FLOWERS FOODS, INC. The following discussion of the financial condition and results of operations of the company as of and for the sixteen weeks endedApril 18, 2020 should be read in conjunction with the Form 10-K and Part II., Item 1A., Risk Factors, of this Form 10-Q.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is segregated into four sections, including:
• Executive overview - provides a summary of our business, operating
performance and cash flows, and strategic initiatives.
• Critical accounting estimates - describes the accounting areas where
management makes critical estimates to report our financial condition and
results of operations. There have been no changes to this section from the
Form 10-K.
• Results of operations - an analysis of the company's consolidated results
of operations for the comparative period presented in our Condensed
Consolidated Financial Statements.
• Liquidity and capital resources - an analysis of cash flow, contractual
obligations, and certain other matters affecting the company's financial
position.
Matters Affecting Comparability
• COVID-19 - On
novel strain of coronavirus (COVID-19) a global pandemic and recommended
containment and mitigation measures worldwide, which has led to adverse
impacts on
drastic shift in consumer buying patterns as a result of the recent
COVID-19 pandemic, we have experienced significant demand for our retail
products resulting in significant sales increases and substantial growth
in income from operations for the first quarter of fiscal 2020 compared to
the prior year quarter. For additional details on the impact of the
COVID-19 pandemic to our business operations and results of operations for
the first quarter of fiscal 2020, see the "Executive Overview - Impact of
COVID-19 on Our Business," "Results of Operations" and "Liquidity and
Capital Resources" sections below.
• Conversion of our
During the first quarter of fiscal 2020, we began the conversion our
Lynchburg, Virginia bakery to an all-organic production facility. Uponcompletion, the converted facility is expected to increase production
capacity of our
to better serve east coast markets with fresher product and reduce
distribution costs. We incurred start-up costs related to the conversion
of approximately
labor and other production costs in our Condensed Consolidated Statements
of Income (Loss) for the sixteen weeks ended
incurring additional start-up costs of approximately
million and expect the bakery will resume production in the third quarter
of fiscal 2020.
• Canyon acquisition - On
Canyon, a leading gluten-free bread baker. Prior to the acquisition,
Canyon's products were distributed frozen through natural, specialty,
grocery, and mass retailers around the country and we expect to continue
this distribution model in the future. In addition to frozen distribution,
we began distributing Canyon branded products fresh via our
direct-store-delivery ("DSD") distribution system during the first quarter
of fiscal 2019. A contingent consideration payment of
paid during the first quarter of fiscal 2020 to the sellers based on the
achievement of certain sales objectives by the Canyon business in fiscal
2019.
36
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Additionally, detailed below are expense (recovery) items affecting
comparability that will provide additional context while reading this
discussion:
For the Sixteen Weeks Ended Footnote
April 18, 2020 April 20, 2019 Disclosure
(Amounts in thousands)Project Centennial consulting costs $ 3,392 $
- Note 3
Restructuring and related impairment charges - 718 Note 3
Recovery on inferior ingredients - (413 ) Note 1
Canyon acquisition costs - 22
Legal settlements 3,220 150 Note 14
Executive retirement agreement - 1,331
Pension plan settlement and curtailment loss 116,207 - Note 17
Other pension plan termination costs 133 -
$ 122,952 $ 1,808
• Project Centennial consulting costs - During the second quarter of fiscal
2016, we launched Project Centennial, an enterprise-wide business and
operational review. Key milestones and initiatives of this multi-year
project are outlined in the "Executive Overview" section below. Consulting
costs associated with the project during the sixteen weeks ended April
18, 2020 were
and administrative expenses line item of the Condensed Consolidated
Statements of Income (Loss). We currently expect these costs to be
approximately
2020. There were no consulting costs associated with the project during
the sixteen weeks ended
• Restructuring and related impairment charges - The following table details
restructuring charges recorded during the sixteen weeks ended April
18, 2020 and April 20, 2019 (amounts in thousands):
For the Sixteen Weeks Ended
April 18, 2020 April 20, 2019
Employee termination benefits and other cash charges $ - $ 188
Property, plant and equipment impairments - 530
Total restructuring and related impairment charges $ - $ 718
During the first quarter of fiscal 2019, we recorded restructuring charges for
asset impairments related to manufacturing line closures and employee relocation
costs. We did not incur any restructuring charges during the first quarter of
fiscal 2020. We continue to explore additional opportunities to streamline our
core operations, but as of April 18, 2020 we are unable to estimate the expected
costs to be incurred for this initiative.
• Recovery on inferior ingredients - Beginning in the second quarter of
fiscal 2018 and continuing through the fourth quarter of fiscal 2019, we
recognized identifiable and measurable costs associated with receiving
inferior ingredients. During the sixteen weeks ended
recognized
previously incurred costs in the amount of
of $0.4 million . No losses or recoveries of inferior ingredients were
incurred or received during the sixteen weeks ended April 18, 2020 . We
continue to seek recovery of all losses through appropriate means.
