FLO 10-Q
Flowers Foods Inc (FLO)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 Exchange Act). Yes
As of May 10, 2024, the registrant had
FLOWERS FOODS, INC.
INDEX
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4 |
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Item 1. |
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Condensed Consolidated Balance Sheets as of April 20, 2024 and December 30, 2023 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Forward-Looking Statements
Statements contained in this filing and certain other written or oral statements made from time to time by Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our business and our future financial condition and results of operations and are often identified by the use of words and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would,” “is likely to,” “is expected to” or “will continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are based upon assumptions we believe are reasonable.
Forward-looking statements are based on current information and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results, performance, liquidity, and achievements to differ materially from those projected are discussed in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and may include, but are not limited to:
2
The foregoing list of important factors does not include all such factors, nor does it necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Refer to Part I, Item 1A., Risk Factors, of our Annual Report on Form 10-K for the year ended December 30, 2023 (the “Form 10-K”) for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.
We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the SEC or in company press releases) on related subjects.
We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this Form 10-Q are listed without the © , ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, trade names and copyrights.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited)
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April 20, 2024 |
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December 30, 2023 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts and notes receivable, net of allowances of $ |
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Inventories, net: |
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Raw materials |
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Packaging materials |
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Finished goods |
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Inventories, net |
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Spare parts and supplies |
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Other |
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Total current assets |
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Property, plant and equipment: |
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Property, plant and equipment |
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Less: accumulated depreciation |
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Property, plant and equipment, net |
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Financing lease right-of-use assets |
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Operating lease right-of-use assets |
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Notes receivable from independent distributor partners |
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Assets held for sale |
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Other assets |
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Goodwill |
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Other intangible assets, net |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current maturities of long-term debt |
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$ |
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Current maturities of financing leases |
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Current maturities of operating leases |
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Accounts payable |
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Other accrued liabilities |
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Total current liabilities |
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Noncurrent long-term debt |
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Noncurrent financing lease obligations |
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Noncurrent operating lease obligations |
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Total long-term debt and right-of-use lease liabilities |
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Other liabilities: |
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Postretirement/post-employment obligations |
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Deferred taxes |
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Other long-term liabilities |
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Total other long-term liabilities |
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and Contingencies |
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Stockholders’ equity: |
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Preferred stock — $ |
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Preferred stock — $ |
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Common stock — $ |
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Treasury stock — |
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Capital in excess of par value |
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Retained earnings |
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Accumulated other comprehensive income |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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(See Accompanying Notes to Condensed Consolidated Financial Statements)
4
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
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For the Sixteen Weeks Ended |
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April 20, 2024 |
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April 22, 2023 |
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Sales |
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$ |
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$ |
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Materials, supplies, labor and other production costs (exclusive |
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Selling, distribution and administrative expenses |
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Depreciation and amortization |
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Impairment of assets |
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— |
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Restructuring charges |
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Income from operations |
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Interest expense |
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Interest income |
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Other components of net periodic pension and postretirement |
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Income before income taxes |
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Income tax expense |
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Net income |
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$ |
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$ |
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Net income per common share: |
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Basic: |
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Net income per common share |
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$ |
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$ |
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Weighted average shares outstanding |
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Diluted: |
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Net income per common share |
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$ |
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$ |
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Weighted average shares outstanding |
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Cash dividends paid per common share |
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$ |
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$ |
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(See Accompanying Notes to Condensed Consolidated Financial Statements)
5
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
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For the Sixteen Weeks Ended |
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April 20, 2024 |
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April 22, 2023 |
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Net income |
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$ |
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$ |
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Other comprehensive loss, net of tax: |
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Pension and postretirement plans: |
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Amortization of prior service credit included in net income |
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( |
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( |
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Amortization of actuarial gain included in net income |
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( |
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( |
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Pension and postretirement plans, net of tax |
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( |
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Derivative instruments: |
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Net change in fair value of derivatives |
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Loss reclassified to net income |
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Derivative instruments, net of tax |
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( |
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Other comprehensive loss, net of tax |
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( |
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( |
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Comprehensive income |
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$ |
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$ |
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(See Accompanying Notes to Condensed Consolidated Financial Statements)
6
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except share data)
(Unaudited)
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For the Sixteen Weeks Ended April 20, 2024 |
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Common Stock |
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Capital in |
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Accumulated |
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Number of |
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Excess |
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Other |
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Treasury Stock |
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Shares |
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Par |
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of Par |
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Retained |
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Comprehensive |
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Number of |
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Cost |
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Total |
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Balances at December 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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( |
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$ |
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$ |
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Net income |
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Derivative instruments, net of tax |
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( |
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( |
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Pension and postretirement |
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( |
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( |
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Amortization of stock-based |
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Issuance of deferred compensation |
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— |
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Time-based restricted stock units issued |
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( |
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— |
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Performance-contingent restricted stock |
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( |
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— |
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Issuance of deferred stock awards |
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( |
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— |
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Share repurchases |
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( |
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Dividends paid on vested |
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( |
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( |
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Dividends paid — $ |
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( |
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( |
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Balances at April 20, 2024 |
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$ |
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$ |
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$ |
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$ |
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( |
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$ |
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$ |
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For the Sixteen Weeks Ended April 22, 2023 |
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Common Stock |
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Capital in |
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Accumulated |
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Number of |
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Excess |
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Other |
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Treasury Stock |
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Shares |
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Par |
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of Par |
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Retained |
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Comprehensive |
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Number of |
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Cost |
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Total |
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Balances at December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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( |
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$ |
( |
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$ |
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Net income |
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Derivative instruments, net of tax |
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( |
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( |
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Pension and postretirement |
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( |
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( |
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Amortization of stock-based |
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Issuance of deferred compensation |
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( |
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— |
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Time-based restricted stock awards issued |
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( |
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Performance-contingent restricted stock |
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( |
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— |
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Issuance of deferred stock awards |
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( |
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— |
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Share repurchases |
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( |
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( |
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Dividends paid on vested share-based |
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( |
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( |
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Dividends paid — $ |
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( |
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( |
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Balances at April 22, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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( |
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$ |
( |
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$ |
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(See Accompanying Notes to Condensed Consolidated Financial Statements)
7
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
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For the Sixteen Weeks Ended |
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April 20, 2024 |
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April 22, 2023 |
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CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Stock-based compensation |
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Loss reclassified from accumulated other comprehensive income to net income |
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|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
|
||
Impairment of assets |
|
|
|
|
|
— |
|
|
Provision for inventory obsolescence |
|
|
|
|
|
|
||
Allowances for accounts receivable |
|
|
|
|
|
|
||
Pension and postretirement plans cost |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
Inventories |
|
|
|
|
|
( |
) |
|
Hedging activities |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
( |
) |
|
|
( |
) |
Other assets and accrued liabilities |
|
|
( |
) |
|
|
( |
) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
|
|
|
|
||
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES: |
|
|
|
|
|
|
||
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
Proceeds from sale of property, plant and equipment |
|
|
|
|
|
|
||
Repurchase of independent distribution rights |
|
|
( |
) |
|
|
( |
) |
Cash paid at issuance of notes receivable |
|
|
( |
) |
|
|
( |
) |
Principal payments from notes receivable |
|
|
|
|
|
|
||
Acquisition of business |
|
|
|
|
|
( |
) |
|
Other investing activities |
|
|
|
|
|
|
||
NET CASH DISBURSED FOR INVESTING ACTIVITIES |
|
|
( |
) |
|
|
( |
) |
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES: |
|
|
|
|
|
|
||
Dividends paid, including dividends on stock-based payment awards |
|
|
( |
) |
|
|
( |
) |
Stock repurchases |
|
|
( |
) |
|
|
( |
) |
Change in bank overdrafts |
|
|
( |
) |
|
|
( |
) |
Proceeds from debt borrowings |
|
|
|
|
|
|
||
Debt obligation payments |
|
|
( |
) |
|
|
( |
) |
Payments on financing leases |
|
|
( |
) |
|
|
( |
) |
Payments for financing fees |
|
|
( |
) |
|
|
( |
) |
NET CASH (DISBURSED FOR) PROVIDED BY FINANCING ACTIVITIES |
|
|
( |
) |
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
(See Accompanying Notes to Condensed Consolidated Financial Statements)
8
FLOWERS FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
BASIS OF ACCOUNTING — The accompanying unaudited Condensed Consolidated Financial Statements of Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the unaudited Condensed Consolidated Financial Statements included herein contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the company’s financial position, results of operations and cash flows. The results of operations for the sixteen weeks ended April 20, 2024 and April 22, 2023 are not necessarily indicative of the results to be expected for a full fiscal year. The Condensed Consolidated Balance Sheet at December 30, 2023 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 30, 2023 (the “Form 10-K”).
INFLATIONARY ECONOMIC ENVIRONMENT AND MACROECONOMIC FACTORS — We continue to monitor the impact of the inflationary economic environment, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine and the conflict in the Middle East on our business. Our results through the first quarter of Fiscal 2024 have continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. However, we have experienced significant input cost inflation during the previous two fiscal years which has partially offset the more optimized sales mix. We implemented price increases during the first quarter of Fiscal 2023 and in the second quarter of Fiscal 2023 to mitigate these cost pressures. Commodity cost inflation began to moderate in the latter half of Fiscal 2023 and has continued during the first quarter of Fiscal 2024.
INVESTMENT IN UNCONSOLIDATED AFFILIATE — In the second quarter of Fiscal 2022, we invested $
During the first quarter of Fiscal 2024, the company's qualitative assessment of the fair value of Base Culture indicated the investment may be impaired. Additional quantitative analysis of Base Culture indicated a fair value of approximately $
ESTIMATES — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting estimates affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, derivative financial instruments, valuation of long-lived assets, goodwill and other intangible assets, leases, self-insurance reserves, income tax expense and accruals, postretirement plans, stock-based compensation, and commitments and contingencies. These estimates are summarized in Form 10-K.
REPORTING PERIODS — Fiscal Year End. Our fiscal year ends on the Saturday nearest December 31, resulting in a 53rd reporting week every five or six years. The last 53-week year was our Fiscal 2020. The next 53-week year will be Fiscal 2025. Our internal financial results and key performance indicators are reported on a weekly calendar basis to ensure the same numbers of Saturdays and Sundays in comparable months and to allow for a consistent four-week progression analysis. The company has elected the first quarter to report the extra four-week period. As such, our quarters are divided as follows:
Quarter |
|
Number of Weeks |
First Quarter |
|
Sixteen |
Second Quarter |
|
Twelve |
Third Quarter |
|
Twelve |
Fourth Quarter |
|
Twelve (or Thirteen in fiscal years with an extra week) |
9
Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.
Fiscal 2024 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 20, 2024 (sixteen weeks), second quarter ending July 13, 2024 (twelve weeks), third quarter ending October 5, 2024 (twelve weeks) and fourth quarter ending December 28, 2024 (twelve weeks).
REPORTING SEGMENT —
SIGNIFICANT CUSTOMER —
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
|
|
(% of Sales) |
|
|||||
Total |
|
|
|
|
|
|
||
Walmart/Sam’s Club is our only customer with greater than 10% of outstanding trade receivables, representing
BUSINESS PROCESS IMPROVEMENT COSTS — In the second half of Fiscal 2020, we launched initiatives to transform our business operations, which include upgrading our information system to a more robust platform, as well as investments in e-commerce, autonomous planning, and our “bakery of the future” initiatives. These costs may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract. The expensed portion of these costs incurred related to these initiatives was $
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
The company did not adopt any accounting pronouncements during the sixteen weeks ended April 20, 2024.
