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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended
September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37540
twnk-20220930_g1.jpg
HOSTESS BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
47-4168492
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)
7905 Quivira Road
66215
Lenexa,
KS
(Zip Code)
(Address of principal executive offices)
(816701-4600
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTicker Symbol Name of each exchange on which registered
Class A Common Stock, Par Value of $0.0001 per shareTWNKThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.:
Large accelerated filer
Accelerated
filer 
Non‑accelerated  filer Smaller reporting company Emerging growth company 
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes  No 
Shares of Class A common stock outstanding - 133,886,737 shares at October 31, 2022




HOSTESS BRANDS, INC.
FORM 10-Q
For the Three Months Ended September 30, 2022

INDEX
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.










Cautionary Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Statements that constitute 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 events and developments that we expect or anticipate will occur are also considered forward-looking statements. All forward-looking statements included herein are made only as of the date hereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Quarterly Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by subsequent filings. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise, except to the extent required by law.






3


PART I
Item 1. Financial Statements (Unaudited)

HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share data)

September 30,December 31,
20222021
ASSETS
Current assets:
Cash and cash equivalents$190,828 $249,159 
Short-term investments41,891  
Accounts receivable, net199,917 148,180 
Inventories65,444 52,813 
Prepaids and other current assets10,914 10,564 
Total current assets508,994 460,716 
Property and equipment, net385,085 335,305 
Intangible assets, net1,926,758 1,944,392 
Goodwill706,615 706,615 
Other assets, net72,732 19,283 
Total assets$3,600,184 $3,466,311 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and lease obligations payable within one year$14,251 $14,170 
Tax receivable agreement payments payable within one year11,100 11,600 
Accounts payable95,958 68,104 
Customer trade allowances68,799 52,746 
Accrued expenses and other current liabilities54,513 47,009 
Total current liabilities244,621 193,629 
Long-term debt and lease obligations1,088,914 1,099,975 
Tax receivable agreement obligations124,592 134,265 
Deferred tax liability343,009 317,847 
Other long-term liabilities1,568 1,605 
Total liabilities1,802,704 1,747,321 
Commitments and Contingencies (Note 9)
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 142,567,808 shares issued and 134,570,118 shares outstanding as of September 30, 2022 and 142,031,329 shares issued and 138,278,573 shares outstanding as of December 31, 2021
14 14 
Additional paid in capital1,307,813 1,303,254 
Accumulated other comprehensive income (loss)36,172 (506)
Retained earnings606,703 475,400 
Treasury stock(153,222)(59,172)
Stockholders’ equity1,797,480 1,718,990 
Total liabilities and stockholders’ equity$3,600,184 $3,466,311 
See accompanying notes to the unaudited condensed consolidated financial statements.
4


HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Net revenue$346,226 $287,969 $1,018,749 $844,875 
Cost of goods sold230,805 188,990 675,004 545,271 
Gross profit115,421 98,979 343,745 299,604 
Operating costs and expenses:
Advertising and marketing
15,816 14,767 43,353 39,692 
Selling9,696 8,166 29,610 26,250 
General and administrative
30,502 23,565 90,301 69,254 
Amortization of customer relationships
5,878 5,877 17,634 17,633 
Tax receivable agreement remeasurement(860) (860) 
Total operating costs and expenses61,032 52,375 180,038 152,829 
Operating income 54,389 46,604 163,707 146,775 
Other expense (income):
Interest expense, net10,276 9,928 29,683 29,899 
Change in fair value of warrant liabilities 228  683 
Other expense (income)(31,921)378 (31,992)1,808 
Total other expense (income)(21,645)10,534 (2,309)32,390 
Income before income taxes76,034 36,070 166,016 114,385 
Income tax expense9,765 9,878 34,713 31,614 
Net income $66,269 $26,192 $131,303 $82,771 
Earnings per Class A share:
Basic$0.49 $0.20 $0.95 $0.63 
Diluted$0.48 $0.19 $0.95 $0.60 
Weighted-average shares outstanding:
Basic136,436,428 129,846,551 137,636,441 130,679,974 
Diluted137,604,256 138,058,866 138,702,172 138,036,371 


See accompanying notes to the unaudited condensed consolidated financial statements.
5


HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, amounts in thousands)
Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Net income$66,269 $26,192 $131,303 $82,771 
Other comprehensive income:
Unrealized gain (loss) on interest rate swap and foreign currency contracts designated as a cash flow hedge19,058 (192)49,041 5,058 
Reclassification into net income(1,188)962 697 3,441 
Income tax expense(4,691)(203)(13,060)(2,253)
Comprehensive income$79,448 $26,759 $167,981 $89,017 


See accompanying notes to the unaudited condensed consolidated financial statements.


