FLOWERS FOODS, INC. The following discussion should be read in conjunction with Item 1., Business, and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this Form 10-K. The following information contains forward-looking statements which involve certain risks and uncertainties. See Forward-Looking Statements at the beginning of this Form 10-K.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is segregated into four sections, including:
• Executive overview - provides a summary of our operating performance and
cash flows, industry trends, and our strategic initiatives.
• Critical accounting estimates - describes the accounting areas where
management makes critical estimates to report our financial condition and
results of operations.
• Results of operations - an analysis of the company's consolidated results
of operations for Fiscal 2020 compared to Fiscal 2019 as presented in the
Consolidated Financial Statements. Refer to the Annual Report on Form 10-K
for the fiscal year ended December 28, 2019 for a discussion of the
results of operations for Fiscal 2019 compared to Fiscal 2018.
• Liquidity, capital resources and financial position - an analysis of cash
flow, contractual obligations, and certain other matters affecting the
company's financial position.
MATTERS AFFECTING COMPARABILITY
Detailed below are expense (recovery) items affecting comparability that will provide additional context while reading this discussion:
Fiscal 2020 Fiscal 2019 Footnote
53 weeks 52 weeks Disclosure
(Amounts in thousands)
Project Centennial consulting costs $ 15,548 $ 784 Note 5
ERP Road Mapping consulting costs 4,363 -
Restructuring and related impairment charges 35,483 23,524 Note 5 Loss (recovery) on inferior ingredients 107 (37 ) Note 4 Non-restructuring lease termination gain (4,066 ) - Note 2 Pension plan settlement and curtailment loss 108,757 - Note 21 Acquisition-related costs - 22 Note 10 Legal settlements 7,250 28,014 Note 23 Other pension plan termination costs 133
-
Executive retirement agreement - 763
$ 167,575 $ 53,070
Project Centennial consulting costs. During the second quarter of Fiscal 2016,
we launched Project Centennial, an enterprise-wide business and operational
review. Key initiatives of the project are outlined in Item 1., Business, of
this Form 10-K. As of the end of Fiscal 2016, we had completed the diagnostic
phase and as of the end of Fiscal 2020, we have completed the implementation
phase of Project Centennial. Consulting costs associated with the project in
Fiscal 2020 and 2019 were $15.5 million and $0.8 million , respectively. Costs
incurred in Fiscal 2020 primarily related to further refining our organizational
structure, portfolio and supply chain optimization initiatives, and improving
our cake operations. In Fiscal 2019, costs were primarily related to the
portfolio and supply chain network optimization initiatives. These consulting
costs are reflected in the selling, distribution and administrative expenses
line item of the Consolidated Statements of Income.
Consulting costs for planning the upgrade of our ERP platform and the broader
digital strategy initiative. As discussed further in Item 1., Business, of this
Form 10-K, we began planning for the upgrade of our ERP platform and other
system related enhancements (the "ERP Road Mapping") during the third quarter of
Fiscal 2020. Consulting costs incurred in Fiscal 2020 associated with these
activities were $4.4 million and are reflected in the selling, distribution and
administrative expenses line item of the Consolidated Statements of Income. We
completed the initial road mapping activities in the fourth quarter of Fiscal
2020 and transitioned to the design phase of the project. We currently expect
significant consulting and infrastructure costs related to this multi-year
project although we cannot estimate these costs at this time.
26
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Restructuring and related impairment charges associated with Project
Centennial. The following table details charges recorded in Fiscal 2020 and 2019
(amounts in thousands):
Fiscal 2020 Fiscal 2019
(Amounts in thousands)
Employee termination benefits and other cash
charges $ 7,779 $ 3,295
Property, plant, equipment and spare parts impairments, net of gain on sale 7,110
4,830
Lease termination and lease impairment charges 13,474
-
Brand rationalization impairments 7,120 15,399
$ 35,483 $ 23,524
Fiscal 2020 Charges
The company continues to evaluate its organizational structure in an effort to
increase its focus on brand growth and product innovation and to improve
underperforming bakeries, as discussed further in Item 1., Business, of this
Form 10-K. The organizational structure changes resulted in employee termination
benefits charges in Fiscal 2020 related to a voluntary employee separation plan
(the "VSIP") of $2.6 million and an involuntary reduction-in-force plan of $5.3
million . The VSIP and reduction-in-force plans together eliminated approximately
250 positions across different departments and job levels and all remaining
payments related to the plans were paid in early Fiscal 2021.
During Fiscal 2020, the company sold three closed bakeries that were included in
assets held for sale and certain idle equipment at other bakeries, resulting in
the recognition of $5.7 million of impairment charges. Additionally, the company
recognized property, plant, and equipment impairment charges of $0.6 million for
manufacturing line and distribution depot closures and an office building the
company has decided to sell, and $0.7 million for spare parts related to
equipment the company no longer intends to use.
In order to optimize our distribution network, we vacated certain distribution
depots during the third quarter, some of which are owned and others that are
leased. These actions resulted in the recognition of lease termination charges
and lease impairment charges totaling $13.5 million and are anticipated to
reduce lease costs and generate overall efficiency savings.
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. The company decided to cease using one of its regional brands and
recognized a $1.3 million impairment charge in the fourth quarter. Additionally,
ingredient and packaging impairments of $1.2 million were recognized as a result
of brand rationalization initiatives.
Fiscal 2019 Charges
In Fiscal 2019, we closed ourOpelika, Alabama bakery and recorded asset impairment charges with respect to the property, plant, equipment, and spare parts totaling$3.9 million and severance costs of$1.5 million . Additionally, we recorded$1.8 million of asset impairment charges for a closed bakery included in assets held for sale and for other manufacturing line closures, and severance and relocation costs of$1.8 million related to transitioning to the new organizational structure. Also, during Fiscal 2019, we recorded a gain on sale of$0.8 million related to a facility that had been previously impaired in a prior year. In the fourth quarter of Fiscal 2019, we completed a brand rationalization study which resulted in$15.4 million of impairment charges for certain trademarks that we either no longer intend to use or plan to use on a more limited basis. Loss (recovery) on inferior ingredients. In Fiscal 2020, we incurred costs of$1.3 million related to receiving inferior ingredients used in the production of certain of our gluten-free products and an adjustment to previously recorded inferior yeast costs, and received a$1.2 million reimbursement for the direct costs associated with receiving inferior yeast in a prior year. We also received a reimbursement of$3.9 million for indirect losses associated with receiving inferior yeast in a prior year and this amount is included in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income. In Fiscal 2019, we incurred costs of$1.8 million related to receiving inferior ingredients and co-manufactured products, and received reimbursements totaling$1.8 million for a portion of previously incurred costs. Non-restructuring lease termination gain. In Fiscal 2020, due to a change in the contractual terms with a transportation entity that transports a significant portion of our fresh bakery products to allow for substitution of assets, among other changes to the terms, a reassessment of the embedded lease accounting treatment was triggered. Based our analysis, we determined the contracts associated with the transportation entity no longer qualify for embedded lease treatment and, in unwinding these leases, the company recognized a noncash gain of$4.1 million in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income. 27 -------------------------------------------------------------------------------- Pension plan settlement loss. OnSeptember 28, 2018 , the Board approved a resolution to terminate theFlowers Foods, Inc. Retirement Plan No. 1 ("Plan No. 1"), effectiveDecember 31, 2018 . In the first quarter of Fiscal 2020, the company distributed a portion of the pension plan assets to participants as lump sum payments and transferred the remaining obligations and assets to an insurance company in the form of a nonparticipating group annuity contract. No cash contributions were required in Fiscal 2020 to support this transaction. In Fiscal 2020, the company recognized$108.8 million of non-cash pension termination charges, comprised of a settlement charge of$104.5 million and a curtailment loss of$4.3 million , and an additional$0.1 million of cash charges for other pension termination charges in our Consolidated Statements of Income. Legal settlements. In Fiscal 2020 and 2019, we reached agreements to settle distributor-related litigation in the aggregate amount of$7.3 million and$29.3 million , respectively, including plaintiffs' attorney fees and the company's FICA obligations. We recorded a benefit of$1.3 million in Fiscal 2019 related to an adjustment of a prior year settlement based on the final amount paid. All amounts related to legal settlements are recorded in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income. AtJanuary 2, 2021 ,$11.9 million of settlements were accrued, of which$8.7 million was paid in January of Fiscal 2021. Executive retirement agreement. OnFebruary 15, 2019 ,Allen Shiver , president and chief executive officer of the company and member of the Board, notified the company he would be retiring from these positions effectiveMay 23, 2019 . In connection withMr. Shiver's retirement, the company andMr. Shiver entered into a retirement agreement and general release, as a part of the agreement,Mr. Shiver was paid$1.3 million upon his retirement, which was expensed in the first quarter of Fiscal 2019. Additionally, upon his retirement in the second quarter of Fiscal 2019, we recognized a benefit of$0.6 million related to the forfeiture of his unvested long-term incentive stock awards. These amounts are reflected in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.
