 $ (0.05 )
Weighted-average shares outstanding:
Basic 99,109,629 97,791,658
Diluted 105,307,293 97,791,658
 
 
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

       
Year Ended
December 31, 2017
November 4, 2016
through
December 31, 2016
January 1, 2016
through
November 3, 2016
(Successor) (Successor) (Predecessor)
Operating activities
Net income (loss) $ 258,108 $ (8,485 ) $ 60,425
Depreciation and amortization 38,170 5,843 10,265
Impairment of property 1,003 7,300
Non-cash loss (gain) on debt modification 1,453 (3,974 )
Debt discount (premium) amortization (925 ) (197 ) 2,790
Tax receivable agreement remeasurement (50,222 )
Stock-based compensation 7,413 26,748 3,890
Loss on sale/abandonment of property and equipment 11 2,551
Deferred taxes (81,270 ) (7,815 )
Change in operating assets and liabilities
Accounts receivable (11,775 ) 3,705 (19,869 )
Inventories (3,901 ) 8,895 (2,994 )
Prepaids and other current assets (3,039 ) (1,694 ) (1,049 )
Accounts payable and accrued expenses 4,839 (11,296 ) 33,886
Customer trade allowances 3,820 2,225 4,828
Other   (344 ) 198  
Net cash provided by operating activities 163,685   13,611   102,221  
 
Investing activities
Purchases of property and equipment (32,913 ) (6,494 ) (28,633 )
Acquisition of business, net of cash (421,242 ) (49,735 )
Proceeds from sale of assets 85 4,000
Acquisition and development of software assets (2,381 ) (460 ) (2,211 )
Net cash used in investing activities (35,209 ) (428,196 ) (76,579 )
 
Financing activities
Repayments of long-term debt and capital lease obligation (5,144 ) (217,400 ) (6,987 )
Payment of deferred underwriting costs (13,125 )
Debt fees (1,066 ) (1,820 )
Distributions to partners (23,582 )
Distributions to non-controlling interest (12,985 ) (1,027 )
Payment of taxes related to the net issuance of employee stock awards (436 )
Proceeds from the exercise of warrants 1      
Net cash used in financing activities (19,630 ) (232,345 ) (31,596 )
Net increase (decrease) in cash and cash equivalents 108,846 (646,930 ) (5,954 )
Cash and cash equivalents at beginning of period 26,855   673,785   64,473  
Cash and cash equivalents at end of period $ 135,701   $ 26,855   $ 58,519  
 
Supplemental Disclosures of Cash Flow Information
Interest $ 45,431   $   $ 68,606  
Taxes paid $ 16,617   $ 43   $  
Supplemental disclosure of non-cash investing
Purchases of property and equipment funded by accounts payable $ 1,089   $ 673   $ 633  
 
 

SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma statements of operations for the year and the quarter ended December 31, 2016 present 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 management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of the 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 management's 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 fair values at the date of acquisition. Third party valuation specialists conducted analyses in order to assist management in determining the fair values of the acquired assets and liabilities assumed. The Company has valued 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 results of operations had the Business Combination occurred on January 1, 2016. The unaudited pro forma financial information also does not project 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 combined consolidated financial information for the three months and year ended December 31, 2016 does not include the results of the Superior acquisition and its related operations prior to the acquisition. The Company 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, the Company refinanced the 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”). The Company 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.

             
HOSTESS BRANDS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

(amounts in thousands, except shares and per share data)

 
 
  Historical(i)              
2017 2016     2016

(In thousands, except per share data)

