FLOWERS FOODS, INC. The following discussion of the financial condition and results of operations of the company as of and for the twelve and twenty-eight weeks endedJuly 17, 2021 should be read in conjunction with the Form 10-K and Part II., Item 1A., Risk Factors, of this Form 10-Q.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is segregated into four sections, including:
• Executive overview - provides a summary of our business, operating
performance and cash flows, and strategic initiatives.
• Critical accounting estimates - describes the accounting areas where
management makes critical estimates to report our financial condition and
results of operations. There have been no changes to this section from the
Form 10-K.
• Results of operations - an analysis of the company's consolidated results
of operations for the two comparative periods presented in our Condensed
Consolidated Financial Statements.
• Liquidity and capital resources - an analysis of cash flow, contractual
obligations, and certain other matters affecting the company's financial
position.
Matters Affecting Comparability
Detailed below are expense items affecting comparability that will provide additional context while reading this discussion:
For the Twelve Weeks Ended For the Twenty-Eight Weeks Ended Footnote
July
July 17, 2021 July 11, 2020 July 17, 2021 11, 2020 Disclosure
(Amounts in thousands) (Amounts in thousands)
Business process improvement
consulting
costs $ 13,205 $ - $ 18,163 $ - Note 1
Loss on inferior ingredients - - 122 - Note 1
Acquisition consideration
adjustment 3,400 3,400 Note 10
Loss on extinguishment of debt - - 16,149 - Note 12
Project Centennial consulting
costs - 5,584 - 8,976 Note 3
Restructuring and related
impairment
charges 10,535 - 10,535
Legal settlements - - - 3,220 Note 14
Pension plan settlement and
curtailment
loss - - - 116,207 Note 17
Other pension plan termination
costs - - - 133
$ 16,605 $ 16,119 $ 37,834 $ 139,071 • Business process improvement costs related to the digital strategy
initiative - In the second half of Fiscal 2020, we launched a digital
strategy initiative to transform our business systems and processes, which
includes upgrading our information system to a more robust platform, as
well as investments in e-commerce, autonomous planning, and our "bakery of
the future" initiative. This initiative is further discussed in the
"Digital Strategy Initiative" section below. Costs related to the digital
strategy initiative incurred during the twelve and twenty-eight weeks
ended
The costs were primarily for consulting services associated with these
activities and are reflected in the selling, distribution, and
administrative expenses line item of the Condensed Consolidated Statements
of Income. We currently expect consulting costs (a portion of which may be
capitalized) related to the initiative to be approximately
associated with the digital strategy initiative during the twenty-eight
weeks ended
• 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
Condensed Consolidated Statements of Income.
35
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• Loss on extinguishment of debt - On
redemption of the Company's
(the "2022 notes") with proceeds received from the issuance of the
Company's $500.0 million of 2.400% senior notes due 2031 (the "2031
notes") on March 9, 2021 . We recognized a loss on extinguishment of debt
of
and the write-off of unamortized debt discount and debt issuance costs
totaling $0.7 million .
• Project Centennial consulting costs - During the second quarter of Fiscal
2016, we launched Project Centennial, an enterprise-wide business and
operational review. The project was completed at the end of Fiscal
2020. Consulting costs associated with the project during the twelve and
twenty-eight weeks ended
respectively, and are reflected in the selling, distribution, and
administrative expenses line item of the Condensed Consolidated Statements
of Income.
• Restructuring and related impairment charges - The following table details
restructuring charges recorded during the twelve and twenty-eight weeks
ended July 11, 2020 (amounts in thousands):
For the Twelve Weeks For the Twenty-Eight
Ended Weeks Ended
July 11, 2020 July 11, 2020
Employee termination benefits and
other cash charges $ 1,265 $ 1,265
Property, plant, and equipment impairments 4,634 4,634
Trademark impairments 4,636 4,636
Total restructuring and related
impairment charges $ 10,535 $ 10,535 In the second quarter of Fiscal 2020, the company reevaluated its organizational structure in an effort to increase its focus on brand growth and product innovation and improve its cake operations. The organizational structure changes resulted in$1.3 million of employee termination benefits charges related to a voluntary employee separation plan (the "VSIP") in the second quarter of Fiscal 2020. Additional charges of$1.3 million related to the VSIP were recorded in the second half of Fiscal 2020. Early in the third quarter of Fiscal 2020, the company announced an involuntary reduction-in-force plan and recognized charges of$5.3 million in Fiscal 2020. The VSIP and reduction-in-force plans together eliminated approximately 250 positions across different departments and job levels, and all of the related payments were completed by early Fiscal 2021. Also, during the second quarter of Fiscal 2020, the company entered into a contract to sell three closed bakeries classified as held for sale and certain idle equipment at other bakeries, resulting in the recognition of$4.6 million of impairment charges. The sale was completed during the fourth quarter of Fiscal 2020. Additionally, in order to optimize sales and production of our organic products, the company decided to cease using the Alpine Valley brand, a finite-lived trademark, resulting in a$4.6 million impairment charge in the second quarter of Fiscal 2020.
• Legal settlements - 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
$0.1 million of cash charges for other pension termination charges in our Condensed Consolidated Statements of Income. The settlement amount was revised in the third and fourth quarters of Fiscal 2020 resulting in a final settlement and curtailment loss of$108.8 million .