6


HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, amounts in thousands)
Class A Voting
Common Stock
Additional
Paid-in Capital
Accumulated
Other Comprehensive Income (Loss)
Retained
 Earnings
Treasury StockTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance–December 31, 2021138,279 $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 options105 — 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)
Balance–March 31, 2022138,275 $14 $1,302,039 $17,720 $509,958 4,212 $(68,852)$1,760,879 
Comprehensive income— — — 5,273 30,476 — — 35,749 
Share-based compensation
23 — 2,648 — — — — 2,648 
Exercise of employee stock options37 — 579 — — — — 579 
Payment of taxes for employee stock awards— — (296)— — — — (296)
Repurchase of common stock(1,848)— — — — 1,848 (38,826)(38,826)
Balance–June 30, 2022136,487 $14 $1,304,970 $22,993 $540,434 6,060 $(107,678)$1,760,733 
Comprehensive income— — — 13,179 66,269 — — 79,448 
Share-based compensation1 — 2,613 — — — — 2,613 
Exercise of employee stock options20 — 300 — — — — 300 
Payment of taxes for employee stock awards— — (70)— — — — (70)
Repurchase of common stock(1,938)— — — — 1,938 (45,544)(45,544)
Balance–September 30, 2022134,570 $14 $1,307,813 $36,172 $606,703 7,998 $(153,222)$1,797,480 

7


Class A Voting
Common Stock
Additional
Paid-in Capital
Accumulated
Other Comprehensive Income (Loss)
Retained
 Earnings
Treasury StockTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance–December 31, 2020130,347 $13 $1,281,018 $(10,407)$356,101 444 $(6,000)$1,620,725 
Comprehensive income — — — 6,162 26,732 — — 32,894 
Share-based compensation146 — 2,723 — — — — 2,723 
Exercise of employee stock options20 — 262 — — — — 262 
Payment of taxes for employee stock awards— — (843)— — — — (843)
Exercise of public warrants672 — 7,722 — — — — 7,722 
Balance–March 31, 2021131,185 $13 $1,290,882 $(4,245)$382,833 444 $(6,000)$1,663,483 
Comprehensive income (loss)— — — (483)29,847 — — 29,364 
Share-based compensation22 — 1,640 — — — — 1,640 
Exercise of employee stock options220 — 3,135 — — — — 3,135 
Exercise of public warrants209 — 2,405 — — — — 2,405 
Payment of taxes for employee stock awards— — (392)— — — — (392)
Repurchase of common stock(1,176)— — — — 1,176 (16,691)(16,691)
Balance–June 30, 2021130,460 $13 $1,297,670 $(4,728)$412,680 1,620 $(22,691)$1,682,944 
Comprehensive income— — — 567 26,192 — — 26,759 
Share-based compensation— — 2,642 — — — — 2,642 
Exercise of employee stock options19 — 255 — — — — 255 
Exercise of public warrants, net of fees of $500
643 — (494)— — — — (494)
Payment of taxes for employee stock awards— — (42)— — — — (42)
Reclassification of warrants— — 298 — — — — 298 
Repurchase of common stock(1,952)— — — — 1,952 (33,372)(33,372)
Balance–September 30, 2021129,170 $13 $1,300,329 $(4,161)$438,872 3,572 $(56,063)$1,678,990 
See accompanying notes to the unaudited condensed consolidated financial statements.
8


HOSTESS BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Nine Months Ended
September 30, 2022September 30, 2021
Operating activities
Net income$131,303 $82,771 
Depreciation and amortization44,500 37,992 
Debt discount amortization921 931 
Change in fair value of warrant liabilities 683 
Tax receivable agreement remeasurement(860) 
Unrealized foreign exchange losses (gains)790 (177)
Non-cash lease expense375 971 
Share-based compensation7,600 7,005 
Deferred taxes12,104 18,280 
Change in operating assets and liabilities:
Accounts receivable(51,904)(31,240)
Inventories(12,631)39 
Prepaids and other current assets(468)13,991 
Accounts payable and accrued expenses16,332 7,949 
Customer trade allowances16,143 8,441 
Net cash provided by operating activities164,205 147,636 
Investing activities
Purchases of property and equipment(55,240)(33,360)
Acquisition of short-term investments(62,891) 
Proceeds from maturity of short-term investments21,000  
Acquisition and development of software assets(8,578)(3,330)
Net cash used in investing activities(105,709)(36,690)
Financing activities
Repayments of long-term debt and lease obligations(8,375)(8,375)
Repurchase of common stock(94,050)(50,063)
Tax payments related to issuance of shares to employees(5,582)(1,277)
Cash received from exercise of options and warrants2,541 13,285 
Payments on tax receivable agreement(9,313)(9,270)
Net cash used in financing activities(114,779)(55,700)
Effect of exchange rate changes on cash and cash equivalents(2,048)(184)
Net increase (decrease) in cash and cash equivalents(58,331)55,062 
Cash and cash equivalents at beginning of period249,159 173,034 
Cash and cash equivalents at end of period$190,828 $228,096 
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized$29,342 $29,019 
Net taxes paid$19,023 $1,568 
Supplemental disclosure of non-cash investing:
Accrued capital expenditures$23,103 $5,603 
See accompanying notes to the unaudited condensed consolidated financial statements.
9