Accounting pronouncements not yet adopted
On August 23, 2023, the FASB issued ASU 2023-05, "Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement", which requires a joint venture to initially measure all contributions received upon its formation at fair value. This accounting will largely be consistent with ASC 805, Business Combinations, although there are some specific exceptions. This new guidance is intended to reduce diversity in practice and provide users of the joint venture’s financial statements with more decision-useful information. It may also reduce the amount of basis differences that an investor in a joint venture needs to track. The standard is effective for all joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. Joint ventures formed prior to the adoption date may elect to apply the new guidance retrospectively back to their original formation date. The company is determining the impact on our business.
On November 27, 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The company is determining the impact on our business.
On December 14, 2023, The FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax disclosures by requiring; (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. For public business entities, the standard is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The company is determining the impact on our business.
10
On March 29, 2024, the FASB issued ASU 2024-02, "Codification Improvements - Amendments to Remove References to the Concepts Statements" which removes references to the Board's concepts statements from the FASB Accounting Standards Codification. The ASU is part of the Board's standing project to make codification updated for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or structure guidance, and other minor improvements. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2024. The company is determining the impact on our business.
We have
3. RESTRUCTURING ACTIVITIES
In April 2024, the company announced a cost savings program to improve operational performance, which includes employee termination benefits associated with a reduction-in-force ("2024 RIF") and other optimization initiatives expected to be completed in Fiscal 2024. The company expects additional 2024 RIF and other restructuring costs of approximately $
In February 2023, to improve operational effectiveness, increase profitable sales, and better meet customer requirements, the company announced a restructuring of plant operation responsibilities from the sales function to the supply chain function. As part of that restructuring, we incurred costs for employee termination benefits and other cash charges, which were primarily related to the voluntary employee separation incentive plan (the "2023 VSIP"), reduction-in-force, and employee relocation costs. There were
T
|
|
For the Sixteen Weeks Ended |
|
|
For the Sixteen Weeks Ended |
|
||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Restructuring charges: |
|
|
|
|
|
|
||
2023 VSIP |
|
$ |
|
|
$ |
|
||
2024 RIF |
|
|
|
|
|
|
||
Relocation costs |
|
|
|
|
|
|
||
Restructuring charges (1) |
|
|
|
|
|
|
||
Restructuring-related implementation costs (2) |
|
|
|
|
|
|
||
Total restructuring charges |
|
$ |
|
|
$ |
|
||
The table below presents the components of, and changes in, our restructuring accruals (amounts in thousands):
|
|
2023 |
|
|
2024 |
|
|
Total |
|
|||
Liability balance at December 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Charges |
|
|
|
|
|
|
|
|
|
|||
Cash payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Liability balance at April 20, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
11
4. ACQUISITION
On
The following table summarizes the consideration paid for Papa Pita based on the fair value at the acquisition date. This table is based on the valuations for the assets acquired (the company did
Fair Value of consideration transferred: |
|
|
|
|
Cash consideration paid |
|
$ |
|
|
Working capital adjustments |
|
|
|
|
Total consideration |
|
$ |
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and |
|
|
|
|
Property, plant, and equipment |
|
$ |
|
|
Identifiable intangible assets |
|
|
|
|
Financial assets |
|
|
|
|
Liabilities assumed |
|
|
( |
) |
Net recognized amounts of identifiable assets acquired |
|
|
|
|
Goodwill |
|
$ |
|
|
The following table presents the acquired intangible assets subject to amortization (amounts in thousands, except amortization periods):
|
|
Total |
|
|
Weighted average amortization years |
|
|
Amortization Method |
||
Trademarks |
|
$ |
|
|
|
|
|
|||
Customer relationships |
|
|
|
|
|
|
|
|||
Noncompete agreements |
|
|
|
|
|
|
|
|||
Total intangible assets |
|
$ |
|
|
|
|
|
|
||
5. LEASES
The company’s leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation and IT equipment. The quantitative disclosures for our leases follow below.
The following table details lease modifications and renewals and lease terminations (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Lease modifications and renewals |
|
$ |
|
|
$ |
|
||
Lease terminations |
|
$ |
|
|
$ |
|
||
The lease modifications and renewals for the sixteen weeks ended April 20, 2024 include renewals of multiple warehouse leases. The lease modifications and renewals for the sixteen weeks ended April 22, 2023 include $
12
Lease costs incurred by lease type, and/or type of payment, and other supplemental quantitative disclosures as of and for the sixteen weeks ended April 20, 2024 and April 22, 2023 were as follows (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Lease cost: |
|
|
|
|
|
|
||
Amortization of right-of-use assets |
|
$ |
|
|
$ |
|
||
Interest on lease liabilities |
|
|
|
|
|
|
||
Operating lease cost |
|
|
|
|
|
|
||
Short-term lease cost |
|
|
|
|
|
|
||
Variable lease cost |
|
|
|
|
|
|
||
Total lease cost |
|
$ |
|
|
$ |
|
||
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash flows from financing leases |
|
$ |
|
|
$ |
|
||
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
||
Financing cash flows from financing leases |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for new financing lease liabilities |
|
$ |
|
|
$ |
— |
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
$ |
|
|
$ |
|
||
Weighted-average remaining lease term (years): |
|
|
|
|
Financing leases |
|
|
|
|
Operating leases |
|
|
|
|
Weighted-average IBR (percentage): |
|
|
|
|
Financing leases |
|
|
|
|
Operating leases |
|
|
|
|
Estimated undiscounted future lease payments under non-cancelable operating leases and financing leases, along with a reconciliation of the undiscounted cash flows to operating and financing lease liabilities, respectively, as of April 20, 2024 (in thousands) were as follows:
|
|
Operating lease |
|
|
Financing lease |
|
||
Remainder of 2024 |
|
$ |
|
|
$ |
|
||
2025 |
|
|
|
|
|
|
||
2026 |
|
|
|
|
|
|
||
2027 |
|
|
|
|
|
|
||
2028 |
|
|
|
|
|
|
||
2029 and thereafter |
|
|
|
|
|
— |
|
|
Total minimum lease payments |
|
|
|
|
|
|
||
Less: amount of lease payments representing interest |
|
|
( |
) |
|
|
( |
) |
Present value of future minimum lease payments |
|
|
|
|
|
|
||
Less: current obligations under leases |
|
|
( |
) |
|
|
( |
) |
Long-term lease obligations |
|
$ |
|
|
$ |
|
||
13
6. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (“AOCI”)
The company’s total comprehensive income presently consists of net income, adjustments for our derivative financial instruments accounted for as cash flow hedges, and various pension and other postretirement benefit related items.
During the sixteen weeks ended April 20, 2024 and April 22, 2023, reclassifications out of AOCI were as follows (amounts in thousands):
|
|
Amount Reclassified from AOCI |
|
|
|
|||||
|
|
For the Sixteen Weeks Ended |
|
|
Affected Line Item in the Statement |
|||||
Details about AOCI Components (Note 2) |
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Where Net Income is Presented |
||
Derivative instruments: |
|
|
|
|
|
|
|
|
||
Interest rate contracts |
|
$ |
|
|
$ |
|
|
Interest expense |
||
Commodity contracts |
|
|
( |
) |
|
|
( |
) |
|
Cost of sales, Note 3 |
Total before tax |
|
|
( |
) |
|
|
( |
) |
|
Total before tax |
Tax benefit |
|
|
|
|
|
|
|
Income tax expense |
||
Total net of tax |
|
|
( |
) |
|
|
( |
) |
|
Net of tax |
Pension and postretirement plans: |
|
|
|
|
|
|
|
|
||
Prior-service credits |
|
|
|
|
|
|
|
Note 1 |
||
Actuarial gain losses |
|
|
|
|
|
|
|
Note 1 |
||
Total before tax |
|
|
|
|
|
|
|
Total before tax |
||
Tax expense |
|
|
( |
) |
|
|
( |
) |
|
Income tax expense |
Total net of tax |
|
|
|
|
|
|
|
Net of tax |
||
Total reclassifications |
|
$ |
( |
) |
|
$ |
( |
) |
|
Net of tax |
|
|
|
|
|
|
|
|
|
||
Note 1:
Note 2:
Note 3:
During the sixteen weeks ended April 20, 2024, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):
|
|
Cash Flow |
|
|
Defined |
|
|
Total |
|
|||
AOCI at December 30, 2023 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Other comprehensive loss before reclassifications |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Reclassified to earnings from AOCI |
|
|
|
|
|
( |
) |
|
|
|
||
AOCI at April 20, 2024 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
During the sixteen weeks ended April 22, 2023, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):
|
|
Cash Flow |
|
|
Defined |
|
|
Total |
|
|||
AOCI at January 1, 2022 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Other comprehensive income before reclassifications |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Reclassified to earnings from AOCI |
|
|
|
|
|
( |
) |
|
|
|
||
AOCI at April 22, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
14
Amounts reclassified out of AOCI to net income that relate to commodity contracts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Gross loss reclassified from AOCI into net |
|
$ |
( |
) |
|
$ |
( |
) |
Tax benefit |
|
|
|
|
|
|
||
Net of tax |
|
$ |
( |
) |
|
$ |
( |
) |
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The table below summarizes our goodwill and other intangible assets at April 20, 2024 and December 30, 2023, respectively, each of which is explained in additional detail below (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Goodwill |
|
$ |
|
|
$ |
|
||
Amortizable intangible assets, net |
|
|
|
|
|
|
||
Indefinite-lived intangible assets |
|
|
|
|
|
|
||
Total goodwill and other intangible assets |
|
$ |
|
|
$ |
|
||
The changes in the carrying amount of goodwill during the sixteen weeks ended April 20, 2024, during which time we finalized the purchase accounting for the acquisition of Papa Pita, are as follows (amounts in thousands):
|
|
Total |
|
|
Balance as of December 30, 2023 |
|
$ |
|
|
Measurement period adjustment (see Note 4, Acquisition) |
|
|
|
|
Balance as of April 20, 2024 |
|
$ |
|
|
On February 17, 2023, the company completed the acquisition of Papa Pita for total consideration of $
As of April 20, 2024 and December 30, 2023, respectively, the company had the following amounts related to amortizable intangible assets (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||||||||||||||||||
Asset |
|
Cost |
|
|
Accumulated |
|
|
Net |
|
|
Cost |
|
|
Accumulated |
|
|
Net |
|
||||||
Trademarks |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Customer relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Distributor relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Aggregate amortization expense for the sixteen weeks ended April 20, 2024 and April 22, 2023 was as follows (amounts in thousands):
|
|
Amortization |
|
|
For the sixteen weeks ended April 20, 2024 |
|
$ |
|
|
For the sixteen weeks ended April 22, 2023 |
|
$ |
|
|
15
Estimated amortization of intangibles for each of the next five years is as follows (amounts in thousands):
|
|
Amortization of |
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
$ |
|
|
2026 |
|
$ |
|
|
2027 |
|
$ |
|
|
2028 |
|
$ |
|
|
There were $
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, and short-term debt approximates fair value because of the short-term maturity of the instruments. Notes receivable are entered into in connection with the purchase of independent distributors’ distribution rights by independent distributor partners (“IDPs”). These notes receivable are recorded in the Condensed Consolidated Balance Sheets at carrying value, which represents the closest approximation of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company financed approximately
Interest income was primarily related to the IDPs’ notes receivable and was as follows (amounts in thousands):
|
|
Interest |
|
|
For the sixteen weeks ended April 20, 2024 |
|
$ |
|
|
For the sixteen weeks ended April 22, 2023 |
|
$ |
|
|
At April 20, 2024 and December 30, 2023, respectively, the carrying value of the distributor notes receivable was as follows (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Distributor notes receivable |
|
$ |
|
|
$ |
|
||
Less: current portion of distributor notes receivable recorded in |
|
|
( |
) |
|
|
( |
) |
Long-term portion of distributor notes receivable |
|
$ |
|
|
$ |
|
||
The distributor notes receivable balance as of April 20, 2024 and December 30, 2023 include a reserve of $
The fair value of the company’s variable rate debt at April 20, 2024 approximates the recorded value. The fair value of the company’s
|
|
Carrying Value |
|
|
Fair Value |
|
|
Level |
||
|
$ |
|
|
$ |
|
|
2 |
|||
|
$ |
|
|
$ |
|
|
2 |
|||
For fair value disclosure information about our derivative assets and liabilities see Note 9, Derivative Financial Instruments.
