FLOWERS FOODS, INC. The following discussion of the financial condition and results of operations of the company as of and for the sixteen weeks endedApril 24, 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 comparative period presented in our Condensed
Consolidated Financial Statements.
• Liquidity and capital resources - an analysis of cash flow, contractual
obligations, and certain other matters affecting the company's financial
position.
Matters Affecting Comparability
Detailed below are expense items affecting comparability that will provide additional context while reading this discussion:
For the Sixteen Weeks Ended Footnote
April 24, 2021 April 18, 2020 Disclosure
(Amounts in thousands)Business process improvement consulting costs $ 4,958 $
- Note 1
Loss on inferior ingredients 122 - Note 1
Loss on extinguishment of debt 16,149 - Note 12
Project Centennial consulting costs - 3,392 Note 3
Legal settlements - 3,220 Note 14
Pension plan settlement and curtailment
loss - 116,207 Note 17
Other pension plan termination costs - 133
$ 21,229 $ 122,952
• 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" project. This initiative is further discussed in the "Digital
Strategy Initiative" section below. Costs related to this initiative
incurred during the first quarter of Fiscal 2021 totaled
were primarily for consulting costs 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 related to these projects to be approximately
million to $25 million for the remainder of Fiscal 2021. There were no
costs associated with this project during the sixteen weeks ended April
18, 2020 .
• Loss on inferior ingredients - In the first quarter of Fiscal 2021, we
incurred additional costs of
inferior ingredients used in the production of certain of our gluten-free
products in the fourth quarter of Fiscal 2020. We continue to seek
recovery of these losses.
• 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 .
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• 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 sixteen
weeks ended April 18, 2020 were $3.4 million and are reflected in the
selling, distribution and administrative expenses line item of the
Condensed Consolidated Statements of Income.
• Legal settlements - In the first quarter of Fiscal 2020, we reached an
agreement to settle certain distributor-related litigation, including
plaintiffs' attorney fees, in the amount of
reflected in the selling, distribution and administrative expenses line
item of the Condensed Consolidated Statements of Income. The settlement
was paid early in the second quarter of Fiscal 2020.
• 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
Condensed Consolidated Statements of Income. The settlement amount was
revised in the third quarter of Fiscal 2020 and a settlement gain of
million was recognized.
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. As
shutdowns and capacity restrictions imposed at the onset of the pandemic
have eased and the rollout of the COVID-19 vaccinations progresses, our
sales have moderated as compared to the first quarter of Fiscal 2020,
which included the peak period of demand for our branded retailproducts. 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
weeks ended
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 are in the planning phase of our multi-year digital strategy initiative as discussed further below. Currently, the company does not expect COVID-19 to materially impact the foregoing optimization or digital strategy initiatives. 34 --------------------------------------------------------------------------------
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 16 Weeks Ending 4/25/21)
• Retail sales comprised 78.7% of total sales for the sixteen 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
distributors 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 actively monitor the impact of the ongoing COVID-19 pandemic on our business operations, results of operations, and liquidity and our operations may continue to experience volatility due to the continued uncertainty caused by the pandemic, including but not limited to new variants of the COVID-19 virus, new hotspots, the current number of COVID-19 cases, the continued distribution of vaccinations, changes in the global andU.S. economic environment, and changes in pandemic safety policies. Our sales have moderated in the first quarter of Fiscal 2021 as compared to the significant increase we experienced in the prior year quarter which resulted from unprecedented sales growth for our branded retail products at the start of the COVID-19 pandemic in March of Fiscal 2020 from increased at-home food consumption. Additionally, at the start of the pandemic, we experienced significant declines in our non-retail sales, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing, but those declines were more than offset by the increase in branded retail sales. As the pandemic has progressed and mandatory shutdowns and restaurant closures across theU.S. have mostly been lifted (although with capacity restrictions and social distancing requirements commonly still in place), our non-retail sales have begun to recover. While we expect our non-retail sales to continue to recover, we cannot currently estimate the timing and speed at which they will recover or if they will return to levels prior to the pandemic. Income from operations for the current quarter continued to benefit from the positive mix shift we have experienced during the ongoing pandemic, however, we anticipate income from operations to moderate in future periods as away-from-home dining continues to return to more normal levels. Although our sales for the current quarter were lower than the prior year quarter, they 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. As consumer buying patterns continue to normalize, we anticipate our Fiscal 2021 sales will be lower than Fiscal 2020 sales due to the unprecedented levels of demand we experienced for our branded retail products caused by the pandemic. However, we cannot currently estimate the magnitude or the timing of this potential impact. 