FLOWERS FOODS, INC. The following discussion should be read in conjunction with Item 1., Business, and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this Form 10-K. The following information contains forward-looking statements which involve certain risks and uncertainties. See Forward-Looking Statements at the beginning of this Form 10-K.
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 operating performance and
cash flows, industry trends, and our strategic initiatives.
• Critical accounting estimates - describes the accounting areas where
management makes critical estimates to report our financial condition and
results of operations.
• Results of operations - an analysis of the company's consolidated results
of operations for Fiscal 2021 compared to Fiscal 2020 as presented in the
Consolidated Financial Statements. Refer to the Annual Report on Form 10-K
for the fiscal year ended
of operations for Fiscal 2020 compared to Fiscal 2019.
• Liquidity, capital resources and financial position - an analysis of cash
flow, contractual obligations, and certain other matters affecting the
company's financial position.
MATTERS AFFECTING COMPARABILITY
Detailed below are expense (recovery) items affecting comparability that will provide additional context while reading this discussion:
Fiscal 2021 Fiscal 2020 Footnote
52 weeks 53 weeks Disclosure
(Amounts in thousands)
Business process improvement consulting costs
- Note 2 Project Centennial consulting costs - 15,548 Note 5 ERP Road Mapping consulting costs - 4,363 Note 2 Restructuring and related impairment charges - 35,483 Note 5 Loss on inferior ingredients 944 107 Note 4 Non-restructuring lease termination gain (2,644 ) (4,066 ) Note 13, 2 Pension plan settlement and curtailment loss 403 108,757 Note 20 Acquisition consideration adjustment 3,400 - Note 12 Legal settlements and related costs 23,089 7,250 Note 22 Loss on extinguishment of debt 16,149 - Note 14 Other pension plan termination costs -
133
Multi-employer pension plan withdrawal costs 3,300 - Note 20
$ 75,934 $ 167,575
Business process improvement consulting costs related to the transformation
strategy initiatives. In the second half of Fiscal 2020, we launched initiatives
to transform how we operate our business, 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. These transformation strategy initiatives are further discussed in
Item 1., Business, of this Form 10-K. In Fiscal 2022, we currently expect costs
for the upgrade of our ERP system (a portion of which may be expensed as
incurred, capitalized, recognized as a cloud computing arrangement, or
recognized as a prepaid service contract) to be approximately $85 million to $95
million . Costs related to our digital strategy initiatives are anticipated in
Fiscal 2022, but these amounts cannot currently be estimated. The expensed
portion of the consulting costs related to both the ERP upgrade and digital
strategy initiatives incurred in Fiscal 2021 was $31.3 million and is reflected
in the selling, distribution, and administrative expenses line item of the
Consolidated Statements of Income. Initial road mapping costs for these
initiatives were incurred in Fiscal 2020 and are included in the "ERP Road
Mapping consulting costs" in the table above.
Project Centennial consulting costs. During the second quarter of Fiscal 2016,
we launched Project Centennial, an enterprise-wide business and operational
review. Key initiatives of the project were to enhance revenue growth, improve
efficiencies, streamline operations, and make investments to strengthen our
competitive position and improve margins over the long-term. The project was
completed at the end of Fiscal 2020. Consulting costs associated with the
project in Fiscal 2020 were $15.5 million and primarily related to further
refining our organizational structure, portfolio and supply chain optimization
initiatives, and improving our cake
24
--------------------------------------------------------------------------------operations. These consulting costs are reflected in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income.
Consulting costs for planning the upgrade of our ERP platform and the broader digital strategy initiative. As discussed above and in Item 1., Business, of this Form 10-K, we began planning for the upgrade of our ERP platform and other system related enhancements (the "ERP road mapping") during the third quarter of Fiscal 2020. We incurred consulting costs associated with these activities of$4.4 million and these costs are reflected in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income. We completed the initial road mapping activities in the fourth quarter of Fiscal 2020 and transitioned to the design phase of the project.
Restructuring and related impairment charges associated with Project Centennial. The following table details charges recorded in Fiscal 2020 (amounts in thousands):
Fiscal 2020
Employee termination benefits and other cash charges
7,110
Lease termination and lease impairment charges 13,474
Brand rationalization impairments 7,120
$ 35,483
In Fiscal 2020, the company reevaluated its organizational structure in an
effort to increase its focus on brand growth and product innovation and to
improve underperforming bakeries. The organizational structure changes resulted
in employee termination benefits charges in Fiscal 2020 related to a voluntary
employee separation plan (the "VSIP") of $2.6 million and an involuntary
reduction-in-force plan of $5.3 million . The VSIP and reduction-in-force plans
together eliminated approximately 250 positions across different departments and
job levels and all remaining payments related to the plans were paid in early
Fiscal 2021.
During Fiscal 2020, the company sold three closed bakeries that were included in
assets held for sale and certain idle equipment at other bakeries, resulting in
the recognition of $5.7 million of impairment charges. Additionally, the company
recognized property, plant, and equipment impairment charges of $0.6 million for
manufacturing line and distribution depot closures and an office building the
company decided to sell, and $0.7 million for spare parts related to equipment
the company no longer intended to use.
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. These actions resulted in the recognition of lease
termination charges and lease impairment charges totaling
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. The company decided to cease using one of its regional brands and recognized a$1.3 million impairment charge in the fourth quarter of Fiscal 2020. Ingredient and packaging impairments of$1.2 million were also recognized as a result of brand rationalization initiatives. Loss on inferior ingredients. In the fourth 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 incurred costs of$1.8 million related to the recall in Fiscal 2021 and these costs are recorded in our Consolidated Statements of Income. The company is seeking recovery of these losses. In Fiscal 2020, we incurred costs of$1.0 million related to receiving inferior ingredients used in the production of certain of our gluten-free products. In the first quarter of Fiscal 2021, we incurred an additional$0.1 million of costs related to the inferior gluten-free ingredients and in the third quarter of Fiscal 2021, we received reimbursements of approximately$1.0 million for these previously incurred costs. These costs and reimbursements are recorded in the loss on inferior ingredients line item of the Consolidated Statements of Income. In Fiscal 2020, in addition to the costs related to inferior gluten-free ingredients, we recognized an adjustment of$0.2 million related to previously recorded inferior yeast costs and received a$1.2 million reimbursement for the direct costs associated with receiving inferior yeast in a prior year. These direct costs and reimbursements of direct costs are included in our Consolidated Income Statements. We also received a reimbursement of$3.9 million for indirect losses associated with receiving inferior yeast in a prior 25 --------------------------------------------------------------------------------
year and this amount is included in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.