16
9. DERIVATIVE FINANCIAL INSTRUMENTS
The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:
Level 1: Fair value based on unadjusted quoted prices for identical assets or liabilities at the measurement date
Level 2: Modeled fair value with model inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3: Modeled fair value with unobservable model inputs that are used to estimate the fair value of the asset or liability
Commodity Risk
The company enters into commodity derivatives designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, and diesel fuel are also important commodity inputs.
As of April 20, 2024, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Other long-term |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Other long-term |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Total |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net Fair Value |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
As of December 30, 2023, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Other long-term |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Other long-term |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Total |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net Fair Value |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix, or limit increases in, prices for a period extending into Fiscal 2025. These instruments are designated as cash-flow hedges. The change in the fair value for these derivatives is reported in AOCI. All the company-held commodity derivatives at April 20, 2024 and December 30, 2023, respectively, qualified for hedge accounting.
Interest Rate Risk
During the first quarter of Fiscal 2021, the company entered into treasury locks to fix the interest rate for the 2031 notes issued on March 9, 2021. The derivative positions were closed when the debt was priced on March 2, 2021 with a cash settlement net receipt of $
17
The company previously entered into treasury rate locks at the time we executed the 2026 notes. These rate locks were designated as a cash flow hedge and the fair value at termination was deferred in AOCI. The deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the related notes through the maturity date.
Derivative Assets and Liabilities
The company has the following derivative instruments located on the Condensed Consolidated Balance Sheets, which are utilized for the risk management purposes detailed above (amounts in thousands):
|
|
Derivative Assets |
|
|
Derivative Liabilities |
|
||||||||||||||||||
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||||||||||||
Derivatives Designated as |
|
Balance |
|
Fair Value |
|
|
Balance |
|
Fair Value |
|
|
Balance |
|
Fair Value |
|
|
Balance |
|
Fair Value |
|
||||
Commodity contracts |
|
Other |
|
$ |
|
|
Other |
|
$ |
|
|
Other |
|
$ |
|
|
Other |
|
$ |
|
||||
Commodity contracts |
|
Other |
|
|
— |
|
|
Other |
|
|
— |
|
|
Other |
|
|
|
|
Other |
|
|
|
||
Total |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
||||
Derivative AOCI transactions
The company had the following derivative instruments for deferred gains and (losses) on closed contracts and the effective portion for changes in fair value recorded in AOCI (no amounts were excluded from the effectiveness test), all of which are utilized for the risk management purposes detailed above (amounts in thousands and net of tax):
|
|
Amount of (Loss) or Gain |
|
|
|
|
Amount of Gain or (Loss) |
|
||||||||||
|
|
Recognized in AOCI on Derivatives |
|
|
|
|
Reclassified from AOCI |
|
||||||||||
|
|
(Effective Portion) |
|
|
Location of Gain or (Loss) |
|
into Income (Effective Portion) |
|
||||||||||
Derivatives in Cash Flow |
|
For the Sixteen Weeks Ended |
|
|
Reclassified from AOCI |
|
For the Sixteen Weeks Ended |
|
||||||||||
Hedge Relationships(1) |
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
into Income (Effective Portion)(2) |
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||||
Interest rate contracts |
|
$ |
— |
|
|
$ |
— |
|
|
Interest expense |
|
$ |
|
|
$ |
|
||
Commodity contracts |
|
|
( |
) |
|
|
( |
) |
|
Production costs(3) |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
There was
At April 20, 2024, the balance in AOCI related to commodity price risk and interest rate risk derivative transactions that closed or will expire over the following years are as follows (amounts in thousands and net of tax) (amounts in parenthesis indicate a debit balance):
|
|
Commodity |
|
|
Interest |
|
|
Totals |
|
|||
Closed contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Expiring in 2024 |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Expiring in 2025 |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||
18
Derivative Transactions Notional Amounts
As of April 20, 2024, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):
|
|
Notional |
|
|
Wheat contracts |
|
$ |
|
|
Soybean oil contracts |
|
|
|
|
Natural gas contracts |
|
|
|
|
Corn contracts |
|
|
|
|
Total |
|
$ |
|
|
The company’s derivative instruments contain no credit-risk related contingent features at April 20, 2024. As of April 20, 2024 and December 30, 2023, the company had $
10. OTHER CURRENT AND NON-CURRENT ASSETS
Other current assets consist of (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Prepaid assets |
|
$ |
|
|
$ |
|
||
Service contracts |
|
|
|
|
|
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Prepaid marketing and promotions |
|
|
|
|
|
|
||
Collateral to counterparties for derivative positions |
|
|
|
|
|
|
||
Income taxes receivable |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Other non-current assets consist of (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Unamortized financing fees |
|
$ |
|
|
$ |
|
||
Investments |
|
|
|
|
|
|
||
Investment in unconsolidated affiliate |
|
|
|
|
|
|
||
Deposits |
|
|
|
|
|
|
||
Noncurrent postretirement benefit plan asset |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
19
11. OTHER ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Other accrued liabilities consist of (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Employee compensation |
|
$ |
|
|
$ |
|
||
Employee vacation |
|
|
|
|
|
|
||
VSIP |
|
|
— |
|
|
|
|
|
Employee bonus |
|
|
|
|
|
|
||
Fair value of derivative instruments |
|
|
|
|
|
|
||
Self-insurance reserves |
|
|
|
|
|
|
||
Bank overdraft |
|
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
|
||
Accrued utilities |
|
|
|
|
|
|
||
Accrued taxes |
|
|
|
|
|
|
||
Accrued advertising |
|
|
|
|
|
|
||
Accrued legal settlements |
|
|
|
|
|
|
||
Accrued legal costs |
|
|
|
|
|
|
||
Accrued short-term deferred income |
|
|
|
|
|
|
||
Collateral due to counterparties for derivative positions |
|
|
|
|
|
|
||
Multi-employer pension plan withdrawal liability |
|
|
— |
|
|
|
|
|
Repurchase obligations of distribution rights |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
The repurchase of distribution rights is part of a legal settlement which requires a phased repurchase of approximately
Other long-term liabilities consist of (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Deferred income |
|
$ |
|
|
$ |
|
||
Deferred compensation |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
12. ASSETS HELD FOR SALE
The company may repurchase distribution rights from IDPs for a variety of reasons, including when the company decides to exit a territory or, in some cases, when the IDP elects to terminate its relationship with the company. In most of the distributor agreements, if the company decides to exit a territory or stop using the independent distribution model in a territory, the company is contractually required to purchase the distribution rights from the IDP. In the event an IDP terminates its relationship with the company, the company, although not legally obligated, may repurchase and operate those distribution rights as a company-owned territory. The IDPs may also sell their distribution rights to another person or entity. Distribution rights purchased from IDPs and operated as company-owned territories are recorded on the Condensed Consolidated Balance Sheets in the line item assets held for sale while the company actively seeks another IDP to purchase the distribution rights for the territory. Distribution rights held for sale and operated by the company are sold to IDPs at fair market value pursuant to the terms of a distributor agreement. There are multiple versions of the distributor agreement in place at any given time and the terms of such distributor agreements vary.
20
Additional assets recorded in assets held for sale are for property, plant and equipment. The carrying values of assets held for sale are not amortized and are evaluated for impairment as required at the end of the reporting period.
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Distribution rights |
|
$ |
|
|
$ |
|
||
Property, plant and equipment |
|
|
|
|
|
|
||
Total assets held for sale |
|
$ |
|
|
$ |
|
||
13. DEBT AND OTHER OBLIGATIONS
Long-term debt (net of issuance costs and debt discounts excluding line-of-credit arrangements) (leases are separately discussed in Note 5, Leases) consisted of the following at April 20, 2024 and December 30, 2023, respectively (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Unsecured credit facility |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Accounts receivable repurchase facility |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less current maturities of long-term debt |
|
|
— |
|
|
|
— |
|
Total long-term debt |
|
$ |
|
|
$ |
|
||
Bank overdrafts occur when checks have been issued but have not been presented to the bank for payment. Certain banks allow us to delay funding of issued checks until the checks are presented for payment. The delay in funding results in a temporary source of financing from the bank. The activity related to bank overdrafts is shown as a financing activity in our Condensed Consolidated Statements of Cash Flows. Bank overdrafts are included in other accrued liabilities on our Condensed Consolidated Balance Sheets.