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. We believe we have sufficient liquidity to satisfy our cash needs and we continue to take steps to preserve adequate liquidity during the ongoing COVID-19 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 COVID-19 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 employees and independent distributor partners. We continue to comply withU.S. Centers for Disease Control and Prevention (CDC ) recommendations at each of our locations taking steps to mitigate the potential risks to us posed by the virus's spread and related circumstances and impacts. These procedures and actions include, but are not limited to, monitoring the symptoms of all team members and essential visitors entering our facilities, requiring face coverings, maintaining (where possible) six feet of distance, conducting enhanced cleaning and sanitizing of common areas and frequently touched surfaces, performing additional decontamination of work areas and equipment if there is a confirmed or presumptive case of COVID-19 at a facility, and other considerations. Certain non-production employees continue to work remotely to minimize contact between personnel. Non-essential travel and non-essential visitor bans are currently still in place to reduce potential exposure. We continue to educate employees on the benefits of the COVID-19 vaccine and encourage employees to seek vaccination when eligible. We are developing plans to safely return to an in-person work environment at our non- 35 -------------------------------------------------------------------------------- production facilities, which may or may not be at the same capacity or level of frequency as prior to the pandemic and is predicated on several factors such as, but not limited to, the availability and widespread distribution of the COVID-19 vaccine, the number of current COVID-19 cases, changes in policies related to pandemic safety measures and compliance in public places, the threat of new COVID-19 variants, and the ability to safely social distance in our existing non-production facilities. Although we have not had to cease production at any of our bakeries in the current quarter as we have in previous quarters, due to the continued uncertainty of the COVID-19 pandemic, we could experience closures in the future and while other bakeries were able to assist with meeting production needs in these instances in the past, the closure of several of our bakeries across the country at one time or in close succession could negatively impact our ability to meet our production requirements. Additionally, unforeseen disruptions in other areas of our operations, including but not limited to procurement of raw materials, transport of our products, recovery by our foodservice customers, could negatively impact our operations, results of operations, cash flows, and liquidity.
Summary of Operating Results, Cash Flows and Financial Condition
Sales decreased 3.5% for the sixteen weeks endedApril 24, 2021 compared to the same quarter 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, most restaurants have reopened, although with capacity restrictions commonly still in place, and COVID-19 vaccinations are being administered. Additionally, returns of unsold product have increased in the current quarter as compared to the prior year quarter's exceptionally low rate of returns resulting from stocking-up behaviors which has largely subsided. Our non-retail sales increased as compared to the prior year quarter, although these sales have not returned to pre-pandemic levels. Income from operations for the sixteen weeks endedApril 24, 2021 was$115.1 million compared to$111.9 million in the prior year quarter. Sales declines and greater investments in marketing in the current quarter were more than offset by the short-term incentive compensation paid in the prior year quarter for appreciation bonuses. Additionally, the improvement in the current year quarter was due to lower bad debt and depreciation and amortization expenses and the legal settlement in the prior year quarter. Net income for the sixteen weeks endedApril 24, 2021 was$71.7 million compared to a net loss of$5.8 million in the prior year quarter. The improvement in income from operations in the current year quarter and the$116.2 million non-cash pension plan settlement and curtailment loss in the prior year quarter in connection with the termination of Plan No. 1 resulted in the increase in net income, partially offset by the$16.1 million loss on extinguishment of debt recognized in the current quarter. During the sixteen weeks endedApril 24, 2021 , we generated net cash flows from operations of$98.0 million and invested$27.3 million in capital expenditures. Additionally, we paid$42.5 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. During the sixteen weeks endedApril 18, 2020 , we generated net cash flows from operations of$106.2 million , invested$21.7 million in capital expenditures, paid$40.3 million in dividends to our shareholders and increased our total indebtedness by$203.8 million to ensure future liquidity given the uncertainty caused by the COVID-19 outbreak on global financial markets and economies.