Year
Ended
December 31
From November 4
through
December 31
From January 1
through
November 3
Pro
Forma
Adjustments
Pro
Forma
Combined
(Successor) (Successor) (Predecessor)
Net revenue $ 776,188 $ 111,998 $ 615,588 $ $ 727,586
Cost of goods sold 449,290 73,284 346,864 (8,541 ) ii 411,607
Special employee incentive compensation     2,195   (2,195 ) iii  
Gross profit 326,898   38,714   266,529   10,736   315,979  
Operating costs and expenses:
Advertising and marketing 33,004 5,245 30,626 35,871
Selling expense 32,086 5,033 25,730 30,763
General and administrative 52,943 7,322 38,391 (3,902 ) iv 41,811
Special employee incentive compensation 2,503 (2,503 ) iii
Amortization of customer relationships 23,855 3,922 1,185 20,050 v 25,157
Impairment of property and equipment 1,003 7,300 7,300
Loss on sale/abandonment of property and equipment, and bakery shutdown costs (recoveries) (144 ) 2,551 2,551
Business combination transaction costs 31,832 (31,257 ) vi 575
Related party expenses 381 26,799 3,539 (26,747 ) vii 3,591
Tax receivable agreement liability remeasurement (50,222 )        
Total operating costs and expenses 92,906   48,321   143,657   (44,359 ) 147,619  
Operating income 233,992 (9,607 ) 122,872 55,095 168,360
Other expense (income):
Interest expense, net 39,174 6,649 60,384 (15,592 ) viii 51,441
(Gain) Loss on modification of debt 2,554 (763 ) (763 )
Other expense 1,360   754   1,624     2,378  
Total other expense 43,088   6,640   62,008   (15,592 ) 53,056  
Income (loss) before income taxes 190,904 (16,247 ) 60,864 70,687 115,304
Income tax expense (benefit) (67,204 ) (7,762 ) 439   40,185   ix 32,862  
Net income (loss) 258,108 (8,485 ) 60,425 30,502 82,442
Less: Net income attributable to the non-controlling interest 34,211   (4,081 ) 3,214   29,565   x 28,698  
Net income attributable to Class A shareholders $ 223,897   $ (4,404 ) $ 57,211   $ 937   $ 53,744  
 
Earnings (loss) per Class A share:
Basic $ 2.26 $ (0.05 ) $ 0.55
Diluted $ 2.13 $ (0.05 ) $ 0.54
 
Weighted-average shares outstanding:
Basic 99,109,629 97,791,658 (180,000 ) xi 97,611,658
Diluted 105,307,293 97,791,658 2,393,000 xii 100,184,658
       
  i.   The amounts in these columns represent the Successor’s and Predecessor’s historical results of operations for the periods reflected.
ii. Reflects the non-cash impact of the remeasurement of inventory at fair value as a result of the Business Combination of approximately $8.9 million offset by the impact to depreciation and amortization associated with the allocation of the purchase price to property and equipment.
iii. For cost of goods sold, this adjustment represents special payments we made to certain employees at our bakery facilities of $2.2 million and for the operating costs this adjustment represents special payments to corporate employees of $2.5 million as compensation for their efforts in connection with the Business Combination.
iv. Represents compensation for management profits interest plan of approximately $3.9 million that was recognized as part of the Business Combination.
v. Represents additional amortization expense associated with the fair value recognized for customer relationships in connection with the Business Combination.
vi. This adjustment consists primarily of legal and professional fees, and other costs associated with the Business Combination.
vii. Represents non-cash expenses incurred by Successor for stock awarded to Mr. Metropoulos as required under his new employment arrangements.
viii. Represents the reduction in interest expense due to the repayment of a portion of Hostess Holdings debt as part of the Business Combination.
ix. Represents the effective income tax rate of 28.5% for the Successor, giving effect to the non-controlling interest, and not giving effect to the adjustment made to the valuation allowance on the Company’s historical deferred tax assets.
x. 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.
xi. This adjustment annualized the basic weighted average number of Class A shares outstanding.
xii. This adjustment includes the dilutive impact of the outstanding warrants that are considered anti-dilutive on a historical basis.
       
