Flowers Foods, Inc. — Form 10-Q Summary
Period: First quarter of fiscal 2020, the sixteen weeks ended April 18, 2020; comparative period ended April 20, 2019. The request metadata says “2019 Q1,” but the filing is for 2020 Q1.
Business context and reporting period
Flowers Foods is a U.S. packaged bakery-foods producer and marketer operating as one segment. Its products include fresh and frozen breads, buns, rolls, snack cakes, and tortillas. Retail sales were 80.2% of first-quarter sales. The company’s direct-store-delivery network relies primarily on independent distributors.
Financial performance and position
| Metric | 16 weeks ended Apr. 18, 2020 | Prior comparable period |
|---|---|---|
| Sales | $1,349.4 million | $1,263.9 million |
| Income from operations | $111.9 million; 8.3% of sales | $90.6 million; 7.2% of sales |
| Net income (loss) | $(5.8) million; $(0.03) per diluted share | $65.9 million; $0.31 per diluted share |
| Cash provided by operations | $106.2 million | $96.2 million |
| Capital expenditures | $21.7 million | $20.8 million |
| Cash dividends paid | $40.3 million; $0.19 per share | $39.3 million; $0.18 per share |
Production costs fell to 49.7% of sales from 51.6%, while selling, distribution and administrative expenses rose to 38.7% from 37.7%. A $116.2 million non-cash pension settlement and curtailment charge drove the net loss, despite higher operating income. The effective tax rate was 25.9%; the company reported a $2.0 million income-tax benefit.
At April 18, 2020, cash was $252.7 million, versus $11.0 million at fiscal year-end. Long-term debt was $1,070.6 million, compared with $866.5 million; debt increased by $203.8 million net during the period. Debt and lease liabilities totaled $1,403.9 million. The company reported $266.6 million of unused revolving-credit availability and $151.0 million available under its receivables facility; total available liquidity, including cash, was $670.3 million. It was in compliance with debt covenants.
Changes versus the prior period
- Sales increased 6.8%, primarily from higher branded retail demand and favorable price/mix, which contributed 6.2 percentage points; volume contributed 0.6 points.
- Branded retail sales rose 17.7% to $891.4 million. Non-retail and other sales fell 15.0% to $267.8 million, with foodservice particularly affected; store-branded retail sales were nearly flat.
- Operating income increased 23.5%, to $111.9 million. COVID-related retail demand and mix benefits were partly offset by higher workforce costs, legal settlements, bad-debt expense, and project consulting costs.
- Operating cash flow increased $10.0 million year over year. Financing cash flow turned positive, largely reflecting additional borrowing; the prior period included a net debt reduction.
Outlook, commentary, risks, and unusual items
- COVID-19: Management estimated the pandemic contributed approximately 6.5%–7.5% to the 6.8% sales increase and improved diluted EPS by approximately $0.09–$0.10. Retail demand surged while foodservice and other non-retail sales declined. Management expects non-retail pressure to continue and says the timing of recovery and normalization cannot be estimated.
- The company paid $6.2 million in one-time appreciation bonuses to frontline and contract workers. A bakery closure in Tucker, Georgia, due to COVID-19 cases temporarily interrupted production; production resumed April 27, 2020. Management warns that multiple bakery closures, supplier or distribution disruption, and customer financial distress could affect operations, collections, and liquidity.
- The pension-plan termination generated the $116.2 million non-cash charge. Plan No. 1’s remaining obligations were transferred to an insurer; the company expected a $2.5 million contribution to its remaining Plan No. 2 in the third quarter.
- Management’s long-term targets remain annual sales growth of 2%–4% and EBITDA margins of 12%–14%. It targeted $10 million–$20 million of savings in the second half of fiscal 2020 from procurement, distribution, operations, and administrative optimization. Fiscal 2020 capital expenditures were estimated at $95 million–$105 million.
- The Lynchburg, Virginia bakery conversion to organic production incurred $1.7 million of start-up costs; an additional $3.0 million–$3.5 million was anticipated, with production expected to resume in the third quarter. Project Centennial consulting costs were $3.4 million in the quarter, with $2.0 million–$3.0 million expected for the remainder of fiscal 2020.
- Distributor misclassification litigation remains a risk: the company was defending 20 complaints, and it said it could not reasonably estimate potential losses for unresolved matters. Several settlements were agreed in principle or completed; $3.2 million of distributor-related settlements was recorded in the quarter.
- Management drew an additional $200 million on its credit facility as a precaution amid market uncertainty. Other risks include variable-rate borrowing costs, commodity-price exposure, dependence on major customers, and possible impairment or bad-debt losses. Walmart/Sam’s Club represented 21.4% of sales.
Important facts for investors to verify
- Whether elevated retail demand persists or represents purchases shifted forward, and how quickly foodservice sales recover.
- The company’s underlying operating earnings excluding the $116.2 million pension charge, and the cash and accounting effects of terminating Plan No. 1.
- Receivable quality and customer concentration, including the impact of foodservice customer distress and Walmart/Sam’s Club exposure.
- Use of borrowed cash, debt levels and maturities—particularly the $625 million scheduled for 2022—and covenant headroom.
- Progress toward stated savings, EBITDA-margin and sales-growth targets, and the costs and schedule for the Lynchburg conversion.
- Developments in unresolved distributor litigation and any resulting settlement costs or changes to the independent-distributor model.