FLOWERS FOODS, INC. The following discussion of the financial condition and results of operations of the company as of and for the twelve and forty weeks endedOctober 9, 2021 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 two comparative periods 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
Detailed below are expense items affecting comparability that will provide additional context while reading this discussion:
For the Twelve Weeks Ended For the Forty Weeks Ended Footnote
October 9, 2021 October 3, 2020 October 9, 2021 October 3, 2020 Disclosure
(Amounts in thousands) (Amounts in thousands)
Business process improvement
consulting
costs $ 9,233 $ - $ 27,396 $ - Note 1
Recovery on inferior ingredients (950 ) - (828 ) - Note 1
Acquisition consideration adjustment - 3,400 Note 10
Loss on extinguishment of debt - - 16,149 - Note 12
Project Centennial consulting costs - 5,068 - 14,044 Note 3
ERP Road Mapping consulting costs - 3,079 - 3,079
Restructuring and related impairment
charges - 20,100 - 30,635 Note 3
Legal settlements and related costs 23,089 3,011 23,089 6,231 Note 14
Multi-employer pension plan
withdrawal costs 3,300 - 3,300 - Note 17
Pension plan settlement and
curtailment
(gain) loss - (7,153 ) - 109,054 Note 17
Other pension plan termination costs - - - 133
$ 34,672 $ 24,105 $ 72,506 $ 163,176
• Business process improvement costs related to the digital strategyinitiative - In the second half of Fiscal 2020, we launched a digital
strategy initiative to transform our business systems and processes, which
includes upgrading our information system to a more robust platform, as
well as investments in e-commerce, autonomous planning, and our "bakery of
the future" initiative. This initiative is further discussed in the
"Digital Strategy Initiative" section below. Costs related to the digital
strategy initiative incurred during the twelve and forty weeks ended
costs were primarily for consulting services associated with these
activities and are reflected in the selling, distribution, and
administrative expenses line item of the Condensed Consolidated Statements
of Income. We currently expect consulting costs (a portion of which may be
expensed as incurred, capitalized, recognized as a cloud computing
arrangement, or recognized as a prepaid service contract) related to the
initiative to be approximately
of Fiscal 2021. Initial road mapping costs for this initiative were
incurred in the third and fourth quarters of Fiscal 2020 and are included
in the "ERP Road Mapping consulting costs" in the table above.
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• Recovery on inferior ingredients - In the fourth quarter of Fiscal 2020,
we incurred costs of
ingredients used in the production of certain of our gluten-free products
and incurred an additional
quarter of Fiscal 2021. In the third quarter of Fiscal 2021, we received
reimbursements of approximately
costs.
Subsequent to the third quarter of Fiscal 2021, the company issued a voluntary recall on certain Tastykake multi-pack cupcakes sold in eight states and certain Tastykake Krimpets distributed to retail customers throughout theU.S. due to the potential presence of tiny fragments of metal mesh wire. The recall was initiated following notification by a vendor of the possible contamination in a supplied ingredient. The company cannot currently estimate the impact to our results of operations.
• Acquisition consideration adjustment - In connection with an acquisition
completed in Fiscal 2012, the Company agreed to make the selling
shareholders whole for certain taxes incurred by the stakeholders on the
sale. There was recently a tax determination that the selling shareholders
owed additional taxes. Unless there is a successful appeal which overturns
the determination, the Company estimates that it will owe the shareholders
approximately
selling, distribution, and administrative expenses line item of the
Condensed Consolidated Statements of Income.
• Loss on extinguishment of debt - On
redemption of the Company's
(the "2022 notes") with proceeds received from the issuance of the
Company's $500.0 million of 2.400% senior notes due 2031 (the "2031
notes") on March 9, 2021 . We recognized a loss on extinguishment of debt
of
and the write-off of unamortized debt discount and debt issuance costs
totaling $0.7 million .
• Project Centennial consulting costs - During the second quarter of Fiscal
2016, we launched Project Centennial, an enterprise-wide business and
operational review. The project was completed at the end of Fiscal
2020. Consulting costs associated with the project during the twelve and
forty weeks ended
respectively, and are reflected in the selling, distribution, and
administrative expenses line item of the Condensed Consolidated Statements
of Income.
• Consulting costs for planning the upgrade of our ERP platform and the
broader digital strategy initiative - As discussed above, in the third
quarter of the prior year, we began planning for the upgrade of our ERPplatform and other system related enhancements ("the ERP road mapping")
and incurred consulting costs associated with these activities. We
completed the ERP road mapping activities in the fourth quarter of Fiscal
2020 and transitioned to the design phase of the project.
• Restructuring and related impairment charges - The following table details
restructuring charges recorded during the twelve and forty weeks ended
October 3, 2020 (amounts in thousands):
For the Twelve Weeks For the Forty Weeks
Ended Ended
October 3, 2020 October 3, 2020
Employee termination benefits and
other cash charges $ 5,996 $ 7,261
Property, plant, and equipment impairments 611
5,245
Lease termination and lease impairment
charges 13,493
13,493
Trademark impairments -
4,636
Total restructuring and related
impairment charges $ 20,100 $ 30,635 In the second quarter of Fiscal 2020, the company reevaluated its organizational structure in an effort to increase its focus on brand growth and product innovation and improve its cake operations. The organizational structure changes resulted in$1.3 million of employee termination benefits charges related to a voluntary employee separation plan (the "VSIP") in the second quarter of Fiscal 2020. Additional charges of$1.3 million related to the VSIP were recorded in the second half of Fiscal 2020. Early in the third quarter of Fiscal 2020, the company announced an involuntary reduction-in-force plan and recognized charges of$5.3 million in Fiscal 2020. The VSIP and reduction-in-force plans together eliminated approximately 250 positions across different departments and job levels, and all of the related payments were completed by early Fiscal 2021. In order to optimize our distribution network, we vacated certain distribution depots during the third quarter of Fiscal 2020, some of which are owned and others that are leased. This resulted in the recognition of lease termination charges 38
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and lease impairment charges totaling
Also, during the second quarter of Fiscal 2020, the company entered into a contract to sell three closed bakeries classified as held for sale and certain idle equipment at other bakeries, resulting in the recognition of$4.6 million of impairment charges. The sale was completed during the fourth quarter of Fiscal 2020. Additionally, in order to optimize sales and production of our organic products, the company decided to cease using the Alpine Valley brand, a finite-lived trademark, resulting in a$4.6 million impairment charge in the second quarter of Fiscal 2020.
