Business context and reporting period
Flowers Foods, Inc. (NYSE: FLO) is a U.S. packaged bakery foods producer and marketer operating as one segment. This filing covers the 12 weeks ended October 9, 2021, and year-to-date 40 weeks ended October 9, 2021, compared with periods ended October 3, 2020. The request metadata says “2020 Q3,” but the filing itself is for fiscal 2021 Q3.
Unless otherwise stated, financial amounts below are in millions of dollars. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 40 weeks 2021 | 40 weeks 2020 |
|---|---|---|---|---|
| Sales | $1,027.8 | $989.7 | $3,347.3 | $3,365.0 |
| Income from operations | $52.1 | $53.0 | $241.1 | $244.1 |
| Operating margin | 5.1% | 5.4% | 7.2% | 7.3% |
| Net income | $38.9 | $44.3 | $166.9 | $96.5 |
| Diluted EPS | $0.18 | $0.21 | $0.78 | $0.45 |
| Cash provided by operations | Not presented for quarter | $315.2 | $364.4 |
- Q3 sales rose 3.9%, with pricing/mix contributing 6.4 percentage points and volume detracting 2.5 points. Year-to-date sales declined 0.5%, as a 4.2-point pricing/mix benefit was more than offset by a 4.7-point volume decline.
- Q3 production costs were 50.1% of sales versus 50.3% a year earlier; selling, distribution and administrative expenses rose to 41.5% from 39.1%, weighing on operating margin. Higher input and transportation costs, marketing, legal costs and digital-project consulting contributed to expense pressure.
- Year-to-date net income increased substantially, primarily because the prior-year period included a $109.1 million noncash pension settlement and curtailment loss. Current-year results included a $16.1 million debt-extinguishment loss; operating income was slightly lower year over year.
- Year-to-date investing cash outflow was $81.7 million, including $86.7 million of capital expenditures and $10.2 million for trademarks. Financing cash outflow was $233.5 million, including $131.5 million of dividends and $81.9 million of net debt repayments.
- At October 9, 2021, cash was $307.5 million and long-term debt was $890.2 million, or approximately $582.7 million of net debt excluding lease liabilities. Total debt and right-of-use lease liabilities were $1,242.5 million; stockholders’ equity was $1,411.9 million. No current maturities of long-term debt were reported.
- Available liquidity was $986.4 million: $307.5 million cash plus $678.9 million available under the receivables facility and revolving credit facility. The company reported compliance with debt covenants.
- Quarterly dividends paid were $0.21 per share; year-to-date dividends were $0.62 per share. Year-to-date share repurchases totaled $9.5 million.
Material changes versus comparable periods
- Q3 sales growth reflected favorable pricing/mix and recovering non-retail sales, partly offset by lower volumes and declining store-brand retail sales. Branded retail sales increased 4.8%; store-brand retail sales fell 8.5%; non-retail and other sales increased 9.2%.
- Year-to-date sales remained slightly below the unusually strong prior-year period, which benefited from pandemic-related at-home demand. Non-retail sales recovered but remained below pre-pandemic levels.
- Q3 net income fell 12.4% year over year; the prior-year quarter included a $7.2 million pension settlement gain and restructuring charges, while the current quarter included higher legal and pension withdrawal costs.
- Cash from operations declined to $315.2 million from $364.4 million year to date. Capital expenditures increased to $86.7 million from $68.3 million.
- The company issued $500 million of 2.40% senior notes due 2031 and redeemed $400 million of 4.375% notes due 2022, extending the earliest non-revolving debt maturity to 2026. It also repaid balances on its revolving credit and receivables facilities.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2021 sales to be below fiscal 2020, partly because fiscal 2021 has 52 weeks versus 53 weeks in fiscal 2020. Long-term targets are 1%–2% sales growth, 4%–6% EBITDA growth and 7%–9% EPS growth; these are targets, not specific current-year guidance.
- Management targeted $30–$40 million of fiscal 2021 savings from optimization initiatives and expected $125–$135 million of fiscal 2021 capital expenditures, including digital and ERP investments. Digital-strategy consulting costs were $27.4 million year to date; approximately $9–$12 million of additional costs were expected for the remainder of fiscal 2021. Frontline appreciation bonuses expected in Q4 were estimated to reduce diluted EPS by about $0.01.
- Input and packaging costs were described as volatile and expected to remain so through the remainder of fiscal 2021 and into fiscal 2022. Labor shortages, wage pressure, transportation costs, pandemic disruptions, shifts from branded to store-brand products and customer credit risks could adversely affect results.
- After quarter-end, the company announced a voluntary recall of certain Tastykake products due to possible metal-mesh fragments in a supplied ingredient. The filing states that the financial impact could not then be estimated.
- The company recorded $23.1 million of Q3 legal settlement and related costs. A settlement covering three Maine distributor lawsuits provides for $16.5 million in payments and phased repurchase of about 75 distribution territories, estimated to cost an additional $6.6 million; court approval was required. The company was defending 24 distributor misclassification complaints and said it could not estimate potential losses for unresolved cases.
- A $3.3 million charge related to withdrawal from a multi-employer pension plan included estimated withdrawal liability and transition payments. Additional liability may be incurred depending on the final plan assessment.
- Other risks include the outcome of distributor classification litigation, labor availability and costs, commodity prices, customer concentration (Walmart/Sam’s Club represented 21.2% of Q3 sales), COVID-19 developments and vaccine requirements. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is fiscal 2021 Q3, not 2020 Q3.
- Assess whether price increases and favorable branded-product mix can offset volume declines, inflation, labor constraints and transportation costs.
- Track the Tastykake recall’s eventual costs and any related claims or operational effects.
- Monitor court approval and implementation of the Maine settlement, remaining distributor litigation and potential repurchase obligations.
- Review delivery of the stated savings and capital-expenditure plans, as well as costs, timing and benefits of the multi-year digital and ERP initiative.
- Reconcile cash generation, dividends, capital spending and debt reduction; note that reported liquidity includes borrowing availability, not cash alone.