Non-restructuring lease termination gain. In Fiscal 2021, the company purchased twenty-seven warehouses that were included in the company's operating leased assets. Two of the purchased properties were fully impaired in Fiscal 2020, resulting in the recognition of a$2.6 million gain upon completion of the purchase of these assets and this amount is included in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income. In Fiscal 2020, due to a change in the contractual terms with a transportation entity that transports a significant portion of our fresh bakery products to allow for substitution of assets, among other changes to the terms, a reassessment of the embedded lease accounting treatment was triggered. Based our analysis, we determined the contracts associated with the transportation entity no longer qualify for embedded lease treatment and, in unwinding these leases, the company recognized a noncash gain of$4.1 million in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income. Pension plan settlement and curtailment loss. In the company-sponsored defined benefit pension plan for union employees ("Plan No. 2"), retired and terminated vested pension plan participants not yet receiving their benefit payments have the option to elect to receive their benefit as a single lump sum payment. In the fourth quarter of Fiscal 2021, a settlement charge of$0.4 million was triggered as a result of lump sum distributions paid in Fiscal 2021. OnSeptember 28, 2018 , the Board approved a resolution to terminate theFlowers Foods, Inc. Retirement Plan No. 1 ("Plan No. 1"), effectiveDecember 31, 2018 . In the first quarter of Fiscal 2020, the company distributed a portion 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. No cash contributions were required in Fiscal 2020 to support this transaction. In Fiscal 2020, the company recognized$108.8 million of non-cash pension termination charges, comprised of a settlement charge of$104.5 million and a curtailment loss of$4.3 million , and an additional$0.1 million of cash charges for other pension termination charges in our Consolidated Statements of Income. 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$3.4 million , and the Company has recorded this cost in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income in Fiscal 2021. Legal settlements and related costs. In Fiscal 2021, we reached an agreement to settle certain distributor-related litigation for a settlement payment, inclusive of plaintiffs' attorney fees, of$16.5 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. In Fiscal 2020, we reached agreements to settle distributor-related litigation in the aggregate amount of$7.3 million , including plaintiffs' attorney fees and the company's FICA obligations. All amounts related to legal settlements and related costs are recorded in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income. AtJanuary 1, 2022 ,$23.1 million of settlements were accrued (inclusive of obligations for repurchase of distribution rights). Loss on extinguishment of debt. OnApril 8, 2021 , we completed the early redemption of the Company's$400.0 million of 4.375% senior notes due 2022 (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") onMarch 9, 2021 . We recognized a loss on extinguishment of debt of$16.1 million comprised of a make-whole cash payment of$15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling$0.7 million . Multi-employer pension plan withdrawal costs. OnSeptember 22, 2021 , the union participants of the Retail,Wholesale and Department Store Union Fund (the "Fund") at ourBirmingham, Alabama plant voted to withdraw from the Fund in the most recent collective bargaining agreement. The withdrawal was effective, and the union participants became eligible to participate in theFlowers Foods, Inc. 401(k) Retirement Savings Plan, onDecember 1, 2021 . This resulted in the recognition of a pension plan withdrawal liability of$3.3 million (including transition payments) in our Consolidated Statements of Income. The transition payments were paid inDecember 2021 and the withdrawal liability is anticipated to be paid in the first half of Fiscal 2022. 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 or in the event of a mass withdrawal as defined by statute, occurring any time within the next three years following our complete withdrawal. 26 --------------------------------------------------------------------------------
Additional Items Impacting Comparability
Reporting Periods. The company operates on a 52-53 week fiscal year ending the Saturday nearestDecember 31 . Fiscal 2021 consisted of 52 weeks and Fiscal 2020 consisted of 53 weeks. Fiscal 2022 will consist of 52 weeks. COVID-19. OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide, which led to adverse impacts on theU.S. and global economies. Due to the drastic change in consumer buying patterns as a result of the COVID-19 pandemic, we experienced a favorable shift in sales mix to our branded retail products as consumers increased at-home consumption of food products resulting in significant growth in income from operations in Fiscal 2021 and 2020 as compared to Fiscal 2019. As shutdowns and capacity restrictions imposed at the onset of the pandemic have eased, our sales volumes have declined in Fiscal 2021 as compared to the prior year, which included the peak period of demand for our branded retail products and an additional week. Improved price/mix in Fiscal 2021 resulting from favorable pricing we have implemented and the continued favorable shift in mix from store branded retail to branded retail sales partially offset the volume declines. For additional details on the impact of the COVID-19 pandemic to 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 ourLynchburg, Virginia bakery to organic production. During Fiscal 2020, we converted ourLynchburg, Virginia bakery to an all-organic production facility. The converted facility has increased production capacity for our DKB 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$5.1 million in Fiscal 2020 and these costs are included in materials, supplies, labor and other production costs in our Consolidated Statements of Income. The bakery resumed production at the end of the third quarter of Fiscal 2020.
EXECUTIVE OVERVIEW
We are the second-largest producer and marketer of packaged bakery foods in theU.S. with Fiscal 2021 sales of$4.3 billion . We operate in the highly competitive fresh bakery market. Our product offerings include a wide range of fresh breads, buns, rolls, snack cakes and tortillas, as well as frozen breads and rolls, which we produce at 46 plants in 18 states. Our products are sold under leading brands such as Nature's Own,Dave's Killer Bread ,Canyon Bakehouse , Tastykake,Mrs. Freshley's , and Wonder. See Item 1., Business, of this Form 10-K for additional information regarding our customers and brands, business strategies, strengths and core competencies, and competition and risks.
Impact of COVID-19 on Our Business:
The COVID-19 pandemic has significantly impacted our business operations and results of operations during Fiscal 2021 and 2020, as further described under "Results of Operations" and "Liquidity and Capital Resources" below. The resulting dramatic changes in consumer buying patterns has led to a significant rise in demand for our branded retail products due to increases in at-home dining. Sales through our non-retail category, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing, declined substantially at the onset of the pandemic in March of Fiscal 2020, but as the pandemic has progressed and mandatory shutdowns and restaurant closures across theU.S. have eased, our non-retail sales have been recovering. Fiscal 2021 sales declined 1.3% mostly due to the additional week in the prior year which negatively impacted Fiscal 2021 sales 1.7%. Although the prior year benefitted from the significant rise in demand for our branded retail products at the beginning of the COVID-19 pandemic, as well as positive shifts in mix throughout the year and the additional week, Fiscal 2021 benefitted from favorable pricing, a continued positive shift in mix from store branded retail to branded retail products, and a partial recovery in non-retail sales. Fiscal 2021 sales remained elevated compared to pre-pandemic levels as we continued to benefit from the positive mix shift to branded retail products during the ongoing pandemic and favorable pricing, partially offset by volume declines. In recognition and support of our frontline workers, in Fiscal 2021 and 2020, we paid$5.2 million and$12.3 million , respectively, in appreciation bonuses to eligible hourly and non-exempt employees, leased labor, and contract workers. These appreciation bonuses are in addition to the company's annual performance-based cash incentive plan, in which all Flowers employees participate. Although our branded retail sales volumes have moderated as the pandemic has continued, we cannot currently estimate when or if they will return to pre-pandemic levels. OnApril 14, 2020 , we temporarily ceased production at ourTucker, Georgia bakery and onJuly 9, 2020 , we temporarily ceased production at ourSavannah, Georgia bakery. Both closures were due to an increase in the number of confirmed COVID-19 cases at these bakeries and the related increase in number of workers self-quarantining. Production resumed at theTucker bakery onApril 27, 2020 and at theSavannah Bakery onJuly 17, 2020 . Although our other bakeries were able to assist with meeting production needs in these instances, 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. While we have had no 27 -------------------------------------------------------------------------------- temporary production interruptions in Fiscal 2021 due to COVID-19, such interruptions are possible due to the uncertainty of the pandemic. 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.