 
HOSTESS BRANDS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

(Amounts in thousands, except shares and per share data)

         
Historical (i)
(Successor) (Successor)     (Predecessor) Pro Forma
Combined
(In thousands) Quarter Ended
December 31, 2017
From
November 4, 2016

through
December 31, 2016

From
October 1, 2016

through

November 3, 2016

Pro

Forma

Adjustments

Quarter Ended
December 31, 2016
Net revenue $ 196,221 $ 111,998 $ 66,831 $ $ 178,829
Cost of goods sold 115,428 73,284 37,437 (8,856 ) ii 101,865
Special employee incentive compensation     2,195   (2,195 ) iii.  
Gross profit 80,793   38,714   27,199   11,051   76,964  
Advertising and marketing 8,700 5,245 3,097 8,342
Selling expenses 7,668 5,033 2,555 7,588
General and administrative 9,528 7,322 6,376 (3,249 ) iv. 10,449
Special employee incentive compensation 2,503 (2,503 ) iii.
Amortization of customer relationships 5,994 3,922 717 2,100 v. 6,739
Impairment of property and equipment 2,065 2,065
Loss on sale/abandonment of property and equipment and bakery shutdown costs (recoveries) (144 ) 33 33
Business combination transaction costs 24,767 (24,767 ) vi.
Related party expenses 97 26,799 108 (26,747 ) vii. 160
Tax receivable agreement liability remeasurement (51,812 )        
Total operating costs and expenses (19,969 ) 48,321   42,221   (55,166 ) 35,376  
Operating income (loss) 100,762 (9,607 ) (15,022 ) 66,217 41,588
Other (income) expense:
Interest expense, net 9,517 6,649 6,638 (1,721 ) viii. 11,566
Loss (gain) on debt extinguishment 432 (763 ) (763 )
Other (income) expense 51   754   (721 )   33  
Total other (income) expense 10,000   6,640   5,917   (1,721 ) 10,836  
Income (loss) before income taxes 90,762 (16,247 ) (20,939 ) 67,938 30,752
Income tax expense (benefit) (98,812 ) (7,762 ) 145   16,381   ix. 8,764  
Net income (loss) 189,574 (8,485 ) (21,084 ) 51,557 21,988
Less: Net income (loss) attributable to the non-controlling interest 9,888   (4,081 ) (895 ) 12,610   x. 7,634  
Net income (loss) attributable to Class A shareholders $ 179,686   $ (4,404 ) $ (20,189 ) $ 38,947   $ 14,354  
Earnings (loss) per share:
Basic $ 1.80 $ (0.05 ) $ 0.15
Diluted $ 1.74 $ (0.05 ) $ 0.14
Weighted-average shares outstanding:
Basic 99,673,097 97,791,658 (95,749 ) xi. 97,695,909
Diluted 103,389,524 97,791,658 2,477,637 xii. 100,269,295
 
 
       
  i.   The amounts in these columns represent the Successor’s and Predecessor’s historical results of operations for the periods reflected.
ii. Reflects the non-cash impact of the remeasurement of inventory at fair value as a result of the Business Combination of approximately $8.9 million offset by the impact to depreciation and amortization associated with the allocation of the purchase price to property and equipment.
iii. For cost of goods sold, this adjustment represents special payments the Company made to certain bakery facility employees of $2.2 million and for the operating costs this adjustment represents special payments to corporate employees of $2.5 million as compensation for their efforts in connection with the Business Combination.
iv. Represents compensation for management profits interest plan of approximately $3.9 million that was recognized as part of the Business Combination offset by the impact to depreciation and amortization associated with the allocation of the purchase price to property and equipment.
v. Represents additional amortization expense associated with the fair value recognized for customer relationships in connection with the Business Combination.
vi. This adjustment consists primarily of legal and professional fees, and other costs associated with the Business Combination.
vii. Represents non-cash expenses incurred by Successor for stock awarded to Mr. Metropoulos as required under his new employment arrangements.

viii.

Represents the reduction in interest expense due to the repayment of a portion of Hostess Holdings debt as part of the Business Combination.
ix. Represents the effective income tax rate of 28.5% for the Successor, giving effect to the non-controlling interest, and not giving effect to the adjustment made to the valuation allowance on the Company’s historical deferred tax assets.
x. 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.
xi. This adjustment annualized the basic weighted average number of Class A shares outstanding.
xii. This adjustment includes the dilutive impact of the outstanding warrants that are considered anti-dilutive on a historical basis.
       