The company also had standby letters of credit (“LOCs”) outstanding of $
2031 Notes, 2026 Notes, Accounts Receivable Repurchase Facility, Accounts Receivable Securitization Facility, and Credit Facility
2031 Notes. On March 9, 2021, the company issued $
21
The face value of the 2031 notes is $
2026 Notes. On September 28, 2016, the company issued $
The face value of the 2026 notes is $
Accounts Receivable Repurchase Facility. On April 14, 2023, the company terminated the accounts receivable securitization facility (the "securitization facility") and entered into a two-year $
The table below presents the borrowings and repayments under the repurchase facility during the sixteen weeks ended April 20, 2024:
|
|
Amount |
|
|
Balance at December 30, 2023 |
|
$ |
|
|
Borrowings |
|
|
|
|
Payments |
|
|
( |
) |
Balance at April 20, 2024 |
|
$ |
|
|
The table below presents the net amount available for working capital and general corporate purposes under the repurchases facility as of April 20, 2024:
|
|
Amount |
|
|
Gross amount available |
|
$ |
|
|
Outstanding |
|
|
( |
) |
Available for withdrawal |
|
$ |
|
|
22
Amounts available for withdrawal under the repurchase facility are determined as the lesser of the total repurchase facility limit and a formula derived amount based on qualifying trade receivables.
|
|
Amount |
|
|
High balance |
|
$ |
|
|
Low balance |
|
$ |
|
|
Financing costs paid at inception of the repurchase facility and when amendments are executed are being amortized over the life of the repurchase facility. The company incurred $
Accounts Receivable Securitization Facility. On July 17, 2013, the company entered into the securitization facility. The company had previously amended the securitization facility 11 times since execution and most recently on February 13, 2023. On April 14, 2023, the company terminated the securitization facility with no outstanding borrowings and recognized a charge of $
Credit Facility. The company is party to an amended and restated credit agreement, dated as of October 24, 2003, with the lenders party thereto and Deutsche Bank Trust Company Americas, as administrative agent, (as amended, restated, modified or supplemented from time to time, the “amended and restated credit agreement”). The company has amended the amended and restated credit agreement eight times since execution, most recently on April 12, 2023 (the “eighth amendment”). Under the amended and restated credit agreement, our credit facility is a
In addition, the credit facility contains a provision that permits the company to request up to $
Financing costs paid at inception of the credit facility and at the time amendments are executed are being amortized over the life of the credit facility. The company incurred additional financing costs of $
Amounts outstanding under the credit facility can vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions, which are part of the company’s overall risk management strategy as discussed in Note 9, Derivative Financial
23
Instruments, of this Form 10-Q.
|
|
Amount |
|
|
Balance at December 30, 2023 |
|
$ |
— |
|
Borrowings |
|
|
|
|
Payments |
|
|
( |
) |
Balance at April 20, 2024 |
|
$ |
— |
|
The table below presents the net amount available under the credit facility as of April 20, 2024:
|
|
Amount |
|
|
Gross amount available |
|
$ |
|
|
Outstanding |
|
|
— |
|
Letters of credit |
|
|
( |
) |
Available for withdrawal |
|
$ |
|
|
The table below presents the highest and lowest outstanding balance under the credit facility during the sixteen weeks ended April 20, 2024:
|
|
Amount |
|
|
High balance |
|
$ |
|
|
Low balance |
|
$ |
— |
|
Aggregate maturities of debt outstanding as of April 20, 2024 are as follows (excluding unamortized debt discount and issuance costs) (amounts in thousands):
Remainder of 2024 |
|
$ |
— |
|
2025 |
|
|
— |
|
2026 |
|
|
|
|
2027 |
|
|
— |
|
2028 |
|
|
— |
|
2029 and thereafter |
|
|
|
|
Total |
|
$ |
|
Debt discount and issuance costs are being amortized straight-line (which approximates the effective method) over the term of the underlying debt outstanding.
|
|
|
|
|
Debt Issuance Costs |
|
|
|
|
|||
|
|
Face Value |
|
|
and Debt Discount |
|
|
Net Carrying Value |
|
|||
2031 notes |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2026 notes |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at December 30, 2023 (amounts in thousands):
|
|
|
|
|
Debt Issuance Costs |
|
|
|
|
|||
|
|
Face Value |
|
|
and Debt Discount |
|
|
Net Carrying Value |
|
|||
2031 notes |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2026 notes |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
24
14. VARIABLE INTEREST ENTITIES
Distribution rights agreement VIE analysis
The incorporated IDPs qualify as variable interest entities ("VIEs"). The IDPs who are formed as sole proprietorships are excluded from the following VIE accounting analysis and discussion.
Incorporated IDPs acquire distribution rights and enter into a contract with the company to sell the company’s products in the IDPs’ defined geographic territory. The incorporated IDPs have the option to finance the acquisition of their distribution rights with the company. They can also pay cash or obtain external financing at the time they acquire the distribution rights. The combination of the company’s loans to the incorporated IDPs and the ongoing distributor arrangements with the incorporated IDPs provide a level of funding to the equity owners of the various incorporated IDPs that would not otherwise be available. As of April 20, 2024 and December 30, 2023, there was $
The company is not considered to be the primary beneficiary of the VIEs because the company does not (i) have the ability to direct the significant activities of the VIEs that would affect their ability to operate their respective businesses and (ii) provide any implicit or explicit guarantees or other financial support to the VIEs, other than the financing described above, for specific return or performance benchmarks. The activities controlled by the incorporated IDPs that are deemed to most significantly impact the ultimate success of the incorporated IDP entities relate to those decisions inherent in operating the distribution business in the territory, including acquiring trucks and trailers, managing fuel costs, employee matters and other strategic decisions. In addition, we do not provide, nor do we intend to provide, financial or other support to the IDP. The IDPs are responsible for the operations of their respective territories.
The company’s maximum contractual exposure to loss for the incorporated IDP relates to the distributor rights note receivable for the portion of the territory the incorporated IDPs financed at the time they acquired the distribution rights. The incorporated IDPs remit payment on their distributor rights note receivable each week during the settlement process of their weekly activity. The company will operate a territory on behalf of an incorporated IDP in situations where the IDP has abandoned its distribution rights. Any remaining balance outstanding on the distribution rights notes receivable is relieved once the distribution rights have been sold on the IDPs behalf. The company’s collateral from the territory distribution rights mitigates the potential losses.
15. COMMITMENTS AND CONTINGENCIES
Self-insurance reserves and other commitments and contingencies
The company records self-insurance reserves as an other accrued liability on our Condensed Consolidated Balance Sheets. The reserves include an estimate of expected settlements on pending claims, defense costs and a provision for claims incurred but not reported. These estimates are based on the company’s assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and current cost trends. The amount of the company’s ultimate liability in respect of these matters may differ materially from these estimates.
In the event the company ceases to utilize the independent distributor model or exits a geographic market, the company is contractually required in some situations to purchase the distribution rights from the independent distributor. The company expects to continue operating under this model and has concluded for the litigation described below that none require loss contingency recognition pursuant to our policy. See Note 2, Summary of Significant Accounting Policies, of our Form 10-K.
The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these laws and regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition, results of operations, cash flows or the competitive position of the company. The company believes it is currently in substantial compliance with all material environmental laws and regulations affecting the company and its properties.
25
Litigation
The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, including personal injury, commercial, contract, environmental, antitrust, product liability, health and safety and employment matters, which are being handled and defended in the ordinary course of business. At this time, the company is defending
Case Name |
|
Case No. |
|
Venue |
|
Date Filed |
|
Status |
Richard et al. v. Flowers Foods, Inc., Flowers Baking Co. of Lafayette, |
|
6:15-cv-02557 |
|
U.S. District Court Western |
|
|
On April 9, 2021, the court decertified the FLSA collective action and denied plaintiffs' motion to certify under Federal Rule of Civil Procedure 23 a state law class of distributors who operated in the state of Louisiana. |
|
Martins v. Flowers Foods, Inc., |
|
8:16-cv-03145 |
|
U.S. District Court Middle |
|
|
|
The company and/or its respective subsidiaries contest the allegations and are vigorously defending all of these lawsuits. Given the stage of the complaints and the claims and issues presented, except for lawsuits disclosed herein that have reached a settlement or agreement in principle, the company cannot reasonably estimate at this time the possible loss or range of loss that may arise from the unresolved lawsuits.
Since the beginning of Fiscal 2023, the company has settled, and the appropriate court has approved, the following collective/class action lawsuits filed by IDPs alleging that such IDPs were misclassified as independent contractors:
Case Name |
|
Case No. |
|
Venue |
|
Date Filed |
|
Comments |
Ludlow et al. v. Flowers Foods, Inc., Flowers Bakeries, LLC and Flowers Finance, LLC |
|
3:18-cv-01190 |
|
U.S. District Court Southern District of California |
|
|
On March 18, 2024, the court approved a settlement to settle this lawsuit and two companion cases – Maciel et al. v. Flowers Foods, Inc. et al., No. 3:20-cv-02059-JO-JLB (U.S. District Court for the Southern District of California) and Maciel v. Flowers Foods, Inc. et al., No. 20-CIV-02959 (Superior Court of San Mateo County, California). The settlement provides for a $ |
26
|
|
|
|
|
|
|
|
California territories that are not part of the settlement, to be approximately $ |
See Note 13, Debt and Other Obligations, for additional information on the company’s commitments.
16. EARNINGS PER SHARE
The following is a reconciliation of net income and weighted average shares for calculating basic and diluted earnings per common share for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively (amounts and shares in thousands, except per share data):
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Net income |
|
$ |
|
|
$ |
|
||
Basic Earnings Per Common Share: |
|
|
|
|
|
|
||
Basic weighted average shares outstanding for common stock |
|
|
|
|
|
|
||
Basic earnings per common share |
|
$ |
|
|
$ |
|
||
Diluted Earnings Per Common Share: |
|
|
|
|
|
|
||
Basic weighted average shares outstanding for common stock |
|
|
|
|
|
|
||
Add: Shares of common stock assumed issued upon exercise of |
|
|
|
|
|
|
||
Diluted weighted average shares outstanding for common stock |
|
|
|
|
|
|
||
Diluted earnings per common share |
|
$ |
|
|
$ |
|
||
There were
17. STOCK-BASED COMPENSATION
On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”). The Omnibus Plan was approved by our shareholders on May 21, 2014 and authorized
The following is a summary of restricted stock and deferred stock outstanding under the Omnibus Plan described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below. The company typically grants awards at the beginning of its fiscal year. Information on grants to employees during the sixteen weeks ended April 20, 2024 is discussed below.
27
Performance-Contingent Restricted Stock Awards
Performance-Contingent Total Shareholder Return Shares (“TSR Shares”)
Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of TSR Shares. The awards vest approximately
Percentile |
|
Payout as % |
|
|
|
|
% |
||
|
|
% |
||
|
|
% |
||
|
|
% |
||
Below |
|
|
% |
|
For performance between the levels described above, the degree of vesting is interpolated on a linear basis.
The TSR Shares vest immediately if the grantee dies or becomes disabled. For awards granted starting in Fiscal 2024, if the grantee retires after attaining at least age 55, provided that the sum of the grantee's age plus years of service is an amount equal to or greater than 65, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. For awards granted prior to Fiscal 2024, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR Shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the TSR Shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability of the company achieving the market condition discussed above.
The following performance-contingent TSR Shares have been granted during the sixteen weeks ended April 20, 2024 under the Omnibus Plan (amounts in thousands, except price data):
Grant Date |
|
Shares |
|
|
Vesting Date |
|
Fair Value |
|
||
12/31/2023 |
|
|
|
|
|
$ |
|
|||
28
Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”)
Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of ROIC Shares. The awards generally vest approximately
Difference of ROIC minus WACC |
|
2024 Award |
Less than |
|
|
|
||
|
||
|
||
|
|
|
Difference of ROIC minus WACC |
|
2023 and 2022 Award |
Less than |
|
|
|
||
|
||
|
For performance between the levels described above, the degree of vesting is interpolated on a linear basis.