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" section below. As discussed further in Item 1., Business, of this Form 10-K, we are continuing to move forward with the upgrade of our ERP system and other transformation strategy initiatives and do not anticipate the pandemic to materially alter the timing of these initiatives.
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, 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, and changes in pandemic safety policies. 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. 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. These plans may be impacted by, among other things, 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. Although the impact of these measures, or any other measures adopted by governmental authorities, 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. During Fiscal 2021, we 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 and 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, 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 decreased 1.3% in Fiscal 2021 compared to Fiscal 2020 mostly due to the additional week in the prior year. Although the prior year benefitted from the significant rise in demand for our branded retail products at the beginning of the COVID-19 pandemic and the additional week, Fiscal 2021 benefitted from positive pricing and a continued positive shift in mix from store branded retail to branded retail products and a partial recovery in non-retail sales. Income from operations for Fiscal 2021 was$294.9 million compared to$321.5 million in the prior year. The decrease resulted from sales declines, input cost inflation, higher consulting costs and legal settlements, and greater investments in marketing in the current year, partially offset by prior year restructuring and related impairment charges, and higher short-term incentive compensation paid for appreciation bonuses and workforce-related performance-based cash incentive plans in the prior year. 28 -------------------------------------------------------------------------------- Net income was$206.2 million for Fiscal 2021, an increase of 35.4% as compared to the prior year. The improvement in the current year resulted primarily from the$108.8 million non-cash pension plan settlement and curtailment loss ($81.6 million net of tax) 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 ($12.1 million net of tax) recognized in the current year and decreased income from operations year over year. In Fiscal 2021, we generated net cash flows from operations of$344.6 million , invested$136.0 million in capital expenditures, and purchased a portfolio of leased warehouses for$64.7 million . Additionally, we paid$175.9 million in dividends to our shareholders and decreased our total indebtedness by$81.9 million . OnMarch 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. Throughout Fiscal 2021, we continued to maintain higher levels of cash on hand compared to pre-pandemic levels in order to ensure future liquidity, although we do not have any presently anticipated need for this additional liquidity. Our cash and cash equivalents balance as ofJanuary 1, 2022 was$185.9 million . In Fiscal 2021, we amended senior unsecured revolving credit facility (the "credit facility") and our accounts receivable securitization facility (the "AR facility") to, among other things, extend the maturity dates toJuly 30, 2026 andSeptember 27, 2023 , respectively. In Fiscal 2020, we generated net cash flows from operations of$454.5 million and invested$97.9 million in capital expenditures. We increased our total indebtedness by$92.5 million and paid$167.3 million in dividends to our shareholders in Fiscal 2020. During the first quarter of Fiscal 2020, we borrowed an additional amount under the credit facility in order to ensure future liquidity in response to the uncertainty caused by the pandemic and cash and cash equivalents atJanuary 2, 2021 were$307.5 million .
Critical Accounting Estimates
The company's discussion and analysis of its results of operations and financial condition are based upon the Consolidated Financial Statements of the company, which have been prepared in accordance with generally accepted accounting principles in theU.S. ("GAAP"). The preparation of these financial statements requires the company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues, expenses, and cash flows during the reporting period. On an ongoing basis, the company evaluates its estimates, including those related to customer programs and incentives, bad debts, raw materials, inventories, long-lived assets, leased assets, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The selection and disclosure of the company's critical accounting estimates have been discussed with the company's audit committee. Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements of this Form 10-K includes a summary of the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The following table lists, in no particular order of importance, areas of critical assumptions and estimates used in the preparation of the Consolidated Financial Statements. Additional detail can be found in the following notes: Critical Accounting Estimate Note Revenue recognition - Derivative financial instruments 10 Long-lived assets -Goodwill and other intangible assets 9 Leases 13 Self-insurance reserves 22 Income tax expense and accruals 21 Postretirement plans 20 Stock-based compensation 18 Commitments and contingencies 22 Revenue Recognition. Revenue is recognized when obligations under the terms of a contract with our customers are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The company records both direct and estimated reductions to gross revenue for customer programs and incentive offerings at the time the incentive is offered or at the time of revenue recognition for the underlying transaction that results in progress by the customer towards earning the incentive. These allowances include price promotion discounts, coupons, customer rebates, cooperative advertising, and product returns. Consideration payable to a customer is recognized at the time control transfers and is a reduction to revenue. The recognition of costs for promotion programs involves the use of judgment related to performance and redemption 29 -------------------------------------------------------------------------------- estimates. Estimates are made based on historical experience and other factors. Price promotion discount expense is recorded as a reduction to gross sales when the discounted product is sold to the customer. Derivative Financial Instruments. The company's cost of primary raw materials is highly correlated to certain commodities markets. Raw materials, such as our baking ingredients, experience price fluctuations. If actual market conditions become significantly different than those anticipated, raw material prices could increase significantly, adversely affecting our results of operations. We enter into forward purchase agreements and other derivative financial instruments qualifying for hedge accounting to manage the impact of volatility in raw material prices. The company measures the fair value of its derivative portfolio using fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. When quoted market prices for identical assets or liabilities are not available, the company bases fair value on internally developed models that use current market observable inputs, such as exchange-quoted futures prices and yield curves. Refer to Item 7A., Quantitative and Qualitative Disclosures About Market Risk, of this Form 10-K for additional information about our derivative financial instruments, including a sensitivity analysis of the company's potential exposure to commodity price risk. Valuation of Long-Lived Assets,Goodwill and Other Intangible Assets. The company records an impairment charge to property, plant and equipment, goodwill and intangible assets in accordance with applicable accounting standards when, based on certain indicators of impairment, it believes such assets have experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of these underlying assets could result in losses or an inability to recover the carrying value of the asset that may not be reflected in the asset's current carrying value, thereby possibly requiring impairment charges in the future. Impairment charges recorded in Fiscal 2020 are discussed above in the "Matters Affecting Comparability" section. Flowers has concluded it has one operating segment based on the nature of products that Flowers sells, an intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the CEO,who is the chief operating decision maker, for the purpose of assessing performance and allocating resources. The company also determined we have one reporting unit. The company evaluates the recoverability of the carrying value of its goodwill on an annual basis or at a time when events occur that indicate the carrying value of the goodwill may be impaired. We have elected not to perform the qualitative approach, but instead perform a quantitative analysis by comparing the fair value of the reporting unit with which the goodwill is associated to the carrying amount of the reporting unit. If the fair value is less than the carrying value, the goodwill is written down to the extent the carrying amount exceeds the fair value. Our annual evaluation of goodwill impairment requires management judgment and the use of estimates and assumptions to determine the fair value of our reporting unit. Fair value is estimated using standard valuation methodologies incorporating market participant considerations and management's assumptions on revenue, revenue growth rates, operating margins, discount rates, and EBITDA (defined as earnings before interest, taxes, depreciation and amortization). Our estimates can significantly affect the