• Legal settlements and related costs - In the third quarter of Fiscal 2021,
we reached an agreement to settle certain distributor-related litigation
for a settlement payment, inclusive of plaintiffs' attorney fees, of
million. The settlement also requires a phased repurchase of approximately
75 distribution rights and the company estimates this cost to be
approximately $6.6 million . The terms of the settlement require court
approval. During the forty weeks ended October 3, 2020 , we reachedagreements to settle certain distributor-related litigation, including
plaintiffs' attorney fees, in the aggregate amount of
these amounts are reflected in the selling, distribution, and
administrative expenses line item of the Condensed Consolidated Statements
of Income. We paid
second quarter of Fiscal 2020 and the remaining amounts are reflected in
other accrued liabilities on the Condensed Consolidated Balance Sheets.
• Multi-employer pension plan withdrawal costs ("MEPP costs") - On September
22, 2021, the union participants of the Retail,
withdraw from the Fund in the most recent collective bargaining
agreement. The withdrawal will be effective, and the union participants
will be eligible to participate in the
Retirement Savings Plan, beginning on
the recognition of a pension plan withdrawal liability of
(including transition payments) in our Condensed Consolidated Statements
of Income and is reflected in other accrued liabilities on the Condensed
Consolidated Balance Sheets. While this is our best estimate of the
ultimate cost of the withdrawal from this Fund, additional withdrawal
liability may be incurred based on the final Fund assessment. We
anticipate making the transition payments in December of Fiscal 2021 and
the withdrawal liability payment in the first half of Fiscal 2022.
• Pension plan termination - On
resolution to terminate the Flowers Foods, Inc. Retirement Plan No. 1
("Plan No. 1"), effective December 31, 2018 . As of March 20, 2020 , the
company had completed the termination of Plan No. 1 and distributed aportion of the pension plan assets to participants as lump sum payments
and transferred the remaining obligations and assets to an insurance
company in the form of a nonparticipating group annuity contract. In the
first quarter of Fiscal 2020, the company recognized
non-cash pension termination charges, comprised of a settlement charge of
$0.1 million of cash charges for other pension termination charges in our Condensed Consolidated Statements of Income. The settlement amount was revised in the third and fourth quarters of Fiscal 2020 resulting in a final settlement and curtailment loss of$108.8 million .
Additional items affecting comparability:
• COVID-19 - On
novel strain of coronavirus ("COVID-19") a global pandemic and recommended
containment and mitigation measures worldwide, which led to adverse
impacts on the
consumer buying patterns at the beginning of the pandemic, we experienced
a more favorable shift in sales mix to our branded retail products due to
increased at-home consumption of food products. As shutdowns and capacity
restrictions imposed at the onset of the pandemic have eased and COVID-19
vaccines are now widely available in the
date have moderated as compared to the prior year period, which included
the peak period of demand for our branded retail products. Improved
price/mix in the current year to date period resulting from favorable
pricing we have implemented and the continued favorable shift in mix from
store branded retail to branded retail sales has mostly offset the volume
declines. For additional details on the impact of the COVID-19 pandemic on
our business operations and results of operations, 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 of our
Lynchburg, Virginia bakery to an all-organic production facility. Wecompleted the conversion and the bakery resumed production by the end of
the third quarter of Fiscal 2020. The converted facility provides
increased production capacity for our
products, allowing the company to better serve east coast markets with
fresher product and reduce distribution costs. We incurred start-up costs
related to the conversion of approximately
for the twelve and forty weeks ended October 3, 2020 , respectively, and
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these costs are included in materials, supplies, labor and other
production costs in our Condensed Consolidated Statements of Income.
Executive Overview Business Flowers is the second-largest producer and marketer of packaged bakery foods inthe United States ("U.S."). Our principal products include breads, buns, rolls, snack cakes, and tortillas and are sold under a variety of brand names, including Nature's Own, DKB, Wonder,Canyon Bakehouse , Tastykake, andMrs. Freshley's . Our brands are among the best known in theU.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. 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. We are continuing to focus on optimization initiatives in our procurement, distribution, operations, and administrative functions and the company is targeting savings in the range of$30 million to$40 million from these activities in Fiscal 2021. Additionally, we have completed the planning phase of our multi-year digital strategy initiative and transitioned into the build phase as discussed further below. Currently, the company does not expect COVID-19 to materially impact the foregoing optimization or digital strategy initiatives.
In the fourth quarter of Fiscal 2021, the company anticipates paying
appreciation bonuses to our frontline workers and these payments are expected to
impact diluted earnings per share approximately
Highlights
• Nature's Own is the best-selling loaf bread in the
selling organic brand in the
gluten-free bread brand in the U.S. (Source: IRI Total US
MultiOutlet+C-Store 12 Weeks Ending 10/10/21)
• Our retail sales comprised 79.0% of total sales for the forty weeks ended
2020 and 75.9% for the forty weeks ended
• We operate 46 bakeries, which produce fresh and frozen breads and rolls,
as well as snack cakes and tortillas.
• We utilize a direct-store-delivery distribution model for fresh bakery
foods, whereby product is sold primarily by a network of independent
distributor partners to retail and foodservice customers with access to
more than 85% of the
• Nationwide distribution of certain fresh snack cakes and frozen breads and
rolls via contract carriers.