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 more agility in our business model, empowering the
organization by fundamentally redesigning core business processes and our ways
of working; (2) embed digital capabilities where it matters and transform the
way we engage with our consumers, our customers and our employees; and (3)
modernize and simplify our application and configuration landscape to remove
existing roadblocks and support new ways of working. This initiative includes
upgrading our information system to a more robust platform, with the new ERP
system becoming a key enabler of our business strategies, as well as investments
in ecommerce, implementing autonomous planning, and our "bakery of the future"
project.
In e-commerce, we strive to become a category leader, engage with the consumer
through digital platforms, and support retail partners. The autonomous planning
project encompasses predictive ordering, network modeling, integrated business
planning, and supply and demand forecasting, among other areas. The bakery of
the future project involves transforming our current manufacturing processes to
apply industry-leading digital manufacturing tools, such as real-time
performance management, automation of repetitive processes and performance
visualization, standardization of processes and procedures, and sensor-based
quality monitoring tools to improve consistency and reduce time to react to
changes.
Combined, these digital projects are expected to improve data management 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 to the team, which will in turn support faster, more-informed business
decisions.
36
-------------------------------------------------------------------------------- We completed the initial planning and road mapping phase of this multi-year project as of 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 design phase for both the autonomous planning and bakery of the future projects and selected two bakeries for the pilot program for bakery of the future. 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 and we expect these costs to continue throughout the project. CRITICAL ACCOUNTING POLICIES: Our financial statements are prepared in accordance with GAAP. These principles are numerous and complex. Our significant accounting policies are summarized in the Form 10-K. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Please see the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K.
RESULTS OF OPERATIONS:
Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the sixteen weeks endedApril 24, 2021 andApril 18, 2020 , respectively, are set forth below (dollars in thousands): For the Sixteen Weeks Ended Percentage of Sales Increase (Decrease) April 24, 2021 April 18, 2020 April 24, 2021 April 18, 2020 Dollars % Sales$ 1,302,168 $ 1,349,444 100.0 100.0$ (47,276 ) (3.5 ) Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) 643,576 670,873 49.4 49.7 (27,297 ) (4.1 ) Selling, distribution and administrative expenses 501,973 522,035 38.5 38.7 (20,062 ) (3.8 ) Loss on inferior ingredients 122 - 0.0 - 122 NM Depreciation and amortization 41,386 44,663 3.2 3.3 (3,277 ) (7.3 ) Income from operations 115,111 111,873 8.8 8.3 3,238 2.9 Other components of net periodic pension and postretirement benefits (credit) expense (125 ) 143 (0.0 ) 0.0 (268 ) NM Pension plan settlement and curtailment loss - 116,207 - 8.6 (116,207 ) NM Interest expense, net 4,201 3,314 0.3 0.2 887 26.8 Loss on extinguishment of debt 16,149 - 1.2 - 16,149 NM Income (loss) before income taxes 94,886 (7,791 ) 7.3 (0.6 ) 102,677 NM Income tax expense (benefit) 23,231 (2,019 ) 1.8 (0.1 ) 25,250 NM Net income (loss) $ 71,655 $ (5,772 ) 5.5 (0.4 )$ 77,427 NM Comprehensive income $ 76,756 $ 94,356 5.9 7.0$ (17,600 ) (18.7 ) NM Not meaningful. 37
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Percentages may not add due to rounding.