outcome of the test. We perform the fair value assessment using the income and market approach. Changes in our forecasted operating results and other assumptions could materially affect these estimates. This test is performed in the fourth quarter of each fiscal year unless circumstances require this analysis to be completed sooner. The income approach is tested using a sensitivity analysis to changes in the discount rate and yield a sufficient buffer to significant variances in our estimates. The estimated fair value of our reporting unit exceeded its carrying value in excess of$4.0 billion in Fiscal 2021. A 1% decrease in the discount rate would increase the fair value of the reporting unit by$1.1 billion and a 1% increase in the discount rate would decrease the fair value by$0.8 billion . Based on management's evaluation, no impairment charges relating to goodwill were recorded for Fiscal 2021 or 2020. In connection with acquisitions, the company has acquired trademarks, customer lists, and non-compete agreements, a portion of which are amortizable. The company evaluates these assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The undiscounted future cash flows of each intangible asset are compared to the carrying amount, and if less than the carrying value, the intangible asset is written down to the extent the carrying amount exceeds the fair value. The fair value is computed using the same approach described above for goodwill and includes the same risks and estimates. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment. We use the multi-period excess earnings and relief from royalty methods to value these intangibles. The method used for impairment testing purposes is consistent with the valuation method employed at acquisition of the intangible asset. No impairment charges related to amortizing intangible assets were recorded in Fiscal 2021. Impairment charges recorded in Fiscal 2020 related to amortizable intangible assets totaled$5.9 million and are discussed above in the "Matters Affecting Comparability" section. As ofJanuary 1, 2022 , the company also owns a trademark acquired through an acquisition with a carrying value of$127.1 million that is an indefinite-lived intangible asset not subject to amortization. The company evaluates the recoverability of intangible assets not subject to amortization by comparing the fair value to the carrying value on an annual basis or at a time when events occur that indicate the carrying value may be impaired. In addition, the assets are evaluated to determine whether events and circumstances continue to support an indefinite life. The fair value is compared to the carrying value of the intangible asset, and if less than the carrying value, the intangible asset is written down to fair value. There are certain inherent risks included in our expectations about the 30 -------------------------------------------------------------------------------- performance of acquired trademarks and brands. If we are unable to implement our growth strategies for these acquired intangible assets as expected, it could adversely impact the carrying value of the brands. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment. Leases. The company's leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation, and IT equipment. The company uses the applicable incremental borrowing rate at lease commencement to perform the lease classification tests on lease components and to measure the lease liabilities and right-of-use assets in situations when discount rates implicit in leases cannot be readily determined. Self-Insurance Reserves. We are self-insured for various levels of general liability, auto liability, workers' compensation, and employee medical and dental coverage. Insurance reserves are calculated on a combination of an undiscounted basis based on actual claims data and estimates of incurred but not reported claims developed utilizing historical claims trends. Projected settlements of incurred but not reported claims are estimated based on pending claims, historical trends, industry trends related to expected losses and actual reported losses, and key assumptions, including loss development factors and expected loss rates. Though the company does not expect them to do so, actual settlements and claims could differ materially from those estimated. Material differences in actual settlements and claims could have an adverse effect on our financial condition and results of operations. A sensitivity analysis has been prepared to quantify the impact of changes in claim severity and frequency on the estimated unpaid losses on the company's workers' compensation liabilities. We estimate a 1% change in the claim severity and frequency would result in immaterial changes in the workers' compensation liability. Income Tax Expense and Accruals. The annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Changes in statutory rates and tax laws in jurisdictions in which we operate may have a material effect on the annual tax rate. The effect of these changes, if any, would be recognized as a discrete item upon enactment. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Our income tax expense, deferred tax assets and liabilities, and reserve for uncertain tax benefits reflect our best assessment of future taxes to be paid in the jurisdictions in which we operate. The company records a valuation allowance to reduce its deferred tax assets if we believe it is more likely than not that some or all of the deferred assets will not be realized. While the company considers future taxable income and ongoing prudent and feasible tax strategies in assessing the need for a valuation allowance, if these estimates and assumptions change in the future, the company may be required to adjust its valuation allowance, which could result in a charge to, or an increase in, income in the period such determination is made. Periodically, we face audits from federal and state tax authorities, which can result in challenges regarding the timing and amount of income or deductions. We provide reserves for potential exposures when we consider it more likely than not that a taxing authority may take a sustainable position on a matter contrary to our position. We evaluate these reserves on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements that may impact the ultimate payment of such potential exposures. While the ultimate outcome of audits cannot be predicted with certainty, we do not currently believe that current or future audits will have a material adverse effect on our consolidated financial condition or results of operations. The company is no longer subject to federal examination for years prior to Fiscal 2018. Postretirement Plans. The company records pension costs and benefit obligations related to its defined benefit plans based on actuarial valuations. These valuations reflect key assumptions determined by management, including the discount rate, expected long-term rate of return on plan assets and mortality. Material changes in pension costs and in benefit obligations may occur in the future due to experience that is different than assumed and changes in these assumptions. A sensitivity analysis of pension costs has been prepared to quantify the impact of changes in the discount rate. We estimate a 0.25% change in the discount rate would result in approximately$0.1 million change in pension costs on a pre-tax basis.
The company sponsors a defined benefit pension plan for union employees, Plan No. 2, and a frozen nonqualified plan covering former Tasty executives.
We use a spot rate approach ("granular method") to estimate the service cost and
interest cost components of benefit cost by applying the specific spot rates
along the yield curve to the relevant projected cash flows, as we believe this
provides the best estimate of service and interest costs.
31
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The pension plan's investment committee, which consists of certain members of
management, establishes investment guidelines and regularly monitors the
performance of the plan's assets. The investment committee is responsible for
executing these strategies and investing the pension assets in accordance with
ERISA and fiduciary standards. The investment objective of the pension plan is
to preserve the plan's capital and maximize investment earnings within
acceptable levels of risk and volatility. The investment committee meets on a
regular basis with its investment advisors to review the performance of the
plan's assets. Based upon performance and other measures and recommendations
from its investment advisors, the investment committee rebalances the plan's
assets to the targeted allocation when considered appropriate. The asset
allocation for Plan No. 2 as of December 31, 2021 is equal to 0-80% equity
securities, 20-100% fixed-income securities, and 0-10% short-term investments
and cash. For the details of our pension plan assets, see Note 20,
Postretirement Plans, of Notes to Consolidated Financial Statements of this Form
10-K.
In developing the expected long-term rate of return on plan assets at each
measurement date, the company considers the plan assets' historical actual
returns, targeted asset allocations, and the anticipated future economic
environment and long-term performance of the individual asset classes, based on
the company's investment strategy. While appropriate consideration is given to
recent and historical investment performance, the assumption represents
management's best estimate of the long-term prospective return. Further, pension
costs do not include an explicit expense assumption, and therefore the return on
assets rate reflects the long-term expected return, net of expenses. Based on
these factors, the long-term rate of return assumption for Plan No. 2 was set at
5.7% for Fiscal 2021 and 5.9% for Fiscal 2022.