Impact of COVID-19 on Our Business
We continue to monitor the impact of the ongoing COVID-19 pandemic on our business operations, results of operations, and liquidity. Our operations may continue to experience disruption due to the continued uncertainty caused by the pandemic, including but not limited to additional variants of the COVID-19 virus (including the Delta variant), new geographic hotspots, changes in the number of COVID-19 cases, the rate of vaccination within theU.S. population and the efficacy of the vaccines, changes in the global andU.S. economic environment, federal vaccine mandates, and changes in pandemic safety policies. Year to date, our sales were down slightly compared to the prior year, which benefitted from unprecedented growth for our branded retail products at the start of the COVID-19 pandemic in March of Fiscal 2020. Our current year to date sales were still elevated as compared to our historical pre-pandemic trends as we continued to benefit from the positive mix shift to branded retail products during the ongoing pandemic and favorable pricing. In addition, as the pandemic has progressed and mandatory shutdowns and restaurant closures across theU.S. have eased, our non-retail sales have been recovering. We cannot currently estimate the magnitude or the timing of this potential impact due to the volatility of the pandemic. Additionally, if there is a significant shift in mix from branded retail to store branded retail products, we expect that our results of operations, including our net sales, earnings, and cash flows, could be negatively impacted. For additional discussion on the impact of the pandemic on our results of operations, refer to the "Results of Operations" section below. 40 -------------------------------------------------------------------------------- We believe we have sufficient liquidity to satisfy our cash needs and we continue to take steps to preserve adequate liquidity during the ongoing pandemic as further discussed in the "Liquidity and Capital Resources" sections below. As discussed further in the "Digital Strategy Initiative" section below, we are continuing to move forward with the upgrade of our ERP system and other digital strategy initiatives and do not anticipate the pandemic to materially alter the timing of these initiatives. Our main focus throughout the pandemic has been and continues to be the health and safety of our team members and independent distributor partners. From the start of the pandemic, we have followed the guidance of theU.S. Centers for Disease Control and Prevention (CDC ), taking a number of recommended steps to safeguard those in our facilities. These steps included, but are not limited to, monitoring the symptoms of everyone entering our facilities, requiring face coverings, maintaining (where possible) social distancing of six feet, conducting enhanced cleaning and sanitizing of common areas and frequently touched surfaces, performing decontamination of work areas and equipment when there is a confirmed or presumptive case of COVID-19 at a facility, and contact tracing. Company-wide bans on non-essential travel and non-essential visitors at all locations were put into place, corporate offices were closed, and office staff were directed to work remotely. In addition, the company issued regular communications about COVID-19 prevention steps. When COVID-19 vaccinations became available, we shared educational information with our team members and encouraged vaccination for those eligible. We have followed the guidance issued by theCDC and theU.S. Occupational Safety and Health Administration (OSHA) and modified our face mask and wellness screening policies to align with local, state, and workplace safety regulations. We remain vigilant in reporting COVID-19 cases in our facilities and continue to evaluate our pandemic safety measures as the pandemic evolves. The majority of employees in non-production roles continue to work remotely. We intend to implement a work policy in 2022 addressing guidelines for three distinct work personas: full-time remote, full-time in office, or flex, a combination of the two. In addition, we are developing plans to reopen offices, with an emphasis on in-person collaboration. Several factors influence this planning. These include, but are not limited to, consideration of pandemic safety measures, the rate of vaccinations and the efficacy of the vaccines, the threat of additional COVID-19 variants, and the ability of office staff to work effectively from remote locations. In addition, onNovember 4, 2021 ,OSHA issued an Emergency Temporary Standard ("ETS") requiring that all employers with at least 100 employees ensure that their employees are fully vaccinated for COVID-19 or undergo weekly COVID-19 testing. Although the impact of these measures on our business and workforce is uncertain, these requirements may result in increased costs and could have an adverse effect on our business, results of operations, and financial condition. While we have had no temporary production interruptions in Fiscal 2021 due to COVID-19, we could experience such interruptions due to the uncertainty of the pandemic. The potential closure of several of our bakeries across the country at the same time - or in close succession - could negatively affect our ability to meet our production requirements, even if the interruption is temporary. Additionally, unforeseen disruptions in other areas of our operations, including but not limited to procurement of raw materials, transport of our products, or recovery by our foodservice customers, could negatively impact our operations, results of operations, cash flows, and liquidity. During Fiscal 2021, we have experienced labor shortages at some of our bakeries. A number of factors may continue to adversely affect the labor force available to us, including high employment, federal unemployment subsidies influencing the decision to work, including unemployment benefits offered in response to the COVID-19 pandemic, and other government regulations. In addition, there also are factors that may negatively affect our ability to efficiently operate our production lines or run at full capacity. These might include, but are not limited to, federal vaccine mandates, a labor shortage or increased turnover rates within our workforce that could lead to 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, increased turnover or labor inflation could have a material adverse impact on the company's operations, results of operations, liquidity, or cash flows.
Summary of Operating Results, Cash Flows and Financial Condition
Sales increased 3.9% for the twelve weeks endedOctober 9, 2021 compared to the same quarter in the prior year, mostly attributable to favorable price/mix and improved promotional efficiency, partially offset by volume declines. While our non-retail sales continued to recover in the current quarter, these sales have not returned to pre-pandemic levels. Sales decreased 0.5% for the forty weeks endedOctober 9, 2021 compared to the same period in the prior year. The prior year period was particularly strong primarily due to the significant rise in demand for our branded retail products at the beginning of the COVID-19 pandemic. That impact has moderated as shutdowns have eased, restaurants have reopened, and COVID-19 vaccines have become widely available to theU.S. population. Additionally, returns of unsold product have increased in the current year as compared to the prior year's exceptionally low rate of returns resulting from stocking-up behaviors which have moderated. Our non-retail sales increased as compared to the prior year period as lockdowns have ended, restaurants have reopened, and traveling and social gatherings have increased, but are still lower than pre-pandemic levels.
Income from operations for the twelve weeks ended
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multi-employer pension plan withdrawal costs in the current year quarter
resulted in the decrease quarter over quarter. These higher costs were mostly
offset by sales increases, increased scrap dough income, and lower bonus expense
in the current quarter and restructuring and related impairment charges in the
prior period.
Income from operations for the forty weeks ended October 9, 2021 was $241.1
million compared to $244.1 million in the prior year period. The decrease
resulted from sales declines, higher consulting costs and legal settlements, and
greater investments in marketing in the current year, mostly offset by the prior
year restructuring and related impairment charges, short-term incentive
compensation paid for appreciation bonuses and higher bonus expense. Increased
income from scrap dough sales and lower bad debt and depreciation and
amortization expenses partially offset the overall decrease year over year.
Net income for the twelve weeks ended October 9, 2021 was $38.9 million compared
to $44.3 million in the prior year period. The decrease resulted primarily from
decreased income from operations, as discussed above, and a higher effective tax
rate in the current year quarter and the pension plan settlement gain in the
prior year quarter.
Net income for the forty weeks ended October 9, 2021 was $166.9 million compared
to $96.5 million in the prior year period. The improvement in the current year
resulted primarily from the $109.1 million non-cash pension plan settlement and
curtailment loss in the prior year in connection with the termination of Plan
No. 1, partially offset by the $16.1 million loss on extinguishment of debt
recognized in the current year and decreased income from operations year over
year.
During the forty weeks ended October 9, 2021 , we generated net cash flows from
operations of $315.2 million and invested $86.7 million in capital
expenditures. Additionally, we paid $131.5 million in dividends to our
shareholders and decreased our total indebtedness by $81.9 million . On March 9,
2021 , we issued the 2031 notes and used the net proceeds from the offering to
complete the early redemption of our outstanding 2022 notes and for other debt
repayments. During the forty weeks ended October 3, 2020 , we generated net cash
flows from operations of $364.4 million , invested $68.3 million in capital
expenditures, paid $124.9 million in dividends to our shareholders and increased
our total indebtedness by $142.5 million to ensure future liquidity given the
uncertainty caused by the COVID-19 outbreak on global financial markets and
economies. During the third quarter of Fiscal 2021, we amended the credit
facility and the facility to, among other things, extend the maturity dates to
July 30, 2026 and September 27, 2023 , respectively.