• Legal settlements - During the sixteen weeks ended
litigation, including plaintiffs' attorney fees, in the aggregate amount
of $3.2 million and $0.15 million , respectively. These amounts are
reflected in the selling, distribution and administrative expenses line
item of the Condensed Consolidated Statements of Income (Loss). Thesettlements recorded in the current quarter were paid early in the second
quarter of fiscal 2020.
• Executive retirement agreement - On
president and chief executive officer of the company and a member of the
Board of Directors, notified the company he would be retiring from these
positions effective
retirement, the company and
and general release, and as part of the agreement,
of fiscal 2019 in the selling, distribution and administrative expenses
line item of the Condensed Consolidated Statements of Income (Loss).
37
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• Pension plan termination - On
approved a resolution to terminate the
No. 1 ("Plan No. 1"), effective
quarter of fiscal 2019, the company offered Plan No. 1 participants the
option to receive an annuity purchased from an insurance carrier or a lump
sum cash payment. During the first quarter of fiscal 2020, the company
transferred
assets were available for the lump sum payments and annuity purchases. Of
this amount,
loan to Plan No. 1 which has been fully reserved for and is expected to be
unwound by the end of the third quarter of fiscal 2020. Additionally, the
company completed the transfer of all lump sum payments and transferred
all remaining benefit obligations related to Plan No. 1 to a highly rated
insurance company in order to purchase a group annuity contract which
began paying pension plan benefits
settlement charge of
million, and an additional
termination costs in our Condensed Consolidated Statements of Income
(Loss) during the first quarter of fiscal 2020. As of
No. 1 has been terminated and reflects no unfunded liability. No
settlement charges were recorded in the first quarter of fiscal 2019.
Executive Overview
Business
Flowers is the second-largest producer and marketer of packaged bakery foods in
the U.S. We operate in the highly competitive fresh bakery market and our
product offerings include fresh breads, buns, rolls, snack cakes and tortillas,
as well as frozen breads and rolls. We are focused on opportunities for growth
within the baked foods category and seek to have our products available wherever
bakery foods are consumed or sold - whether in homes, restaurants, fast food
outlets, institutions, supermarkets, convenience stores, or vending machines. We
manage our business as one operating segment.
Highlights
• Major brands include Nature's Own, DKB, Wonder,
Freshley's, and Tastykake.
• Nature's Own, including Whitewheat, is the best-selling loaf bread in the
U.S. , DKB is the #1 selling organic brand in theU.S. , andCanyon Bakehouse is the #1 selling gluten-free bread brand in theU.S. (Source: IRI Total US MultiOutlet+C-Store L52 Weeks Ending 4/19/20)
• Retail sales comprised 80.2% of total first quarter fiscal 2020 sales and
non-retail and other sales comprised 19.8%.
• We operate 46 bakeries, which produce fresh and frozen breads and rolls,
as well as snack cakes and tortillas.
• We utilize a DSD distribution model for fresh bakery foods, whereby
product is sold primarily by a network of independent distributors to
retail and foodservice customers with access to over 85% of the U.S.
population.
• Nationwide distribution of certain fresh snack cakes and frozen breads and
rolls via contract carriers.
Impact of COVID-19 on Our Business
The recent COVID-19 pandemic has significantly impacted our business operations and results of operations for the first quarter of fiscal 2020, as further described under "Results of Operations" and "Liquidity and Capital Resources" below. The resulting drastic changes in consumer buying patterns led to an overwhelming increase in demand for our retail products and substantial growth in income from operations. Sales through our non-retail category, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing, declined significantly due to the pandemic, particularly beginning inMarch 2020 . The volume losses in the non-retail category were more than offset by the volume gains in the branded retail category during the quarter. We estimate the financial impact of the COVID-19 pandemic on our first quarter fiscal 2020 results of operations to be as follows:
• Contributed approximately 6.5% to 7.5% to the overall sales increase of
6.8% for the first quarter fiscal 2020.
• Positively impacted first quarter fiscal 2020 net loss per diluted share
of $0.03 by approximately $0.09 to $0.10 .