The company utilizes the Society of Actuaries' ("SOA") published mortality
tables and improvement scales in developing their best estimates of mortality.
In October 2019 , the SOA published its final report on their "standard"
mortality table ("Pri-2012"). For purposes of measuring pension benefit
obligations of Plan No. 2, the company used a blue color adjustment to the
Pri-2012 base table and a projection scale of MP-2020. No other collar
adjustments are applied for any other plans. In addition, contingent annuitant
mortality rates are applied for surviving spouses after the death of the
original retiree.
The company determines the fair value of substantially all of its plans' assets
utilizing market quotes rather than developing "smoothed" values, "market
related" values, or other modeling techniques. Plan asset gains or losses in a
given year are included with other actuarial gains and losses due to
remeasurement of the plans' projected benefit obligations ("PBO"). If the total
unrecognized gain or loss exceeds 10% of the larger of (i) the PBO or (ii) the
market value of plan assets, the excess of the total unrecognized gain or loss
is amortized over the expected average remaining service period of active
covered employees (or average future lifetime of participants if the plan is
inactive or frozen). Prior service cost or credit, which represents the effect
on plan liabilities due to plan amendments, is amortized over the average
remaining service period of active covered employees (or average future lifetime
if the plan is inactive or frozen).
In Fiscal 2022, the company expects to make a
Stock-based compensation. Stock-based compensation expense for all share-based
payment awards granted is determined based on the grant date fair value. The
company recognizes these compensation costs net of an estimated forfeiture rate,
and recognizes compensation cost only for those shares expected to vest on a
straight-line basis over the requisite service period of the award, which is
generally the vesting term of the share-based payment award.
We grant performance stock awards that separately have a market and performance
condition. The expense computed for the total shareholder return shares ("TSR")
is fixed and recognized on a straight-line basis over the vesting period. The
expense computed for the return on invested capital ("ROIC") shares can change
depending on the expected attainment of performance condition goals. The expense
for the ROIC shares can be within a range of 0% to 125% of the target. There is
a possibility that this expense component will change in subsequent quarters
depending on how the company performs relative to the ROIC target. Additionally,
there are time-based stock awards that vest over a period of three years. See
Note 18, Stock-Based Compensation, of Notes to Consolidated Financial Statements
of this Form 10-K for additional information. In early Fiscal 2022, the company
granted stock awards to certain employees and stock-based compensation expense
is expected to increase approximately $2 million to $3 million as compared to
Fiscal 2021. In addition, the payout for the Fiscal 2020 grant is currently
trending at 125% of target and as a result, we anticipate an additional $1.7
million of expense will be recognized in the first quarter of Fiscal 2022.
Commitments and contingencies. The company and its subsidiaries from time to
time are parties to, or targets of, lawsuits, claims, investigations and
proceedings, including personal injury, commercial, contract, environmental,
antitrust, product liability, health and safety and employment matters,
including lawsuits related to the independent distributors, which are being
handled and defended in the ordinary course of business. Loss contingencies are
recorded at the time it is probable an asset is impaired or a liability has been
incurred and the amount can be reasonably estimated. For litigation claims, the
company considers the degree of probability of an unfavorable outcome and the
ability to make a reasonable estimate of the loss. Losses are recorded in the
selling, distribution and administrative expenses line item of the Consolidated
Statements of Income.
32
--------------------------------------------------------------------------------Results of Operations
Consolidated Results - Fiscal 2021 compared to Fiscal 2020
The company's results of operations, expressed as a percentage of sales, are set forth below for Fiscal 2021 and Fiscal 2020:
Percentage of Sales Increase (Decrease)
Fiscal 2021 Fiscal 2020 Fiscal 2021 Fiscal 2020 Dollars %
52 weeks 53 weeks 52 weeks 53 weeks
(Amounts in thousands, except percentages)
Sales $ 4,330,767 $ 4,387,991 100.0 100.0 $ (57,224 ) (1.3 )
Materials, supplies, labor
and other production
costs (exclusive of
depreciation and
amortization shown
separately below) 2,175,247 2,196,142 50.2 50.0 (20,895 ) (1.0 )
Selling, distribution and
administrative
expenses 1,719,797 1,693,387 39.7 38.6 26,410 1.6
Loss on inferior
ingredients 944 107 0.0 0.0 837 NM
Restructuring and related
impairment charges - 35,483 - 0.8 (35,483 ) NM
Multi-employer pension plan
withdrawal costs 3,300 - 0.1 - 3,300 NM
Depreciation and
amortization 136,559 141,384 3.2 3.2 (4,825 ) (3.4 )
Income from operations 294,920 321,488 6.8 7.3 (26,568 ) (8.3 )
Other components of net
periodic pension and
postretirement benefits
credit (405 ) (74 ) (0.0 ) (0.0 ) (331 ) NM
Pension plan settlement and
curtailment loss 403 108,757 0.0 2.5 (108,354 ) NM
Interest expense, net 8,001 12,094 0.2 0.3 (4,093 ) (33.8 )
Loss on extinguishment of
debt 16,149 - 0.4 - 16,149 NM
Income before income taxes 270,772 200,711 6.3 4.6 70,061 34.9
Income tax expense 64,585 48,393 1.5 1.1 16,192 33.5
Net income $ 206,187 $ 152,318 4.8 3.5 $ 53,869 35.4
Comprehensive income $ 202,350 $ 264,762 4.7 6.0 $ (62,412 ) (23.6 )
NM - the computation is not meaningful
Percentages may not add due to rounding.
Sales
Fiscal 2021 Fiscal 2020
52 weeks 53 weeks
$ % $ % % Change
(Amounts in (Amounts in
thousands) thousands)
Branded retail $ 2,875,418 66.4 $ 2,914,072 66.4 (1.3 )
Store branded retail 534,794 12.3 607,741 13.9 (12.0 )
Non-retail and other 920,555 21.3 866,178 19.7 6.3
Total $ 4,330,767 100.0 $ 4,387,991 100.0 (1.3 )
(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 attributable to the following:
Favorable
Percentage point change in sales attributed to: (Unfavorable) Pricing/mix
4.6
Volume (4.2 )
Impact of 53rd week in Fiscal 2020 (1.7 )
Total percentage change in sales (1.3 )
33
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Sales decreased year over year primarily due to the additional week in the prior
year and significant declines in store branded retail sales, partially offset by
positive pricing implemented during Fiscal 2021 across all sales categories and
recovery of non-retail and other sales. In Fiscal 2021, the company has
experienced a favorable sales mix of branded retail sales even as away-from-home
dining returned to more normal levels. The mix of branded retail sales to total
sales remained consistent with Fiscal 2020 which benefitted from increased
demand for our branded retail products as consumers shifted to greater at-home
consumption due to the pandemic. In Fiscal 2019, branded retail sales comprised
60.1% of total sales which is significantly lower than 66.4% for Fiscal 2021 and
2020. We continued to invest in our brands in Fiscal 2021, including targeting
the e-commerce channel which has experienced significant growth during the
ongoing pandemic. Improved promotional efficiency (measurement of a promotion's
impact on operating performance) in the current year also mitigated the sales
decrease. The promotional environment remained relatively stable during Fiscal
2021, however the sustainability of this trend is uncertain.