Additional items affecting comparability:
• COVID-19 - On
novel strain of coronavirus ("COVID-19") a global pandemic and recommended
containment and mitigation measures worldwide, which led to adverse
impacts on the
consumer buying patterns at the beginning of the pandemic, we experienced
a more favorable shift in sales mix to our branded retail products due to
increased at-home consumption
36
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of food products. As shutdowns and capacity restrictions imposed at the
onset of the pandemic have eased and COVID-19 vaccines are now widely
available in the U.S. , our sales have moderated as compared to the first
half of Fiscal 2020, which included the peak period of demand for our
branded retail products. For additional details on the impact of theCOVID-19 pandemic on our business operations and results of operations,
see the "Executive Overview - Impact of COVID-19 on Our Business,"
"Results of Operations" and "Liquidity and Capital Resources" sections
below.
• Conversion of our
During the first quarter of Fiscal 2020, we began the conversion of our
Lynchburg, Virginia bakery to an all-organic production facility. Wecompleted the conversion and the bakery resumed production by the end of
the third quarter of Fiscal 2020. The converted facility provides
increased production capacity for our
products, allowing the company to better serve east coast markets with
fresher product and reduce distribution costs. We incurred start-up costs
related to the conversion of approximately
for the twelve and twenty-eight weeks ended
and these costs are included in materials, supplies, labor and other
production costs in our Condensed Consolidated Statements of Income.
Executive Overview Business Flowers is the second-largest producer and marketer of packaged bakery foods inthe United States ("U.S."). Our principal products include breads, buns, rolls, snack cakes, and tortillas and are sold under a variety of brand names, including Nature's Own, DKB, Wonder,Canyon Bakehouse , Tastykake, andMrs. Freshley's . Our brands are among the best known in theU.S. baking industry. Many of our brands have a major presence in the product categories in which they compete. We manage our business as one operating segment. Flowers' strategic priorities include developing our team, focusing on our brands, prioritizing our margins, and proactively seeking smart, disciplined acquisitions in the grain-based foods category. We believe executing on our strategic priorities will drive future growth and margin expansion and deliver meaningful shareholder value over time allowing us to achieve our long-term financial targets of 1% to 2% sales growth, 4% to 6% EBITDA growth, and 7% to 9% EPS growth. We are continuing to focus on optimization initiatives in our procurement, distribution, operations, and administrative functions and the company is targeting savings in the range of$30 million to$40 million from these activities in Fiscal 2021. Additionally, we 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.
Highlights
• Nature's Own is the best-selling loaf bread in the
selling organic brand in the
gluten-free bread brand in the U.S. (Source: IRI Total US
MultiOutlet+C-Store 12 Weeks Ending 7/18/21)
• Retail sales comprised 78.9% of total sales for the twenty-eight 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. Our operations may continue to experience volatility due to the continued uncertainty caused by the pandemic, including but not limited to additional variants of the COVID-19 virus (including the Delta variant), new geographic hotspots, changes in the number of COVID-19 cases, the rate of vaccination within theU.S. population and the efficacy of the vaccines, changes in the global andU.S. economic environment, and changes in pandemic safety policies. 37 -------------------------------------------------------------------------------- Our sales have moderated in the first half of Fiscal 2021 as compared to the significant increase we experienced for the comparable period in the prior year. Prior year sales benefitted from unprecedented 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, partially offset by significant declines in our non-retail sales, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing. As the pandemic has progressed and mandatory shutdowns and restaurant closures across theU.S. have mostly been lifted (though some capacity restrictions and social distancing requirements remain in place), our non-retail sales have been recovering, however, we cannot currently estimate when or if they will return to pre-pandemic levels and any recovery is subject to additional shutdowns that may result from additional variants of the virus or the efficacy or the distribution and rate of vaccinations. Income from operations for the first half of Fiscal 2021 was lower than the first half of Fiscal 2020 but remained elevated compared to pre-pandemic periods. 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 first half of the current year were lower than the comparable period in the prior year, 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. If 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 due to the volatility of the pandemic. Additionally, if there is a significant shift in mix from branded retail to store branded retail products, we expect that our results of operations, including our net sales, earnings, and cash flows, could be negatively impacted. For additional discussion on the impact of the pandemic on our results of operations, refer to the "Results of Operations" section below. 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 team members and independent distributor partners. From the start of the pandemic, we have followed the recommendations and guidance of theU.S. Centers for Disease Control and Prevention (CDC ), taking all necessary 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. Non-essential travel and non-essential visitor bans 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 readily available, we shared educational information with our team members and encouraged vaccination for those eligible. We follow the guidance issued by theCDC and theU.S. Occupational Safety and Health Administration (OSHA) and modify our face mask and wellness screening policies to align with local and state health and workplace safety regulations. We remain vigilant in monitoring COVID-19 cases in our facilities and in the communities where they are located and will reinstate all pandemic safety measures if deemed necessary. We are developing plans to safely return to an in-person office environment at our non-production locations which may or may not be at the same capacity or level of frequency as pre-pandemic. Several factors are involved in this planning. These include, but are not limited to, consideration of pandemic safety measures, the rate of vaccinations and the efficacy of the vaccines, the threat of additional COVID-19 variants, and the ability of office staff to work effectively from remote locations. Although we have not had to cease production at any of our bakeries in the first half of the current year 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, or recovery by our foodservice customers, could negatively impact our operations, results of operations, cash flows, and liquidity. During the first half of Fiscal 2021, we have experienced labor shortages at some of our bakeries. A number of factors may continue to adversely affect the labor force available to us, including high employment levels, federal unemployment subsidies, including unemployment benefits offered in response to the COVID-19 pandemic, and other government regulations. A labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, and could negatively affect our ability to efficiently operate our bakeries and bread lines or to operate at full capacity. 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. 38 --------------------------------------------------------------------------------