Additional Items Impacting Comparability
Reporting Periods. The company operates on a 52-53 week fiscal year ending the Saturday nearestDecember 31 . Fiscal 2020 consisted of 53 weeks and Fiscal 2019 consisted of 52 weeks. Fiscal 2021 will consist of 52 weeks. COVID-19. OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide, which has led to adverse impacts on theU.S. and global economies. Due to the drastic change in consumer buying patterns as a result of the COVID-19 pandemic, we experienced a favorable shift in sales mix to our branded retail products resulting in significant growth in income from operations in Fiscal 2020 as compared Fiscal 2019. For additional details on the impact of the COVID-19 pandemic to our business operations and results of operations, see the "Executive Overview - Impact of COVID-19 on Our Business," "Results of Operations" and "Liquidity and Capital Resources" sections below. Conversion of ourLynchburg, Virginia bakery to organic production - During Fiscal 2020, we converted ourLynchburg, Virginia bakery to an all-organic production facility. The converted facility increases production capacity for our DKB products, allowing the company to better serve east coast markets with fresher product and reduce distribution costs. We incurred start-up costs related to the conversion of approximately$5.1 million in Fiscal 2020 and these costs are included in materials, supplies, labor and other production costs in our Consolidated Statements of Income. The bakery resumed production at the end of the third quarter of Fiscal 2020.Canyon Bakehouse LLC acquisition. OnDecember 14, 2018 , we completed the acquisition of Canyon, a privately held, gluten-free baking company inJohnstown, Colorado , for$205.2 million total consideration. Canyon operates one production facility inJohnstown, Colorado . The Canyon Bakehouse brand is the #1 gluten-free bread loaf brand in theU.S. We funded the purchase price of the Canyon acquisition with cash on hand and borrowings under our accounts receivable securitization facility (the "AR facility") and incurred acquisition-related expenses of$4.5 million . Canyon's results of operations for the period fromDecember 14, 2018 throughDecember 29, 2018 were excluded from our consolidated results for Fiscal 2018 due to immateriality and were reported in our first quarter of Fiscal 2019. Prior to the acquisition, Canyon's sales were distributed frozen through natural, specialty, grocery, and mass retailers around the country and this has and will continue. In addition to frozen distribution, we began distributing fresh Canyon branded products via our DSD distribution system during the first quarter of Fiscal 2019. In January of Fiscal 2020, we paid$5.0 million to the prior owner related to the contingent consideration recorded as part of the acquisition. 28 -------------------------------------------------------------------------------- Product recall. OnJuly 9, 2019 , we issued a voluntary product recall for certain hamburger and hot dog buns and other bakery products due to the potential presence of small pieces of hard plastic that may have been introduced during production. The products recalled were distributed to retail customers under a variety of brand names in 18 states. We are not currently aware of any confirmed injuries or illnesses. We incurred costs related to lost production time, scrapped inventory, and product removal, among other costs, of approximately$0.5 million and$0.3 million during the second and third quarters of Fiscal 2019, respectively.
EXECUTIVE OVERVIEW
We are the second-largest producer and marketer of packaged bakery foods in theU.S. with Fiscal 2020 sales of$4.4 billion . We operate in the highly competitive fresh bakery market and our product offerings include fresh breads, buns, rolls, snack cakes and tortillas, as well as frozen breads and rolls. We operate 46 plants in 18 states that produce a wide range of breads, buns, rolls, snack cakes, and tortillas. See Item 1., Business, of this Form 10-K for information regarding our customers and brands, business strategies, strengths and core competencies, and competition and risks.
Impact of COVID-19 on Our Business:
The COVID-19 pandemic significantly impacted our business operations and results of operations during Fiscal 2020, as further described under "Results of Operations" and "Liquidity and Capital Resources" below. The resulting dramatic changes in consumer buying patterns has led to a significant rise in demand for our branded retail products due to increases in at-home dining, but sales through our non-retail category, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing, have declined substantially during the pandemic. In recognition and support of our frontline workers, we paid$12.3 million in appreciation bonuses to eligible hourly and non-exempt employees, leased labor, and contract workers in Fiscal 2020. These appreciation bonuses are in addition to the company's annual bonus program, in which all Flowers employees participate. Although sales of our branded retail products have moderated as the pandemic has continued, we cannot currently estimate when or if they will return to levels prior to the pandemic. OnApril 14, 2020 , we temporarily ceased production at ourTucker, Georgia bakery and onJuly 9, 2020 , we temporarily ceased production at ourSavannah, Georgia bakery. Both closures were due to an increase in the number of confirmed COVID-19 cases at these bakeries and the related increase in number of workers self-quarantining. Production resumed at theTucker bakery onApril 27, 2020 and at theSavannah Bakery onJuly 17, 2020 . While our other bakeries have been able to assist with meeting production needs in these instances, 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 in the future. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows, will continue to be impacted by decreases in foodservice and other non-retail outlets sales. Foodservice sales are likely to remain under pressure until the restaurant industry returns to more normal operations. We cannot predict the timing and speed of the foodservice industry recovery, and any delay in the recovery could significantly impact our future results. We continue to actively monitor the collectability of our trade accounts receivables, including our foodservice customers in particular. We may incur losses in the future if these customers are forced into financial distress or bankruptcy and cannot pay us or their other suppliers on a timely basis or at all. We continue to actively monitor the global outbreak and spread of COVID-19 and are taking steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We are focused on navigating the challenges presented by the COVID-19 global pandemic through the implementation of additional procedures at each of our locations to comply withU.S. Centers for Disease Control and Prevention (CDC ) recommendations. 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 have also been working remotely to mitigate contact between personnel. Non-essential travel and non-essential visitor bans also were implemented to reduce potential exposure. We are considering the options available to us under the FFCRA Act, the CARES Act, and the CCA Act. As of the beginning of the second quarter of Fiscal 2020, we began taking advantage of deferrals of certain payroll tax payments in accordance with the CARES Act. In addition, we continue to evaluate the impact of certain tax credits that are available under these Acts. We have also availed ourselves of the deferral of federal income tax payments made available under an emergency declaration onMarch 13, 2020 . The evolving COVID-19 pandemic could continue to impact our results of operations and liquidity; the operations of our suppliers, vendors, and customers; and our employees as a result of health concerns, quarantines, facility closures, and travel and logistics restrictions. 29 --------------------------------------------------------------------------------
Summary of Operating Results, Cash Flows and Financial Condition:
Sales increased 6.4% in Fiscal 2020 compared to Fiscal 2019 primarily due to a positive shift in mix resulting from much higher demand for our branded retail products due to increased at-home dining as a result of the COVID-19 pandemic combined with improved promotional efficiency, fewer product returns, and the benefit of the additional week. Partially offsetting the increase were substantial declines in our non-retail sales which have been negatively impacted by lower foodservice sales due to restaurant closings or limited capacity restrictions experienced by these customers during the ongoing pandemic, and to a lesser extent declines in our store branded retail sales. Net income was$152.3 million for Fiscal 2020, a decrease of 7.4% as compared to the prior year, primarily due to recognizing non-cash pension plan settlement and curtailment charges of$108.8 million in connection with the termination of Plan No. 1, partially offset by a much more favorable sales mix, mainly resulting from the COVID-19 pandemic, decreased ingredient and packaging costs and legal settlement charges, the reimbursement of prior year losses resulting from receipt of inferior ingredients, and the impact of the additional week. Increased workforce-related incentive costs, including appreciation bonuses paid to frontline workers, restructuring and related impairment charges, and consulting costs, combined with start-up costs for theLynchburg, Virginia bakery conversion, also contributed to the decrease in net income year over year. In Fiscal 2020, we generated net cash flows from operations of$454.5 million and invested$97.9 million in capital expenditures. Additionally, we paid$167.3 million in dividends to our shareholders and increased our total indebtedness by$92.5 million . During the first quarter of Fiscal 2020, we borrowed an additional amount under our senior unsecured revolving credit facility (the "credit facility") in order to ensure future liquidity in response to the uncertainty caused by the COVID-19 pandemic on global financial markets and economies. Although we do not have any presently anticipated need for this additional liquidity, our cash and cash equivalents as ofJanuary 2, 2021 was$307.5 million . In Fiscal 2020, we amended the AR facility to extend the maturity date toSeptember 27, 2022 .
In Fiscal 2019, we generated net cash flows from operations of
Critical Accounting Estimates
The company's discussion and analysis of its results of operations and financial condition are based upon the Consolidated Financial Statements of the company, which have been prepared in accordance with generally accepted accounting principles in theU.S. ("GAAP"). The preparation of these financial statements requires the company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues, expenses, and cash flows during the reporting period. On an ongoing basis, the company evaluates its estimates, including those related to customer programs and incentives, bad debts, raw materials, inventories, long-lived assets, leased assets, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. 30 -------------------------------------------------------------------------------- The selection and disclosure of the company's critical accounting estimates have been discussed with the company's audit committee. Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements of this Form 10-K includes a summary of the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The following table lists, in no particular order of importance, areas of critical assumptions and estimates used in the preparation of the Consolidated Financial Statements. Additional detail can be found in the following notes: Critical Accounting Estimate Note Revenue recognition - Derivative financial instruments 11 Long-lived assets -Goodwill and other intangible assets 9 Leases 14 Self-insurance reserves 23 Income tax expense (benefit) and accruals 22 Postretirement plans 21 Stock-based compensation 19 Commitments and contingencies 23 Revenue Recognition. Revenue is recognized when obligations under the terms of a contract with our customers are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The company records both direct and estimated reductions to gross revenue for customer programs and incentive offerings at the time the incentive is offered or at the time of revenue recognition for the underlying transaction that results in progress by the customer towards earning the incentive. These allowances include price promotion discounts, coupons, customer rebates, cooperative advertising, and product returns. Consideration payable to a customer is recognized at the time control transfers and is a reduction to revenue. The recognition of costs for promotion programs involves the use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors. Price promotion discount expense is recorded as a reduction to gross sales when the discounted product is sold to the customer. Derivative Financial Instruments. The company's cost of primary raw materials is highly correlated to certain commodities markets. Raw materials, such as our baking ingredients, experience price fluctuations. If actual market conditions become significantly different than those anticipated, raw material prices could increase significantly, adversely affecting our results of operations. We enter into forward purchase agreements and other derivative financial instruments qualifying for hedge accounting to manage the impact of volatility in raw material prices. The company measures the fair value of its derivative portfolio using fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. When quoted market prices for identical assets or liabilities are not available, the company bases fair value on internally developed models that use current market observable inputs, such as exchange-quoted futures prices and yield curves. Valuation of Long-Lived Assets,Goodwill and Other Intangible Assets. The company records an impairment charge to property, plant and equipment, goodwill and intangible assets in accordance with applicable accounting standards when, based on certain indicators of impairment, it believes such assets have experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of these underlying assets could result in losses or an inability to recover the carrying value of the asset that may not be reflected in the asset's current carrying value, thereby possibly requiring impairment charges in the future. Impairment charges recorded in Fiscal 2020 and 2019 are discussed above in the "Matters Affecting Comparability" section. Flowers has concluded it has one operating segment based on the nature of products that Flowers sells, an intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the CEO, who is the chief operating decision maker, for the purpose of assessing performance and allocating resources. The company also determined we have one reporting unit. We completed our transition to the current structure and began managing our business as one operating segment as of the beginning of Fiscal 2019. The company evaluates the recoverability of the carrying value of its goodwill on an annual basis or at a time when events occur that indicate the carrying value of the goodwill may be impaired. As discussed above, beginning in Fiscal 2019, we changed to a single reporting unit and reassessed the recoverability of goodwill at that time and determined there was no impairment. We have elected not to perform the qualitative approach, but instead perform a quantitative analysis by comparing the fair value of the reporting unit with which the goodwill is associated to the carrying amount of the reporting unit. If the fair value is less than the carrying value, the goodwill is written down to the extent the carrying amount exceeds the fair value. Our annual evaluation of goodwill impairment requires management judgment and the use of estimates and assumptions to determine the fair value of our reporting unit. Fair value is estimated using standard valuation methodologies incorporating market participant considerations and management's assumptions on revenue, revenue growth rates, operating margins, discount rates, and EBITDA (defined as earnings before interest, taxes, depreciation and amortization). Our estimates can significantly affect the outcome 31 -------------------------------------------------------------------------------- of the test. We perform the fair value assessment using the income and market approach. Changes in our forecasted operating results and other assumptions could materially affect these estimates. This test is performed in the fourth quarter of each fiscal year unless circumstances require this analysis to be completed sooner. The income approach is tested using a sensitivity analysis to changes in the discount rate and yield a sufficient buffer to significant variances in our estimates. The estimated fair value of our reporting unit exceeded its carrying value in excess of$4.0 billion in Fiscal 2020. Based on management's evaluation, no impairment charges relating to goodwill were recorded for Fiscal 2020 and 2019. In connection with acquisitions, the company has acquired trademarks, customer lists, and non-compete agreements, a portion of which are amortizable. The company evaluates these assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The undiscounted future cash flows of each intangible asset are compared to the carrying amount, and if less than the carrying value, the intangible asset is written down to the extent the carrying amount exceeds the fair value. The fair value is computed using the same approach described above for goodwill and includes the same risks and estimates. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment. We use the multi-period excess earnings and relief from royalty methods to value these intangibles. The method used for impairment testing purposes is consistent with the valuation method employed at acquisition of the intangible asset. Impairment charges recorded in Fiscal 2020 and 2019 related to amortizable intangible assets totaled$5.9 million and$15.4 million , respectively, and are discussed above in the "Matters Affecting Comparability" section. As ofJanuary 2, 2021 , the company also owns a trademark acquired through an acquisition with a carrying value of$127.1 million that is an indefinite-lived intangible asset not subject to amortization. The company evaluates the recoverability of intangible assets not subject to amortization by comparing the fair value to the carrying value on an annual basis or at a time when events occur that indicate the carrying value may be impaired. In addition, the assets are evaluated to determine whether events and circumstances continue to support an indefinite life. The fair value is compared to the carrying value of the intangible asset, and if less than the carrying value, the intangible asset is written down to fair value. There are certain inherent risks included in our expectations about the performance of acquired trademarks and brands. If we are unable to implement our growth strategies for these acquired intangible assets as expected, it could adversely impact the carrying value of the brands. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment. As of the end of Fiscal 2019, the company determined a trademark with a carrying value of$79.5 million was no longer deemed to have an indefinite life and began amortizing this trademark in Fiscal 2020 over its remaining useful life of 33 years. Leases. The company's leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation, and IT equipment. The company uses the applicable incremental borrowing rate at lease commencement to perform the lease classification tests on lease components and to measure the lease liabilities and right-of-use assets in situations when discount rates implicit in leases cannot be readily determined. Self-Insurance Reserves. We are self-insured for various levels of general liability, auto liability, workers' compensation, and employee medical and dental coverage. Insurance reserves are calculated on a combination of an undiscounted basis based on actual claims data and estimates of incurred but not reported claims developed utilizing historical claims trends. Projected settlements of incurred but not reported claims are estimated based on pending claims, historical trends, industry trends related to expected losses and actual reported losses, and key assumptions, including loss development factors and expected loss rates. Though the company does not expect them to do so, actual settlements and claims could differ materially from those estimated. Material differences in actual settlements and claims could have an adverse effect on our financial condition and results of operations. Income Tax Expense and Accruals. The annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Changes in statutory rates and tax laws in jurisdictions in which we operate may have a material effect on the annual tax rate. The effect of these changes, if any, would be recognized as a discrete item upon enactment. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Our income tax expense, deferred tax assets and liabilities, and reserve for uncertain tax benefits reflect our best assessment of future taxes to be paid in the jurisdictions in which we operate. The company records a valuation allowance to reduce its deferred tax assets if we believe it is more likely than not that some or all of the deferred assets will not be realized. While the company considers future taxable income and ongoing prudent and feasible tax strategies in assessing the need for a valuation allowance, if these estimates and assumptions change in the future, the company may be required to adjust its valuation allowance, which could result in a charge to, or an increase in, income in the period such determination is made. 32 -------------------------------------------------------------------------------- Periodically, we face audits from federal and state tax authorities, which can result in challenges regarding the timing and amount of income or deductions. We provide reserves for potential exposures when we consider it more likely than not that a taxing authority may take a sustainable position on a matter contrary to our position. We evaluate these reserves on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements that may impact the ultimate payment of such potential exposures. While the ultimate outcome of audits cannot be predicted with certainty, we do not currently believe that current or future audits will have a material adverse effect on our consolidated financial condition or results of operations. The company is no longer subject to federal examination for years prior to Fiscal 2017. Postretirement Plans. The company records pension costs and benefit obligations related to its defined benefit plans based on actuarial valuations. These valuations reflect key assumptions determined by management, including the discount rate, expected long-term rate of return on plan assets and mortality. Material changes in pension costs and in benefit obligations may occur in the future due to experience that is different than assumed and changes in these assumptions.
The company sponsors an ongoing defined benefit pension plan for union employees ("Plan No. 2") and a frozen nonqualified plan covering former Tasty executives.
We use a spot rate approach ("granular method") to estimate the service cost and
interest cost components of benefit cost by applying the specific spot rates
along the yield curve to the relevant projected cash flows, as we believe this
provides the best estimate of service and interest costs.
The pension plan's investment committee, which consists of certain members of
management, establishes investment guidelines and regularly monitors the
performance of the plan's assets. The investment committee is responsible for
executing these strategies and investing the pension assets in accordance with
ERISA and fiduciary standards. The investment objective of the pension plan is
to preserve the plan's capital and maximize investment earnings within
acceptable levels of risk and volatility. The investment committee meets on a
regular basis with its investment advisors to review the performance of the
plan's assets. Based upon performance and other measures and recommendations
from its investment advisors, the investment committee rebalances the plan's
assets to the targeted allocation when considered appropriate. The asset
allocation for Plan No. 2 as of December 31, 2020 is equal to 0-80% equity
securities, 20-100% fixed-income securities, and 0-10% short-term investments
and cash. For the details of our pension plan assets, see Note 21,
Postretirement Plans, of Notes to Consolidated Financial Statements of this Form
10-K.
In developing the expected long-term rate of return on plan assets at each
measurement date, the company considers the plan assets' historical actual
returns, targeted asset allocations, and the anticipated future economic
environment and long-term performance of the individual asset classes, based on
the company's investment strategy. While appropriate consideration is given to
recent and historical investment performance, the assumption represents
management's best estimate of the long-term prospective return. Further, pension
costs do not include an explicit expense assumption, and therefore the return on
assets rate reflects the long-term expected return, net of expenses. Based on
these factors, the long-term rate of return assumption for Plan No. 2 was set at
7.1% for Fiscal 2020 and 5.7% for Fiscal 2021.
The company utilizes the Society of Actuaries' ("SOA") published mortality
tables and improvement scales in developing their best estimates of mortality.
In October 2019 , the SOA published its final report on their "standard"
mortality table ("Pri-2012") and released its annual update to the mortality
improvement scale ("MP-2020"). For purposes of measuring pension benefit
obligations of Plan No. 2, the company used a blue color adjustment to the
Pri-2012 base table and a projection scale of MP-2020. No other collar
adjustments are applied for any other plans. In addition, contingent annuitant
mortality rates are applied for surviving spouses after the death of the
original retiree.
The company determines the fair value of substantially all of its plans' assets
utilizing market quotes rather than developing "smoothed" values, "market
related" values, or other modeling techniques. Plan asset gains or losses in a
given year are included with other actuarial gains and losses due to
remeasurement of the plans' projected benefit obligations ("PBO"). If the total
unrecognized gain or loss exceeds 10% of the larger of (i) the PBO or (ii) the
market value of plan assets, the excess of the total unrecognized gain or loss
is amortized over the expected average remaining service period of active
covered employees (or average future lifetime of participants if the plan is
inactive or frozen). Prior service cost or credit, which represents the effect
on plan liabilities due to plan amendments, is amortized over the average
remaining service period of active covered employees (or average future lifetime
if the plan is inactive or frozen).
In Fiscal 2021, the company does not expect to make any cash contributions to
Plan No. 2 and expects to pay $0.3 million in nonqualified pension benefits from
corporate assets.