Digital Strategy Initiative
In the second half of Fiscal 2020, we launched a digital strategy initiative to transform how we operate our business. The primary goals of this new strategic initiative are: (1) enable a more agile business model, empowering the organization by fundamentally redesigning core business processes and our ways of working; (2) embed digital capabilities and transform the way we engage with consumers, customers, and employees; and (3) modernize and simplify our application and technology infrastructure landscape. This initiative includes upgrading our information system to a more robust ERP platform, enabling our business strategies, as well as investments in initial digital domains of ecommerce, autonomous planning, and bakery of the future. 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. Combined, these digital domains are expected to improve data visibility and efficiencies while automating many of our processes. When implemented, we expect this work will further our brand efforts, bring us ever 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 completed the initial planning and road mapping phase of this multi-year digital transformation at the end of Fiscal 2020 and transitioned into the design phase in early Fiscal 2021. During the first quarter of Fiscal 2021, we engaged a leading, global consulting firm to assist us in planning and implementing the upgrade of our ERP platform and serve as the system integrator for the project. Additionally, we have transitioned into the implementation phase for the ecommerce, autonomous planning, and bakery of the future domains and selected two bakeries for the pilot program for bakery of the future and autonomous planning.
We expect the digital strategy initiative will require significant capital investment and expense over the next several years. To date, these costs have mainly been comprised of consulting costs, which we expect to continue throughout the project.
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--------------------------------------------------------------------------------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. 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.
RESULTS OF OPERATIONS:
Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve weeks endedOctober 9, 2021 andOctober 3, 2020 , respectively, are set forth below (dollars in thousands): For the Twelve Weeks Ended Percentage of Sales Increase (Decrease) October 9, 2021 October 3, 2020 October 9, 2021 October 3, 2020 Dollars % Sales$ 1,027,800 $ 989,650 100.0 100.0$ 38,150 3.9 Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) 515,078 497,659 50.1 50.3 17,419
3.5
Selling, distribution and administrative expenses 426,575 386,739 41.5 39.1 39,836
10.3
Recovery on inferior ingredients (950 ) - (0.1 ) - (950 )
NM
Restructuring and related impairment charges - 20,100 - 2.0 (20,100 )
NM
Multi-employer pension plan withdrawal costs 3,300 - 0.3 - 3,300 NM Depreciation and amortization 31,680 32,162 3.1 3.2 (482 ) (1.5 ) Income from operations 52,117 52,990 5.1 5.4 (873 ) (1.6 ) Other components of net periodic pension and postretirement benefits credit (94 ) (72 ) (0.0 ) (0.0 ) (22 ) NM Pension plan settlement gain - (7,153 ) - (0.7 ) 7,153 NM Interest expense, net 1,311 2,755 0.1 0.3 (1,444 ) (52.4 ) Income before income taxes 50,900 57,460 5.0 5.8 (6,560 ) (11.4 ) Income tax expense 12,048 13,113 1.2 1.3 (1,065 ) (8.1 ) Net income $ 38,852 $ 44,347 3.8 4.5$ (5,495 ) (12.4 ) Comprehensive income $ 34,909 $ 54,485 3.4 5.5$ (19,576 ) (35.9 ) NM Not meaningful. 43
-------------------------------------------------------------------------------- Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the forty weeks endedOctober 9, 2021 andOctober 3, 2020 , respectively, are set forth below (dollars in thousands): For the Forty Weeks Ended Percentage of Sales Increase
(Decrease)
October 9, 2021 October 3, 2020 October 9, 2021 October 3, 2020 Dollars %
Sales $ 3,347,277 $ 3,364,955 100.0 100.0 $ (17,678 ) (0.5 )
Materials, supplies, labor and other
production costs
(exclusive of depreciation and
amortization shown
separately below) 1,662,716 1,674,565 49.7 49.8 (11,849 ) (0.7 )
Selling, distribution and
administrative expenses 1,336,255 1,305,678 39.9 38.8 30,577 2.3
Recovery on inferior ingredients (828 ) - (0.0 ) - (828 ) NM
Restructuring and related impairment charges - 30,635 - 0.9 (30,635 )
NM
Multi-employer pension plan withdrawal costs 3,300 - 0.1 - 3,300
NM
Depreciation and amortization 104,685 110,005 3.1 3.3 (5,320 ) (4.8 ) Income from operations 241,149 244,072 7.2 7.3 (2,923 ) (1.2 ) Other components of net periodic pension and postretirement benefits credit (312 ) (1 ) (0.0 ) (0.0 ) (311 )
NM
Pension plan settlement and curtailment loss - 109,054 - 3.2 (109,054 )
NM
Interest expense, net 6,582 8,938 0.2 0.3 (2,356 ) (26.4 ) Loss on extinguishment of debt 16,149 - 0.5 - 16,149
NM
Income before income taxes 218,730 126,081 6.5 3.7 92,649 NM Income tax expense 51,865 29,587 1.5 0.9 22,278 NM Net income $ 166,865 $ 96,494 5.0 2.9$ 70,371 NM Comprehensive income $ 163,188 $ 204,118 4.9 6.1$ (40,930 ) (20.1 ) NM Not meaningful.
Percentages may not add due to rounding.
TWELVE WEEKS ENDED
Sales (dollars in thousands)
For the Twelve Weeks Ended
Percentage of Sales Increase (Decrease)
October 9, 2021 October 3, 2020 October 9, 2021 October 3, 2020 Dollars %
Branded retail $ 689,055 $ 657,480 67.0 66.4 $ 31,575 4.8
Store branded retail 124,593 136,098 12.1 13.8 (11,505 ) (8.5 )
Non-retail and other 214,152 196,072 20.9 19.8 18,080 9.2
Total $ 1,027,800 $ 989,650 100.0 100.0 $ 38,150 3.9
(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:
Pricing/mix 6.4
Volume (2.5 )
Total percentage change in sales 3.9
Sales increased quarter over quarter mainly due to favorable pricing and
continued positive shift in mix from store branded retail to branded retail
sales. Volume decreases resulted from declines in store branded retail sales
and, to a lesser extent, branded retail sales as the level of at-home food
consumption resulting from the on-going COVID-19 pandemic has moderated and we
continue to execute on our strategy to optimize our sales portfolio. Continued
recovery of foodservice sales mitigated the volume decline as away-from-home
food consumption increased compared to the prior period, though this trend may
not continue given the uncertainty caused by the ongoing pandemic. The
promotional environment has remained relatively stable in the third quarter of
Fiscal 2021 as compared to the same quarter in the prior year, however, this
trend may not continue in future periods.
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Branded retail sales increased quarter over quarter due to favorable price/mix
and improved promotional efficiency, partially offset by volume declines as
at-home food consumption has continued to moderate since the peak period of the
COVID-19 pandemic in the prior year period. The volume declines were mostly
attributable to branded traditional loaf breads and branded cake and were
partially offset by continued volume growth for our DKB and Canyon Bakehouse
branded products. While branded traditional loaf bread volumes were lower than
the comparable period, they were elevated as compared to historical pre-pandemic
levels.