Summary of Operating Results, Cash Flows and Financial Condition
Sales decreased 0.8% for the twelve weeks endedJuly 17, 2021 compared to the same quarter in the prior year. The prior year quarter benefitted from increased demand for branded retail products due to higher levels of at-home consumption in response to the ongoing pandemic and lower rates of return of unsold products, partially offset by improved price/mix in the current quarter. While our non-retail sales continued to recover in the current quarter, these sales have not returned to pre-pandemic levels. Sales decreased 2.4% for the twenty-eight weeks endedJuly 17, 2021 compared to the same period in the prior year. The prior year period was particularly strong primarily due to the significant rise in demand for our branded retail products at the beginning of the COVID-19 pandemic. That impact has moderated as shutdowns have eased, restaurants have reopened, and COVID-19 vaccines have become widely available to theU.S. population. Additionally, returns of unsold product have increased in the current year as compared to the prior year's exceptionally low rate of returns resulting from stocking-up behaviors which has largely subsided. Our non-retail sales increased as compared to the prior year period as lockdowns have ended, restaurants have reopened, and traveling and social gatherings have increased, but are still lower than pre-pandemic levels. Income from operations for the twelve weeks endedJuly 17, 2021 was$73.9 million compared to$79.2 million in the prior year quarter. Sales declines quarter over quarter combined with higher consulting costs, greater marketing investments, and the acquisition consideration adjustment in the current year quarter were partially offset by restructuring and related impairment charges and higher bonus expense in the prior year quarter and increased scrap dough income from higher prices in the current quarter. Income from operations for the twenty-eight weeks endedJuly 17, 2021 was$189.0 million compared to$191.1 million in the first half of the prior year. Sales declines, higher consulting costs, and greater investments in marketing in the current year resulted in the decline, mostly offset by the short-term incentive compensation paid in the prior year for appreciation bonuses and higher bonus expense. Increased income from scrap dough sales and lower bad debt, depreciation and amortization, and legal expenses partially offset the overall decrease year over year. Net income for the twelve weeks endedJuly 17, 2021 was$56.4 million compared to$57.9 million in the prior year period. The decrease resulted primarily from decreased income from operations, partially offset by a lower effective tax rate and decreased interest expense in the current year quarter. Net income for the twenty-eight weeks endedJuly 17, 2021 was$128.0 million compared to$52.1 million in the prior year quarter. The improvement in the first half of the current year resulted primarily from the$116.2 million non-cash pension plan settlement and curtailment loss in the prior year in connection with the termination of Plan No. 1, partially offset by the$16.1 million loss on extinguishment of debt recognized in the current year and decreased income from operations year over year. During the twenty-eight weeks endedJuly 17, 2021 , we generated net cash flows from operations of$223.4 million and invested$58.3 million in capital expenditures. Additionally, we paid$87.0 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 twenty-eight weeks endedJuly 11, 2020 , we generated net cash flows from operations of$275.8 million , invested$46.6 million in capital expenditures, paid$82.6 million in dividends to our shareholders and increased our total indebtedness by$142.5 million to ensure future liquidity given the uncertainty caused by the COVID-19 outbreak on global financial markets and economies. Subsequent to the end of the second quarter of Fiscal 2021, we amended the credit facility to, among other things, extend the maturity date toJuly 30, 2026 . Digital Strategy Initiative In the second half of Fiscal 2020, we launched a digital strategy initiative to transform how we operate our business. The primary goals of this new strategic initiative are: (1) enable a more agile business model, empowering the organization by fundamentally redesigning core business processes and our ways of working; (2) embed digital capabilities and transform the way we engage with consumers, customers, and employees; and (3) modernize and simplify our application and configuration landscape. This initiative includes upgrading our information system to a more robust ERP platform, enabling our business strategies, as well as investments in initial digital domains of ecommerce, implementing autonomous planning, and bakery of the future. In e-commerce, we strive to become a category and market share leader, engage with the consumer through digital platforms, and support retail partners. The autonomous planning project encompasses predictive ordering, cost-to-serve modeling, integrated business planning, and supply and demand forecasting, among other areas. Bakery of the future involves transforming our current manufacturing processes 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. 39
-------------------------------------------------------------------------------- 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, which will in turn enable more predictive business decision making. We completed the initial planning and road mapping phase of this multi-year digital transformation at the end of Fiscal 2020 and transitioned into the design phase in early Fiscal 2021. During the first quarter of Fiscal 2021, we engaged a leading, global consulting firm to assist us in planning and implementing the upgrade of our ERP platform and serve as the system integrator for the project. Additionally, we have transitioned into the 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, which we expect 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. Refer to the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K.