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 the U.S. under the Hostess® brands and in North America under the 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.
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.
Adoption of New Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. ASU No. 2020-04 is elective and effective as of March 12, 2020 through December 31, 2022. Once elected, this ASU must be applied prospectively for all eligible contract modifications. The Company will adopt Topic 848 when its relevant contracts are modified upon transition to alternative reference rates. The Company does not expect the adoption of Topic 848 to have a material impact on its consolidated financial statements.
Principles of Consolidation
All intercompany balances and transactions related to activity between the Company 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.
Investments
The Company considers all investments purchased with original maturities of greater than three months, but less than one year as short-term investments and all investments purchased with original maturities of greater than one year as long-term investments.
10


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company classifies its investments in debt securities where it has positive intent and ability to hold until maturity as held-to-maturity. As of September 30, 2022, the Company’s held-to-maturity investments classified as cash equivalents on the condensed consolidated balance sheet totaled $63.6 million, which consisted of $34.8 million of commercial paper, $12.9 million of U.S. treasury securities and $15.9 million of U.S. agency bonds and held-to-maturity investments classified as short-term investments on the condensed consolidated balance sheet totaled $41.9 million, which consisted of $20.0 million of commercial paper, $12.9 million of U.S. treasury securities and $9.0 million of U.S. agency bonds. As of December 31, 2021, the Company had no held-to-maturity investments. Held-to-maturity investments are recorded at amortized cost, which approximates fair value, and realized gains or losses are reported in interest expense, net on the condensed consolidated statements of operations. For the three and nine months ended September 30, 2022, the Company recognized $0.5 million and $0.6 million in realized gains, respectively. The Company’s held-to-maturity investments are classified as Level 2 in the fair value hierarchy because they are valued using inputs other than quoted prices, which are directly or indirectly observable in the market, including prices for similar assets in active markets as well as quoted prices for identical or similar assets in markets that are not active.
Accounts Receivable
Accounts receivable represents amounts invoiced to customers for performance obligations which have been satisfied. As of September 30, 2022 and December 31, 2021, the Company’s accounts receivable were $199.9 million and $148.2 million, respectively, which have been reduced by an allowance for damages occurring during shipment, quality claims and doubtful accounts in the amount of $4.3 million and $3.0 million for the periods ended September 30, 2022 and December 31, 2021, respectively.
The allowance for doubtful accounts represents the Company’s estimate of expected credit losses related to trade receivables. To estimate the allowance for doubtful accounts, the Company leverages information on historical losses, current conditions, and reasonable and supportable forecasts of future conditions. Account balances are written off against the allowance when the Company deems the amount is uncollectible.
Inventories
Inventories are stated at the lower of cost or net-realizable value on a first-in first-out basis. Abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) are expensed in the period they are incurred.
The components of inventories are as follows:
(In thousands)
September 30,
2022
December 31,
2021
Ingredients and packaging$33,629 $22,607 
Finished goods28,047 26,988 
Inventory in transit to customers3,768 3,218 
$65,444 $52,813 
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 $0.3 million and $0.5 million during the three and nine months ended September 30, 2022, respectively. No interest was capitalized during the three and nine months ended September 30, 2021. Capitalized interest is included in property and equipment, net on the condensed consolidated balance sheets.



11


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Software Costs
Capitalized software is included in other assets on the condensed consolidated balance sheets in the amount of $20.1 million and $14.7 million as of September 30, 2022 and December 31, 2021, 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 $1.1 million and $3.2 million for the three and nine months ended September 30, 2022, respectively, compared to $1.0 million and $2.9 million for the three and nine months ended September 30, 2021, 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 September 30, 2022
(In thousands)
Sweet Baked GoodsCookiesTotal
United States$307,332 $33,573 $340,905 
Canada 5,321 5,321 
$307,332 $38,894 $346,226 
Three Months Ended September 30, 2021
(In thousands)
Sweet Baked GoodsCookiesTotal
United States$258,818 $25,185 $284,003 
Canada 3,966 3,966 
$258,818 $29,151 $287,969 
Nine Months Ended September 30, 2022
(In thousands)
Sweet Baked GoodsCookiesTotal
United States$907,141 $96,837 $1,003,978 
Canada 14,771 14,771 
$907,141 $111,608 $1,018,749 
Nine Months Ended September 30, 2021
(In thousands)
Sweet Baked GoodsCookiesTotal
United States$759,010 $73,394 $832,404 
Canada 12,471 12,471 
$759,010 $85,865 $844,875 
Concentrations
The Company had one customer (together with its affiliates) that accounted for 19.7% and 20.2% of total net revenue for the three and nine months ended September 30, 2022, respectively, and 18.0% and 18.8% for the three and nine months ended September 30, 2021, respectively.