SIXTEEN WEEKS ENDED
Sales (dollars in thousands)
For the Sixteen Weeks Ended
Percentage of Sales Increase (Decrease)
April 24, 2021 April 18, 2020 April 24, 2021 April 18, 2020 Dollars %
Branded retail $ 861,354 $ 890,503 66.1 66.0 $ (29,149 ) (3.3 )
Store branded retail 162,949 190,849 12.5 14.1 (27,900 ) (14.6 )
Non-retail and other 277,865 268,092 21.4 19.9 9,773 3.6
Total $ 1,302,168 $ 1,349,444 100.0 100.0 $ (47,276 ) (3.5 )
(The table above presents certain sales by category that have been reclassified from amounts previously reported.)
The change in sales was generally attributable to the following:
Percentage Point Change in Sales Attributed to: Pricing/mix 3.4 Volume (6.9 ) Total percentage change in sales (3.5 ) Sales decreased quarter over quarter mainly due to cycling the significant rise in demand for our branded retail products experienced at the start of the COVID-19 pandemic resulting from consumers shifting to mostly at-home consumption, partially offset by positive price/mix. This increased demand in the prior year quarter more than offset the significant decline in foodservice sales during that time. As the pandemic has progressed, our sales have moderated as shutdowns have eased, most restaurants have reopened (although with capacity restrictions and social distancing requirements commonly still in place), and the COVID-19 vaccinations, which became available in the current quarter, continue to be administered. Additionally, returns of unsold product have increased in the current quarter as compared to the prior year quarter's exceptionally low rate of returns resulting from stocking-up behaviors which has largely subsided. The promotional environment has remained relatively stable in the first quarter of Fiscal 2021 as compared to the same quarter in the prior year, however, this trend may not continue in future periods. Branded retail sales decreased quarter over quarter due to difficult prior year comparisons caused by unprecedented demand for these products from increased at-home consumption, which included stocking-up behaviors at the onset of the COVID-19 pandemic as discussed above. Sales of our branded traditional loaf breads experienced the largest declines as we focused production on these items in the prior year quarter to quickly meet heightened customer demand, however, current quarter sales were still elevated as compared to our historical pre-pandemic levels. Partially offsetting the branded retail sales decline, were continued increases in sales of our DKB andCanyon Bakehouse branded products. 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. 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 quarter, we continued to make marketing investments to target e-commerce sales. Non-retail sales have begun to recover compared to the significant declines experienced in the prior year quarter due to restaurant closings and shutdowns, although these sales have not returned to the pre-pandemic levels. As consumer buying patterns continue to normalize, we anticipate our Fiscal 2021 sales will be lower than Fiscal 2020 sales due to the unprecedented levels of demand we experienced for our branded retail products caused by the pandemic. However, we cannot currently estimate the magnitude or the timing of this potential impact. Furthermore, Fiscal 2021 is 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. If we experience a significant shift in mix away from branded retail products to store branded retail products, we expect that our results of operations, including our net sales, earnings and cash flows, could be negatively impacted. 38 --------------------------------------------------------------------------------
Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
For the Sixteen Weeks Ended Increase
April 24, 2021 April 18, 2020 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Ingredients and packaging 27.5 27.1 0.4
Workforce-related costs 14.8 15.0 (0.2 )
Other 7.1 7.6 (0.5 )
Total 49.4 49.7 (0.3 )
Costs as a percent of sales were lower quarter over quarter as the ongoing
COVID-19 pandemic continued to drive positive shifts in mix from store-branded
retail products to branded retail products, partially offset by increased
product returns in the current quarter and lower production
volumes. Additionally, the prior year quarter included $4.1 million of
short-term incentive compensation and $1.7 million of start-up costs related to
the conversion of our Lynchburg, 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. The decline in workforce-related
costs was partially offset by significantly lower production volumes quarter
over quarter. Ingredient and packaging costs increased as a percent of sales due
to an increase in product returns, discussed above, combined with reduced
outside purchases of product (sales with no associated ingredient costs) and
rising commodity prices. The Other line item reflects the decrease in outside
purchases of product as well as improved manufacturing efficiencies in the
current quarter including in our cake operations.