RESULTS OF OPERATIONS:
Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve weeks endedJuly 17, 2021 andJuly 11, 2020 , respectively, are set forth below (dollars in thousands): For the Twelve Weeks Ended Percentage of Sales Increase (Decrease) July 17, 2021 July 11, 2020 July 17, 2021 July 11, 2020 Dollars % Sales$ 1,017,309 $ 1,025,861 100.0 100.0$ (8,552 ) (0.8 ) Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) 504,062 506,033 49.5 49.3 (1,971 ) (0.4 ) Selling, distribution and administrative expenses 407,707 396,904 40.1 38.7 10,803 2.7 Restructuring and related impairment charges - 10,535 - 1.0 (10,535 ) NM Depreciation and amortization 31,619 33,180 3.1 3.2 (1,561 ) (4.7 ) Income from operations 73,921 79,209 7.3 7.7 (5,288 ) (6.7 ) Other components of net periodic pension and postretirement benefits (credit) expense (93 ) (72 ) (0.0 ) (0.0 ) (21 ) NM Interest expense, net 1,070 2,869 0.1 0.3 (1,799 ) (62.7 ) Income before income taxes 72,944 76,412 7.2 7.4 (3,468 ) (4.5 ) Income tax expense 16,586 18,493 1.6 1.8 (1,907 ) (10.3 ) Net income$ 56,358 $ 57,919 5.5 5.6$ (1,561 ) (2.7 ) Comprehensive income$ 51,523 $ 55,277 5.1 5.4$ (3,754 ) (6.8 ) NM Not meaningful. 40
-------------------------------------------------------------------------------- Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twenty-eight weeks endedJuly 17, 2021 andJuly 11, 2020 , respectively, are set forth below (dollars in thousands): For the Twenty-Eight Weeks Ended Percentage of Sales Increase (Decrease) July 17, 2021 July 11, 2020 July 17, 2021 July 11, 2020 Dollars % Sales$ 2,319,477 $ 2,375,305 100.0 100.0$ (55,828 ) (2.4 ) Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) 1,147,638 1,176,906 49.5 49.5 (29,268 ) (2.5 ) Selling, distribution and administrative expenses 909,680 918,939 39.2 38.7 (9,259 ) (1.0 ) Restructuring and related impairment charges - 10,535 - 0.4 (10,535 ) NM Loss on inferior ingredients 122 - 0.0 - 122 NM Depreciation and amortization 73,005 77,843 3.1 3.3 (4,838 ) (6.2 ) Income from operations 189,032 191,082 8.1 8.0 (2,050 ) (1.1 ) Other components of net periodic pension and postretirement benefits (credit) expense (218 ) 71 (0.0 ) 0.0 (289 ) NM Pension plan settlement and curtailment loss - 116,207 - 4.9 (116,207 ) NM Interest expense, net 5,271 6,183 0.2 0.3 (912 ) (14.8 ) Loss on extinguishment of debt 16,149 - 0.7 - 16,149 NM Income before income taxes 167,830 68,621 7.2 2.9 99,209 NM Income tax expense 39,817 16,474 1.7 0.7 23,343 NM Net income$ 128,013 $ 52,147 5.5 2.2$ 75,866 NM Comprehensive income$ 128,279 $ 149,633 5.5 6.3$ (21,354 ) (14.3 ) NM Not meaningful.
Percentages may not add due to rounding.
TWELVE WEEKS ENDEDJULY 17, 2021 COMPARED TO TWELVE WEEKS ENDEDJULY 11, 2020 Sales (dollars in thousands) For the Twelve Weeks Ended Percentage of Sales Increase (Decrease) July 17, 2021 July 11, 2020 July 17, 2021 July 11, 2020 Dollars % Branded retail$ 674,749 $ 688,869 66.3 67.2$ (14,120 ) (2.0 ) Store branded retail 131,022 144,574 12.9 14.1 (13,552 ) (9.4 ) Non-retail and other 211,538 192,418 20.8 18.7 19,120 9.9 Total$ 1,017,309 $ 1,025,861 100.0 100.0$ (8,552 ) (0.8 )
(The table above presents certain sales by category that have been reclassified from amounts previously reported.)
The change in sales was generally attributable to the following:
Percentage Point Change in Sales Attributed to: Pricing/mix 3.1 Volume (3.9 ) Total percentage change in sales (0.8 ) Sales decreased quarter over quarter mainly due to lapping the elevated demand we experienced for our branded retail products in the prior year quarter as the level of at-home food consumption resulting from the on-going COVID-19 pandemic has moderated. Additionally, returns of unsold product have increased in the current quarter as compared to the prior year quarter, but are still below historical pre-pandemic levels. These declines were mitigated by improved price/mix and recovery of foodservice sales as away-from-home food consumption continued to increase from restaurants reopening (though some capacity restrictions and social distancing requirements remain in place) and the COVID-19 vaccines becoming widely available within theU.S. population, though this trend may not continue given the uncertainty caused by the ongoing pandemic. The promotional environment has remained relatively stable in the second quarter of Fiscal 2021 as compared to the same quarter in the prior year, however, this trend may not continue in future periods. 41 -------------------------------------------------------------------------------- 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, partially offset by improved price/mix. While we experienced significant declines in sales of our branded traditional loaf breads, current quarter sales of these products were considerably greater than our historical pre-pandemic levels. Continued sales growth in our DKB andCanyon Bakehouse branded products partially offset the decline in branded retail sales. 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 continued to recover compared to the significant declines experienced in the prior year quarter due to restaurant and school closures during that time, however, these sales have not returned to their pre-pandemic levels.