The ROIC Shares vest immediately if the grantee dies or becomes disabled. For awards granted starting in Fiscal 2024, if the grantee retires after attaining at least age 55, provided that the sum of the grantee's age plus years of service is an amount equal to or greater than 65, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. For awards granted prior to Fiscal 2024, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of ROIC Shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC Shares will immediately vest at the target level. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the ROIC Shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. Since these awards have a performance condition feature, the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. The 2022 award is being expensed at our current estimated payout percentage of
The following performance-contingent ROIC Shares have been granted under the Omnibus Plan during the sixteen weeks ended April 20, 2024 (amounts in thousands, except price data):
Grant Date |
|
Shares |
|
|
Vesting Date |
|
Fair Value |
|
||
12/31/2023 |
|
|
|
|
|
$ |
|
|||
Performance-Contingent Restricted Stock
The table below presents the TSR modifier share adjustment (a
Award Granted |
|
|
Fiscal Year |
|
|
TSR Modifier |
|
|
ROIC Modifier |
|
|
Dividends at |
|
|
Tax |
|
|
Fair Value at |
|
|||||||
|
2021 |
|
|
|
2024 |
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
29
The company’s performance-contingent restricted stock activity for the sixteen weeks ended April 20, 2024 is presented below (amounts in thousands, except price data):
|
|
Shares |
|
|
Weighted |
|
||
Nonvested shares at December 30, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Grant increase for achieving the ROIC modifier |
|
|
|
|
$ |
|
||
Grant increase for achieving the TSR modifier |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Nonvested shares at April 20, 2024 |
|
|
|
|
$ |
|
||
As of April 20, 2024, there was $
Time-Based Restricted Stock Units
Certain key employees have been granted time-based restricted stock units (“TBRSU Shares”) at the beginning of the year. These awards vest on
The following TBRSU Shares have been granted under the Omnibus Plan during the sixteen weeks ended April 20, 2024 (amounts in thousands, except price data):
Grant Date |
|
Shares Granted |
|
|
Vesting Date |
|
Fair Value |
|
||
12/31/2023 |
|
|
|
|
Equally over |
|
$ |
|
||
2/16/2024 |
|
|
|
|
Equally over |
|
$ |
|
||
The TBRSU Shares activity for the sixteen weeks ended April 20, 2024 is set forth below (amounts in thousands, except price data):
|
|
TBRSU Shares |
|
|
Weighted |
|
|
Weighted |
|
|
Unrecognized |
|
||||
Nonvested shares at December 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Vested |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Forfeitures |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Nonvested shares at April 20, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The table below presents the accumulated dividends on vested shares and the tax (expense)/benefit at vesting of the time-based restricted stock units (amounts in thousands).
Award Granted |
|
|
Fiscal Year |
|
|
Dividends at |
|
|
Tax |
|
|
Fair Value at |
|
|||||
|
2023 |
|
|
|
2024 |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
2022 |
|
|
|
2024 |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
2021 |
|
|
|
2024 |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
30
Deferred Stock
Non-employee directors may convert their annual board retainers into deferred stock equal in value to
Non-employee directors also receive annual grants of deferred stock. This deferred stock vests
The deferred stock activity for the sixteen weeks ended April 20, 2024 is set forth below (amounts in thousands, except price data):
|
|
Shares |
|
|
Weighted |
|
|
Weighted |
|
|
Unrecognized |
|
||||
Nonvested shares at December 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Vested |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Nonvested shares at April 20, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Stock-Based Payments Compensation Expense Summary
The following table summarizes the company’s stock-based compensation expense for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Performance-contingent restricted stock awards |
|
$ |
|
|
$ |
|
||
TBRSU Shares |
|
|
|
|
|
|
||
Deferred and restricted stock |
|
|
|
|
|
|
||
Total stock-based compensation |
|
$ |
|
|
$ |
|
||
18. POSTRETIREMENT PLANS
The following summarizes the company’s Condensed Consolidated Balance Sheets related pension and other postretirement benefit plan accounts at April 20, 2024 compared to accounts at December 30, 2023 (amounts in thousands):
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
||
Noncurrent benefit asset |
|
$ |
|
|
$ |
|
||
Current benefit liability |
|
$ |
|
|
$ |
|
||
Noncurrent benefit liability |
|
$ |
|
|
$ |
|
||
AOCI, net of tax |
|
$ |
( |
) |
|
$ |
( |
) |
Defined Benefit Plans and Nonqualified Plan
The company sponsors two pension plans, the Flowers Foods, Inc. Retirement Plan No. 2, and the Tasty Baking Company Supplemental Executive Retirement Plan (“Tasty SERP”). The Tasty SERP is frozen and has only retirees and beneficiaries remaining in the plan.
31
The company used a measurement date of December 31, 2023 for the defined benefit and postretirement benefit plans described below.
There were
The net periodic pension cost for the company’s plans include the following components (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Service cost |
|
$ |
|
|
$ |
|
||
Interest cost |
|
|
|
|
|
|
||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
Amortization of prior service cost |
|
|
|
|
|
|
||
Amortization of net loss |
|
|
|
|
|
|
||
Total net periodic pension cost |
|
$ |
|
|
$ |
|
||
The components of total net periodic benefit cost other than the service cost are included in the other components of net periodic pension and postretirement benefit plans credit line item on our Condensed Consolidated Statements of Income.
Postretirement Benefit Plan
The company provides certain health care and life insurance benefits for eligible retired employees covered under the active medical plans. The plan incorporates an up-front deductible, coinsurance payments and retiree contributions at various premium levels. Eligibility and maximum period of coverage is based on age and length of service.
The net periodic postretirement expense for the company includes the following components (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Service cost |
|
$ |
|
|
$ |
|
||
Interest cost |
|
|
|
|
|
|
||
Amortization of prior service credit |
|
|
( |
) |
|
|
( |
) |
Amortization of net gain |
|
|
( |
) |
|
|
( |
) |
Total net periodic postretirement credit |
|
$ |
( |
) |
|
$ |
( |
) |
The components of total net periodic postretirement benefits credit other than the service cost are included in the other components of net periodic pension and postretirement benefit plans credit line item on our Condensed Consolidated Statements of Income.
The Flowers Foods, Inc. 401(k) Retirement Savings Plan covers substantially all the company’s employees who have completed certain service requirements. The total cost and employer contributions were as follows (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
||
Total cost and employer contributions |
|
$ |
|
|
$ |
|
||
Multi-employer Pension Plan
On July 19, 2022, the company announced the closure of the Holsum Bakery in Phoenix, Arizona. The bakery produced bread and bun products and ceased production on October 31, 2022. As a result, the union participants of the IAM National Pension Fund (the “IAM Fund”) at the Phoenix bakery will withdraw from the IAM Fund. During the third quarter of Fiscal 2022, the company recorded a liability of $
32
19. INCOME TAXES
The company’s effective tax rate for the sixteen weeks ended April 20, 2024 was
During the sixteen weeks ended April 20, 2024, the company’s activity with respect to its uncertain tax positions and related interest expense accrual was not significant to the Condensed Consolidated Financial Statements. As of April 20, 2024, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.
20. SUBSEQUENT EVENTS
The company has evaluated subsequent events since April 20, 2024, the date of these financial statements. We believe there were no material events or transactions discovered during this evaluation that require recognition or disclosure in the financial statements other than the item discussed below.
On May 9, 2024, the company paid $
33
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of the company as of and for the sixteen weeks ended April 20, 2024 should be read in conjunction with the Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is segregated into four sections, including:
Matters Affecting Comparability
Comparative results from quarter to quarter are impacted by the company's fiscal reporting calendar. Internal financial results and key performance indicators are reported on a weekly basis to ensure the same number of Saturdays and Sundays in comparable months to allow for consistent four-week progression analysis. This structure results in our first quarter consisting of sixteen weeks while the remaining three quarters have twelve weeks (except in cases where there is an extra week every five or six years). Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.
Additionally, detailed below are expense items affecting comparability that will provide greater context while reading this discussion:
|
For the Sixteen Weeks Ended |
|
|
Footnote |
|||||
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Disclosure |
||
|
(Amounts in thousands) |
|
|
|
|||||
Business process improvement costs |
$ |
3,683 |
|
|
$ |
6,219 |
|
|
Note 1 |
Restructuring charges |
|
598 |
|
|
|
4,195 |
|
|
Note 3 |
Restructuring-related implementation costs |
|
1,344 |
|
|
|
— |
|
|
Note 3 |
Impairment of assets |
|
4,000 |
|
|
|
— |
|
|
Note 1 |
Acquisition-related costs |
|
— |
|
|
|
3,223 |
|
|
Note 4 |
|
$ |
9,625 |
|
|
$ |
13,637 |
|
|
|
In February 2023, to improve operational effectiveness, increase profitable sales, and better meet customer requirements, the company announced a restructuring of plant operation responsibilities from the sales function to the supply chain
34
function. As part of that restructuring, we incurred costs for employee termination benefits and other cash charges, which were primarily related to the voluntary employee separation incentive plan (the "VSIP"), RIF, and employee relocation costs. During the first quarter of Fiscal 2023, we recorded VSIP-related charges of $3.9 million and made VSIP-related payments of $0.5 million. Relocation costs incurred and paid during the first quarter of Fiscal 2023 were $0.3 million. These costs are recorded in the restructuring charges line item of the Condensed Consolidated Statements of Income. In the first quarter of Fiscal 2024, we paid the remaining VSIP payments of $1.4 million.
Executive Overview
Business
Flowers is the second-largest producer and marketer of packaged bakery foods in the U.S. Our principal products include breads, buns, rolls, snack items, bagels, English muffins, and tortillas and are sold under a variety of brand names, including Nature’s Own, Dave's Killer Bread ("DKB"), Wonder, Canyon Bakehouse, Tastykake, and Mrs. Freshley’s. Our brands are among the best known in the U.S. baking industry. Many of our brands have a major presence in the product categories in which they compete. We manage our business as one operating segment. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization.
Flowers’ strategic priorities include developing our team, focusing on our brands, prioritizing our margins, and proactively seeking smart, disciplined acquisitions in the grain-based foods category. We believe executing on our strategic priorities will drive future growth and margin expansion and deliver meaningful shareholder value over time allowing us to achieve our long-term financial targets of 1% to 2% sales growth, 4% to 6% EBITDA growth, and 7% to 9% EPS growth.
Optimization initiatives in our procurement, distribution, operations, and administrative functions are projected to save $40 million to $50 million in Fiscal 2024. In the second quarter of Fiscal 2023, we completed the build phase of our ERP upgrade project and began the deployment, which is anticipated to be completed in Fiscal 2026. Additionally, we continue to implement our digital strategy initiatives as discussed further in the “Transformation Strategy Initiatives” section below.
Highlights
35
Impact of the Inflationary Economic Environment and Other Macroeconomic Factors on Our Business
We continue to monitor the impact of a variety of factors on our business, including the inflationary economic environment, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East. Our results through the first quarter of Fiscal 2024 have continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. However, we experienced significant input cost inflation during the previous two fiscal years which has partially offset the improved sales mix. We implemented price increases to mitigate these cost pressures during the first quarter of Fiscal 2023 and midway through the second quarter of Fiscal 2023. Commodity cost inflation began to moderate in the latter half of Fiscal 2023, though it remains above pre-pandemic levels, and we expect that trend to continue throughout the remainder of Fiscal 2024.
Additionally, in the prior year period, capacity constraints, largely for gluten-free production, resulted in lower production volumes and sales. These supply chain and other disruptions could continue to negatively impact production volumes as the global and U.S. supply chain remains uncertain. Although the conflict between Russia and Ukraine and the conflict in the Middle East have not impacted our operations directly, we are closely monitoring the impact of these conflicts on the broader economy, including on the availability and price of commodities used in or for the production of our products. Disruptions in our operations, related to factors including, but not limited to, the procurement of raw materials and packaging items, transport of our products, and available workforce, have negatively impacted, and could continue to negatively impact, our operations, results of operations, cash flows, and liquidity.