Commodities, such as those used for our baking ingredients and packaging
materials, periodically experience price fluctuations, and, for that reason, we
continually monitor the market for these commodities. The commodities markets
are currently experiencing significant volatility. Ingredient and packaging
costs are expected to be volatile to us for the remainder of Fiscal 2021. 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 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 Sixteen Weeks Ended Increase
April 24, 2021 April 18, 2020 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Workforce-related costs 11.7 11.5 0.2
Distributor distribution fees 15.0 15.5 (0.5 )
Other 11.8 11.7 0.1
Total 38.5 38.7 (0.2 )
Workforce-related costs increased as a percent of sales primarily due to sales
declines quarter over quarter and higher stock-based compensation expense,
partially offset by $2.1 million of short-term incentive compensation in the
prior year quarter. 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. The increase in the Other line in
the table above reflects lower sales and increased marketing investments in the
current quarter and business process improvement consulting costs incurred
during the quarter of $5.0 million associated with ongoing digital strategy
initiatives. These items were mostly offset by $3.4 million of consulting costs
associated with Project Centennial and $3.2 million of legal settlements in the
prior year quarter, both of which are discussed in the "Matters Affecting
Comparability" section above, and additional bad debt allowances recorded for
our foodservice customers in the prior year quarter of $2.7 million . See Note
14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial
Statements of this Form 10-Q for additional information regarding legal
settlements.
Loss on Inferior Ingredients
In the fourth quarter of Fiscal 2020, we incurred losses related to receiving inferior ingredients associated with the production of certain of our gluten-free products and in the first quarter of Fiscal 2021, we incurred an additional$0.1 million of costs as discussed in the "Matter Affecting Comparability" section above. 39 --------------------------------------------------------------------------------
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.
Income from Operations
Income from operations increased as a percent of sales for the sixteen weeks endedApril 24, 2021 compared to the sixteen weeks endedApril 18, 2020 mostly due to decreases in production costs and selling, distribution and administrative expenses in the current quarter, as discussed above.
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) for the current quarter increased as compared to the prior year quarter in dollars and as a percent of sales due to the issuance of the 2031 notes onMarch 9, 2021 prior to the redemption of the outstanding 2022 notes onApril 8, 2021 and sales declines quarter over quarter.
Loss on Extinguishment of Debt
We completed the redemption of the outstanding 2022 notes and incurred a loss of$16.1 million due to the make-whole provision of$15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling$0.7 million as further discussed in the "Matters Affecting Comparability" section above.
Income Tax Expense (Benefit)
The effective tax rate for the sixteen weeks endedApril 24, 2021 was 24.5% compared to 25.9% in the prior year quarter. The decrease in the rate quarter over quarter was primarily due to the relative impact of windfalls related to the vesting of employee stock compensation awards. Discrete tax benefits in the prior year quarter resulted in an increase to the tax rate due to negative earnings before tax. For both periods presented, the primary differences in the effective rate and the statutory rate were state income taxes and windfalls on stock-based compensation. 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 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 recognizing the pension settlement and curtailment loss in earnings in the prior year quarter in conjunction with the pension plan termination, net of changes in the fair value of derivatives and the increase in net earnings quarter over quarter.
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;
40
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• 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 sixteen weeks endedApril 24, 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, 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 situation surrounding COVID-19 remains fluid and its future impact on the company's business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. 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$921.3 million as ofApril 24, 2021 , consisting of cash on hand and the available balances under our credit facility and the facility.