 

Results of Operations by Segment—For the Year Ended December 31, 2017 and Pro Forma Year Ended December 31, 2016

 
 
(Successor)   (Successor)     (Predecessor)         Pro

Forma

Combined

(In thousands)

Year Ended

December 31,

2017

From November 4,

through

December 31

From January 1,

through

November 3, 2016

Pro Forma
Adjustments
(Unaudited)

Year Ended

December 31,

2016

Net revenue $ 776,188 $ 111,998 $ 615,588 $ $ 727,586
Cost of goods sold 449,290 73,284 346,864 (8,541 ) i. 411,607
Special employee incentive compensation   $   2,195   (2,195 ) ii.
Gross profit $ 326,898   $ 38,714   $ 266,529   $ 10,736   $ 315,979
 

Segment

Net Revenue
Sweet baked goods $ 733,827 $ 105,211 $ 595,645 $ $ 700,856
In-Store Bakery 42,361   6,787   19,943     26,730
$ 776,188   $ 111,998   $ 615,588   $   $ 727,586
Gross Profit
Sweet baked goods $ 316,916 $ 37,387 $ 262,930 $ 10,232 iii. $ 310,549
In-Store Bakery 9,982   1,327   3,599   504   iii. 5,430
$ 326,898   $ 38,714   $ 266,529   $ 10,736   $ 315,979
       
  i.   Reflects the non-cash impact of the remeasurement of inventory at fair value as a result of the Business Combination of approximately $8.9 million offset by the impact to depreciation and amortization associated with the allocation of the purchase price to property and equipment.
ii. This adjustment represents special payments the Company made to certain bakery facility employees in connection with the Business Combination.
iii. This reflects the segment allocation of the adjustments described in i. and ii. above.
       
 

Results of Operations by Segment—For the Quarter Ended December 31, 2017 and Pro Forma Combined Quarter Ended December 31, 2016

 
 
(Successor)   (Successor)     (Predecessor)         Pro

Forma

Combined

(In thousands)

Quarter Ended

December 31,

2017

From November 4,

through

December 31

From October 1,

through

November 3, 2016

Pro Forma
Adjustments
(Unaudited)

Quarter Ended

December 31,

2016

Net revenue $ 196,221 $ 111,998 $ 66,831 $ $ 178,829
Cost of goods sold 115,428 73,284 37,437 (8,856 ) i. 101,865
Special employee incentive compensation     2,195   (2,195 ) ii.
Gross profit $ 80,793   $ 38,714   $ 27,199   $ 11,051   $ 76,964
 

Segment

Net Revenue
Sweet baked goods 185,330 105,211 63,394 $ 168,605
In-Store Bakery 10,891   6,787   3,437     10,224
$ 196,221   $ 111,998   $ 66,831   $   $ 178,829
Gross Profit
Sweet baked goods 78,358 37,387 26,087 10,547 iii. 74,021
In-Store Bakery 2,435   1,327   1,112   504   iii. 2,943
$ 80,793   $ 38,714   $ 27,199   $ 11,051   $ 76,964
       
  i.   Reflects the non-cash impact of the remeasurement of inventory at fair value as a result of the Business Combination of approximately $8.9 million offset by the impact to depreciation and amortization associated with the allocation of the purchase price to property and equipment.
ii. This adjustment represents special payments the Company made to certain bakery facility employees in connection with the Business Combination.
iii. This reflects the segment allocation of the adjustments described in i. and ii. above.
       
 

Reconciliation of Non-GAAP Financial Measures

Adjusted EBITDA, adjusted net income attributed to Class A stockholders and adjusted EPS are non-GAAP financial measures commonly used in the Company's industry and should not be construed as an alternative to net income or earnings per share as indicators 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). These measures may not be comparable to similarly titled measures reported by other companies. The Company has included adjusted EBITDA, adjusted net income attributed to Class A shareholders, and adjusted EPS, because it believes these measures provide 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.