38
-------------------------------------------------------------------------------- Additionally, in recognition and support of our frontline workers, we paid$6.2 million in one-time bonuses to eligible hourly and non-exempt employees, leased labor, and contract workers during the first quarter of fiscal 2020. These appreciation bonuses are in addition to the company's annual bonus program, in which all Flowers employees participate. In compliance with newly issued governmental rules and regulations, we have also implemented emergency COVID-19 leave and short-term disability policies for all employees. OnApril 14, 2020 , we temporarily ceased production at ourTucker, Georgia bakery due to an increase in the number of confirmed COVID-19 cases at the bakery and an increase in workers self-quarantining. The bakery primarily produces frozen, non-retail specialty and foodservice bread and bun items. Furloughed production workers continued to be compensated during the shut-down and production resumed at the bakery onApril 27, 2020 . The total costs for the shutdown were$0.5 million , of which$0.3 million is recorded during the first quarter of fiscal 2020 and another$0.2 million will be recorded during the second quarter of fiscal 2020. While the other bakeries were able to assist with meeting production needs, the closure of several of our bakeries across the country at one time or in close succession could negatively impact our ability to meet our production requirements. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows, will be impacted by decreases in foodservice and other non-retail outlets sales. Foodservice sales are likely to remain under pressure until the restaurant industry returns to more normal operations. The timing and speed of the foodservice industry recovery could significantly impact our future results. We are actively monitoring the collectability of our trade accounts receivables, including our foodservice customers in particular, and recorded additional bad debt allowances of$2.7 million in the first quarter of fiscal 2020. Future losses may be realized if more customers are forced into financial distress or bankruptcy and cannot pay us or their other suppliers on a timely basis or at all. We have been actively monitoring the global outbreak and spread of COVID-19 and taking steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We are focused on navigating these recent challenges presented by the COVID-19 global pandemic through the implementation of additional procedures at each of our locations to comply withU.S. Centers for Disease Control and Prevention (CDC ) suggestions. This includes, but is not limited to, monitoring the symptoms of employees as shifts start, using personal protective equipment, maintaining (where possible) six feet of distancing, and other considerations. Certain non-production employees have also been working remotely to mitigate contact between personnel. A non-essential travel and visitors ban was also implemented as a way to reduce potential exposure. We are considering the options available to us under the Families First Coronavirus Response Act ("FFCRA Act") and Coronavirus Aid, Relief, and Economic Security Act ("CARES ACT") and, as of the beginning of the second quarter of fiscal 2020, have begun taking advantage of deferrals of certain tax payments in accordance with the CARES Act. In addition, we continue to evaluate the impact of certain tax credits that are available under the FFCRA Act. Although we anticipate both sales and income from operations to normalize over time, we cannot currently estimate when this will occur. The evolving COVID-19 pandemic could continue to impact our results of operations and liquidity; the operations of our suppliers, vendors, and customers; and our employees as a result of quarantines, facility closures, and travel and logistics restrictions. See "The extent to which the outbreak of the novel strain of coronavirus (COVID-19) and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict." in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
Summary of Operating Results, Cash Flows and Financial Condition
Sales increased 6.8% for the sixteen weeks endedApril 18, 2020 compared to the same period in the prior year primarily due to a significant rise in demand for our retail products due to the COVID-19 pandemic causing a positive shift in mix to branded retail products. Non-retail sales declined significantly due to considerable volume decreases caused by the pandemic, but these volume declines were more than offset by the significant volume increases for our branded retail products discussed above. Income from operations for the sixteen weeks endedApril 18, 2020 increased$21.3 million , or 23.5%, to$111.9 million as compared to the same period in the prior year. The increase was primarily due to significant sales increases caused by the COVID-19 pandemic. Most of the sales increase was attributable to positive price/mix. Start-up costs incurred in the current quarter for the conversion of theLynchburg, Virginia bakery to an organic production facility combined with increased workforce-related costs, including appreciation bonuses paid to frontline workers, bad debt expense, legal settlements and consulting costs partially offset the overall increase to income from operations. For the sixteen weeks endedApril 18, 2020 , we recorded a net loss of$5.8 million compared to net income of$65.9 million in the prior year quarter, a decrease of$71.6 million . The current quarter net loss resulted from recognizing non-cash pension plan termination costs of$116.2 million in connection with the termination of Plan No. 1, mostly offset by the significant growth in sales and income from operations as a result of the COVID-19 pandemic. 39 -------------------------------------------------------------------------------- During the sixteen weeks endedApril 18, 2020 , we generated net cash flows from operations of$106.2 million and invested$21.7 million in capital expenditures. Additionally, we paid$40.3 million in dividends to our shareholders and increased our total indebtedness by$203.8 million . During the current quarter, we made a significant draw on our credit facility. Although we do not have any presently anticipated need for this additional liquidity, we decided to draw this additional amount to ensure future liquidity given the recent significant impact on global financial markets and economies as a result of the COVID-19 outbreak. During the sixteen weeks endedApril 20, 2019 , we generated net cash flows from operations of$96.2 million , invested$20.8 million in capital expenditures, paid$39.3 million in dividends to our shareholders and reduced our total indebtedness by$40.5 million .