12


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


2. Property and Equipment
Property and equipment consists of the following:
(In thousands)
September 30,
2022
December 31,
2021
Land and buildings$74,872 $70,692 
Right of use assets, operating32,637 32,192 
Machinery and equipment306,272 299,071 
Construction in progress86,093 26,027 
499,874 427,982 
Less accumulated depreciation and amortization(114,789)(92,677)
$385,085 $335,305 
Depreciation expense was $9.5 million and $23.7 million for the three and nine months ended September 30, 2022, compared to $5.9 million and $17.4 million for the three and nine months ended September 30, 2021, respectively.

3. Accrued Expenses and Other Current Liabilities
Included in accrued expenses and other current liabilities are the following:
(In thousands)September 30,
2022
December 31,
2021
Incentive compensation$22,756 $21,172 
Payroll, vacation and other compensation12,870 7,791 
Accrued interest5,645 4,828 
Interest rate swap and foreign currency contracts639 2,042 
Other12,603 11,176 
$54,513 $47,009 
13


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Debt and Lease Obligations
A summary of the carrying value of the debt and lease obligations are as follows:
(In thousands)September 30,
2022
December 31,
2021
Term loan (5.1% as of September 30, 2022)
Principal$1,083,221 $1,091,596 
Unamortized debt premium and issuance costs(3,101)(3,679)
1,080,120 1,087,917 
Lease obligations23,045 26,228 
Total debt and lease obligations1,103,165 1,114,145 
Less: Current portion of long term debt and lease obligations(14,251)(14,170)
Long-term portion$1,088,914 $1,099,975 
At September 30, 2022, minimum debt repayments under the term loan are due as follows:
(In thousands)
2022$2,792 
202311,167 
202411,167 
20251,058,095 
Leases
The Company has entered into operating leases for certain properties which expire at various times through 2026. The Company determines if an arrangement is a lease at inception.
At September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021, 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 EndedNine Months Ended
(In thousands)September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Operating lease expense$1,623 $1,504 $4,811 $4,928 
Short-term lease expense645 501 1,479 1,083 
Variable lease expense403 367 1,176 1,109 
$2,671 $2,372 $7,466 $7,120 
14


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Derivative Instruments
Interest Rate Swap and Foreign Currency Contracts
The Company entered into interest rate swap contracts with counterparties to make a series of payments based on fixed rates ranging from 1.11% to 2.06% in addition to the term loan margin of 2.25% and receive a series of payments based on the greater of LIBOR or 0.75%. Both the fixed and floating payment streams are based on the September 30, 2022 notional amount of $700 million, outstanding through August 2025. The Company entered into these transactions to reduce its exposure to changes in cash flows associated with its variable rate debt and has designated these derivatives as cash flow hedges. At September 30, 2022, the interest on the Company’s variable rate debt hedged by these contracts is effectively fixed at rates ranging from 3.36% to 4.31%.
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 entered into CAD purchase contracts. The contracts provide for the Company to sell a total of $9.5 million USD for $12.1 million CAD at varying defined settlement dates through June 2023. The Company has designated these contracts as cash flow hedges.
A summary of the fair value of interest rate and foreign currency instruments is as follows:
(In thousands)September 30,
2022
December 31,
2021
Asset derivativesLocation
Interest rate swap contracts (1)Other non-current assets$50,219 $1,803 
Liability derivativesLocation
Interest rate swap contracts (1)Accrued expenses$ $1,798 
Foreign currency contracts (2)Accrued expenses639 244 
$639 $2,042 
(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 EndedNine Months Ended
(In thousands)September 30,
2022
September 30,
2021
September 30,
2022
September 30,
2021
(Gain ) Loss on derivative contracts designated as cash flow hedgesLocation
Interest rate swap contractsInterest expense, net$(1,325)$962 $560 $3,441 
Foreign currency contractsCost of goods sold137  137  
$(1,188)$962 $697 $3,441 

15


HOSTESS BRANDS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 RSUs and stock options as well as public and private placement warrants.

Below are basic and diluted net income per share:
Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Numerator:
Net income (in thousands)$66,269 $26,192 $131,303 $82,771 
Denominator:
Weighted-average Class A shares outstanding - basic 136,436,428 129,846,551 137,636,441 130,679,974 
Dilutive effect of warrants 7,462,176