Flowers Foods, Inc. — Form 10-K Summary
Reporting period: Fiscal 2020, ended January 2, 2021 (53 weeks), compared with fiscal 2019 (52 weeks). Although the request specifies “2019 Q4,” the supplied filing is the annual report for fiscal 2020; it does not represent a 2019 fourth-quarter filing. Flowers Foods is a U.S. packaged bakery company, with breads, buns, rolls, snack cakes and tortillas sold under brands including Nature’s Own, Dave’s Killer Bread, Wonder and Canyon Bakehouse. The company reports one operating segment.
Financial performance
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Sales | $4.388 billion | $4.124 billion | +6.4% |
| Income from operations | $321.5 million | $225.4 million | +42.6% |
| Operating margin | 7.3% | 5.5% | +1.8 percentage points |
| Net income | $152.3 million | $164.5 million | -7.4% |
| Diluted EPS | $0.72 | $0.78 | -7.7% |
| Operating cash flow | $454.5 million | $367.0 million | +$87.5 million |
| Capital expenditures | $97.9 million | $103.7 million | -$5.8 million |
| Cash and cash equivalents, year-end | $307.5 million | $11.0 million | +$296.4 million |
| Long-term debt and lease liabilities, year-end | $1.254 billion | $1.206 billion | +$47.7 million |
The filing does not report gross margin as a separate measure. Net margin was approximately 3.5% versus 4.0%. Fiscal 2020 net income included a $108.8 million non-cash pension settlement and curtailment charge related to terminating a pension plan. Excluding this item would not, by itself, constitute a company-reported adjusted earnings measure.
Sales mix shifted sharply toward branded retail: branded retail sales rose 17.5% to $2.912 billion and represented 66.4% of sales, versus 60.1% in 2019. Store-branded retail sales fell 5.7% to $609.9 million; non-retail and other sales fell 13.2% to $866.0 million. Pricing and mix contributed 7.5 percentage points to sales growth, volume reduced growth by 2.9 points, and the extra fiscal week contributed 1.8 points.
Production costs declined to 50.0% of sales from 52.3%, primarily on favorable product mix, lower returns and ingredient and packaging costs. Selling, distribution and administrative expenses increased to 38.6% of sales from 38.2%. Interest expense, net, was $12.1 million versus $11.1 million; the effective tax rate was 24.1% versus 22.4%.
Cash, liquidity and debt
- Year-end available liquidity was $808.2 million, comprising cash and available capacity under the revolving credit and accounts receivable (AR) facilities. Availability was $441.6 million under the credit facility and $59.1 million under the AR facility.
- Total debt outstanding increased $92.5 million during fiscal 2020. At year-end, principal debt was about $964 million before unamortized discounts and issuance costs; balance-sheet long-term debt and right-of-use lease liabilities totaled $1.254 billion. The $307.5 million cash balance included funds borrowed in part as a precaution amid pandemic uncertainty.
- Flowers paid $167.3 million in dividends, up from $160.0 million, and increased its annual dividend rate to $0.80 per share from $0.76. It paid $97.9 million for capital expenditures and made $111.3 million of net debt repayments after the first quarter’s precautionary borrowing.
- The company reported compliance with debt covenants at year-end. Its $400 million 2022 senior notes mature in 2022, alongside the credit and AR facilities, also scheduled to mature in 2022.
Changes, outlook and notable items
- Management attributed stronger sales and operating income mainly to pandemic-driven increases in at-home dining and branded retail demand. Foodservice, restaurant, institutional and other non-retail channels were materially weaker. Management cautioned that branded retail demand may moderate and that a shift back toward store-brand and non-retail products could pressure sales, earnings and cash flow.
- Net income declined despite higher operating income, principally because of the pension termination charge. Other comparability items included $35.5 million of restructuring and impairment charges, $15.5 million of Project Centennial consulting costs, $4.4 million of ERP road-mapping costs, and $7.3 million of legal settlement charges. The year also included a $4.1 million non-cash lease termination gain and $3.9 million of reimbursement for prior-year indirect losses from inferior yeast.
- COVID-19 led to temporary production stoppages at the Tucker, Georgia bakery and Savannah, Georgia bakery; both resumed production during 2020. Flowers paid $12.3 million in frontline appreciation bonuses, including amounts recorded in production costs and selling, distribution and administrative expenses.
- Management’s long-term goals, excluding acquisitions, are annual sales growth of 1%–2%, EBITDA growth of 4%–6%, and EPS growth of 7%–9%. These are long-term goals, not specific fiscal 2021 guidance. Management expected fiscal 2021 ingredient costs to be higher than in 2020 and estimated capital expenditures of $140–$150 million, including ERP and digital-strategy spending. The ERP project is multi-year; management expects significant future consulting and infrastructure costs but did not provide an estimate.
- Material risks include pandemic-related demand and operating disruption, customer concentration (Walmart/Sam’s Club represented 21.2% of sales; the top ten customers represented 53.6%), commodity and fuel cost volatility, competition and pricing pressure, distributor-classification litigation, and ERP implementation and cybersecurity risks. The company was defending 19 distributor misclassification complaints; it said potential losses on unresolved matters could not be reasonably estimated.
- A voluntary recall of certain gluten-free products followed possible gluten presence in supplier ingredients; the company reported $1.3 million of related costs and said it was seeking remedies. Separately, audited financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Investor verification priorities
- Separate underlying operating improvement from the 53rd week, pandemic-related branded retail mix, and significant pension and restructuring items.
- Track whether foodservice and other non-retail sales recover, branded retail growth persists, and higher input costs can be offset through pricing or productivity.
- Review liquidity, refinancing plans and covenant headroom ahead of the 2022 debt and facility maturities, including the effect of lease obligations.
- Monitor outcomes and cash costs of distributor litigation, customer receivable collectability, and any further product recalls or supplier claims.
- Assess the ERP program’s spending, milestones and control risks against the projected $140–$150 million fiscal 2021 capital expenditure range.