Project Centennial - Strategic Initiatives and Update on Progress
In June of 2016, the company launched Project Centennial, an enterprise-wide business and operational review to evaluate opportunities to streamline our operations, drive efficiencies, and invest in strategic capabilities that we believe will strengthen our competitive position and help us achieve our long-term objectives to build value for our shareholders. Since 2017, the company has been executing on the following strategic priorities:
• Reinvigorate core business. Focus on national brands, streamline the
product assortment, align brands to consumers, invest in brand growth and
innovation, and support independent distributor partners ("IDPs").
• Reduce costs to fuel growth. Prioritize margins, simplify and streamline
our operating model, optimize product portfolio and supply chain network,
and better leverage our national footprint.
• Capitalize on adjacencies. Make smart acquisitions in the baked foods
category in growing bakery segments and underdeveloped geographic areas.
• Invest in capabilities and growth. Develop the team by adding critical
capabilities to build brands, manage costs, and deliver insights.
We have completed this initial phase of Project Centennial and are now in the
second phase, which is focused on portfolio and supply chain optimization. Our
focus is on targeting the optimal portfolio to promote margin accretive growth
and tailoring the network and resources required to support and grow that
portfolio going forward.
By delivering on these strategic imperatives, the company expects to deliver on
its stated long-term goals of sales growth in the range of 2% to 4% and EBITDA
margins in the range of 12% to 14%. The company defines EBITDA as earnings
before interest, taxes, depreciation and amortization.
Since transitioning to these strategies in fiscal 2017, the company has:
• Established two business units - Fresh Packaged Bread and
Snacking/Specialty - and refined the organizational structure to better
align operating functions.
• Streamlined our brand assortment in key retail categories.
• Augmented sales growth with new product introductions of Nature's Own
Perfectly Crafted breads, a line of artisan-inspired, thick-sliced bakery
breads, and DKB bagels and English muffins.
• Conducted a foundational consumer research study to inform and accelerate
product innovation and engaged a leading consumer-focused advertising
agency.
• Conducted marketing campaigns for Nature's Own and Wonder to increase
brand awareness.
• Developed a strategic pricing initiative to address inflationary headwinds.
• Added a high-speed production line to bakeries in
and closed inefficient bakeries in
• Added organic production in the Northeast.
• Implemented working capital policies that improved the cash conversion
cycle and generated incremental cash flow.
• Activated a trade promotion management system to increase promotional
effectiveness, enhance price realizations, and improve profitability.
•
producer of gluten-free bakery foods in the
• Updated its incentive compensation framework to continue recruitment and
development of our executive team.
• Realigned key leadership roles and appointed a chief operating officer
("COO") to enhance execution and accountability.
40
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• Hired a chief marketing officer.
• Hired a corporate development officer to concentrate on strategic options,
including targeted merger and acquisition activities.
• Completed a voluntary employee separation incentive plan (the "VSIP") as
part of its effort to restructure and streamline operations.
In fiscal 2020 and beyond, Flowers' priorities are to continue proactively pursuing a lower cost operating model, executing against its stronger brand architecture, and evaluating strategic investments to complement its core business. Specifically, in fiscal 2020, the company is converting itsLynchburg, Virginia facility to organic production to support growing sales of organic products and lower transportation costs. In the second half of fiscal 2020, the company is targeting savings in the range of$10 million to$20 million driven by ongoing optimization initiatives in its procurement, distribution, operations, and administrative functions. Currently, the company does not expect COVID-19 to materially impact the conversion of theLynchburg bakery or the foregoing optimization initiatives. Benefits from these initiatives are expected to drive sales growth and EBITDA margins to achieve our stated long-term goals discussed above. CRITICAL ACCOUNTING POLICIES: Our financial statements are prepared in accordance with 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. Please see 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 except as disclosed in Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q, which details recently adopted accounting pronouncements and accounting pronouncements not yet adopted.
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 endedApril 18, 2020 andApril 20, 2019 , respectively, are set forth below (dollars in thousands): For the Sixteen Weeks Ended Percentage of Sales Increase (Decrease)April 18, 2020 April 20, 2019
$ 1,349,444 $ 1,263,895 100.0 100.0$ 85,549 6.8 Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) 670,873 652,141 49.7 51.6 18,732 2.9 Selling, distribution and administrative expenses 522,035 476,049 38.7 37.7 45,986 9.7 Restructuring and related impairment charges - 718 - 0.1 (718 ) NM Recovery on inferior ingredients - (413 ) - (0.0 ) 413 NM Depreciation and amortization 44,663 44,819 3.3 3.5 (156 ) (0.3 ) Income from operations 111,873 90,581 8.3 7.2 21,292 23.5 Other components of net periodic pension and postretirement benefits expense 143 692 0.0 0.1 (549 ) NM Pension plan settlement and curtailment loss 116,207 - 8.6 - 116,207 NM Interest expense, net 3,314 3,824 0.2 0.3 (510 ) (13.3 ) Income tax (benefit) expense (2,019 ) 20,199 (0.1 ) 1.6 (22,218 ) (110.0 ) Net (loss) income $ (5,772 ) $ 65,866 (0.4 ) 5.2$ (71,638 ) (108.8 ) Comprehensive income $ 94,356 $ 55,743 7.0 4.4$ 38,613 69.3 NM Not meaningful.