If 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.
Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
For the Twelve Weeks Ended Increase
July 17, 2021 July 11, 2020 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Ingredients and packaging 27.6 27.0 0.6
Workforce-related costs 14.8 14.5 0.3
Other 7.1 7.8 (0.7 )
Total 49.5 49.3 0.2
Costs as a percent of sales were higher quarter over quarter due to our sales
moderating compared to the elevated demand experienced from greater at-home food
consumption during the prior year quarter. Additionally, increases in returns of
unsold product in the current quarter also contributed to the higher costs,
partially offset by $1.5 million of start-up costs related to the conversion of
our Lynchburg, Virginia facility to an organic bakery. The start-up costs were
largely workforce-related and we completed the bakery conversion at the end of
the third quarter of Fiscal 2020. Ingredient and packaging costs were impacted
by decreases in outside purchases of product (sales with no associated
ingredient costs), higher input costs and increased product returns. Rising
commodity costs were partially offset by positive price/mix and improved
promotional efficiency. Workforce-related costs increased primarily due to a
competitive labor market and we expect this trend to continue. The Other line
item reflects the decrease in outside purchases of product as well as
differences in the timing of sell-through of food service inventories.
Ingredients and packaging materials periodically experience price fluctuations
and we continually monitor these markets. Ingredient and packaging costs are
currently experiencing significant volatility and are expected to be volatile to
us for the remainder of Fiscal 2021 and in Fiscal 2022. The cost of these inputs
may fluctuate widely due to government policy and regulation, weather
conditions, domestic and international demand, or other unforeseen
circumstances. We enter into forward purchase agreements and other financial
instruments to manage the impact of volatility in certain raw material prices.
Any decrease in the availability of these agreements and instruments could
increase the price of these raw materials and significantly affect our earnings.
42
--------------------------------------------------------------------------------Selling, Distribution and Administrative Expenses (as a percent of sales)
For the Twelve Weeks Ended Increase
July 17, 2021 July 11, 2020 (Decrease) as a
Line Item Component % of Sales % of Sales % of Sales
Workforce-related costs 11.1 11.2 (0.1 )
Distributor distribution fees 14.9 15.4 (0.5 )
Other 14.1 12.1 2.0
Total 40.1 38.7 1.4
Distributor distribution fees decreased as a percent of sales primarily due to
the shift in sales mix which resulted in a smaller portion of our sales being
made through IDPs, however this decrease was more than offset by the rise in
transportation costs which is reflected in the Other line item. The increase in
the Other line in the table above reflects lower sales, higher transportation
costs, and increased marketing investments in the current quarter. Additionally,
business process improvement consulting costs incurred during the quarter were
$13.2 million associated with ongoing digital strategy initiatives and we
recorded $3.4 million for the acquisition consideration adjustment. These items
were partially offset by $5.6 million of consulting costs associated with
Project Centennial in the prior year quarter and higher prices for scrap dough
sales in the current quarter. See the "Matters Affecting Comparability" section
above for a discussion of these costs.
Restructuring and Related Impairment Charges
Refer to the discussion in the "Matters Affecting Comparability" section above regarding these items.
Depreciation and Amortization Expense
Depreciation and amortization expense was lower in dollars and as a percent of sales primarily due to a change in the contractual terms with a transportation entity that transports a significant portion of our fresh bakery products no longer qualifying for treatment as an embedded lease as of the end of Fiscal 2020. Income from Operations
Income from operations decreased as a percent of sales for the twelve weeks
ended
Net Interest Expense
Net interest expense decreased in dollars and as a percent of sales due to lower average amounts outstanding under our borrowing arrangements quarter over quarter combined with the lower interest rate on the 2031 notes as compared to the 2022 notes which were redeemed in the first quarter of Fiscal 2021.