Branded retail sales declined year over year primarily due to the additional
week in the prior year. Positive pricing actions and favorable mix shifts in
Fiscal 2021 mostly offset volume declines. We experienced a significant increase
in prior year volumes as a result of the onset of the pandemic and the impact of
the additional week. 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. Both our DKB organic products and
Canyon Bakehouse gluten-free products continued to experience volume growth in
Fiscal 2021 which partially offset the branded retail sales decline. Fiscal 2021
volumes were still significantly higher than our historical pre-pandemic levels.
Store branded retail sales declined significantly due to decreased volume for
store branded breads, buns and rolls as consumers continued to shift to branded
retail products and the impact of the additional week in the prior year. These
decreases were 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, partly due to executing on our strategy to prioritize
a more favorable sales mix of branded retail sales.
As discussed above, our non-retail sales recovered during Fiscal 2021 compared
to the significant declines experienced in the prior year period due to
restaurant and school closures and shutdowns but have not returned to
pre-pandemic levels. Increased foodservice volumes and to a lesser extent,
positive price/mix drove the increase, partially offset by the impact of the
additional week in the prior year and declines in sales of unsold products
through our outlet stores.
We anticipate our Fiscal 2022 sales will be positively impacted by the benefit
of price increases implemented during Fiscal 2021 and at the beginning of Fiscal
2022, however, this could potentially be offset to some extent by changes in
consumer buying patterns which are unpredictable.
Materials, Supplies, Labor, and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
Fiscal 2021 Fiscal 2020 Change as a
Line item component % of sales % of sales % of sales
Ingredients and packaging 28.1 27.4 0.7
Workforce-related costs 14.9 15.1 (0.2 )
Other 7.2 7.5 (0.3 )
Total 50.2 50.0 0.2
Overall, input cost inflation was mostly mitigated by pricing actions
implemented in Fiscal 2021 and the continued shift in mix away from lower margin
store branded retail products to higher margin branded retail products. The
positive shift in mix resulted from the ongoing COVID-19 pandemic and executing
on our strategy to be a more brand-focused company. Additionally, we realized
improvement in our cake operations. Ingredient and packaging costs were
significantly higher as percent of sales due to higher input prices, mostly
notably for non-organic flour, oils, bread bags, and corrugated
packaging. Reduced outside purchases of product (sales with no associated
ingredient costs) also contributed to the increase in ingredient and packaging
costs and these are reflected in the Other line item in the table
above. Workforce-related costs decreased as a percent of sales due to lower
incentive compensation costs in Fiscal 2021, partly due to decreases in
appreciation bonuses for frontline workers of $4.5 million , and the prior year
included $5.1 million of start-up costs incurred for the conversion of our
Lynchburg, Virginia plant to an organic bakery. These start-up costs were
largely workforce-related. The conversion began in the first quarter of Fiscal
2020 and the bakery resumed production at the end of the third quarter. As
discussed above, the labor market is highly competitive and the company
continues to face labor shortages. We anticipate this trend to continue in
Fiscal 2022.
34
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Raw materials, such as our baking ingredients, periodically experience price
fluctuations. The cost of these inputs may fluctuate significantly due to
government policy and regulation, weather conditions, domestic and international
demand and supply, or other unforeseen circumstances. We enter into forward
purchase agreements and other derivative financial instruments in an effort to
manage the impact of such volatility in raw material prices, but some organic
and specialty ingredients do not offer the same hedging opportunities to reduce
the impact of price volatility. Any decrease in the availability of these
agreements could increase the effective price of these raw materials to us and
significantly affect our earnings. We currently anticipate ingredient costs to
be significantly higher in Fiscal 2022 relative to Fiscal 2021.
Selling, Distribution and Administrative Expenses (as a percent of sales)
Fiscal 2021 Fiscal 2020 Change as a
Line item component % of sales % of sales % of sales
Workforce-related costs 11.4 11.5 (0.1 )
Distributor distribution fees 14.9 15.3 (0.4 )
Other 13.4 11.8 1.6
Total 39.7 38.6 1.1
Workforce-related costs decreased slightly as a percent of sales compared to the
prior year primarily due to lower workforce-related incentive costs, including a
$2.6 million decrease in appreciation bonuses paid to frontline workers, mostly
offset by wage inflation and a competitive labor market. The appreciation
bonuses are in addition to the company's annual performance-based cash incentive
plan in which all Flowers employees participate. Stock-based compensation
expense increased in Fiscal 2021 due to an increase in the number of awards
outstanding as compared to Fiscal 2020 and partially offset the overall decrease
in workforce-related costs.
Distributor distribution fees decreased as a percent of sales due to the shift
in sales mix to include a larger percentage of non-retail and other sales
resulting in a smaller portion of our sales being made through IDPs. Non-retail
and other sales experienced a partial recovery in Fiscal 2021 after the
significant decline in Fiscal 2020 due to the pandemic. The decrease in
distributor distribution fees was offset by higher transportation costs which
are reflected in the Other line item in the table above.
Increases in marketing investments, higher consulting costs, legal settlements,
and transportation costs, and the prior year reimbursement of indirect losses
for inferior yeast of $3.9 million primarily resulted in the increase in the
Other line item in the table above. We continued to invest in our brands through
our marketing efforts, including through broadcast advertising and e-commerce
investments, among others. We incurred $31.3 million of business process
improvement consulting costs during Fiscal 2021 associated with ongoing
transformation strategy initiatives compared to $15.5 million of Project
Centennial consulting costs and $4.4 million of ERP Road Mapping consulting
costs both incurred in the prior year. For additional details regarding these
consulting costs and the reimbursement related to inferior ingredients, see the
"Matters Affecting Comparability" section above. In the current year, we
incurred $23.1 million of legal settlement and related charges and $3.4 million
for the acquisition consideration adjustment compared to $7.3 million of legal
settlements in the prior year, as discussed in the "Matters Affecting
Comparability" section above. Additionally, See Note 22, Commitments and
Contingencies, of Notes to Consolidated Financial Statements of this Form 10-K
for additional information regarding legal settlements. Higher prices for scrap
dough sales in the current year partially offset the overall increase in costs.
Loss 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 unchanged 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. Income from Operations
The decrease in income from operations year over year in dollars and as a percent of sales resulted from sales declines, input cost inflation, higher selling, distribution, and administrative expenses, and current year multi-employer pension plan withdrawal costs, as discussed above. The decrease was partially offset by the prior year restructuring and related impairment charges.