Percentages may not add due to rounding.
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SIXTEEN WEEKS ENDED
Sales (dollars in thousands)
For the Sixteen Weeks Ended
Percentage of Sales Increase (Decrease)
April 18, 2020 April 20, 2019 April 18, 2020 April 20, 2019 Dollars %
Branded retail $ 891,449 $ 757,685 66.1 60.0 $ 133,764 17.7
Store branded retail 190,181 191,062 14.1 15.1 (881 ) (0.5 )
Non-retail and other 267,814 315,148 19.8 24.9 (47,334 ) (15.0 )
Total $ 1,349,444 $ 1,263,895 100.0 100.0 $ 85,549 6.8
(The table above presents certain sales by category that have been reclassified from amounts previously reported.)
The change in sales was generally attributable to the following:
Percentage Point Change in Sales Attributed to: Pricing/mix 6.2 Volume 0.6 Total percentage change in sales 6.8 Sales increases quarter over quarter were primarily due to a significant rise in demand for our branded retail products caused by the COVID-19 pandemic which resulted in a positive shift in mix from non-retail sales to branded retail sales. A reduction in product returns also contributed to the sales increase. The volume gains in the branded retail sales category were mostly offset by volume declines in the non-retail and other sales category, most notably, foodservice sales. The pandemic has disrupted business for most of our non-retail customers. Most of these customers have had to close or greatly reduce their operations which has negatively impacted our non-retail sales. We expect these trends to continue while the pandemic is ongoing, although we expect the sales growth to moderate as panic-buying and stock-up shopping patterns have begun to subside. Branded retail sales increased significantly due to the COVID-19 pandemic as discussed above. In order to quickly meet heightened customer and consumer demand for traditional branded loaf breads and buns, we streamlined our product offerings and focused production on certain high-demand items. Additionally, DKB organic loaf breads and breakfast items and Canyon Bakehouse gluten-free products continued to contribute to the overall growth in branded retail sales. The modest decrease in store branded retail sales resulted from lost store branded breakfast bread business and volume declines for store branded cake, mostly offset by increased sales of gluten-free store branded items produced by Canyon. As discussed above, significant volume losses drove the decrease in non-retail and other sales with foodservice customers experiencing the greatest declines.
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
April 18, 2020 April 20, 2019 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Ingredients and packaging 27.1 29.2 (2.1 )
Workforce-related costs 15.0 14.9 0.1
Other 7.6 7.5 0.1
Total 49.7 51.6 (1.9 )
Costs were considerably lower quarter over quarter as a percent of sales as the
COVID-19 pandemic resulted in positive shifts in mix from non-retail products to
branded retail products. Partially offsetting the lower costs were $4.1 million
of appreciation bonuses paid to frontline workers and $1.7 million of start-up
costs incurred with the ongoing conversion of our Lynchburg, Virginia plant to
an organic bakery. We currently anticipate the conversion to be complete during
the third quarter of fiscal 2020. Ingredient and packaging costs were much lower
as percent of sales due to the positive shift in mix and a reduction in product
returns, both discussed above, combined with lower prices for organic
ingredients, non-organic flour, and eggs, partially offset by higher yeast
prices.
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--------------------------------------------------------------------------------Selling, Distribution and Administrative Expenses (as a percent of sales)
For the Sixteen Weeks Ended Increase
April 18, 2020 April 20, 2019 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Workforce-related costs 11.5 11.2 0.3
Distributor distribution fees 15.5 14.8 0.7
Other 11.7 11.7 -
Total 38.7 37.7 1.0
Workforce-related costs were higher as a percent of sales quarter over quarter
due to $2.1 million of appreciation bonuses paid to frontline workers as a
result of the COVID-19 pandemic and higher employee incentive costs. Partially
offsetting the increase in workforce-related costs, was $1.3 million of expense
recorded in the prior year quarter for the executive retirement agreement which
is discussed in the "Matters Affecting Comparability" section above. Distributor
distribution fees increased considerably as a percent of sales due to the shift
in product mix, which resulted in a larger portion of our sales being made
through IDPs. Reduced transportation and travel and entertainment costs were
offset by higher consulting costs associated with Project Centennial, higher
legal costs, and increased bad debt expense, all of which are included in the
Other line item in the table above. Project Centennial consulting costs were
$3.4 million in the current quarter and we currently expect these costs to be
approximately $2.0 million to $3.0 million for the remainder of fiscal
2020. Legal settlements recorded in the current quarter were $3.2 million as
compared to $0.15 million in the prior year quarter. See Note 14, Commitments
and Contingencies, of Notes to Condensed Consolidated Financial Statements of
this Form 10-Q for additional information regarding legal settlements. In light
of the current economic uncertainty for certain of our foodservice customers
caused by the ongoing pandemic, we have recorded additional bad debt allowances
of $2.7 million in the first quarter of fiscal 2020.