Liquidity Discussion for the Sixteen Weeks Ended
Cash and cash equivalents were
For the Sixteen Weeks Ended
Cash Flow Component April 24, 2021 April 18, 2020 Change
Cash provided by operating activities $ 97,995 $ 106,185 $ (8,190 )
Cash disbursed for investing activities (19,117 ) (16,817 ) (2,300 )
Cash (disbursed for) provided by financing
activities (135,784 ) 152,271 (288,055 )
Total change in cash $ (56,906 ) $ 241,639 $ (298,545 ) Cash Flows Provided by Operating Activities. Net cash provided by operating activities consisted of the following items for non-cash adjustments to net income (amounts in thousands):
For the Sixteen Weeks Ended
April 24, 2021 April 18, 2020 Change
Depreciation and amortization $ 41,386 $ 44,663 $ (3,277 )
Loss reclassified from accumulated other
comprehensive
income to net income 75 503 (428 )
Allowances for accounts receivable 1,779 6,340 (4,561 )
Stock-based compensation 7,182 3,894 3,288
Deferred income taxes 4,066 (29,605 ) 33,671
Pension and postretirement plans cost 277 116,702 (116,425 )
Other non-cash items 1,073 1,154 (81 )
Net non-cash adjustment to net income $ 55,838
• The change in deferred income taxes was primarily due to the termination
of Plan No. 1 in the first quarter of Fiscal 2020.
41
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• 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 Pension plan termination discussion in the "Matters Affecting
Comparability" section above for additional information regarding the
change in pension and postretirement plans cost.
Net changes in working capital and pension plan contributions consisted of the following items (amounts in thousands):
For the Sixteen Weeks Ended
April 24, 2021 April 18, 2020 Change
Changes in accounts receivable, net $ 1,761 $ (61,630 ) $ 63,391
Changes in inventories, net (3,297 ) (9,238 ) 5,941
Changes in hedging activities, net 6,172 (7,933 ) 14,105
Changes in other assets and accrued
liabilities, net (45,456 ) 21,210 (66,666 )
Changes in accounts payable, net 11,322 27,322 (16,000 )
Qualified pension plan contributions - (1,425 ) 1,425
Net changes in working capital and pension
plan
contributions $ (29,498 ) $ (31,694 ) $ 2,196 • Changes in accounts receivable, inventories, and accounts payable were
mainly attributable to the significant rise in demand for our products in
the prior year quarter at the start 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 and legal accruals and changes in income taxes payable
resulted in the change in other accrued liabilities. Under the CARES Act,
we were able to defer Federal income tax payments in the first quarter of
Fiscal 2020 which were subsequently paid in the second quarter of Fiscal
2020. During the first quarter of Fiscal 2021 and Fiscal 2020, we paid
$64.6 million and $18.6 million , respectively, including our share ofemployment 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 sixteen weeks ended
paid
in prior periods. Under the CARES Act, the company deferred approximately
period from the beginning of the second quarter of Fiscal 2020 through
December 31, 2020 , of which$15.0 million will be paid byDecember 31, 2021 and the remaining amount byDecember 31, 2022 .
• During the sixteen weeks ended
$6.4 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 $5.0 million . In the third quarter of Fiscal 2020,
the company finalized its group annuity contract for Plan No. 1 and
reversed the $6.4 million cash contribution since the cash was no longer
needed to sufficiently cover the obligations of the transaction.
Cash Flows Disbursed for Investing Activities. The table below presents net cash
disbursed for investing activities for the sixteen weeks ended April 24, 2021
and April 18, 2020 , respectively (amounts in thousands):
For the Sixteen Weeks Ended
April 24, 2021 April 18, 2020 Change
Purchases of property, plant, and
equipment $ (27,278 ) $ (21,700 ) $ (5,578 )
Principal payments from notes receivable,
net of repurchases of
independent distributor territories 5,252 4,021 1,231
Proceeds from sale of property, plant and
equipment 2,159 862 1,297
Other 750 - 750
Net cash disbursed for investing
activities $ (19,117 ) $ (16,817 ) $ (2,300 ) • We currently anticipate capital expenditures of
million for Fiscal 2021 (inclusive of expenditures for the ERP upgrade and
related digital strategy initiatives).