Adjusted EBITDA

The Company defines 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.

Adjusted Net Income Attributed to Class A Stockholders and Adjusted EPS

Adjusted net income attributed to Class A stockholders excludes certain items that affect comparability. Adjusted net income attributed to Class A stockholders is divided by weighted average diluted Class A shares outstanding to determine adjusted EPS. The adjustments to net income attributed to Class A stockholders are itemized below. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating adjusted net income attributed to Class A stockholders and adjusted EPS, 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 presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or recurring items. Certain adjustments are shown net of income taxes and net of allocation to the non-controlling interest.

 
Reconciliation of Adjusted EBITDA
(Unaudited)
    Three Months Ended   Year Ended

(In thousands)

December 31,
2017

(Successor)

    December 31,
2016

Pro Forma Combined

December 31,

2017

(Successor)

    December 31,

2016

Pro Forma Combined

 
Net income $ 189,574 $ 21,988 $ 258,108 $ 82,442
Plus non-GAAP adjustments:
Income tax provision (98,812 ) 8,764 (67,204 ) 32,862
Interest expense, net 9,517 11,566 39,174 51,441
Depreciation and amortization 9,594 9,168 38,170 36,520
Share-based compensation i. (576 ) 7,413
Tax receivable agreement liability remeasurement ii. (51,812 ) (50,222 )
Other expense iii. 51 33 1,360 2,375
Loss (gain) on debt modification iv. 432 (763 ) 2,554 (763 )
Impairment of property and equipment v. 2,065 1,003 7,300
Business combination transaction costs vi. 575
Loss on sale/abandonment of property and equipment and bakery shutdown costs (recoveries) vii. (144 ) 33   (144 ) 2,551  
Adjusted EBITDA $ 57,824   $ 52,854   $ 230,212   $ 215,303  
       
  i.   For the three months and year ended December 31, 2017, the Company recognized expense related to awards under the Hostess Brands, Inc. 2016 Equity Incentive Plan.
ii. During the third quarter of 2017, the Company incurred a loss due to the remeasurement of the tax receivable agreement due to a change in state tax law. During the fourth quarter of 2017, the Company recognized a gain due to the remeasurement of the tax receivable agreement due to a reduction in the Company's federal tax rate resulting from Tax Reform.
iii. For the year ended December 31, 2017, other costs included professional fees incurred related to the secondary public offering of common stock, the registration of certain privately held warrants, and other special projects. For the pro forma three months and year ended December 31, 2016, other expense primarily consisted of professional fees attributed to the pursuit of a potential acquisition that has since been abandoned, and other special projects.
iv. During the three months and year ended December 31, 2017, the Company recognized costs related to the modification of its First Lien Term Loan. During the pro forma three months and year ended December 31, 2016, the Company recognized a gain on refinancing of its First Lien Term Loan and extinguishment of its Second Lien Term Loan
v. During the year ended December 31, 2017, the Company transitioned the production of one of its products to a third party and recognized an impairment loss resulting from the idling of the related production equipment. During the three months and year ended December 31, 2016, the Company closed multiple production lines in its Indianapolis, Indiana bakery and transitioned production to other facilities resulting in an impairment loss.
vi. For the year ended December 31, 2016, business combination transaction costs consisted of professional and legal costs for the acquisition of Superior.
vii. For the pro forma combined three months and year ended December 31, 2016, the Company incurred a 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, the Company incurred losses of approximately $2.6 million related to equipment that we no longer intended to use or had idled. During the three months and year ended December 31, 2017, the Company recovered $0.1 million of these costs.
       