Restructuring and Related Impairment Charges and Recovery on Inferior Ingredients
Refer to the discussion in the "Matters Affecting Comparability" section above regarding these items.
Depreciation and Amortization Expense
Depreciation and amortization expense was relatively consistent quarter over quarter.
Income from Operations Income from operations increased substantially as a percent of sales for the sixteen weeks endedApril 18, 2020 compared to the sixteen weeks endedApril 20, 2019 largely due to significant sales increases caused by the COVID-19 pandemic. Most of the sales increase was attributable to positive price/mix. Start-up costs incurred in the current quarter for the conversion of theLynchburg, Virginia bakery to an organic production facility, combined with increased workforce-related costs, including appreciation bonuses paid to frontline workers, and bad debt expense, legal settlements and consulting costs partially offset the overall increase to income from operations.
Pension Plan Settlement and Curtailment Loss
We recognized$116.2 million of non-cash pension plan termination charges in the first quarter of fiscal 2020 comprised of a settlement charge of$111.9 million and a curtailment loss of$4.3 million as discussed in the "Matter Affecting Comparability" section above.
Net Interest Expense
Net interest expense for the current quarter was relatively consistent with the prior year quarter as a percent of sales.
Income Tax (Benefit) Expense
The effective tax rate for the sixteen weeks endedApril 18, 2020 was 25.9% compared to 23.5% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to the relative impact of windfalls related to the vesting of employee stock compensation awards. Discrete tax benefits in the current quarter resulted in an increase to the tax rate due to negative earnings before tax. Conversely, higher discrete tax benefits in the prior year quarter reduced the effective tax rate on earnings before income tax. The primary differences in the effective rate and the statutory rate were state income taxes and windfalls on stock-based compensation. The CARES ACT did not have a material impact on the effective tax rate for the first quarter of fiscal 2020 and there is no anticipated material impact on the effective tax rate in future periods. As discussed above, the company is deferring certain tax payments to future periods under the CARES Act. 43 --------------------------------------------------------------------------------
Comprehensive Income
The increase in comprehensive income quarter over quarter resulted primarily from recognizing the pension settlement and curtailment loss in earnings in conjunction with the pension plan termination, net of the decrease in net earnings.
LIQUIDITY AND CAPITAL RESOURCES:
Strategy
We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. The COVID-19 pandemic may continue to significantly impact the economy and our ability to generate future cash flows. In particular, if the foodservice industry is slow to recover, our future cash flows could be negatively impacted. Additionally, we strive to maintain a conservative financial position. We believe having a conservative financial position 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, pension contributions and obligated debt repayments. We believe 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: • implementing our strategies under Project Centennial; • paying dividends to our shareholders; • maintaining an investment grade credit rating; • making strategic acquisitions; • repurchasing shares of our common stock; and • making discretionary contributions to our qualified pension plans. The situation surrounding COVID-19 remains fluid and its future impact on the company's business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. We believe the fundamentals of the company remain strong and that we have sufficient liquidity on hand to continue business operations during this volatile period. The company has total available liquidity of$670.3 million as ofApril 18, 2020 , consisting of cash on hand and the available balance of a revolving credit facility. In addition, the company has no material debt maturities until 2022. In light of these potential risks, the company has taken actions to safeguard its capital position. During the first quarter of fiscal 2020, we drew an additional$200.0 million on our credit facility. We borrowed this additional amount out of an abundance of caution to ensure future liquidity given the recent significant impact on global financial markets and economies as a result of the COVID-19 outbreak. If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including$266.6 million of remaining availability on the credit line, capital expenditure reductions, adjustments to its 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.