Labor shortages and turnover at some bakeries has negatively impacted our results in the current and prior year periods. These and other factors, including, but not limited to, high employment rates and additional government regulations, may continue to adversely affect labor availability and labor costs. These challenges may negatively impact the efficiency of our production lines and our ability to operate at, or near, full capacity, and could result in increased labor costs, including additional overtime to meet demand, and higher wage rates to attract and retain workers. An overall labor shortage, lack of skilled labor, or increased turnover has and could continue to have a negative impact on the company’s operations, results of operations, liquidity, or cash flows.
We believe we have sufficient liquidity to satisfy our cash needs and we continue to execute on our strategic priorities, including our transformation strategy initiatives, as further discussed in the “Liquidity and Capital Resources” section below.
Summary of Operating Results, Cash Flows and Financial Condition
Sales increased 2.8% for the sixteen weeks ended April 20, 2024 compared to the same quarter in the prior year, with price/mix contributing 3.1% and the Papa Pita acquisition contributing 0.5% (cycled on February 17, 2024), partially offset by volume declines of 0.8%. The benefits of inflation-driven pricing actions implemented in the prior year were partially offset by softer volumes. Volume declines were concentrated in our Other sales category, where we exited certain lower margin foodservice business in the second half of Fiscal 2023. Those declines were partially offset by volume increases in Branded Retail sales from execution in the marketplace. Sales of DKB continued to grow on higher volumes and sales of Nature's Own improved on positive price/mix, partially offset by lower volumes.
For the sixteen weeks ended April 20, 2024, income from operations was $101.5 million compared to $93.8 million in the prior year quarter. The improvement resulted from moderating input costs, sales price increases implemented in the prior year, and the prior year acquisition costs, partially offset by increased workforce-related, repairs and maintenance, and depreciation expenses and lower production volumes (excluding the acquisition impact) quarter over quarter.
Net income for the sixteen weeks ended April 20, 2024 was $73.0 million compared to $70.7 million in the prior year period. The increase resulted primarily from the increase in income from operations, as described above, net of increased interest expense and a higher effective tax rate quarter over quarter.
During the sixteen weeks ended April 20, 2024, we generated net cash flows from operations of $105.1 million, invested $33.3 million in capital expenditures, decreased our indebtedness by $5.0 million, and paid $51.1 million in dividends to our shareholders. On April 15, 2024, we amended the two-year $200.0 million accounts receivable repurchase facility (the "repurchase facility") to extend the scheduled facility expiration date to April 14, 2026. During the sixteen weeks ended April 22, 2023, we generated net cash flows from operations of $58.0 million, paid $270.5 million for the Papa Pita acquisition (an additional $4.3 million net working capital purchase price adjustment was paid in the second quarter of Fiscal 2023), invested $34.0 million in capital expenditures, increased our indebtedness $171.0 million, and paid $49.1 million in dividends to our shareholders.
Transformation Strategy Initiatives
In the second half of Fiscal 2020, we launched initiatives to transform our business operations. The primary goals of these initiatives are: (1) enable a more agile business model, empowering the organization by fundamentally redesigning core business
36
processes; (2) embed digital capabilities and transform the way we engage with our consumers, customers and employees; and (3) modernize and simplify our application and technology infrastructure landscape, inclusive of the upgrade of our ERP system.
As discussed above, in February 2023, we announced a restructuring of plant operation responsibilities from the sales function to the supply chain function to improve operational effectiveness, increase profitable sales, and better meet customer requirements. This restructuring has transitioned to digitally enabling these key functions, driving accountability, and improving operational performance and sales execution.
Digital Strategy Initiatives
Our digital strategy initiatives include investments in digital domains of e-commerce, autonomous planning, bakery of the future, digital logistics, and digital sales. In e-commerce, we strive to become a category and market share leader, engage with the consumer through digital platforms and marketplaces, and support our retail partners’ omnichannel strategies. The autonomous planning domain encompasses predictive ordering, cost-to-serve modeling, integrated business planning, and supply and demand forecasting, among other areas. Bakery of the future involves transforming our current manufacturing processes and operational visibility to apply industry-leading digital manufacturing tools, such as real-time performance management and visibility, automation of repetitive processes, standardization of processes and procedures, and sensor-based quality monitoring tools to improve consistency and quality. Digital logistics includes real-time operational visibility, improving our routing efficiency, and automating the freight bill pay audit process. Finally, digital sales is focused on improving our sales execution through improved visibility to in-store activities, streamlined reporting, focusing in-store priorities, and improved collaboration tools across our sales ecosystem.
These digital domains are expected to improve data visibility and efficiencies while automating many of our processes. When fully implemented, we expect this work will further our brand efforts, bring us closer to the consumer, increase operational efficiencies, and deliver higher-quality, real-time insights, which will in turn enable more predictive business decision-making. We transitioned into the implementation phase for the e-commerce, autonomous planning, and bakery of the future domains and selected two bakeries for the pilot program for bakery of the future and autonomous planning in Fiscal 2021. To date, we have rolled out bakery of the future to 35 bakeries, digital logistics to all bakery locations, and autonomous planning and our digital sales tools across our entire sales organization. Costs related to the digital initiatives are fluid and cannot be currently estimated.
ERP Upgrade
Our ERP initiative, which includes upgrading our information system platform, is expected to improve data management and efficiencies while automating many of our processes. We completed the initial planning and road mapping phase of the ERP upgrade at the end of Fiscal 2020. In the first quarter of Fiscal 2021, we transitioned into the design phase and engaged a leading, global consulting firm to assist us in designing and implementing the upgrade of our ERP platform and to serve as the system integrator for the project. We transitioned into the build phase at the beginning of Fiscal 2022 and during the second quarter of Fiscal 2023, we began deploying the ERP upgrade. The deployment is anticipated to be completed in Fiscal 2026. We currently estimate total costs for the upgrade of our ERP system will be approximately $350 million (of which approximately 34% has been or is anticipated to be capitalized). As of April 20, 2024, we have incurred costs related to the project of approximately $223 million.
CRITICAL ACCOUNTING POLICIES:
Our financial statements are prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"). These principles are numerous and complex. Our significant accounting policies are summarized in the Form 10-K. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Refer to the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K.
37
RESULTS OF OPERATIONS:
Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively, are set forth in the table below (dollars in thousands):
|
|
For the Sixteen Weeks Ended |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
Percentage of Sales |
|
|
Increase (Decrease) |
|
||||||||||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Dollars |
|
|
% |
|
||||||
Sales |
|
$ |
1,576,818 |
|
|
$ |
1,534,493 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
$ |
42,325 |
|
|
|
2.8 |
|
Materials, supplies, labor and other production costs |
|
|
797,186 |
|
|
|
800,852 |
|
|
|
50.6 |
|
|
|
52.2 |
|
|
|
(3,666 |
) |
|
|
(0.5 |
) |
Selling, distribution and administrative expenses |
|
|
625,251 |
|
|
|
591,943 |
|
|
|
39.7 |
|
|
|
38.6 |
|
|
|
33,308 |
|
|
|
5.6 |
|
Restructuring charges |
|
|
598 |
|
|
|
4,195 |
|
|
|
0.0 |
|
|
|
0.3 |
|
|
|
(3,597 |
) |
|
NM |
|
|
Impairment of assets |
|
|
4,000 |
|
|
|
— |
|
|
|
0.3 |
|
|
|
— |
|
|
|
4,000 |
|
|
NM |
|
|
Depreciation and amortization |
|
|
48,235 |
|
|
|
43,735 |
|
|
|
3.1 |
|
|
|
2.9 |
|
|
|
4,500 |
|
|
|
10.3 |
|
Income from operations |
|
|
101,548 |
|
|
|
93,768 |
|
|
|
6.4 |
|
|
|
6.1 |
|
|
|
7,780 |
|
|
|
8.3 |
|
Other components of net periodic pension and |
|
|
(158 |
) |
|
|
(83 |
) |
|
|
(0.0 |
) |
|
|
(0.0 |
) |
|
|
(75 |
) |
|
NM |
|
|
Interest expense, net |
|
|
5,611 |
|
|
|
3,886 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
1,725 |
|
|
|
44.4 |
|
Income before income taxes |
|
|
96,095 |
|
|
|
89,965 |
|
|
|
6.1 |
|
|
|
5.9 |
|
|
|
6,130 |
|
|
|
6.8 |
|
Income tax expense |
|
|
23,052 |
|
|
|
19,255 |
|
|
|
1.5 |
|
|
|
1.3 |
|
|
|
3,797 |
|
|
|
19.7 |
|
Net income |
|
$ |
73,043 |
|
|
$ |
70,710 |
|
|
|
4.6 |
|
|
|
4.6 |
|
|
$ |
2,333 |
|
|
|
3.3 |
|
Comprehensive income |
|
$ |
72,954 |
|
|
$ |
68,547 |
|
|
|
4.6 |
|
|
|
4.5 |
|
|
$ |
4,407 |
|
|
|
6.4 |
|
NM - the computation is not meaningful.
Percentages may not add due to rounding.
SIXTEEN WEEKS ENDED APRIL 20, 2024 COMPARED TO SIXTEEN WEEKS ENDED APRIL 22, 2023
Sales (dollars in thousands)
|
|
For the Sixteen Weeks Ended |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
Percentage of Sales |
|
|
Increase (Decrease) |
|
||||||||||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Dollars |
|
|
% |
|
||||||
Branded Retail |
|
$ |
1,014,901 |
|
|
$ |
980,479 |
|
|
|
64.4 |
|
|
|
63.9 |
|
|
$ |
34,422 |
|
|
|
3.5 |
|
Other |
|
|
561,917 |
|
|
|
554,014 |
|
|
|
35.6 |
|
|
|
36.1 |
|
|
|
7,903 |
|
|
|
1.4 |
|
Total |
|
$ |
1,576,818 |
|
|
$ |
1,534,493 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
$ |
42,325 |
|
|
|
2.8 |
|
(The table above presents certain sales by category that have been reclassified from amounts previously reported to conform to the current period presentation.)
The change in sales was generally attributable to the following:
Percentage Point Change in Sales Attributed to: |
|
Branded Retail |
|
|
Other |
|
|
Total |
|
|||
|
|
Favorable (Unfavorable) |
|
|||||||||
Pricing/Mix* |
|
|
2.6 |
|
|
|
3.3 |
|
|
|
3.1 |
|
Volume* |
|
|
0.3 |
|
|
|
(2.2 |
) |
|
|
(0.8 |
) |
Acquisition until cycled on February 17, 2024 |
|
|
0.6 |
|
|
|
0.3 |
|
|
|
0.5 |
|
Total percentage change in sales |
|
|
3.5 |
|
|
|
1.4 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|||
* Computations above are calculated as follows (the Total column is consolidated and is not adding the Branded Retail and Other columns): |
|
|
|
|
|
|
|
|||||
Price/Mix $ = Current year period units x change in price per unit |
|
|||||||||||
Price/Mix % = Price/Mix $ ÷ Prior year period Sales $ |
|
|||||||||||
|
|
|||||||||||
Volume $ = Prior year period price per unit x change in units |
|
|||||||||||
Volume % = Volume $ ÷ Prior year period Sales $ |
|
|||||||||||
The company disaggregates its sales into two categories, Branded Retail and Other. These categories align with our brand-focused strategy to drive above-market growth via innovation and focusing on higher-margin products. The Other category includes store branded retail and non-retail sales (foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing).