Stock-based compensation. Stock-based compensation expense for all share-based
payment awards granted is determined based on the grant date fair value. The
company recognizes these compensation costs net of an estimated forfeiture rate,
and
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recognizes compensation cost only for those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the share-based payment award.
We grant performance stock awards that separately have a market and performance
condition. The expense computed for the total shareholder return shares ("TSR")
is fixed and recognized on a straight-line basis over the vesting period. The
expense computed for the return on invested capital ("ROIC") shares can change
depending on the expected attainment of performance condition goals. The expense
for the ROIC shares can be within a range of 0% to 125% of the target. There is
a possibility that this expense component will change in subsequent quarters
depending on how the company performs relative to the ROIC target. Additionally,
there are time-based stock awards that vest over a period of three years. See
Note 19, Stock-Based Compensation, of Notes to Consolidated Financial Statements
of this Form 10-K for additional information. In early Fiscal 2021, the company
granted stock awards to certain employees and stock-based compensation expense
is expected to increase approximately $7.0 million to $9.0 million as compared
to Fiscal 2020.
Commitments and contingencies. The company and its subsidiaries from time to
time are parties to, or targets of, lawsuits, claims, investigations and
proceedings, including personal injury, commercial, contract, environmental,
antitrust, product liability, health and safety and employment matters,
including lawsuits related to the independent distributors, which are being
handled and defended in the ordinary course of business. Loss contingencies are
recorded at the time it is probable an asset is impaired or a liability has been
incurred and the amount can be reasonably estimated. For litigation claims, the
company considers the degree of probability of an unfavorable outcome and the
ability to make a reasonable estimate of the loss. Losses are recorded in
selling, distribution and administrative expenses line item of the Consolidated
Statements of Income.
Results of Operations
Consolidated Results - Fiscal 2020 compared to Fiscal 2019
The company's results of operations, expressed as a percentage of sales, are set forth below for Fiscal 2020 and Fiscal 2019:
Percentage of Sales Increase (Decrease)
Fiscal 2020 Fiscal 2019 Fiscal 2020 Fiscal 2019 Dollars %
53 weeks 52 weeks 53 weeks 52 weeks
(Amounts in thousands, except percentages)
Sales $ 4,387,991 $ 4,123,974 100.0 100.0 $ 264,017 6.4
Materials, supplies, labor
and other production
costs (exclusive of
depreciation and
amortization shown
separately below) 2,196,142 2,155,709 50.0 52.3 40,433 1.9
Selling, distribution and
administrative
expenses 1,693,387 1,575,122 38.6 38.2 118,265 7.5
Loss (recovery) on inferior
ingredients 107 (37 ) 0.0 (0.0 ) 144 NM
Restructuring and related
impairment charges 35,483 23,524 0.8 0.6 11,959 NM
Depreciation and
amortization 141,384 144,228 3.2 3.5 (2,844 ) (2.0 )
Income from operations 321,488 225,428 7.3 5.5 96,060 42.6
Other components of net
periodic pension and
postretirement benefits
(credit) expense (74 ) 2,248 (0.0 ) 0.1 (2,322 ) NM
Pension plan settlement and
curtailment loss 108,757 - 2.5 - 108,757 NM
Interest expense, net 12,094 11,097 0.3 0.3 997 9.0
Income tax expense 48,393 47,545 1.1 1.2 848 1.8
Net income $ 152,318 $ 164,538 3.5 4.0 $ (12,220 ) (7.4 )
Comprehensive income $ 264,762 $ 167,689 6.0 4.1 $ 97,073 57.9
NM - the computation is not meaningful
Percentages may not add due to rounding.
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Sales (dollars in thousands)
Fiscal 2020 Fiscal 2019
53 weeks 52 weeks
$ % $ % % Change
(Amounts in (Amounts in
thousands) thousands)
Branded retail $ 2,912,096 66.4 $ 2,478,669 60.1 17.5
Store branded retail 609,887 13.9 647,056 15.7 (5.7 )
Non-retail and other 866,008 19.7 998,249 24.2 (13.2 )
Total $ 4,387,991 100.0 $ 4,123,974 100.0 6.4
(The table above presents certain sales by category that have been reclassified from amounts previously reported.)
The change in sales was attributable to the following:
Favorable
Percentage point change in sales attributed to: (Unfavorable) Pricing/mix
7.5
Volume (2.9 )
Week 53 1.8
Total percentage change in sales 6.4
Sales significantly increased year over year primarily due to a substantial rise
in demand for our branded retail products as at-home dining has increased as a
result of the ongoing COVID-19 pandemic which began in the U.S. in mid-March of
2020. This increase resulted in a positive shift in mix from the non-retail and
other sales and store branded retail sales categories to the branded retail
sales category. Fiscal 2020 sales were also positively impacted by a reduction
in product returns, improved promotional efficiency, and the benefit of the
additional week. Considerable volume declines for non-retail and other sales
partially offset the overall increase. We expect these trends to continue while
the pandemic is ongoing, although branded retail sales growth could continue to
moderate as away-from-home dining returns to more normal levels.
Branded retail sales increased significantly due to the increased demand caused
by the COVID-19 pandemic. In Fiscal 2020, sales of our leading brands, Nature's
Own, DKB, and Wonder, all achieved double-digit sales growth. Although not as
impactful, sales of Canyon Bakehouse gluten-free products also experienced
double-digit sales growth year over year. In order to quickly meet heightened
customer and consumer demand for traditional branded loaf breads and buns at the
start of the pandemic, we streamlined our product offerings and focused
production on certain high-demand items. Although the panic-buying and stock-up
shopping patterns we experienced in the first few months of the pandemic have
abated, the shift to at-home consumption remained elevated through the end of
Fiscal 2020 and continued to favorably impact sales of our branded retail
products. Additionally, reduced product returns, growth from recently introduced
products, improved promotional efficiency, and the benefit of the additional
week in the current year contributed to the branded retail sales gains. We
introduced Nature's Own Perfectly Crafted brioche bread and dinner rolls in
Fiscal 2019 and brioche buns in Fiscal 2020 and DKB organic English muffins in
Fiscal 2019 and organic buns in Fiscal 2020, among other newly introduced
branded items.
Store branded retail sales decreased due to volume declines for store branded
breads, buns, and rolls as consumers shifted to branded retail products. The
increase in e-commerce sales contributed to the shift from store branded to
branded retail sales. Additionally, lost store branded breakfast bread business
in the second half of the prior year contributed to the decrease, partially
offset by the benefit of the additional week in the current year.
As discussed above, significant volume losses drove the considerable decrease in
non-retail and other sales, with our foodservice customers experiencing the
greatest declines, partially offset by the benefit of the additional week. At
the onset of the pandemic in the U.S. , business was disrupted for most of our
non-retail customers, most significantly foodservice customers, and many had to
close or greatly reduce their operations. Although many of our foodservice
customers have been able to reopen, they have been subject to capacity
restrictions and other limiting factors, which has negatively impacted our
non-retail sales. Additionally, sales through convenience stores, vending
outlets, and schools and other institutions have experienced significant
declines as a result of the pandemic. We expect these trends to continue while
the pandemic is ongoing.