 
 
Reconciliation of Adjusted Net Income Attributed to Class A Stockholders and Adjusted EPS

(unaudited)

      Three Months Ended   Year Ended

(In thousands except share and per share data)

December 31,

2017

  Pro Forma

December 31,

2016

December 31,

2017

  Pro Forma

December 31,

2016

 
Net income attributed to Class A shareholders $ 179,686 $ 14,354 $ 223,897 $ 53,744
Plus Non-GAAP adjustments(i):
Impairment of property and equipment ii. 974 472 3,439
Loss on sale/abandonment of property and equipment and bakery shutdown costs iii. (68 ) 16 (68 ) 1,202
Business combination transaction costs iv. 271
Tax receivable agreement liability remeasurement v. (51,812 ) (50,222 )
State tax law change vi. 1,778
Federal tax law change vii. (110,399 ) (110,399 )
Loss (gain) on modification of debt viii. 205   (360 ) 1,215   (360 )
Adjusted net income attributed to Class A stockholders $ 17,612   $ 14,984   $ 66,673   $ 58,296  
Weighted average Class A shares outstanding-diluted 103,389,524   97,792,658   105,307,293   97,792,658  
Adjusted EPS $ 0.17   $ 0.15   $ 0.63   $ 0.60  
       
  i.   All adjustments to net income attributed to Class A stockholders are net of the impact to the non-controlling interest and income taxes, where applicable.
ii. During the year ended December 31, 2017, the Company transitioned the production of one of its products to a third party and recognized an impairment loss resulting from the idling of the related production equipment. During the pro forma combined three months and year ended December 31, 2016, the Company closed multiple production lines in its Indianapolis, Indiana bakery and transitioned production to other facilities resulting in an impairment loss.
iii. For the pro forma combined three months and year ended December 31, 2016, the Company incurred a 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, the Company incurred losses related to equipment that we no longer intended to use or had idled. During the three months and year ended December 31, 2017, the Company recovered a portion of these costs.
iv. For the pro forma year ended December 31, 2016, the Company incurred expenses related to the acquisition of Superior.
v. During the third quarter of 2017, the Company incurred a loss due to the remeasurement of the tax receivable agreement due to a change in state tax law. During the fourth quarter of 2017, the Company recognized a gain due to the remeasurement of the tax receivable agreement due to a reduction in the Company's federal tax rate resulting from Tax Reform.
vi. During the third quarter of 2017, there was an increase in the deferred tax liability due to a change in state tax law that went into effect during the three months ended September 30, 2017.
vii. During the fourth quarter of 2017, there was a decrease in the deferred tax liability due to a change in the Company's federal tax rate resulting from Tax Reform.
viii. During the three months and year ended December 31, 2017 the Company recognized costs related to the modification of its First Lien Term Loan. During the pro forma three months and year ended December 31, 2016, the Company recognized a gain on refinancing of its First Lien Term Loan and extinguishment of its Second Lien Term Loan.
       
 

Reconciliation of Adjusted EBITDA-Guidance for the year ended December 31, 2018

Reconciliation of 2018 adjusted EBITDA guidance to net income presents inherent difficulty in forecasting certain amounts that are necessary for a full reconciliation to net income. The Company's outlook for 2018 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 2018. 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 December 31, 2017. Changes to these assumptions could significantly impact net income for 2018 and accordingly, the reconciliation of adjusted EBITDA to net income, but not adjusted EBITDA itself. For additional information regarding adjusted EBITDA, refer to the related explanations presented above under “Reconciliation of Adjusted EBITDA”.

2018 Guidance
Adjusted EBITDA Reconciliation
(Unaudited)
    Estimated
Year Ended
December 31, 2018

Amounts in millions, except shares and per share data

Net income attributed to common stockholders $69 - $75
Net income attributed to the non-controlling interest i. 29 - 31
Net income ii. 98 - 106
 