Income Tax Expense
The effective tax rate for the twelve weeks endedJuly 17, 2021 was 22.7% compared to 24.2% in the prior year quarter. The decrease in the rate quarter over quarter was primarily due to the impact of discrete state credits recognized in the current year quarter. This adjustment reduced our tax rate in the current year quarter by 2.0%. For the current quarter, the primary differences in the effective rate and statutory rate were state income taxes including the recognition of discrete state tax credits. The primary differences in the effective rate and the statutory rate for the prior year quarter 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 second quarter of Fiscal 2021 and there is no anticipated material impact on the effective tax rate in future periods. As discussed in the "Liquidity and Capital Resources" section below, in the prior year the company deferred certain tax payments to future periods under the CARES Act. Comprehensive Income The decrease in comprehensive income quarter over quarter resulted primarily from changes in the fair value of derivatives and the decrease in net earnings quarter over quarter. 43
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TWENTY-EIGHT WEEKS ENDED
Sales (dollars in thousands)
Twenty-Eight Weeks Ended
Percentage of Sales Increase (Decrease)
July 17, 2021 July 11, 2020 July 17, 2021 July 11, 2020 Dollars %
Branded retail $ 1,536,622 $ 1,579,950 66.2 66.5 $ (43,328 ) (2.7 )
Store branded retail 293,462 334,858 12.7 14.1 (41,396 ) (12.4 )
Non-retail and other 489,393 460,497 21.1 19.4 28,896 6.3
Total $ 2,319,477 $ 2,375,305 100.0 100.0 $ (55,828 ) (2.4 )
(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 3.2 Volume (5.6 ) Total percentage change in sales (2.4 ) Sales decreased year over year mainly due to the significant rise in demand for our branded retail products experienced during the peak period of the COVID-19 pandemic resulting from consumers shifting to mostly at-home consumption, partially offset by positive price/mix. This increased demand for branded retail products in the prior year 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, restaurants have reopened (though some capacity restrictions and social distancing requirements remain in place), and COVID-19 vaccines, which became available in the first quarter of Fiscal 2021, are widely available to theU.S. population. Additionally, returns of unsold product have increased in the current period as compared to the prior year's exceptionally low rate of returns resulting from stocking-up behaviors which has largely subsided. The promotional environment has remained relatively stable in the first half of Fiscal 2021 as compared to the same period in the prior year, however, this trend may not continue in future periods. Branded retail sales decreased year over year 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 to quickly meet heightened customer demand, however, current year 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, partially offset by increased sales of store brand cake items. Sales of our store branded retail products had been declining prior to the pandemic and we have experienced an acceleration of this trend during the pandemic due to growth in e-commerce sales, combined with successfully executing our strategy to prioritize a more favorable sales mix of branded retail sales. During the current year, we continued to make marketing investments to target e-commerce sales. Non-retail sales have been recovering in the first half of Fiscal 2021 compared to the significant declines experienced in the prior year period due to restaurant closings and shutdowns, but have not returned to pre-pandemic levels. If 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. 44 --------------------------------------------------------------------------------
Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
For the Twenty-Eight Weeks Ended Increase
July 17, 2021 July 11, 2020 (Decrease) as a
Line item component % of sales % of sales % of sales
Ingredients and packaging 27.6 27.1 0.5
Workforce-related costs 14.8 14.8 -
Other 7.1 7.6 (0.5 )
Total 49.5 49.5 -
Costs as a percent of sales were consistent with the prior year period as we
continued to benefit from the favorable mix shift from store-branded retail
products to branded retail products which resulted from the ongoing COVID-19
pandemic and executing on our strategy to be a more brands-focused company. We
also realized improvement in our cake operations. This was partially offset by
increased ingredient and packaging costs. Additionally, the prior year quarter
included $4.1 million of short-term incentive compensation and $3.2 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. Ingredient
and packaging costs were impacted by reduced outside purchases of product (sales
with no associated ingredient costs), input cost inflation, lower production
volumes, and increased product returns year over year. Rising commodity costs
were partially offset by positive price/mix and improved promotional
efficiency. The Other line item mostly reflects the decrease in outside
purchases of product year over year.
Selling, Distribution and Administrative Expenses (as a percent of sales)
For the Twenty-Eight Weeks Ended Increase
July 17, 2021 July 11, 2020 (Decrease) as a
Line item component % of sales % of sales % of sales
Workforce-related costs 11.4 11.3 0.1
Distributor distribution fees 15.0 15.4 (0.4 )
Other 12.8 12.0 0.8
Total 39.2 38.7 0.5
Distributor distribution fees decreased as a percent of sales primarily due to
the shift in sales mix which resulted in a smaller portion of our sales being
made through IDPs in the current year, however the decrease was mostly offset by
higher transportation costs which is reflected in the Other line item. The
increase in the Other line in the table above reflects lower sales, increased
marketing investments, and business process improvement consulting costs
incurred during the current year of $18.2 million associated with ongoing
digital strategy initiatives. Additionally, we incurred $3.4 million for the
acquisition consideration adjustment discussed in the "Matters Affecting
Comparability" section above. These items were somewhat offset by $9.0 million
of consulting costs associated with Project Centennial and $3.2 million of legal
settlements in the prior year, 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 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.
Restructuring and Related Impairment Charges
Refer to the discussion in the "Matters Affecting Comparability" section above regarding these items.
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.
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.
45
--------------------------------------------------------------------------------Income from Operations
Income from operations decreased as a percent of sales for the twenty-eight
weeks ended
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) was relatively consistent with the prior year in dollars and as a percent of sales.
Loss on Extinguishment of Debt
In the first quarter of Fiscal 2021, we completed the redemption of the
outstanding 2022 notes and incurred a loss of
Income Tax Expense
The effective tax rate for the twenty-eight weeks endedJuly 17, 2021 was 23.7% compared to 24.0% in the prior year period. The decrease in the rate year over year was primarily due to the impact of discrete state credits recognized in the current year. For the current year, the primary differences in the effective rate and the statutory rate were state income taxes including the recognition of discrete state tax credits. The primary differences in the effective rate and statutory rate for the prior year 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 half of Fiscal 2021 and there is no anticipated material impact on the effective tax rate in future periods. As discussed in the "Liquidity and Capital Resources" section below, in the prior year the company deferred certain tax payments to future periods under the CARES Act.