Liquidity Discussion for the Sixteen Weeks Ended
The pandemic presents potential new risks to the company's business. Although there has been no material adverse impact on the company's first quarter fiscal 2020 results of operations, we considered various potential COVID-19-related business risks. Those potential risks include foodservice business continuity as customers have experienced disruptions that negatively impacted their sales and could affect their ability to meet their obligations, including to the company, an extension of days of sales outstanding as customers shift to work-from-home operations, and possible further impacts to production, among other risks. Cash and cash equivalents were$252.7 million atApril 18, 2020 compared to$11.0 million atDecember 28, 2019 , an increase of$241.7 million as a result of the increased liquidity risk discussed above. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands): For the Sixteen Weeks Ended Cash Flow Component April 18, 2020 April 20, 2019 Change Cash provided by operating activities$ 106,185 $ 96,178 $ 10,007 Cash disbursed for investing activities (16,817 ) (20,390 ) 3,573 Cash provided by (disbursed for) financing activities 152,271 (89,510 ) 241,781 Total change in cash$ 241,639 $ (13,722 ) $ 255,361 44
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Cash Flows Provided by Operating Activities. Net cash provided by operating activities consisted of the following items for non-cash adjustments to net (loss) income (amounts in thousands):
For the Sixteen Weeks Ended
April 18, 2020 April 20, 2019 Change
Depreciation and amortization $ 44,663 $ 44,819 $ (156 )
Restructuring and related impairment charges - 530 (530 )
Stock-based compensation 3,894 3,179 715
Deferred income taxes (29,605 ) 3,614 (33,219 )
Pension and postretirement plans cost 116,702 994 115,708
Other non-cash items 7,997 1,641 6,356
Net non-cash adjustment to net (loss) income
54,777$ 88,874
• Refer to the Restructuring and related impairment charges and Pension plan
termination discussions in the "Matters Affecting Comparability" section
above for additional information.
• The change in deferred income taxes for the first quarter of fiscal 2020
was primarily due to the termination of Plan No. 1.
• Other non-cash items include non-cash interest expense for theamortization of debt discounts and deferred financing costs and gains or
losses on the sale of assets.
Net changes in working capital and pension plan contributions consisted of the following items (amounts in thousands):
For the Sixteen Weeks Ended
April 18, 2020 April 20, 2019 Change
Changes in accounts receivable, net $ (61,630 ) $ (23,832 ) $ (37,798 )
Changes in inventories, net (9,238 ) (2,555 ) (6,683 )
Changes in hedging activities, net (7,933 ) (13,089 ) 5,156
Changes in other assets and accrued
liabilities, net 21,210 19,904 1,306
Changes in accounts payable, net 27,322 (4,893 ) 32,215
Qualified pension plan contributions (1,425 ) - (1,425 )
Net changes in working capital and pension
plan
contributions $ (31,694 ) $ (24,465 ) $ (7,229 ) • Changes in accounts receivable and accounts payable resulted from sales
increases. Changes in inventories resulted from sales increases and, for
the current quarter, a build-up of foodservice inventories due to
COVID-19.
• Hedging activities change from market movements that affect the fair value
and the associated required collateral of positions and the timing and
recognition of deferred gains or losses. These changes will occur as part
of our hedging program.
• The change in other assets primarily resulted from changes in income tax
receivable balances year over year and changes in deferred gains recorded
in conjunction with the sale of distribution rights to IDPs. Changes in
employee compensation accruals, changes in legal accruals, and changes in
income taxes payable resulted in the change in other accrued
liabilities. During the first quarter of fiscal 2020 and fiscal 2019, we
paid
employment taxes, in performance-based cash awards under our bonus plan.
An additional $0.2 million and $1.2 million was paid during the first
quarter of fiscal 2020 and fiscal 2019, respectively, for our share of
employment taxes on the vesting of employee restricted stock awards in
each respective year. During the sixteen weeks ended
recognized
for in prior periods. Under the CARES Act, the company will defer an
estimated
the period beginning the second quarter of fiscal 2020 to
2020. The company otherwise is responsible for the remaining federal
employment taxes. The deferred employment tax will be paid over the next
two years with half of the required amount to be paid by
and the remaining amount by
• During the sixteen weeks ended
company made a cash contribution of
which has been fully reserved for and is expected to be unwound by the end
of the third quarter of fiscal 2020, to fully fund the liabilities of Plan
No. 1 at termination. We anticipate making a
defined benefit plan pension contribution to Plan No. 2 in the third
quarter of fiscal 2020. The company believes its cash flow and balance
sheet will allow it to fund future pension needs without adversely
affecting the business strategy of the company.
45
-------------------------------------------------------------------------------- Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the sixteen weeks endedApril 18, 2020 andApril 20, 2019 , respectively (amounts in thousands): For the Sixteen Weeks Ended April 18, 2020 April 20, 2019 Change Purchases of property, plant, and equipment$ (21,700 ) $ (20,761 ) $ (939 ) Principal payments from notes receivable, net of repurchases of independent distributor territories 4,021 136 3,885 Proceeds from sale of property, plant and equipment 862 235 627 Net cash disbursed for investing activities$ (16,817 ) $ (20,390 ) $ 3,573
• We currently anticipate capital expenditures of
million for fiscal 2020.