Plus non-GAAP adjustments:
Income tax provision iii. 27 - 29
Interest expense, net 41 - 41
Depreciation and amortization 42 - 42
Share-based compensation iv. 8 - 8
Other expenses v. 4 - 4
Adjusted EBITDA $220 - $230
       
  i.   The net income of Hostess Holdings is allocated to owners pro rata based on ownership percentage. As of December 31, 2017, the Company owned approximately 99.8 million of Hostess Holdings' 130.1 million total partnership units. The remaining approximately 30.3 million partnership units are owned by a non-controlling interest.
ii. Estimated net income excludes the impact of the gain expected to be realized in the first quarter of 2018 related to the buyout of the Apollo Funds' interest in the tax receivable agreement. See the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2018 for further information regarding this transaction.
iii. 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. This provision reflects the projected effects of Tax Reform on the Company's effective tax rate. Neither the non-controlling interest tax distributions nor the tax receivable agreement payment are included in the income tax provision.
iv. Represents amounts associated with the issuance of stock options, restricted stock units, or performance share units and restricted stock to employees of the Company.
v. Expected other expenses consist of $2.0 million of professional fees incurred for the pursuit of potential acquisitions or financing transactions and $2.0 million of non-capitalizable costs incurred to transition the production facility acquired from Aryzta, LLC.
       
 
Other 2018 Guidance
    Estimated
Year Ended
December 31, 2018
Earnings per Class A share:
Basic i. $0.69 - $0.75
Diluted i. $0.64 - $0.69
Adjusted ii. $0.65 - $0.70
Weighted-average shares outstanding:
Basic iii. 99,916,245
Diluted iv. 107,516,245
 
Net increase in cash and cash equivalents v. $35 - $40
 
Capital expenditures $50 - $60
 
Leverage ratio 3.60x - 3.80x
 
Expected statutory corporate federal and state income tax rate applied to income attributed to Class A shareholders 27% - 28%
Payments related to the Company's current federal and state income tax liabilities $8 - $9
Distributions to holders of the non-controlling interest to cover income tax payments 11 - 12
2018 payments to the selling equity holders of Hostess Holdings related to the 2017 activity under the terms of the tax receivable agreement 8 - 9
       
  i.   Estimated basic and diluted EPS exclude the impact of the gain expected to be realized in the first quarter of 2018 related to the buyout of the Apollo Funds' interest in the tax receivable agreement. See the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2018 for further information regarding this transaction.
ii. Adjusted EPS excludes the after-tax impact to Class A stockholders allocated net income attributed to approximately $2 million of professional fees in pursuit of potential acquisitions or financing transactions and $2 million of non-capitalizable costs incurred to transition the production facility acquired from Aryzta, LLC. Expected weighted-average dilutive shares as described in "iv" below were used to calculate adjusted EPS.
iii. Weighted-average basic common shares outstanding for 2017 includes 99,791,245 Class A common shares outstanding as of December 31, 2017 and the projected impact of 2018 stock-based compensation vesting activity.
iv. Reflects the dilutive impact of 7.4 million Class A common shares issuable upon exercise of outstanding warrants (based on a range of 6.9 million to 7.9 million) and 0.2 million Class A common shares issuable upon vesting of outstanding unvested equity awards to employees (based on a range of 0.1 million to 0.3 million).
v. Net increase in cash and cash equivalents reflects the $34 million of cash used to buy out a portion of the tax receivable agreement and $24 million used to purchase certain assets from Aryzta, LLC. Both transactions happened in the first quarter of 2018.
       
 
Leverage Ratio
(Unaudited)
   
Year Ended

December 31, 2017

(in thousands)

Estimated

Year Ended

December 31, 2018

(in millions)

Long-term debt and capital lease obligations, including current maturities $ 999,188 $988 - $988
Less: capital lease obligation (569 ) (0) - (0)
Less: Unamortized debt premium and issuance costs (4,857 ) (4) - (4)
Term loan debt 993,762 984 - 984
Less: cash and cash equivalents (135,701 ) (170 - 175)
Net term loan debt $ 858,061   $814 - $809
Adjusted EBITDA $ 230,212   $215 - $225
 
Leverage ratio 3.73   3.80 - 3.60

Contacts

Investors, please contact:
ICR
Katie Turner, 646-277-1228
katie.turner@icrinc.com
or
Media, please contact:
LAK Public Relations, Inc.
Hannah Arnold, 212-329-1417
harnold@lakpr.com
or
LAK Public Relations, Inc.
Marie Espinel, 212-899-4744
mespinel@lakpr.com

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