Comprehensive Income
The decrease in comprehensive income year over year resulted primarily from recognizing the pension settlement and curtailment loss in earnings in the prior year in conjunction with the pension plan termination, net of changes in the fair value of derivatives and the increase in net earnings year over year.
LIQUIDITY AND CAPITAL RESOURCES:
Strategy and Update on Impact of COVID-19
We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. Furthermore, we strive to maintain a conservative financial position as we believe having a conservative financial position allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, and obligated debt repayments. We believe we currently have access to available funds and financing sources to meet our short and long-term capital requirements. The company's strategy for use of its excess cash flows includes:
• implementing our strategic priorities, including our digital strategy
initiatives;
• paying dividends to our shareholders;
• maintaining a conservative financial position;
• making strategic acquisitions; and
• repurchasing shares of our common stock.
Although there has been no material adverse impact on the company's results of
operations, liquidity or cash flows for the twenty-eight weeks ended
46
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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 $955.4 million as of July 17, 2021 , consisting of cash on hand and
the available balances under the credit facility and the facility.
Liquidity Discussion for the Twenty-Eight Weeks Ended
Cash and cash equivalents were
For the Twenty-Eight Weeks Ended
Cash Flow Component July 17, 2021 July 11, 2020 Change
Cash provided by operating activities $ 223,430 $ 275,794 $ (52,364 )
Cash disbursed for investing activities (56,971 ) (35,779 ) (21,192 )
Cash (disbursed for) provided by financing
activities (181,665 ) 48,503 (230,168 )
Total change in cash $ (15,206 ) $ 288,518 $ (303,724 ) 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 Twenty-Eight Weeks Ended
July 17, 2021 July 11, 2020 Change
Depreciation and amortization $ 73,005 $ 77,843 $ (4,838 )
Restructuring and related impairment
charges - 9,270 (9,270 )
(Gain) loss reclassified from accumulated
other comprehensive
income to net income (602 ) 1,355 (1,957 )
Allowances for accounts receivable 3,579 9,245 (5,666 )
Stock-based compensation 11,957 6,836 5,121
Deferred income taxes 6,208 (30,079 ) 36,287
Pension and postretirement plans cost 486 116,892 (116,406 )
Other non-cash items 1,971 2,151 (180 )
Net non-cash adjustment to net income
193,513$ (96,909 )
• The change in deferred income taxes was primarily due to the termination
of Plan No. 1 in the first quarter of Fiscal 2020.
• Other non-cash items include non-cash interest expense for theamortization of debt discounts and deferred financing costs (including
$0.7 million related to the write-off of unamortized costs upon the early redemption of the 2022 notes in the first quarter of Fiscal 2021) and gains or losses on the sale of assets.
• Refer to the Restructuring and related impairment charges and Pension plan
termination discussions in the "Matters Affecting Comparability" section
above for additional information regarding the changes in these items.
47
--------------------------------------------------------------------------------Net changes in working capital and pension plan contributions consisted of the following items (amounts in thousands):
For the Twenty-Eight Weeks Ended
July 17, 2021 July 11, 2020 Change
Changes in accounts receivable, net $ (6,949 ) $ (49,803 ) $ 42,854
Changes in inventories, net (2,228 ) 1,097 (3,325 )
Changes in hedging activities, net 1,135 (7,279 ) 8,414
Changes in other assets and accrued
liabilities, net (32,959 ) 68,929 (101,888 )
Changes in accounts payable, net 39,814 18,615 21,199
Qualified pension plan contributions - (1,425 ) 1,425
Net changes in working capital and pension
plan
contributions $ (1,187 ) $ 30,134 $ (31,321 )
• Changes in accounts receivable, inventories, and accounts payable weremainly attributable to the significant rise in demand for our products in
the prior year as a result of the COVID-19 pandemic.
• Hedging activities change from market movements that affect the fair value
and the associated required collateral of positions and the timing and
recognition of deferred gains or losses. These changes will continue to
occur as part of our hedging program.
• The change in other assets primarily resulted from changes in income tax
receivable balances and prepaid assets year over year. Changes in employee
compensation accruals and income taxes payable primarily 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
and
in performance-based cash awards under our bonus plans. An additional
million and
and Fiscal 2020, respectively, for our share of employment taxes on the
vesting of employee restricted stock awards in each respective year.
During the twenty-eight weeks ended
legal settlements, all of which had been accrued for in prior periods. In
the prior year period, we accrued and paid
settlements. Under the CARES Act, the company deferred approximately
million of the employer share of the
from the beginning of the second quarter of Fiscal 2020 through December
31, 2020, of which
remaining amount by
• During the twenty-eight 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 twenty-eight weeks ended
For the Twenty-Eight Weeks Ended
July 17, 2021 July 11, 2020 Change
Purchases of property, plant, and
equipment $ (58,270 ) $ (46,594 ) $ (11,676 )
Principal payments from notes receivable,
net of repurchases of
independent distributor territories 8,056 9,295 (1,239 )
Proceeds from sale of property, plant and
equipment 2,411 1,452 959
Acquisition of trademarks (10,200 ) - (10,200 )
Other 1,032 68 964
Net cash disbursed for investing
activities $ (56,971 ) $ (35,779 ) $ (21,192 ) • We currently anticipate capital expenditures of
million for Fiscal 2021 (inclusive of expenditures for the ERP upgrade and
related digital strategy initiatives).