38
Sales increased quarter over quarter due to positive pricing actions implemented in the first and second quarters of the prior year to mitigate considerable cost inflation, and, to a lesser extent, the Papa Pita acquisition contribution. These increases were partially offset by volume declines, largely for non-retail items and, to a lesser extent, for branded retail traditional loaf breads. Our promotional activity increased quarter over quarter largely due to inflationary pressure on consumer spending but remained lower than pre-pandemic levels.
Branded Retail Sales
Branded retail sales grew 3.5% quarter over quarter due to favorable price/mix, the acquisition contribution, and volume growth. Price/mix benefitted from inflation-driven pricing actions taken in the second quarter of the prior year and improved mix from greater branded organic product sales. Volumes improved mainly as a result of efficient sales execution in a competitive marketplace. Volume growth in branded organic products, branded buns and rolls, and branded Keto bread was partially offset by softer volumes primarily for branded traditional loaf breads. Our Nature's Own and DKB brands continued to perform well benefiting from inflation-driven price increases and growth from more recently introduced products, such as Nature's Own Keto bread and Hawaiian and Everything bun varieties, all introduced in the second quarter of Fiscal 2023, and DKB snack bars and bites. Nature's Own did experience volume declines quarter over quarter largely due to inflationary pressure on consumer spending.
Other Sales
Sales in the Other category increased 1.4% due to positive price/mix from price increases implemented in the prior year, and the acquisition contribution, partially offset by volume declines. Store branded retail sales increased largely due to volume growth in store branded traditional loaf breads, partially offset by negative price/mix. Non-retail sales increased quarter over quarter due to inflation-driven pricing actions in the prior year and the acquisition contribution, offset mostly by volume declines. Foodservice drove most of the volume decrease as we exited certain lower margin business in the second half of Fiscal 2023. Declines in vending also contributed to lower volumes, partially offset by increased contract manufacturing volume.
We anticipate our Fiscal 2024 sales will be flat to higher than Fiscal 2023 sales due to price increases implemented in Fiscal 2023, however, this benefit could be offset by changes in consumer buying patterns, changes in promotional activity, and the impact of cycling certain exits of lower margin business that occurred in Fiscal 2023.
Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
|
|
For the Sixteen Weeks Ended |
|
|
Increase |
|
||||||
Line Item Component |
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
(Decrease) as a |
|
|||
Ingredients and packaging |
|
|
30.0 |
|
|
|
32.7 |
|
|
|
(2.7 |
) |
Workforce-related costs |
|
|
14.3 |
|
|
|
13.5 |
|
|
|
0.8 |
|
Other |
|
|
6.3 |
|
|
|
6.0 |
|
|
|
0.3 |
|
Total |
|
|
50.6 |
|
|
|
52.2 |
|
|
|
(1.6 |
) |
Materials, supplies, labor and other production costs as a percent of sales decreased quarter over quarter due to the benefit of prior year inflation-driven pricing actions, moderating ingredient and packaging costs, and decreased product returns. Lower production volumes (excluding the acquisition impact) and higher workforce-related and bakery maintenance costs, reflected in the Other line item, partially offset the overall improvement. The decrease in ingredient and packaging costs was mostly attributed to lower pricing for commodities such as flour, fats and oils, and eggs, and packaging items including bags and corrugated containers. Wage inflation, higher employee compensation costs, and lower production volumes resulted in the increase in workforce-related costs as a percent of sales. We expect the impact of lower production volumes (excluding the acquisition impact) and the competitive labor market to continue to negatively impact our operations.
Prices of ingredient and packaging materials fluctuate due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances, and we monitor these markets closely. Ingredient and packaging costs continued to experience volatility in the current quarter and are expected to remain volatile for the remainder of Fiscal 2024. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the cost of these raw materials and significantly affect our earnings.
39
Selling, Distribution and Administrative Expenses (as a percent of sales)
|
|
For the Sixteen Weeks Ended |
|
|
Increase |
|
||||||
Line Item Component |
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
(Decrease) as a |
|
|||
Workforce-related costs |
|
|
11.9 |
|
|
|
10.8 |
|
|
|
1.1 |
|
Distributor distribution fees |
|
|
13.8 |
|
|
|
14.1 |
|
|
|
(0.3 |
) |
Other |
|
|
14.0 |
|
|
|
13.7 |
|
|
|
0.3 |
|
Total |
|
|
39.7 |
|
|
|
38.6 |
|
|
|
1.1 |
|
Workforce-related costs increased as a percent of sales due to higher employee compensation costs quarter over quarter, a shift from distributor distribution fees, and a competitive labor market. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. We anticipate a continued shift from distributor distribution fees to workforce-related costs and territory-related logistics costs, among others, as the company completes a phased repurchase of the California distribution rights and converts to an employee-based model in that state. The repurchases began at the end of the first quarter of Fiscal 2024 and are anticipated to be completed by the end of the first quarter of Fiscal 2025. The increase in the Other line item mostly reflects increased amortization of cloud-based applications, increased rent expense, and lower scrap dough income, partially offset by reduced transportation costs and the prior year quarter acquisition costs. See the “Matters Affecting Comparability” section above for a discussion of the acquisition-related costs.
Restructuring Charges and Impairment of Assets
Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.
Depreciation and Amortization Expense
Depreciation and amortization expense for the first quarter of Fiscal 2024 increased in dollars and as a percent of sales as compared to the prior year period primarily due to ERP assets being placed in service in the second quarter of Fiscal 2023 and, to a lesser extent, the Papa Pita assets acquired midway through the first quarter of Fiscal 2023, partially offset by assets becoming fully depreciated.
Income from Operations
Income from operations for the sixteen weeks ended April 20, 2024 increased as a percent of sales compared to the prior year quarter due primarily to moderating input costs, partially offset by lower production volumes (excluding the acquisition impact), increased selling, distribution, and administrative expenses, and increased depreciation and amortization expense, as discussed above.
Net Interest Expense
Net interest expense increased in dollars and as a percent of sales as compared to the prior year quarter largely due to higher average amounts outstanding under our borrowing arrangements primarily from funding the Papa Pita acquisition in the first quarter of Fiscal 2023 and increased interest rates on our variable rate debt. Decreased interest income also contributed to the overall increase in net interest expense. We anticipate higher net interest expense year over year due to funding payments associated with the legal settlement and related costs, all accrued for in Fiscal 2023, and lower interest income resulting from decreases in distributor notes receivable outstanding.
Income Tax Expense
The effective tax rate for the sixteen weeks ended April 20, 2024 was 24.0% compared to 21.4% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to a decrease in windfall tax benefits on stock-based compensation. For both periods presented, the primary differences in the effective rate and statutory rate were state income taxes and windfall/shortfall tax impacts related to stock-based compensation.
Comprehensive Income
The increase in comprehensive income quarter over quarter resulted primarily from increased net earnings and changes in the fair value of derivatives.
40
LIQUIDITY AND CAPITAL RESOURCES:
Strategy and Update on Impact of the Inflationary Economic Environment and Other Macroeconomic Factors on Our Business
We believe that our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. Furthermore, we strive to maintain a conservative financial position as we believe it allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, and obligated debt repayments. We believe that we currently have access to available funds and financing sources to meet our short and long-term capital requirements. The company’s strategy for use of its excess cash flows includes:
Although there has been no material adverse impact on our results of operations, liquidity or cash flows for the sixteen weeks ended April 20, 2024, volatility in global and U.S. economic environments, as a result of, among other things, the inflationary economic environment, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East, could significantly impact our ability to generate future cash flows and we continue to evaluate these various potential business risks. Potential risks include the possibility of future economic downturns that could shift consumer demand away from our branded retail products to store branded products, supply chain disruptions that have impacted, and could continue to impact, the procurement of raw materials and packaging items, the available workforce, and our ability to implement additional pricing actions to offset inflation.
The macroeconomic-related factors discussed above remain fluid and the future impact on our business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. In the event of a significant reduction in revenues, we would have additional alternatives to maintain liquidity, including the availability on our debt facilities, capital expenditure reductions, adjustments to our capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds. During the first quarter of Fiscal 2024, we amended the two-year $200.0 million trade receivable repurchase facility (the "repurchase facility") to extend the maturity date to April 14, 2026. We believe that we have sufficient liquidity on hand to continue business operations during this time of volatility in the global and U.S. economic environments. As of April 20, 2024, we had total available liquidity of $557.4 million, consisting of cash on hand and the available balances under the senior unsecured revolving credit facility (the "credit facility") and repurchase facility.
Liquidity Discussion for the Sixteen Weeks Ended April 20, 2024 and April 22, 2023
Cash and cash equivalents were $15.8 million at April 20, 2024 and $22.5 million at December 30, 2023. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|
|
|
||||||
Cash Flow Component |
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Change |
|
|||
Cash provided by operating activities |
|
$ |
105,149 |
|
|
$ |
57,952 |
|
|
$ |
47,197 |
|
Cash disbursed for investing activities |
|
|
(35,927 |
) |
|
|
(301,207 |
) |
|
|
265,280 |
|
Cash (disbursed for) provided by financing activities |
|
|
(75,931 |
) |
|
|
105,841 |
|
|
|
(181,772 |
) |
Total change in cash |
|
$ |
(6,709 |
) |
|
$ |
(137,414 |
) |
|
$ |
130,705 |
|
41
Cash Flows Provided by Operating Activities. Net cash provided by operating activities consisted of the following items for non-cash adjustments to net income (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|
|
|
||||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Change |
|
|||
Depreciation and amortization |
|
$ |
48,235 |
|
|
$ |
43,735 |
|
|
$ |
4,500 |
|
Impairment of assets |
|
|
4,000 |
|
|
|
— |
|
|
|
4,000 |
|
Loss reclassified from accumulated other comprehensive |
|
|
886 |
|
|
|
1,407 |
|
|
|
(521 |
) |
Allowances for accounts receivable |
|
|
2,445 |
|
|
|
4,341 |
|
|
|
(1,896 |
) |
Stock-based compensation |
|
|
11,129 |
|
|
|
9,836 |
|
|
|
1,293 |
|
Deferred income taxes |
|
|
6,951 |
|
|
|
1,868 |
|
|
|
5,083 |
|
Other non-cash items |
|
|
4,575 |
|
|
|
1,788 |
|
|
|
2,787 |
|
Net non-cash adjustment to net income |
|
$ |
78,221 |
|
|
$ |
62,975 |
|
|
$ |
15,246 |
|
Net changes in working capital consisted of the following items (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|
|
|
||||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Change |
|
|||
Changes in accounts receivable |
|
$ |
(32,833 |
) |
|
$ |
(18,201 |
) |
|
$ |
(14,632 |
) |
Changes in inventories |
|
|
4,523 |
|
|
|
(14,552 |
) |
|
|
19,075 |
|
Changes in hedging activities |
|
|
(1,202 |
) |
|
|
(2,334 |
) |
|
|
1,132 |
|
Changes in accounts payable |
|
|
(16,499 |
) |
|
|
(9,285 |
) |
|
|
(7,214 |
) |
Changes in other assets and accrued liabilities |
|
|
(104 |
) |
|
|
(31,361 |
) |
|
|
31,257 |
|
Net changes in working capital |
|
$ |
(46,115 |
) |
|
$ |
(75,733 |
) |
|
$ |
29,618 |
|
42
Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|
|
|
||||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Change |
|
|||
Purchases of property, plant, and equipment |
|
$ |
(33,332 |
) |
|
$ |
(33,958 |
) |
|
$ |
626 |
|
Principal payments from notes receivable, net of repurchases of |
|
|
(2,655 |
) |
|
|
3,106 |
|
|
|
(5,761 |
) |
Proceeds from sale of property, plant and equipment |
|
|
60 |
|
|
|
96 |
|
|
|
(36 |
) |
Acquisition of business |
|
|
— |
|
|
|
(270,451 |
) |
|
|
270,451 |
|
Net cash disbursed for investing activities |
|
$ |
(35,927 |
) |
|
$ |
(301,207 |
) |
|
$ |
265,280 |
|
Cash Flows Disbursed for Financing Activities. The table below presents net cash disbursed for financing activities for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively (amounts in thousands):
|
|
For the Sixteen Weeks Ended |
|
|
|
|
||||||
|
|
April 20, 2024 |
|
|
April 22, 2023 |
|
|
Change |
|
|||
Dividends paid, including dividends on stock-based |
|
$ |
(51,106 |
) |
|
$ |
(49,100 |
) |
|
$ |
(2,006 |
) |
Payments for financing fees |
|
|
(150 |
) |
|
|
(218 |
) |
|
|
68 |
|
Stock repurchases |
|
|
(8,879 |
) |
|
|
(10,981 |
) |
|
|
2,102 |
|
Change in bank overdrafts |
|
|
(10,701 |
) |
|
|
(4,261 |
) |
|
|
(6,440 |
) |
Net change in debt obligations |
|
|
(5,000 |
) |
|
|
171,000 |
|
|
|
(176,000 |
) |
Payments on financing leases |
|
|
(95 |
) |
|
|
(599 |
) |
|
|
504 |
|
Net cash (disbursed for) provided by financing activities |
|
$ |
(75,931 |
) |
|
$ |
105,841 |
|
|
$ |
(181,772 |
) |
Date Declared |
|
Record Date |
|
Payment Date |
|
Dividend per |
|
|
Dividends |
|
||
February 16, 2024 |
|
March 1, 2024 |
|
March 15, 2024 |
|
$ |
0.2300 |
|
|
$ |
48,560 |
|
Additionally, we paid dividends of $2.5 million at the time of vesting of certain restricted stock awards. The increase in dividends paid resulted from an increase in the dividend rate compared to the prior year. While there are no requirements to increase our dividend rate, we have shown a recent historical trend to do so. We anticipate funding future dividend payments from cash flows from operations.