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Materials, Supplies, Labor, and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)
Fiscal 2020 Fiscal 2019 Change as a
Line item component % of sales % of sales % of sales
Ingredients and packaging 27.4 29.3 (1.9 )
Workforce-related costs 15.1 15.2 (0.1 )
Other 7.5 7.8 (0.3 )
Total 50.0 52.3 (2.3 )
Overall, costs decreased considerably year over year as a percent of sales
largely from the positive shift in mix from non-retail and store branded retail
products to branded retail products caused mostly by the COVID-19
pandemic. Substantial declines in product returns also contributed to the lower
costs. Partially offsetting these items were $8.2 million of appreciation
bonuses paid to frontline workers and $5.1 million of start-up costs incurred
for the conversion of our Lynchburg, Virginia plant to an organic bakery. The
conversion began in the first quarter of Fiscal 2020 and the bakery resumed
production at the end of the third quarter. Ingredient and packaging costs were
significantly lower as percent of sales due to the positive shift in mix and the
decrease in product returns, both discussed above, as well as lower production
volumes in the current year. Also, lower prices for organic and non-organic
flour, gluten, bread bags, and corrugated packaging contributed to the
improvement, partially offset by higher yeast and sweetener prices and reduced
outside purchases of product.
Raw materials, such as our baking ingredients, periodically experience price
fluctuations. The cost of these inputs may fluctuate significantly due to
government policy and regulation, weather conditions, domestic and international
demand, or other unforeseen circumstances. We enter into forward purchase
agreements and other derivative financial instruments in an effort to manage the
impact of such volatility in raw material prices, but some organic and specialty
ingredients do not offer the same hedging opportunities to reduce the impact of
price volatility. Any decrease in the availability of these agreements could
increase the effective price of these raw materials to us and significantly
affect our earnings. We currently anticipate ingredient costs to be higher in
Fiscal 2021 relative to Fiscal 2020.
Selling, Distribution and Administrative Expenses (as a percent of sales)
Fiscal 2020 Fiscal 2019 Change as a
Line item component % of sales % of sales % of sales
Workforce-related costs 11.5 11.0 0.5
Distributor distribution fees 15.3 14.7 0.6
Other 11.8 12.5 (0.7 )
Total 38.6 38.2 0.4
Workforce-related costs increased as a percent of sales compared to the prior
year primarily due to higher workforce-related incentive costs, including $4.1
million of appreciation bonuses paid to frontline workers as a result of the
COVID-19 pandemic, partially offset by a more favorable sales mix. These
appreciation bonuses are in addition to the company's annual bonus program, in
which all Flowers employees participate.
Distributor distribution fees increased considerably as a percent of sales due
to the shift in sales mix, which resulted in a larger portion of our sales being
made through IDPs.
Decreases in legal settlements, reduced transportation costs, a
non-restructuring lease termination gain of $4.1 million , and a $3.9 million
reimbursement of indirect losses associated with receiving inferior yeast in a
prior year primarily resulted in the decrease in the Other line item in the
table above. These items were partially offset by higher consulting costs
associated with Project Centennial and the ERP Road Mapping initiatives and
greater investments in marketing to support brand growth which are also included
in the Other line item above. For additional details regarding the
non-restructuring lease termination gain, the Project Centennial and ERP Road
Mapping consulting costs, and the reimbursement related to inferior ingredients,
see the "Matters Affecting Comparability" section above.
Project Centennial consulting costs increased $14.8 million and the ERP Road
Mapping consulting costs were $4.4 million in the current year. Project
Centennial was completed in Fiscal 2020. For Fiscal 2021 and over the next
several years, we anticipate incurring significant consulting costs associated
with implementing the digital strategy initiative, which includes the upgrade of
our ERP system, and is further discussed in Item 1., Business, of this Form
10-K. Legal settlements recorded in the current year were $7.3 million as
compared to prior year settlements of $28.0 million (inclusive of a $1.3 million
benefit related to an adjustment of a prior year settlement based on the final
amount paid). See Note 23, Commitments and Contingencies, of Notes to
Consolidated Financial Statements of this Form 10-K for
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additional information regarding legal settlements. Lower fuel costs, the shift
in sales mix to more branded retail sales, and distribution optimization
initiatives we have implemented contributed to the improvement in transportation
costs.
Loss (Recovery) on Inferior Ingredients and 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 decreased as a percent of sales primarily due to sales increases combined with assets becoming fully depreciated in the current year and fewer assets being placed into service.
Income from Operations
The growth in income from operations year over year as a percent of sales resulted largely from positive shifts in mix resulting from the increase in at-home dining caused by the COVID-19 pandemic and lower ingredient and packaging costs, partially offset by increased restructuring and related impairment charges in the current year as well as higher selling, distribution, and administrative expenses, as discussed above.
Pension Plan Settlement and Curtailment Loss
We recognized$108.8 million of non-cash pension plan settlement and curtailment charges in the current year composed of a settlement charge of$104.5 million and a curtailment loss of$4.3 million as discussed in the "Matters Affecting Comparability" section above.
Net Interest Expense
Net interest expense for the current year was relatively consistent with the prior year as a percent of sales.
Income Tax Expense
The effective tax rate for Fiscal 2020 was 24.1% compared to 22.4% in the prior year. The increase in the rate year over year was primarily due to state taxes, the reduced windfalls on the vesting of stock-based compensation awards in the current year and more executive compensation subject to the limitations of I.R.C. Section 162(m). For the current year, the primary differences in the effective rate and statutory rate related to state income taxes. The CARES Act did not have a material impact on the effective tax rate for Fiscal 2020 and there is no anticipated material impact on the effective tax rate in future periods. The primary differences in the effective rate and statutory rate for the prior year were state income taxes and windfalls on stock-based compensation.
As discussed above, we have also availed ourselves of the deferral of federal
income tax payments made available under an emergency declaration issued on
In 2019, the most significant difference in the effective rate and the statutory rate related to state income taxes.
Comprehensive Income
The increase in comprehensive income year over year resulted primarily from recognizing the pension plan settlement and curtailment loss in earnings in conjunction with the termination of Plan No. 1 and changes in the fair value of derivatives, net of the decrease in net earnings.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION
Strategy
We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. The COVID-19 pandemic may continue to significantly impact the economy and our ability to generate future cash flows. In particular, if the foodservice industry is slow to recover, our future cash flows could be negatively impacted.
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We strive to maintain a conservative financial position as we believe it allows
us flexibility to make investments and acquisitions and is a strategic
competitive advantage. Currently, our liquidity needs arise primarily from
working capital requirements, capital expenditures, and obligated debt
repayments. We believe we currently have access to available funds and financing
sources to meet our short and long-term capital requirements. The company's
strategy for use of its excess cash flows includes:
• implementing our strategic priorities, including our digital strategy
initiatives;
• paying dividends to our shareholders;
• maintaining a conservative financial position;
• making strategic acquisitions; and
• repurchasing shares of our common stock.
The situation surrounding COVID-19 remains fluid and its future impact on the
company's business, results of operations, liquidity or capital resources cannot
be reasonably estimated with any degree of certainty. We believe the
fundamentals of the company remain strong and that we have sufficient liquidity
on hand to continue business operations during the pandemic. The company had
total available liquidity of $808.2 million as of January 2, 2021 consisting of
cash on hand and the available balances under our credit facility and AR
facility.
In light of the potential risks associated with the pandemic, the company has
taken actions to safeguard its capital position. During the first quarter of
Fiscal 2020, we borrowed an additional $200.0 million under our credit facility.