The decrease in store branded retail sales primarily resulted from volume
declines for store branded breads, buns and rolls as consumers have continued to
shift to branded retail products. Increased sales of store branded cake and
gluten-free items partially offset the overall decline. Sales of our store
branded retail products had been declining prior to the pandemic and we have
experienced an acceleration of this trend during the pandemic due to growth in
e-commerce sales and successful execution of our strategy to prioritize a more
favorable sales mix of branded retail sales. During the current quarter, we
continued to make marketing investments to target e-commerce sales.
Non-retail sales continued to recover compared to the significant declines
experienced in the prior year quarter due to restaurant and school closures
during that time, however, these sales have not returned to their pre-pandemic
levels. Additionally, favorable price/mix in the current year contributed to the
increase in non-retail sales.
We anticipate our Fiscal 2021 sales will be lower than Fiscal 2020 sales due to
Fiscal 2021 being comprised of fifty-two weeks as compared to fifty-three weeks
for Fiscal 2020 which will impact the year over year sales comparison in the
fourth quarter and for the full year.
Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
For the Twelve Weeks Ended Increase
October 9, 2021 October 3, 2020 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Ingredients and packaging 28.1 28.2 (0.1 )
Workforce-related costs 14.9 15.0 (0.1 )
Other 7.1 7.1 -
Total 50.1 50.3 (0.2 )
Costs as a percent of sales were lower quarter over quarter due to sales
increases from favorable price/mix, and the prior year period included $1.9
million of start-up costs related to the conversion of our Lynchburg, Virginia
facility to an organic bakery. The start-up costs were largely workforce-related
and we completed the bakery conversion at the end of the third quarter of Fiscal
2020. A more favorable sales price/mix mitigated higher costs for ingredient and
packaging items but was partially offset by decreases in outside purchases of
product (sales with no associated ingredient costs). Although workforce-related
costs were relatively unchanged as a percent of sales quarter over quarter, the
competitive labor market continues to impact our operations and we expect this
trend to continue. The Other line item reflects the decrease in outside
purchases of product and was offset by decreases in manufacturing efficiencies
and the impact of timing differences of the sell-through of food service
inventories.
Ingredients and packaging materials periodically experience price fluctuations
and we continually monitor these markets. Ingredient and packaging costs are
currently experiencing significant volatility and are expected to be volatile to
us for the remainder of Fiscal 2021 and into Fiscal 2022. The cost of these
inputs may fluctuate widely due to government policy and regulation, weather
conditions, domestic and international demand, or other unforeseen
circumstances. 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 price of these raw materials and significantly affect our earnings.
Selling, Distribution and Administrative Expenses (as a percent of sales)
For the Twelve Weeks Ended Increase
October 9, 2021 October 3, 2020 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Workforce-related costs 11.1 11.2 (0.1 )
Distributor distribution fees 14.9 15.3 (0.4 )
Other 15.5 12.6 2.9
Total 41.5 39.1 2.4
45
-------------------------------------------------------------------------------- Distributor distribution fees decreased as a percent of sales primarily due to the shift in sales mix which resulted in a smaller portion of our sales being made through IDPs, however this decrease was more than offset by the rise in transportation costs which is reflected in the Other line item. The increase in the Other line in the table above reflects increased marketing investments and higher transportation costs in the current quarter. Additionally, legal settlements and related costs in the current quarter were$23.1 million compared to$3.0 million in the prior year quarter and business process improvement consulting costs incurred during the quarter were$9.2 million associated with ongoing digital strategy initiatives. These items were partially offset by consulting costs associated with Project Centennial and the ERP road mapping in the prior year quarter of$5.1 million and$3.1 million , respectively. Sales increases and higher prices for scrap dough sales in the current quarter partially offset these higher costs. See the "Matters Affecting Comparability" section above for a discussion of the legal settlements and project-related consulting costs. Additionally, see Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding legal settlements.
Recovery on Inferior Ingredients, Restructuring and Related Impairment Charges, and Multi-Employer Pension Plan Withdrawal Costs
Refer to the discussion in the "Matters Affecting Comparability" section above regarding these items.
Depreciation and Amortization Expense
Depreciation and amortization expense was lower in dollars and as a percent of sales primarily due to a change in the contractual terms with a transportation entity that transports a significant portion of our fresh bakery products no longer qualifying for treatment as an embedded lease as of the end of Fiscal 2020, partially offset by assets being placed in service.
Income from Operations
Income from operations decreased as a percent of sales for the twelve weeks endedOctober 9, 2021 compared to the twelve weeks endedOctober 3, 2020 mostly due to increased selling, distribution, and administrative expenses and the multi-employer pension plan withdrawal costs in the current quarter, partially offset by sales increases and the prior year restructuring and related impairment charges, as discussed above.
Pension Plan Settlement Gain
Refer to the discussion in the "Matters Affecting Comparability" section above regarding this item.
Net Interest Expense Net interest expense decreased in dollars and as a percent of sales quarter over quarter due to the lower interest rate on the 2031 notes as compared to the 2022 notes which were redeemed in the first quarter of Fiscal 2021 and lower average amounts outstanding under our borrowing arrangements, partially offset by a decrease in interest income.