43
Capital Structure
Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at April 20, 2024 and December 30, 2023, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 5, Leases, and Note 13, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
|
|
Balance at |
|
|
Fixed or |
|
Final |
|||||
|
|
April 20, 2024 |
|
|
December 30, 2023 |
|
|
Variable Rate |
|
Maturity |
||
Long-term debt and right-of-use lease obligations |
|
(Amounts in thousands) |
|
|
|
|
|
|||||
2031 notes |
|
$ |
494,947 |
|
|
$ |
494,723 |
|
|
Fixed Rate |
|
2031 |
2026 notes |
|
|
398,596 |
|
|
|
398,421 |
|
|
Fixed Rate |
|
2026 |
Unsecured credit facility |
|
|
— |
|
|
|
— |
|
|
Variable Rate |
|
2026 |
Accounts receivable repurchase facility |
|
|
150,000 |
|
|
|
155,000 |
|
|
Variable Rate |
|
2026 |
Right-of-use lease obligations |
|
|
305,190 |
|
|
|
284,501 |
|
|
|
|
2036 |
|
|
|
1,348,733 |
|
|
|
1,332,645 |
|
|
|
|
|
Less: Current maturities of long-term debt and right- |
|
|
(57,763 |
) |
|
|
(47,606 |
) |
|
|
|
|
Long-term debt and right-of-use lease obligations |
|
$ |
1,290,970 |
|
|
$ |
1,285,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total stockholders' equity |
|
|
|
|
|
|
|
|
|
|
||
Total stockholders' equity |
|
$ |
1,375,880 |
|
|
$ |
1,351,782 |
|
|
|
|
|
The repurchase facility and the credit facility are generally used for short-term liquidity needs. On April 15, 2024, we amended the repurchase facility to extend the scheduled facility expiration date to April 14, 2026. See Note 13, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information.
We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to closely monitor our liquidity in light of the continued economic uncertainty in the U.S. and throughout the world due to, among other things, the impact of the inflationary economic environment, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East on our business. There is no current portion payable over the next year for our debt obligations. Amounts available for withdrawal under the repurchase facility are determined as the lesser of the total facility limit and a formula derived amount based on qualifying trade receivables.
The following table details the amounts available under the repurchase facility and the credit facility and the highest and lowest balances outstanding under these arrangements during the sixteen weeks ended April 20, 2024:
|
|
Amount Available |
|
|
For the Sixteen Weeks Ended April 20, 2024 |
|
||||||
|
|
for Withdrawal at |
|
|
Highest |
|
|
Lowest |
|
|||
Facility |
|
April 20, 2024 |
|
|
Balance |
|
|
Balance |
|
|||
|
|
(Amounts in thousands) |
|
|||||||||
Accounts receivable repurchase facility |
|
$ |
50,000 |
|
|
$ |
175,000 |
|
|
$ |
105,000 |
|
Unsecured credit facility (1) |
|
|
491,600 |
|
|
|
17,500 |
|
|
|
— |
|
|
|
$ |
541,600 |
|
|
|
|
|
|
|
||
Amounts outstanding under the credit facility can vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 9, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the sixteen weeks ended April 20, 2024, the company made $37.5 million in revolving borrowings and $37.5 million in payments on revolving borrowings under the credit facility. The amount available under the credit facility is reduced by $8.4 million for letters of credit.
The repurchase facility and the credit facility are variable rate debt and provide us the greatest direct exposure to changing interest rates. In periods of rising interest rates, like we experienced in Fiscal 2023 and Fiscal 2022, the cost of using these facilities becomes more expensive and results in increased interest expense.
44
Restrictive financial covenants for our borrowings can include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The company believes that, given its current cash position, its cash flow from operating activities, and its available credit capacity, it can comply with the current terms of the debt agreements and can meet presently foreseeable financial requirements. As of April 20, 2024, the company was in compliance with all restrictive covenants under our debt agreements.
At April 20, 2024, the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.
Under our share repurchase plan, the company may repurchase its common stock in the open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the sixteen weeks ended April 20, 2024, 388,291 shares, at a cost of $8.9 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through April 20, 2024, 72.4 million shares, at a cost of $742.2 million, have been repurchased.
Accounting Pronouncements Recently Adopted and Not Yet Adopted
See Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding recently adopted accounting pronouncements and accounting pronouncements not yet adopted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forward, futures, swap and option contracts to hedge existing or future exposure to changes in interest rates and commodity prices. The company does not enter into these derivative financial instruments for trading or speculative purposes. If actual market conditions are less favorable than those anticipated, raw material prices could increase significantly, adversely affecting the margins from the sale of our products.
Commodity Price Risk
The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of April 20, 2024, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $(1.7) million, based on quoted market prices. All of this amount relates to instruments that will be utilized in Fiscal 2024 except for an immaterial amount that will be utilized in Fiscal 2025.
A sensitivity analysis has been prepared to quantify the company’s potential exposure to commodity price risk with respect to the derivative portfolio. Based on the company’s derivative portfolio as of April 20, 2024, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $2.2 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to ensure that material information relating to the company, which is required to be timely disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is accumulated and communicated to management in a timely fashion and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer and Chief Accounting Officer ("CFO and CAO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the CEO and the CFO and CAO concluded that the company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the company files or submits to the SEC under the Exchange Act.
45
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended April 20, 2024 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
46
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of all material pending legal proceedings, see Note 15, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
ITEM 1A. RISK FACTORS
Refer to Part I, Item 1A., Risk Factors, in the Form 10-K for information regarding factors that could affect the company’s results of operations, financial condition and liquidity. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse ultimate impact on our business, financial condition, or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
As originally announced on December 19, 2002, and subsequently increased, our Board of Directors had approved a plan that authorized share repurchases of up to 74.6 million shares. On May 26, 2022, the company announced that the Board of Directors increased the company's share repurchase authorization by 20.0 million shares. Under the share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions or under an accelerated share repurchase program at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors.
During the sixteen weeks ended April 20, 2024, 388,291 million shares, at a cost of $8.9 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through April 20, 2024, 72.4 million shares, at a cost of $742.2 million, have been repurchased. The company currently has 22.1 million shares remaining available for repurchase under the share repurchase plan. The table below sets forth the common stock repurchased by the company during the sixteen weeks ended April 20, 2024 (amounts in thousands, except share price data):
Period |
|
Total Number |
|
|
Weighted |
|
|
Total Number of |
|
|
Maximum Number |
|
||||
December 31, 2023 — January 27, 2024 |
|
|
78 |
|
* |
$ |
22.80 |
|
|
|
78 |
|
* |
|
22,451 |
|
January 28, 2024 — February 24, 2024 |
|
|
310 |
|
* |
$ |
22.88 |
|
|
|
310 |
|
* |
|
22,141 |
|
February 25, 2024 — March 23, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
22,141 |
|
March 24, 2024 — April 20, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
22,141 |
|
Total |
|
|
388 |
|
|
$ |
22.87 |
|
|
|
388 |
|
|
|
|
|
* These shares were acquired to satisfy employees' tax withholding and payment obligations in connection with the vesting of restricted stock awards, which are repurchased by the company based on the fair market value on the vesting date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None of the company's
47
ITEM 6. EXHIBITS
The following documents are filed as exhibits hereto:
Exhibit |
|
|
|
|
No |
|
|
|
Name of Exhibit |
3.1 |
|
— |
|
|
3.2 |
|
— |
|
|
10.1 |
* |
— |
|
|
31.1 |
* |
— |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
* |
— |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 |
* |
— |
|
|
101.INS |
* |
— |
|
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
* |
— |
|
Inline XBRL Taxonomy Extension Schema Linkbase. |
101.CAL |
* |
— |
|
Inline XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF |
* |
— |
|
Inline XBRL Taxonomy Extension Definition Linkbase. |
101.LAB |
* |
— |
|
Inline XBRL Taxonomy Extension Label Linkbase. |
101.PRE |
* |
— |
|
Inline XBRL Taxonomy Extension Presentation Linkbase. |
104 |
|
— |
|
The cover page from Flowers Foods' Quarterly Report on Form 10-Q for the quarter ended April 20, 2024 has been formatted in Inline XBRL. |
* Filed herewith
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
FLOWERS FOODS, INC. |
||
|
|
|
|
|
By: |
|
/s/ A. RYALS MCMULLIAN |
|
Name: |
|
A. Ryals McMullian |
|
Title: |
|
Chairman and Chief Executive Officer |
|
By: |
|
/s/ R. STEVE KINSEY |
|
Name: |
|
R. Steve Kinsey |
|
Title: |
|
Chief Financial Officer and Chief Accounting Officer |
Date: May 16, 2024
49