Cash Flows Provided by (Disbursed for) Financing Activities. The table below presents net cash provided by (disbursed for) financing activities for the sixteen weeks endedApril 18, 2020 andApril 20, 2019 , respectively (amounts in thousands): For the Sixteen Weeks Ended April 18, 2020 April 20, 2019 Change Dividends paid$ (40,286 ) $ (39,296 ) $ (990 ) Stock repurchases (783 ) (7,054 ) 6,271 Change in bank overdrafts (3,530 ) (788 ) (2,742 ) Payment of contingent consideration (4,700 ) - (4,700 ) Net change in debt obligations 203,750 (40,500 ) 244,250 Payments on financing leases (2,180 ) (1,872 ) (308 ) Net cash provided by (disbursed for) financing activities$ 152,271 $ (89,510 ) $ 241,781
• Our dividends paid increased due to an increased dividend payout rate
compared to the prior year. While there are no requirements to increase
the dividend payout, we have shown a historical trend to do so. If this
trend continues in the future, we will have additional cash needs to meet
these expected dividend payouts. Our Board of Directors declared the
following quarterly dividend during the sixteen weeks ended
(amounts in thousands, except per share data):
Dividend per Dividends
Date Declared Record Date Payment Date Common Share Paid
February 14, 2020 February 28, 2020 March 13, 2020 $ 0.1900 $ 40,199 Additionally, we paid dividends of
• Stock repurchase decisions are made based on our stock price, our belief
of relative value, and our cash projections at any given time. During the
sixteen weeks ended
$0.8 million under a share repurchase plan approved by our Board of Directors. • The payment for contingent consideration was made to satisfy the
contingent consideration liability recorded in the Canyon acquisition.
• See the discussion below under the "Capital Structure" section regarding
changes in debt obligations.
46
--------------------------------------------------------------------------------
Capital Structure
Long-term debt and right-of-use lease obligations and stockholders' equity were as follows atApril 18, 2020 andDecember 28, 2019 , respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 4, Leases, and Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Balance at Fixed or Final December April 18, 2020 28, 2019 Variable Rate Maturity Long-term debt and right-of-use lease obligations (Amounts in thousands) 2026 notes$ 396,298 $ 396,122 Fixed Rate 2026 2022 notes 399,054 398,906 Fixed Rate 2022 Credit facility 225,000 41,750 Variable Rate 2022 AR facility 49,000 26,000 Variable Rate 2021 Right-of-use lease obligations 395,369 404,503 2036 Other notes payable 1,245 3,730 2020 1,465,966 1,271,011 Current maturities of long-term debt and right-of-use lease obligations 62,064 64,712 Long-term debt and right-of-use lease obligations$ 1,403,902 $ 1,206,299 Total stockholders' equity Total stockholders' equity$ 1,320,611 $ 1,263,430 The facility and credit facility are generally used for short-term liquidity needs. As discussed above, in light of the current economic uncertainty in theU.S. and throughout the world due to the COVID-19 pandemic, the company has increased its liquidity through borrowings under the credit facility during the current quarter, although we do not have any presently anticipated need for this additional liquidity. There is no current portion payable over the next year for these obligations. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.
The following table details the amounts available under the facility and credit
facility and the highest and lowest balances outstanding under these
arrangements during the sixteen weeks ended
Amount Available For the
Sixteen Weeks Ended
for Withdrawal at Highest Lowest
Facility April 18, 2020 Balance Balance
(Amounts in thousands)
The facility $ 151,000 $ 79,000 $ 19,000
The credit facility (1) 266,600 235,000 6,400
$ 417,600
(1) Amount excludes a provision in the credit facility agreement which allows the
company to request an additional
commitments.
Amounts outstanding under the credit facility 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 8, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the sixteen weeks endedApril 18, 2020 , the company borrowed$272.6 million in revolving borrowings under the credit facility and repaid$89.4 million in revolving borrowings. The amount available under the credit facility is reduced by$8.4 million for letters of credit. The facility and the credit facility are variable rate debt. In periods of rising interest rates, the cost of using the facility and the credit facility will become more expensive and increase our interest expense. Therefore, borrowings under these facilities provide us the greatest direct exposure to rising rates. In addition, if interest rates do increase, it will make the cost of funds more expensive. 47
-------------------------------------------------------------------------------- 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 ofApril 18, 2020 , the company was in compliance with all restrictive covenants under our debt agreements.
The company has begun assessing the impact changes from LIBOR to an alternative interest rate benchmark could have on our business.
Additionally, inMarch 2020 , the company provided an unsecured, short-term, interest-free loan to Plan No. 1 of$5.0 million which has been fully reserved for and is expected to be unwound, at which time it will be converted to a contribution, by the end of the third quarter of fiscal 2020. The loan provides Plan No. 1 with incremental liquidity to pay ongoing benefits and administrative costs. Under our share repurchase plan, the company may repurchase its common stock in 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 endedApril 18, 2020 , 0.04 million shares, at a cost of$0.8 million , of the company's common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan throughApril 18, 2020 , 68.4 million shares, at a cost of$643.4 million , have been repurchased.
Off-Balance Sheet Arrangements
At
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.
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