Income Tax Expense
The effective tax rate for the twelve weeks endedOctober 9, 2021 was 23.7% compared to 22.8% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to the impact of discrete state credits recognized in the third quarter of the prior year. For the current and prior year quarter, the primary differences in the effective rate and statutory rate were state income taxes including the recognition of discrete state credits. The American Rescue Plan Act (ARP Act) and Consolidated Appropriations Act, 2021 (CAA Act) enacted onMarch 11, 2021 andDecember 27, 2020 did not have a material impact on the effective tax rate for the third quarter of Fiscal 2021 and there is no anticipated material impact on the effective tax rate in future periods. As discussed in the "Liquidity and Capital Resources" section below, in the prior year the company deferred certain tax payments to future periods under the CARES Act. Comprehensive Income The decrease in comprehensive income quarter over quarter resulted primarily from changes in the fair value of derivatives and the decrease in net earnings quarter over quarter. 46
-------------------------------------------------------------------------------- FORTY WEEKS ENDEDOCTOBER 9, 2021 COMPARED TO FORTY WEEKS ENDEDOCTOBER 3, 2020 Sales (dollars in thousands) Forty Weeks Ended Percentage of Sales Increase (Decrease) October 9, 2021 October 3, 2020 October 9, 2021 October 3, 2020 Dollars % Branded retail$ 2,225,648 $ 2,237,374 66.5 66.5$ (11,726 ) (0.5 ) Store branded retail 418,038 470,956 12.5 14.0 (52,918 ) (11.2 ) Non-retail and other 703,591 656,625 21.0 19.5 46,966 7.2 Total$ 3,347,277 $ 3,364,955 100.0 100.0$ (17,678 ) (0.5 )
(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: Pricing/mix 4.2 Volume (4.7 ) Total percentage change in sales (0.5 ) Sales decreased year over year mainly due to the significant rise in demand for our branded retail products experienced during the peak period of the COVID-19 pandemic in the prior year period resulting from consumers shifting to mostly at-home consumption. This increased demand for branded retail products in the prior year period more than offset the significant decline in foodservice sales during that time. Additionally, returns of unsold product have increased in the current period as compared to the prior year's exceptionally low rate of returns resulting from stocking-up behaviors which have largely moderated. As shutdowns have ended, restaurants have reopened (though some capacity restrictions and social distancing requirements remain in place), and COVID-19 vaccines, which became available in the first quarter of Fiscal 2021, are widely available to theU.S. population, our foodservice sales have been recovering. This combined with a more favorable price/mix in the current year period partially offset the sales decrease. The promotional environment has remained relatively stable through the third quarter of Fiscal 2021 as compared to the same period in the prior year, however, this trend may not continue in future periods. Branded retail sales were lower compared to the significant increase experienced in the prior year period as a result of the onset of the pandemic but were still significantly higher than our historical pre-pandemic levels. This decline was mostly mitigated by the benefit from the shift in mix from store branded retail to branded retail sales and positive pricing. Sales of our branded traditional loaf breads experienced the largest declines as we focused production on these items in the prior year to quickly meet heightened customer demand caused by the shift to mostly at-home consumption at the onset of the pandemic. Sales of our DKB andCanyon Bakehouse branded products continued to increase and partially offset the branded retail sales decline. The decrease in store branded retail sales resulted from volume declines for store branded breads, buns and rolls as consumers have continued to shift to branded retail products, partially offset by increased sales of store branded cake and gluten-free products. Sales of our store branded retail products had been declining prior to the pandemic and we have experienced an acceleration of this trend during the pandemic due to growth in e-commerce sales, combined with successfully executing our strategy to prioritize a more favorable sales mix of branded retail sales. During the current year, we continued to make marketing investments to target e-commerce sales. As discussed above, our non-retail sales have been recovering in the current year period compared to the significant declines experienced in the prior year period due to restaurant closings and shutdowns but have not returned to pre-pandemic levels. Improved price/mix also contributed to the current year increase but was partially offset by declines in sales of unsold products through our outlet stores. We anticipate our Fiscal 2021 sales will be lower than Fiscal 2020 sales due to Fiscal 2021 being comprised of fifty-two weeks as compared to fifty-three weeks for Fiscal 2020 which will impact the year over year sales comparison in the fourth quarter and for the full year. 47 --------------------------------------------------------------------------------
Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
For the Forty Weeks Ended Increase
October 9, 2021 October 3, 2020 (Decrease) as a
Line item component % of sales % of sales % of salesIngredients and packaging 27.7 27.4 0.3 Workforce-related costs 14.8 14.9 (0.1 ) Other 7.2 7.5 (0.3 ) Total 49.7 49.8 (0.1 ) Costs as a percent of sales were relatively consistent with the prior year period as we continued to benefit from the favorable mix shift from store-branded retail products to branded retail products which resulted from the ongoing COVID-19 pandemic and executing on our strategy to be a more brands-focused company. We also realized improvement in our cake operations. Furthermore, the prior year period included$4.1 million of short-term incentive compensation and$5.1 million of start-up costs related to the conversion of ourLynchburg, Virginia facility to an organic bakery and these costs were largely workforce-related. We completed the bakery conversion at the end of the third quarter of Fiscal 2020. This was partially offset by increased ingredient and packaging costs and a competitive labor market. Ingredient and packaging costs were impacted by reduced outside purchases of product (sales with no associated ingredient costs), input cost inflation, and increased returns of unsold product year over year, partially offset by improved sales price/mix. The Other line item mostly reflects the decrease in outside purchases of product year over year, partially offset by lower production volumes in the current year period.
Selling, Distribution and Administrative Expenses (as a percent of sales)
For the Forty Weeks Ended Increase
October 9, 2021 October 3, 2020 (Decrease) as a
Line item component % of sales % of sales % of sales
Workforce-related costs 11.3 11.3 -
Distributor distribution fees 15.0 15.4 (0.4 )
Other 13.6 12.1 1.5
Total 39.9 38.8 1.1
Distributor distribution fees decreased as a percent of sales primarily due to
the shift in sales mix which resulted in a smaller portion of our sales being
made through IDPs in the current year, however the decrease was mostly offset by
higher transportation costs which is reflected in the Other line item. The
increase in the Other line in the table above reflects lower sales, increased
marketing investments, higher transportation costs, and business process
improvement consulting costs incurred during the current year of $27.4 million
associated with ongoing digital strategy initiatives. Additionally, in the
current year period, we incurred $23.1 million of legal settlement and related
charges and $3.4 million for the acquisition consideration adjustment, both
discussed in the "Matters Affecting Comparability" section above. These items
were somewhat offset by $14.0 million of consulting costs associated with
Project Centennial, $3.1 million of ERP road mapping consulting costs, and $6.2
million of legal settlements in the prior year period, all of which are
discussed in the "Matters Affecting Comparability" section above. Also, higher
prices for scrap dough sales in the current year and additional bad debt
allowances recorded for our foodservice customers in the prior year of $2.7
million partially offset the increased costs. See Note 14, Commitments and
Contingencies, of Notes to Condensed Consolidated Financial Statements of this
Form 10-Q for additional information regarding legal settlements.
Recovery on Inferior Ingredients, Restructuring and Related Impairment Charges, and Multi-Employer Pension Plan Withdrawal Costs
Refer to the discussion in the "Matters Affecting Comparability" section above regarding these items.
Depreciation and Amortization Expense
Depreciation and amortization expense was lower in dollars and as a percent of
sales primarily due to a change in the contractual terms with a transportation
entity that transports a significant portion of our fresh bakery products no
longer qualifying for treatment as an embedded lease as of the end of Fiscal
2020 and to a lesser extent, other property, plant, and equipment becoming fully
depreciated in the second half of Fiscal 2020.
48
--------------------------------------------------------------------------------Income from Operations
Income from operations decreased slightly as a percent of sales for the forty weeks endedOctober 9, 2021 compared to the forty weeks endedOctober 3, 2020 mostly due to sales declines and increases in selling, distribution, and administrative expenses in the current year, partially offset by prior year restructuring and related impairment charges.