48
-------------------------------------------------------------------------------- Cash Flows (Disbursed for) Provided by Financing Activities. The table below presents net cash (disbursed for) provided by financing activities for the twenty-eight weeks endedJuly 17, 2021 andJuly 11, 2020 , respectively (amounts in thousands): For the Twenty-Eight Weeks Ended July 17, 2021 July 11, 2020 Change Dividends paid $ (87,042 )$ (82,628 ) $ (4,414 ) Payment of financing fees (4,681 ) - (4,681 ) Stock repurchases (1,058 ) (783 ) (275 ) Change in bank overdrafts (6,160 ) (1,986 ) (4,174 ) Payment of contingent consideration - (4,700 ) 4,700 Net change in debt obligations (81,858 ) 142,500 (224,358 ) Payments on financing leases (866 ) (3,900 ) 3,034 Net cash (disbursed for) provided by financing activities$ (181,665 ) $ 48,503 $ (230,168 )
• Our Board of Directors declared the following quarterly dividends during
the twenty-eight weeks ended July 17, 2021 (amounts in thousands, except
per share data):
Dividend per Dividends
Date Declared Record Date Payment Date Common Share Paid
May 27, 2021 June 10, 2021 June 24, 2021 $ 0.2100 $ 44,468
February 19, 2021 March 5, 2021 March 19, 2021 $ 0.2000 $ 42,340
Additionally, we paid dividends of $0.2 million at the time of vesting of
certain restricted stock awards, director stock awards, and at issuance of
deferred compensation shares. The increase in dividends paid resulted from an
increase in the dividend rate compared to the prior year. While there are no
requirements to increase our dividend rate, we have shown a recent historical
trend to do so. We anticipate funding future dividend payments from cash flows
from operations.
• We paid financing costs associated with the issuance of the 2031 notes in
the first quarter of Fiscal 2021.
• Stock repurchase decisions are made based on our stock price, our belief
of relative value, and our cash projections at any given time. During the
twenty-eight weeks ended
our common stock for
by our Board of Directors. These shares were acquired to satisfy
employees' tax withholding and payment obligations in connection with the
vesting of restricted stock awards, which are repurchased by the company
based on the fair market value on the vesting date.
• The payment for contingent consideration was made to satisfy the
contingent consideration liability recorded in the Canyon Bakehouse
acquisition completed at the end of Fiscal 2018.
• See the discussion below under the "Capital Structure" section regarding
changes in debt obligations.
49
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Capital Structure Long-term debt and right-of-use lease obligations and stockholders' equity were as follows atJuly 17, 2021 andJanuary 2, 2021 , respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 4, Leases, and Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Balance at Fixed or Final July 17, 2021 January 2, 2021 Variable Rate Maturity Long-term debt and right-of-use lease obligations (Amounts in thousands) 2031 notes$ 492,866 $ - Fixed Rate 2031 2026 notes 397,012 396,705 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 358,671 345,762 2036 1,248,549 1,305,865 Less: Current maturities of long-term debt and right- of-use lease obligations (55,599 ) (51,908 ) Long-term debt and right-of-use lease obligations$ 1,192,950 $ 1,253,957 Total stockholders' equity Total stockholders' equity$ 1,425,130 $ 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. Subsequent to the end of the second quarter of Fiscal 2021, we amended the credit facility to, among other things, extend the maturity date toJuly 30, 2026 , as further discussed in Note 19, Subsequent Events, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. There is no current portion payable over the next year for these obligations. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.
The following table details the amounts available under the facility and credit
facility and the highest and lowest balances outstanding under these
arrangements during the twenty-eight weeks ended
Amount Available For the
Twenty-Eight Weeks Ended
for Withdrawal at Highest Lowest
Facility July 17, 2021 Balance Balance
(Amounts in thousands)
The facility $ 171,500 $ 114,000 $ -
The credit facility (1) 491,600 50,000 -
$ 663,100
(1) Amount excludes a provision in the credit facility agreement which allows the
company to request an additional
commitments.
Amounts outstanding under the credit facility can vary daily. Changes in the
gross borrowings and repayments can be caused by cash flow activity from
operations, capital expenditures, acquisitions, dividends, share repurchases,
and tax payments, as well as
50
-------------------------------------------------------------------------------- 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 twenty-eight weeks endedJuly 17, 2021 , the company did not make any revolving borrowings and repaid$50.0 million in revolving borrowings. The amount available under the credit facility is reduced by$8.4 million for letters of credit. The facility and the credit facility are variable rate debt. In periods of rising interest rates, the cost of using the facility and the credit facility will become more expensive and increase our interest expense. Therefore, any borrowings under these facilities provide us the greatest direct exposure to rising rates. In addition, if interest rates do increase, it will make the cost of funds more expensive. Restrictive financial covenants for our borrowings can include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the debt agreements and can meet presently foreseeable financial requirements. As ofJuly 17, 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 twenty-eight weeks endedJuly 17, 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 throughJuly 17, 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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