We borrowed this additional amount out of an abundance of caution to ensure
future liquidity given the significant impact on global financial markets and
economies as a result of the COVID-19 outbreak. If the company experienced a
significant reduction in revenues, the company would have additional
alternatives to maintain liquidity, including amounts available on our debt
facilities, capital expenditure reductions, adjustments to its capital
allocation policy, and cost reductions. Subsequent to the first quarter of
Fiscal 2020, we made net debt repayments totaling $111.3 million . Although we do
not currently anticipate a need, we also believe that we could access the
capital markets to raise additional funds.
The company leases certain property and equipment under various financing and
operating lease arrangements. Most of the operating leases provide the company
with the option, after the initial lease term, to purchase the property at the
then fair value, renew the lease at the then fair value, or return the property.
The financing leases provide the company with the option to purchase the
property at a fixed price at the end of the lease term. The company believes the
use of leases as a financing alternative places the company in a more favorable
position to fulfill its long-term strategy for the use of its cash flow. See
Note 14, Leases, of Notes to Consolidated Financial Statements of this Form 10-K
for detailed financial information regarding the company's lease arrangements.
Key items impacting our liquidity, capital resources and financial position in Fiscal 2020 and 2019:
Fiscal 2020: • We generated$454.5 million of net cash from operating activities. • We paid dividends to our shareholders of$167.3 million . • We increased our total debt outstanding$92.5 million .
• We invested in our business through capital expenditures of
• We incurred Project Centennial implementation costs, including
restructuring cash payments of $12.0 million and non-restructuring
consulting costs of $15.5 million .
• We incurred ERP Road Mapping consulting costs of $4.4 million .
Fiscal 2019:
• We generated$367.0 million of net cash from operating activities. • We paid dividends to our shareholders of$160.0 million . • We decreased our total debt outstanding$114.3 million .
• We invested in our business through capital expenditures of
• We incurred Project Centennial implementation costs, including
restructuring cash payments of $2.1 million and non-restructuring
consulting costs of $0.8 million .
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Liquidity Discussion
Cash flow component Fiscal 2020 Fiscal
2019
Cash flows provided by operating activities
(73,992 ) (97,093 )
Cash disbursed for financing activities (84,040 ) (284,121 )
Total change in cash $ 296,432 $ (14,262 )
Cash Flows Provided by Operating Activities. Net cash provided by operating
activities included the following items for non-cash adjustments to net income
(amounts in thousands):
Fiscal 2020 Fiscal 2019
Depreciation and amortization $ 141,384 $ 144,228
Restructuring and related impairment charges 23,627 21,062
Stock-based compensation 12,855 7,430
Deferred income taxes (31,154 ) 18,609
Pension and postretirement plans expense
(including settlement and curtailment losses) 109,823 3,234
Other non-cash 16,696
9,243
Net non-cash adjustment to net income$ 273,231 $ 203,806
• Refer to the Restructuring and related impairment charges discussion in
the "Matters Affecting Comparability" section above regarding these items.
• The change in stock-based compensation from Fiscal 2019 to Fiscal 2020 was
due to an increase in the number of stock grants outstanding in the
current year as compared to the prior year.
• For Fiscal 2020 and Fiscal 2019, the changes in deferred income taxes
resulted from changes in temporary differences year over year, including
the impact of the termination of Plan No. 1.
• Changes in pension and postretirement plan (benefit) expense were
primarily due to the settlement and curtailment loss of
recognized in Fiscal 2020 in conjunction with the termination of Plan No.
1.
• Other non-cash items include non-cash interest expense for theamortization of debt discounts and deferred financing costs and gains or
losses on the sale of assets.
Net cash for working capital requirements and pension contributions included the following items (amounts in thousands):
Fiscal 2020 Fiscal 2019
Changes in accounts receivable, net $ (25,021 ) $ (7,809 )
Changes in inventories, net (1,771 ) (4,774 )
Changes in hedging activities, net 15,829 10,289
Changes in other assets and accrued liabilities, net 53,250
17,557
Changes in accounts payable (5,772 ) (14,155 ) Qualified pension plan contributions (7,600 ) (2,500 ) Net changes in working capital and pension contributions$ 28,915 $ (1,392 )
• The change in accounts receivable primarily resulted from sales increases
in Fiscal 2020 as compared to Fiscal 2019.
• Hedging activities change from market movements that affect the fair value
and required collateral of positions and the timing and recognition of
deferred gains or losses. These changes will occur as part of our hedging
program.
• The change in other assets and accrued liabilities primarily resulted from
changes in employee compensation accruals, legal settlement accruals,
income tax receivables, hedge margin and payroll tax deferrals under the
CARES Act. In Fiscal 2020 and 2019, we paid
million, respectively, of restructuring-related cash charges. We paid
had been accrued for in prior years, and paid
all of which had been accrued for in prior years. We anticipate making
payments of approximately
taxes, in performance-based cash awards under our bonus plans in the
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first quarter of Fiscal 2021. During Fiscal 2020 and 2019, the company
paid
employment taxes, in performance-based cash awards under the company's
bonus plan. The increase in performance-based cash awards expected to be
paid in Fiscal 2021 resulted from improved financial performance in Fiscal
2020. An additional
2020 and 2019, respectively, for our share of employment taxes on the
vesting of the performance-contingent restricted stock awards in each
respective year.
• During Fiscal 2020 and 2019, we made voluntary contributions to our
qualified defined benefit pension plans of
respectively. We do not expect to make any cash contributions to our
pension plans in Fiscal 2021, however, we do expect to pay
nonqualified pension benefits from corporate assets. The company believes
its cash flow and balance sheet will allow it to fund future pension needs
without adversely affecting the business strategy of the company.
Cash Flows Disbursed for Investing Activities. The table below presents net
cash disbursed for investing activities for Fiscal 2020 and 2019 (amounts in
thousands):
Fiscal 2020 Fiscal 2019
Purchase of property, plant, and equipment $ (97,929 ) $ (103,685 )
Principal payments from notes receivable, net of
repurchases of independent distributor territories 18,379 3,824
Proceeds from sale of property, plant and equipment 5,368
2,649
Other 190
119
Net cash disbursed for investing activities$ (73,992 ) $ (97,093 )
• The company currently estimates capital expenditures of approximately
$140.0 million to$150.0 million (inclusive of expenditures for the ERP upgrade and related digital strategy initiatives) in Fiscal 2021. Cash Flows Disbursed for Financing Activities. The table below presents net cash provided by (disbursed for) financing activities for Fiscal 2020 and 2019 (amounts in thousands): Fiscal 2020 Fiscal 2019 Dividends paid, including dividends on share-based payment awards$ (167,270 ) $ (159,987 ) Payment of contingent consideration (4,700 ) - Payment of financing fees (206 ) (110 ) Stock repurchases (783 ) (7,054 ) Change in bank overdrafts 3,134 3,217 Net change in debt obligations 92,500 (114,250 ) Payments on financing leases (6,715 )
(5,937 )
Net cash disbursed for financing activities
• Our annual dividend rate increased from
$0.80 per share in Fiscal 2020. While there are no requirements to increase our dividend rate, we have shown a recent historical trend to do so. We anticipate funding future dividend payments from cash flows from operations. • The payment for contingent consideration was made to satisfy the
contingent consideration liability recorded in the Canyon acquisition.
• Stock repurchase decisions are made based on our stock price, our belief
of relative value, and our cash projections at any given time. See Note
18, Stockholders' Equity, of Notes to Consolidated Financial Statements of
this Form 10-K for additional information.