35
--------------------------------------------------------------------------------Pension Plan Settlement and Curtailment Loss
As discussed in the "Matters Affecting Comparability" section above, we recognized$0.4 million of non-cash pension plan settlement charges in Fiscal 2021 associated with Plan No. 2 and$108.8 million of non-cash pension plan settlement and curtailment charges in Fiscal 2020 composed of a settlement charge of$104.5 million and a curtailment loss of$4.3 million associated with Plan No. 1. Net Interest Expense Year over year, net interest expense (exclusive of the portion related to the loss on extinguishment of debt discussed below) decreased in dollars and as a percent of sales primarily 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, to a lesser extent, lower average amounts outstanding under our borrowing arrangements, 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 Fiscal 2021 was 23.9% compared to 24.1% in the prior
year. The decrease in the rate year over year was primarily due to state income
taxes.
For the current year and prior year, the primary differences in the effective
rate and statutory rate related to state income taxes. The Consolidated
Appropriations Act, 2021 (CAA Act), American Rescue Plan Act ("ARPA"), and
Infrastructure Investment and Jobs Act ("IIJA") did not have a material impact
on the effective tax rate for Fiscal 2021 and there is no anticipated material
impact on the effective tax rate in future periods.
Comprehensive Income
The decrease in comprehensive income year over year resulted primarily from recognizing the pension plan settlement and curtailment loss in earnings in the prior year in conjunction with the termination of Plan No. 1 and changes in the fair value of derivatives, net of the increase in net earnings.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION
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. Furthermore, we strive to maintain a conservative financial position as we believe it allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, and obligated debt repayments. We believe 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 transformation
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 in Fiscal 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 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,
36
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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 AR facility
and 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 $872.0 million as of January 1, 2022 , consisting of cash on hand
and the available balances under the credit facility and the AR facility.
We expect the transformation strategy initiatives will require significant
capital investment and expense over the next several years. We currently
anticipate the upgrade of our ERP system will cost approximately $275 million
(of which approximately 40% is expected to be capitalized) and anticipate the
upgrade to be completed in 2026. As of January 1, 2022 , we had incurred costs
related to the project of approximately $47 million . Costs related to the
digital initiatives are more fluid and cannot currently be estimated.
The company leases certain property and equipment under various financing and
operating lease arrangements. Most of the operating leases provide the company
with the option, after the initial lease term, to purchase the property at the
then fair value, renew the lease at the then fair value, or return the property.
The financing leases provide the company with the option to purchase the
property at a fixed price at the end of the lease term. The company believes the
use of leases as a financing alternative places the company in a more favorable
position to fulfill its long-term strategy for the use of its cash flow. See
Note 13, Leases, of Notes to Consolidated Financial Statements of this Form 10-K
for detailed financial information regarding the company's lease arrangements.
Key items impacting our liquidity, capital resources and financial position in Fiscal 2021 and 2020:
Fiscal 2021:
• We generated$344.6 million of net cash from operating activities. • We paid dividends to our shareholders of$175.9 million . • We decreased our total debt outstanding$81.9 million .
• We invested in our business through capital expenditures of
(inclusive of
recognized in accounts payable at year end) for the ERP upgrade) and
purchase of leased warehouses of $64.7 million .
• We paid
accrued for in the prior year.
• We incurred business process improvement consulting costs of
related to the ongoing transformation strategy initiatives (exclusive of
capitalized or deferred costs).
Fiscal 2020:
• We generated$454.5 million of net cash from operating activities. • We paid dividends to our shareholders of$167.3 million . • We increased our total debt outstanding$92.5 million .
• We invested in our business through capital expenditures of
• We incurred Project Centennial implementation costs, including
restructuring cash payments of $12.0 million and non-restructuring
consulting costs of $15.5 million .
• We incurred ERP Road Mapping costs of $4.4 million .
37--------------------------------------------------------------------------------
Liquidity Discussion
Cash flow component Fiscal 2021 Fiscal
2020
Cash flows provided by operating activities
(191,438 ) (73,992 )
Cash disbursed for financing activities (274,777 ) (84,040 )
Total change in cash $ (121,605 ) $ 296,432
Cash Flows Provided by Operating Activities. Net cash provided by operating
activities included the following items for non-cash adjustments to net income
(amounts in thousands):
Fiscal 2021 Fiscal 2020
Depreciation and amortization $ 136,559 $ 141,384
Restructuring and related impairment charges - 23,627
Stock-based compensation 21,343 12,855
Deferred income taxes 6,777 (31,154 )
Pension and postretirement plans expense (including
settlement and curtailment losses) 1,306 109,823
Other non-cash 6,445
16,696
Net non-cash adjustment to net income$ 172,430 $ 273,231
• Refer to the Restructuring and related impairment charges discussion in
the "Matters Affecting Comparability" section above regarding this item.
• The change in stock-based compensation from Fiscal 2020 to Fiscal 2021 was
primarily due to an increase in the number of awards outstanding in the
current year as compared to the prior year.
• For Fiscal 2021 deferred income taxes changed due to changes in temporary
differences. For Fiscal 2020, the change in deferred income taxes resulted
from changes in temporary differences year over year, including the impact
of the termination of Plan No. 1.
• Changes in pension and postretirement plan (benefit) expense were
primarily due to the settlement and curtailment loss of
recognized in Fiscal 2020 in conjunction with the termination of Plan No.
1.
• Other non-cash items include non-cash interest expense for theamortization of debt discounts and deferred financing costs, activity in
allowances for accounts receivable and inventory obsolescence, and gains
or losses on the sale of assets.
Net cash for working capital requirements and pension plan contributions included the following items (amounts in thousands):
Fiscal 2021 Fiscal 2020
Changes in accounts receivable, net $ (10,600 ) $ (25,021 )
Changes in inventories, net (9,767 ) (1,771 )
Changes in hedging activities, net (4,967 ) 15,829
Changes in other assets and accrued liabilities, net (46,749 )
53,250
Changes in accounts payable 38,076 (5,772 ) Qualified pension plan contributions - (7,600 ) Net changes in working capital and pension plan contributions$ (34,007 ) $ 28,915
• The change in accounts receivable, inventories, and accounts payable
resulted primarily from changes in sales and increases in ingredient and
packaging costs year over year.
• Hedging activities change from market movements that affect the fair value
and 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 and accrued liabilities primarily resulted from
changes in employee compensation accruals, cloud-computing arrangement
service contracts, legal settlement accruals, income tax receivable
balances, hedge margin, and payroll tax deferrals under the CARES Act. In
Fiscal 2021 and 2020, we paid
respectively, of restructuring-related cash charges. In Fiscal 2021, we
accrued
38
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2020, we accrued
which
making payments of approximately $38.2 million , including our share of
employment taxes, in performance-based cash awards under our cash
incentive plans in the first quarter of Fiscal 2022. During Fiscal 2021
and 2020, the company paid
including our share of employment taxes, in performance-based cash awards
under the company's incentive plan. The increase in performance-based cash
awards paid in Fiscal 2021 resulted from improved financial performance in
Fiscal 2020. An additional
Fiscal 2021 and 2020, respectively, for our share of employment taxes on
the vesting of the performance-contingent restricted stock awards in each
respective year. Under the CARES Act, the company deferred approximately
from the beginning of the second quarter of Fiscal 2020 through December
31, 2020 and paid approximately $15.0 million in December 2021 with the
remaining amount to be paid by December 31, 2022 .