Pension Plan Settlement and Curtailment Loss
We recognized
Net Interest Expense
Net interest expense (exclusive of the portion related to the loss on extinguishment of debt discussed below) decreased year over year due to lower average amounts outstanding under our borrowing arrangements and the lower interest rate on the 2031 notes as compared to the 2022 notes which were redeemed in the first quarter of Fiscal 2021, partially offset by a decrease in interest income.
Loss on Extinguishment of Debt
In the first quarter of Fiscal 2021, we completed the redemption of the
outstanding 2022 notes and incurred a loss of
Income Tax Expense
The effective tax rate for the forty weeks endedOctober 9, 2021 was 23.7% compared to 23.5% in the prior year period. For the current and prior year period, the primary differences in the effective rate and statutory rate were state income taxes including the recognition of discrete state credits. The American Rescue Plan Act (ARP Act) and Consolidated Appropriations Act, 2021 (CAA Act) enacted onMarch 11, 2021 andDecember 27, 2020 did not have a material impact on the effective tax rate for the first half of Fiscal 2021 and there is no anticipated material impact on the effective tax rate in future periods. As discussed in the "Liquidity and Capital Resources" section below, in the prior year, the company deferred certain tax payments to future periods under the CARES Act.
Comprehensive Income
The decrease in comprehensive income year over year resulted primarily from recognizing the pension settlement and curtailment loss in earnings in the prior year in conjunction with the pension plan termination and the changes in the fair value of derivatives, partially offset by the increase in net earnings year over year.
LIQUIDITY AND CAPITAL RESOURCES:
Strategy and Update on Impact of COVID-19
We believe 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 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, 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 strategic priorities, including our digital strategy
initiatives;
• paying dividends to our shareholders;
• maintaining a conservative financial position;
• making strategic acquisitions; and
• repurchasing shares of our common stock.
Although there has been no material adverse impact on the company's results of
operations, liquidity or cash flows for the forty weeks ended October 9, 2021 ,
the COVID-19 pandemic could significantly impact our ability to generate future
cash flows and we continue to evaluate various potential COVID-19-related
business risks. Those potential risks include the possibility of future
49
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economic downturns which could result in a significant shift away from our
branded retail products to store branded products, 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.
In light of the potential risks associated with the ongoing pandemic, the
company has taken actions to safeguard its capital position. We continue to
maintain higher levels of cash on hand compared to pre-pandemic levels and, in
the first quarter of Fiscal 2021, we issued the 2031 notes and used the net
proceeds from the offering to redeem in full the outstanding 2022 notes,
extending the earliest maturity date of our non-revolving debt to
2026. Additionally, we repaid the outstanding balances on both the accounts
receivable securitization facility (the "facility") and the credit facility (the
"credit facility") with proceeds from the issuance of the 2031 notes and from
cash flows from operations. The ongoing COVID-19 pandemic 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. If the company experienced a significant reduction in revenues, the
company would have additional alternatives to maintain liquidity, including
amounts available on our debt facilities, 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. We believe the fundamentals of the
company remain strong and that we have sufficient liquidity on hand to continue
business operations during the pandemic. The company had total available
liquidity of $986.4 million as of October 9, 2021 , consisting of cash on hand
and the available balances under the credit facility and the facility.
Liquidity Discussion for the Forty Weeks Ended
Cash and cash equivalents were$307.5 million atOctober 9, 2021 which was consistent with the balance atJanuary 2, 2021 and was significantly higher than historical pre-pandemic levels. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands): For the Forty Weeks Ended Cash Flow Component October 9, 2021 October 3, 2020 Change Cash provided by operating activities $ 315,223 $ 364,436$ (49,213 ) Cash disbursed for investing activities (81,714 ) (52,587 ) (29,127 ) Cash (disbursed for) provided by financing activities (233,462 ) 2,938 (236,400 ) Total change in cash $ 47 $ 314,787$ (314,740 )
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 Forty Weeks Ended
October 9, 2021 October 3, 2020 Change
Depreciation and amortization $ 104,685 $ 110,005 $ (5,320 )
Restructuring and related impairment
charges - 21,310 (21,310 )
(Gain) loss reclassified from accumulated
other comprehensive
income to net income (1,055 ) 2,224 (3,279 )
Allowances for accounts receivable 5,880 11,050 (5,170 )
Stock-based compensation 16,768 9,669 7,099
Deferred income taxes (1,294 ) (34,083 ) 32,789
Pension and postretirement plans cost 694 109,929 (109,235 )
Other non-cash items 4,971 4,031 940
Net non-cash adjustment to net income $ 130,649 $
234,135 $ (103,486 ) • The change in deferred income taxes was primarily due to the termination
of Plan No. 1 in the first quarter of Fiscal 2020.
• Other non-cash items include non-cash interest expense for theamortization of debt discounts and deferred financing costs (including
$0.7 million related to the write-off of unamortized costs upon the early redemption of the 2022 notes in the first quarter of Fiscal 2021) and gains or losses on the sale of assets.
• Refer to the Restructuring and related impairment charges and Pension plan
termination discussions in the "Matters Affecting Comparability" section
above for additional information regarding the changes in these items.
50
--------------------------------------------------------------------------------Net changes in working capital and pension plan contributions consisted of the following items (amounts in thousands):
For the Forty Weeks Ended
October 9, 2021 October 3, 2020 Change
Changes in accounts receivable, net $ (5,961 ) $ (37,498 ) $ 31,537
Changes in inventories, net (8,200 ) (3,224 ) (4,976 )
Changes in hedging activities, net (1,002 ) 6,105 (7,107 )
Changes in other assets and accrued
liabilities, net (4,045 ) 51,513 (55,558 )
Changes in accounts payable, net 36,917 24,511 12,406
Qualified pension plan contributions - (7,600 ) 7,600
Net changes in working capital and pension
plan
contributions $ 17,709 $ 33,807 $ (16,098 ) • Changes in accounts receivable, inventories, and accounts payable were
mainly attributable to the significant rise in demand for our products in
the prior year as a result of the COVID-19 pandemic.
• 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 continue to
occur as part of our hedging program.
• The change in other assets primarily resulted from changes in income tax
receivable balances and prepaid assets year over year. Changes in employee
compensation accruals, legal settlement accruals, and payroll taxes
payable primarily resulted in the change in other accrued
liabilities. During the first quarter of Fiscal 2021 and Fiscal 2020, we
paid
employment taxes, in performance-based cash awards under our bonus plans.
An additional
quarter of Fiscal 2021 and Fiscal 2020, respectively, for our share of
employment taxes on the vesting of employee restricted stock awards in
each respective year. During the forty weeks ended October 9, 2021 , we
incurred $23.1 million of costs associated with legal settlements and
related costs (of which $21.2 million is included in other accrued
liabilities as of
other assets) and paid
been accrued for in prior periods. In the prior year period, we accrued
Act, the company deferred approximately
share of the
second quarter of Fiscal 2020 through
million will be paid by December 31, 2021 and the remaining amount by
December 31, 2022 .