42
-------------------------------------------------------------------------------- Cash Flows (Disbursed for) Provided by Financing Activities. The table below presents net cash (disbursed for) provided by financing activities for the sixteen weeks endedApril 24, 2021 andApril 18, 2020 , respectively (amounts in thousands): For the Sixteen Weeks Ended April 24, 2021 April 18, 2020 Change Dividends paid$ (42,503 ) $ (40,286 ) $ (2,217 ) Payment of financing fees (3,522 ) - (3,522 ) Stock repurchases (1,058 ) (783 ) (275 ) Change in bank overdrafts (6,420 ) (3,530 ) (2,890 ) Payment of contingent consideration - (4,700 ) 4,700 Net change in debt obligations (81,858 ) 203,750 (285,608 ) Payments on financing leases (423 ) (2,180 ) 1,757 Net cash (disbursed for) provided by financing activities$ (135,784 ) $ 152,271 $ (288,055 )
• Our Board of Directors declared the following quarterly dividend during
the sixteen weeks ended April 24, 2021 (amounts in thousands, except per
share data):
Dividend per Dividends
Date Declared Record Date Payment Date Common Share Paid
February 19, 2021 March 5, 2021 March 19, 2021 $ 0.2000 $ 42,340
Additionally, we paid dividends of $0.2 million at the time of vesting of our
performance-contingent restricted stock awards and at issuance of deferred
compensation shares. The increase in dividends paid resulted from an increase in
the dividend rate compared to the prior year quarter. While there are no
requirements to increase our dividend rate, we have shown a recent historical
trend to do so. We anticipate funding future dividend payments from cash flows
from operations.
• We paid financing costs associated with the issuance of the 2031 notes in
the first quarter of Fiscal 2021.
• Stock repurchase decisions are made based on our stock price, our belief
of relative value, and our cash projections at any given time. During the
sixteen weeks ended
common stock for
our Board of Directors. These shares were acquired to satisfy employees'
tax withholding and payment obligations in connection with the vesting of
restricted stock awards, which are repurchased by the company based on the
fair market value on the vesting date.
• The payment for contingent consideration was made to satisfy the
contingent consideration liability recorded in the Canyon Bakehouse
acquisition completed at the end of Fiscal 2018.
• See the discussion below under the "Capital Structure" section regarding
changes in debt obligations.
43
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Capital Structure Long-term debt and right-of-use lease obligations and stockholders' equity were as follows atApril 24, 2021 andJanuary 2, 2021 , respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 4, Leases, and Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Balance at Fixed or Final April 24, 2021 January 2, 2021 Variable Rate Maturity Long-term debt and right-of-use lease obligations (Amounts in thousands) 2031 notes$ 492,696 - Fixed Rate 2031 2026 notes 396,881 396,705 Fixed Rate 2026 2022 notes - 399,398 Credit facility - 50,000 Variable Rate 2022 Accounts receivable securitization facility - 114,000 Variable Rate 2022 Right-of-use lease obligations 360,118 345,762 2041 1,249,695 1,305,865 Less: Current maturities of long-term debt and right- of-use lease obligations (51,245 ) (51,908 ) Long-term debt and right-of-use lease obligations$ 1,198,450 $ 1,253,957 Total stockholders' equity Total stockholders' equity$ 1,413,371 $ 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. The company has historically entered into amendments and extensions approximately one year prior to the maturity of the facility and the credit facility. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.
The following table details the amounts available under the facility and credit
facility and the highest and lowest balances outstanding under these
arrangements during the sixteen weeks ended
Amount Available For the Sixteen Weeks Ended April 24, 2021
for Withdrawal at Highest Lowest
Facility April 24, 2021 Balance Balance
(Amounts in thousands)
The facility $ 179,100 $ 114,000 $ -
The credit facility (1) 491,600 50,000 -
$ 670,700
(1) Amount excludes a provision in the credit facility agreement which allows the
company to request an additional
commitments.
Amounts outstanding under the credit facility vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company's overall risk management strategy as discussed in Note 8, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the sixteen weeks endedApril 24, 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. 44
-------------------------------------------------------------------------------- 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 ofApril 24, 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 sixteen weeks endedApril 24, 2021 , 0.05 million shares, at a cost of$1.1 million , of the company's common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan throughApril 24, 2021 , 68.4 million shares, at a cost of$644.0 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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