• Net debt obligations increased in Fiscal 2020 primarily due to increasing
our available liquidity in response to uncertainty in global markets and
economies caused by the pandemic, net of repayments we made during the
year.
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Capital Structure
Long-term debt and right-of-use lease obligations and stockholders' equity were as follows atJanuary 2, 2021 andDecember 28, 2019 . For a detailed description of our debt and right-of-use lease obligations and information regarding our distributor arrangements, deferred compensation, and guarantees and indemnification obligations, see Note 14, Leases, and Note 15, Debt and Other Commitments, of Notes to Consolidated Financial Statements of this Form 10-K: Interest Rate at Final Balance at Fixed or December 28, January 2, 2021 Maturity January 2, 2021 2019 Variable Rate (Amounts in thousands) 2026 senior notes 3.50% 2026 $ 396,705$ 396,122 Fixed Rate 2022 senior notes 4.38% 2022 399,398 398,906 Fixed Rate Credit facility 1.15% 2022 50,000 41,750 Variable Rate AR facility 1.25% 2022 114,000 26,000 Variable Rate Right-of-use lease obligations 2036 345,762 404,503 Other notes payable - 3,730 1,305,865 1,271,011 Current maturities of long-term debt and right-of-use lease obligations 51,908 64,712 Long-term debt and right-of-use lease obligations $
1,253,957$ 1,206,299 Total stockholders' equity was as follows atJanuary 2, 2021 andDecember 28, 2019 : Balance at January 2, 2021 December 28, 2019 (Amounts in thousands) Total stockholders' equity$ 1,372,994 $ 1,263,430 The AR facility and credit facility are generally used for short term liquidity needs. The company has historically entered into amendments and extensions approximately one year prior to the maturity of the AR facility and the credit facility. The following table details the amounts available under the AR facility and credit facility and the highest and lowest balances outstanding under these arrangements during Fiscal 2020: Amount Available Highest Lowest for Withdrawal at Balance in Balance in Facility January 2, 2021 Fiscal 2020 Fiscal 2020 (Amounts in thousands) AR facility $ 59,100$ 154,000 $ 19,000 Credit facility (1) 441,600$ 235,000 $ 10,000 $ 500,700
(1) Amount excludes a provision in the agreement which allows the company to
request an additional
Amounts outstanding under the credit facility can vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company's overall risk management strategy as discussed in Note 11, Derivative Financial Instruments, of Notes to Consolidated Financial Statements of this Form 10-K. During Fiscal 2020, the company borrowed$272.6 million in revolving borrowings under the credit facility and repaid$264.4 million in revolving borrowings. The amount available under the credit facility is reduced by$8.4 million for letters of credit. The AR facility and the credit facility are variable rate debt. In periods of rising interest rates, the cost of using the AR facility and the credit facility will become more expensive and increase our interest expense. Therefore, borrowings under these facilities provide us the greatest direct exposure to rising rates. In addition, if interest rates do increase, it will make the cost of funds more expensive.
Restrictive financial covenants for our borrowings include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and
41
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events of default. The company believes that, given its current cash position,
its cash flow from operating activities and its available credit capacity, it
can comply with the current terms of the debt agreements and can meet its
presently foreseeable financial requirements. As of January 2, 2021 and December
28, 2019 , the company was in compliance with all restrictive covenants under our
debt agreements.
Special Purpose Entities. At January 2, 2021 and December 28, 2019 , the company
did not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which are established to facilitate off-balance sheet
arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments. The following table summarizes the
company's contractual obligations and commitments at January 2, 2021 and the
effect such obligations are expected to have on its liquidity and cash flow in
the indicated future periods:
Payments Due by Fiscal Year
(Amounts in thousands)
2026 and
Total 2021 2022-2023 2024-2025 Beyond
Contractual Obligations:
Long-term debt $ 964,000 $ - $ 564,000 $ - $ 400,000
Interest payments (1) 121,200 34,500 28,900 28,900 28,900
Financing right-of-use leases
(2) 5,644 1,907 3,635 102 -
Operating right-of-use leases
(2) 414,736 63,044 98,544 76,067 177,081
Pension and postretirement
contributions and
payments (3) 30,932 4,889 7,032 6,226 12,785
Deferred compensation plan
obligations (4) 18,308 1,634 2,996 2,615 11,063
Purchase obligations (5) 379,437 379,437 - - -
Total contractual cash
obligations $ 1,934,257 $ 485,411 $ 705,107 $ 113,910 $ 629,829
Amounts Expiring by Fiscal Year
(Amounts in thousands)
Less than More than
Total 1 Year 1-3 Years 4-5 Years 5 Years
Commitments:
Standby letters of credit (6) $ 19,064 $ 10,814 $ - $ - $ 8,250
Total commitments $ 19,064 $ 10,814 $ - $ - $ 8,250 (1) Amounts outstanding under our credit facility at
included since payments into and out of the credit facility change daily. The
AR facility interest rate is based on the actual rate at
Interest on the senior notes and other notes payable is based on the stated
rate and excludes the amortization of debt discount and debt issuance costs.
(2) Includes the computed interest portion of the payments based on the
incremental borrowing rate.
(3) Includes the expected benefit payments for postretirement plans from Fiscal
2021 through Fiscal 2030. These future postretirement plan payments are not
recorded on the Consolidated Balance Sheets but will be recorded as these
payments are incurred in the Consolidated Statements of Income. The company
completed the termination of Plan No. 1 in Fiscal 2020. The company does not
expect to make any cash contributions to Plan No. 2 in Fiscal 2021.
(4) These are unsecured general obligations to pay the deferred compensation of,
and our contributions to, participants in the executive deferred compensation
plan. This liability is recorded on the Consolidated Balance Sheets as either
a current or long-term liability.
(5) Represents the company's various ingredient and packaging purchasing
commitments. This item is not recorded on the Consolidated Balance Sheets.
(6) These letters of credit are for the benefit of certain insurance companies
related to workers' compensation liabilities recorded by the company as of
recorded on the Consolidated Balance Sheets, but
reduces the availability of funds under the credit facility.
In the event the company ceases to utilize the independent distribution form of
doing business or exits a geographic market, the company is contractually
required to purchase the distribution rights from the independent distributor.
These potential commitments are excluded from the table above because they
cannot be known at this time.
42
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Stock Repurchase Plan. The Board has approved a plan that currently authorizes
share repurchases of up to 74.6 million shares of the company's common stock. At
the close of the company's fourth quarter on January 2, 2021 , 6.2 million shares
remained under the existing authorization. Under the plan, the company may
repurchase its common stock in open market or privately negotiated transactions
or under an accelerated repurchase program at such times and at such prices as
determined to be in the company's best interest. These purchases may be
commenced or suspended without prior notice depending on then-existing business
or market conditions and other factors. During Fiscal 2020, 0.04 million shares
of the company's common stock were repurchased under the plan at a cost of $0.8
million and during Fiscal 2019, 0.3 million shares were repurchased under the
plan at a cost of $7.1 million . From the inception of the plan through January
2, 2021 , 68.4 million shares, at a cost of $643.4 million , have been
repurchased. There were no repurchases of the company's common stock during the
fourth quarter of Fiscal 2020.
New Accounting Pronouncements Not Yet Adopted
See Note 3, Recent Accounting Pronouncements, of Notes to Consolidated Financial Statements of this Form 10-K regarding this information.
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