• During Fiscal 2020, we made voluntary contributions to our qualified
defined benefit pension plans of
contributions to our qualified defined benefit pension plans in Fiscal
2021. We expect to make
our pension plans in Fiscal 2022 and expect to pay
nonqualified pension benefits from corporate assets. 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.
Cash Flows Disbursed for Investing Activities. The table below presents net
cash disbursed for investing activities for Fiscal 2021 and 2020 (amounts in
thousands):
Fiscal 2021 Fiscal 2020
Purchase of property, plant, and equipment $ (135,964 ) $ (97,929 )
Purchase of leased portfolio (64,689 ) -
Principal payments from notes receivable, net of
repurchases of independent distributor territories 15,276
18,379
Acquisition of trademarks (10,200 ) - Proceeds from sale of property, plant and equipment 2,995
5,368
Other 1,144
190
Net cash disbursed for investing activities$ (191,438 ) $ (73,992 )
• The company currently estimates capital expenditures of approximately
$175.0 million to$185.0 million (inclusive of expenditures for the ERP upgrade of$65.0 million to$75.0 million ) in Fiscal 2022. Cash Flows Disbursed for Financing Activities. The table below presents net cash disbursed for financing activities for Fiscal 2021 and 2020 (amounts in thousands): Fiscal 2021 Fiscal 2020 Dividends paid, including dividends on share-based payment awards$ (175,903 ) $ (167,270 ) Payment of contingent consideration - (4,700 ) Payment of financing fees (6,022 ) (206 ) Stock repurchases (9,510 ) (783 ) Change in bank overdrafts 261 3,134 Net change in debt obligations (81,858 )
92,500
Payments on financing leases (1,745 ) (6,715 ) Net cash disbursed for financing activities$ (274,777 ) $
(84,040 )
• Our annual dividend rate increased from
$0.84 per share in Fiscal 2021. 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. • The payment for contingent consideration was made to satisfy the contingent consideration liability recorded in theCanyon Bakehouse LLC acquisition.
• 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 AR facility
and credit facility in the third quarter of Fiscal 2021.
39
--------------------------------------------------------------------------------• Stock repurchase decisions are made based on our stock price, our belief
of relative value, and our cash projections at any given time. See Note
17, Stockholders' Equity, of Notes to Consolidated Financial Statements of
this Form 10-K for additional information. 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.
• See the discussion below under the "Capital Structure" section regarding
changes in debt obligations.
Capital Structure
Long-term debt and right-of-use lease obligations and stockholders' equity were as follows atJanuary 1, 2022 andJanuary 2, 2021 . For a detailed description of our debt and right-of-use lease obligations and information regarding our distributor arrangements, deferred compensation, and guarantees and indemnification obligations, see Note 13, Leases, and Note 14, Debt and Other Commitments, of Notes to Consolidated Financial Statements of this Form 10-K: Interest Rate at Final Balance at Fixed or January 1, 2022 Maturity January 1, 2022 January 2, 2021 Variable Rate (Amounts in thousands) 2031 notes 2.40% 2031 $ 493,333 $ - Fixed Rate 2026 notes 3.50% 2026 397,276 396,705 Fixed Rate 2022 notes 4.38% 2022 - 399,398 Fixed Rate Credit facility 1.02% 2026 - 50,000 Variable Rate AR facility 1.00% 2023 - 114,000 Variable Rate
Right-of-use lease
obligations 2036 300,522 345,762
1,191,131 1,305,865
Less: Current maturities
of long-term debt
and right-of-use lease
obligations (47,974 ) (51,908 )
Long-term debt and
right-of-use lease
obligations $ 1,143,157 $ 1,253,957
Total stockholders' equity was as follows at January 1, 2022 and January 2,
2021 :
Balance at
January 1, 2022 January 2, 2021
(Amounts in thousands)
Total stockholders' equity $ 1,411,274 $ 1,372,994
On March 9, 2021 , the company issued $500.0 million of senior notes with a
maturity date of March 15, 2031 . The company pays semiannual interest on the
2031 notes on each March 15 and September 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 AR 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 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.
40
--------------------------------------------------------------------------------
The credit facility and AR facility are generally used for short term liquidity
needs. The company has historically entered into amendments and extensions
approximately one year prior to the maturity of these facilities. During the
third quarter of Fiscal 2021, we amended the credit facility to, among other
things, extend the maturity date to July 30, 2026 and amended the AR facility
to, among other things, extend the maturity date to September 27, 2023 . The
following table details the amounts available under the AR facility and credit
facility and the highest and lowest balances outstanding under these
arrangements during Fiscal 2021:
Amount Available Highest Lowest
for Withdrawal at Balance in Balance in
Facility January 1, 2022 Fiscal 2021 Fiscal 2021
(Amounts in thousands)
AR facility $ 194,500 $ 114,000 $ -
Credit facility (1) 491,600 $ 50,000 $ -
$ 686,100
(1) Amount excludes a provision in the agreement which allows the company to
request an additional
Amounts outstanding under the credit facility can vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company's overall risk management strategy as discussed in Note 10, Derivative Financial Instruments, of Notes to Consolidated Financial Statements of this Form 10-K. During Fiscal 2021, the company borrowed$10.0 million in revolving borrowings under the credit facility and repaid$60.0 million in revolving borrowings. The amount available under the credit facility is reduced by$8.4 million for letters of credit. The AR facility and the credit facility are variable rate debt. In periods of rising interest rates, the cost of using these facilities 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. Restrictive financial covenants for our borrowings 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 its presently foreseeable financial requirements. As ofJanuary 1, 2022 andJanuary 2, 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.
Special Purpose Entities. AtJanuary 1, 2022 andJanuary 2, 2021 , the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Guarantees. In the event the company ceases to utilize the independent distribution form of doing business or exits a geographic market, the company is contractually required to purchase the distribution rights from the independent distributor. Stock Repurchase Plan. The Board has approved a plan that currently authorizes share repurchases of up to 74.6 million shares of the company's common stock. At the close of the company's fourth quarter onJanuary 1, 2022 , 5.8 million shares remained under the existing authorization. Under the plan, the company may repurchase its common stock in open market or privately negotiated transactions or under an accelerated repurchase program at such times and at such prices as determined to be in the company's best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During Fiscal 2021, 0.41 million shares of the company's common stock were repurchased under the plan at a cost of$9.5 million and during Fiscal 2020, 0.04 million shares were repurchased under the plan at a cost of$0.8 million . From the inception of the plan throughJanuary 1, 2022 , 68.8 million shares, at a cost of$652.9 million , have been repurchased. There were no repurchases of the company's common stock during the fourth quarter of Fiscal 2021. 41 --------------------------------------------------------------------------------
New Accounting Pronouncements Not Yet Adopted
See Note 3, Recent Accounting Pronouncements, of Notes to Consolidated Financial Statements of this Form 10-K regarding this information.
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