• During the forty weeks ended
million in cash to Plan No.1 to ensure that sufficient assets were
available for the lump sum payments and annuity purchases, made up of a
loan to Plan No. 1 of
the company finalized its group annuity contract for Plan No. 1 and
reversed the
needed to sufficiently cover the obligations of the transaction. The
company made a voluntary defined benefit plan pension contribution of
million to Plan No. 2 in the third quarter of Fiscal 2020.
Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the forty weeks endedOctober 9, 2021 andOctober 3, 2020 , respectively (amounts in thousands): For the Forty Weeks Ended October 9, 2021 October 3, 2020 Change Purchases of property, plant, and equipment $ (86,723 ) $ (68,270 )$ (18,453 ) Principal payments from notes receivable, net of repurchases of independent distributor territories 11,638 13,897 (2,259 ) Proceeds from sale of property, plant and equipment 2,525 1,700 825 Acquisition of trademarks (10,200 ) - (10,200 ) Other 1,046 86 960 Net cash disbursed for investing activities $ (81,714 ) $ (52,587 )$ (29,127 )
• We currently anticipate capital expenditures of
million for Fiscal 2021 (inclusive of expenditures for the ERP upgrade and
related digital strategy initiatives).
51
-------------------------------------------------------------------------------- Cash Flows (Disbursed for) Provided by Financing Activities. The table below presents net cash (disbursed for) provided by financing activities for the forty weeks endedOctober 9, 2021 andOctober 3, 2020 , respectively (amounts in thousands): For the Forty Weeks Ended October 9, 2021 October 3, 2020 Change Dividends paid $ (131,510 )$ (124,948 ) $ (6,562 ) Payment of financing fees (5,811 ) (206 ) (5,605 ) Stock repurchases (9,510 ) (783 ) (8,727 ) Change in bank overdrafts (3,462 ) (2,432 ) (1,030 ) Payment of contingent consideration - (4,700 ) 4,700 Net change in debt obligations (81,858 ) 142,500 (224,358 ) Payments on financing leases (1,311 ) (6,493 ) 5,182 Net cash (disbursed for) provided by financing activities $ (233,462 ) $ 2,938$ (236,400 )
• Our Board of Directors declared the following quarterly dividends during
the forty weeks ended October 9, 2021 (amounts in thousands, except per
share data):
Dividend per Dividends
Date Declared Record Date Payment Date Common Share Paid
August 20, 2021 September 3, 2021 September 17, 2021 $ 0.2100 $ 44,468
May 27, 2021 June 10, 2021 June 24, 2021 $ 0.2100 $ 44,468
February 19, 2021 March 5, 2021 March 19, 2021 $ 0.2000 $ 42,340
Additionally, we paid dividends of $0.2 million at the time of vesting of
certain restricted stock awards, director stock awards, and at issuance of
deferred compensation shares. 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.
• We paid financing costs associated with the issuance of the 2031 notes in
the first quarter of Fiscal 2021 and for the amendments of the facility
and credit facility in the third quarter of Fiscal 2021.
• 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
forty weeks ended
common stock for
our Board of Directors. A portion of 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.
• The payment for contingent consideration was made to satisfy the
contingent consideration liability recorded in the Canyon Bakehouse
acquisition completed at the end of Fiscal 2018.
• See the discussion below under the "Capital Structure" section regarding
changes in debt obligations.
52
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Capital Structure Long-term debt and right-of-use lease obligations and stockholders' equity were as follows atOctober 9, 2021 andJanuary 2, 2021 , 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 October 9, 2021 January 2, 2021 Variable Rate Maturity Long-term debt and right-of-use lease obligations (Amounts in thousands) 2031 notes $ 493,036 $ - Fixed Rate 2031 2026 notes 397,144 396,705 Fixed Rate 2026 2022 notes - 399,398 Credit facility - 50,000 Variable Rate 2026 Accounts receivable securitization facility - 114,000 Variable Rate 2023 Right-of-use lease obligations 352,331 345,762 2036 1,242,511 1,305,865 Less: Current maturities of long-term debt and right- of-use lease obligations (55,774 ) (51,908 ) Long-term debt and right-of-use lease obligations$ 1,186,737 $ 1,253,957 Total stockholders' equity Total stockholders' equity$ 1,411,930 $ 1,372,994 OnMarch 9, 2021 , the company issued$500.0 million of senior notes with a maturity date ofMarch 15, 2031 . The company pays semiannual interest on the 2031 notes on eachMarch 15 andSeptember 15 and the notes bear interest at 2.400% per annum. The net proceeds received of$494.3 million (before expenses and net of debt discount at issuance of$2.4 million and underwriting discount of$3.3 million ) from the issuance of the 2031 notes were used for the early redemption of the outstanding 2022 notes and repayments on the facility and the credit facility. The early redemption of the 2022 notes resulted in cash payments of$415.4 million (inclusive of a make-whole amount of$15.4 million ) which is classified as a financing cash outflow in the Condensed Consolidated Statement of Cash Flows. We recognized a loss on extinguishment of debt of$16.1 million comprised of the make-whole cash payment of$15.4 million and non-cash charges of$0.7 million for the write-off of unamortized debt discount and debt issuance costs. The facility and credit facility are generally used for short-term liquidity needs. As discussed above, both the facility and credit facility were repaid with proceeds from the issuance of the 2031 notes and cash flows from operations. 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 theU.S. and throughout the world due to the ongoing COVID-19 pandemic. During the third quarter of Fiscal 2021, we amended the credit facility to, among other things, extend the maturity date toJuly 30, 2026 and amended the facility to, among other things, extend the maturity date toSeptember 27, 2023 . See Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information. 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 forty weeks ended
Amount Available For the
Forty Weeks Ended
for Withdrawal at Highest Lowest
Facility October 9, 2021 Balance Balance
(Amounts in thousands)
The facility $ 187,300 $ 114,000 $ -
The credit facility (1) 491,600 50,000 -
$ 678,900
(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 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
53
-------------------------------------------------------------------------------- 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 forty weeks endedOctober 9, 2021 , the company did not make any revolving borrowings and repaid$50.0 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, any 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. 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 ofOctober 9, 2021 , the company was in compliance with all restrictive covenants under our debt agreements.
The company has debt exposure to LIBOR and sufficient LIBOR successor rate provisions to cover the discontinuance of LIBOR. The company continues to monitor the progression of LIBOR discontinuation and the recommendation for an alternative interest rate benchmark.
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 forty weeks endedOctober 9, 2021 , 406,840 shares, at a cost of$9.5 million , of the company's common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan throughOctober 9, 2021 , 68.8 million shares, at a cost of$652.9 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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