Flowers Foods, Inc. — Form 10-Q Summary
Reporting period: The filing covers the twelve and twenty-eight weeks ended July 17, 2021. The request metadata says “2020 Q2,” but the filing is for fiscal 2021 Q2; comparable periods ended July 11, 2020.
Business context
Flowers Foods is a U.S. packaged bakery foods producer, operating as one reporting segment. Its products include breads, buns, rolls, snack cakes, and tortillas, sold through branded retail, store-branded retail, and non-retail channels. Walmart/Sam’s Club represented 21.8% of quarterly sales.
Financial performance
| Metric | 12 weeks ended July 17, 2021 | 12 weeks ended July 11, 2020 | 28 weeks ended July 17, 2021 | 28 weeks ended July 11, 2020 |
|---|---|---|---|---|
| Sales | $1,017.3 million | $1,025.9 million | $2,319.5 million | $2,375.3 million |
| Operating income | $73.9 million | $79.2 million | $189.0 million | $191.1 million |
| Operating margin | 7.3% | 7.7% | 8.1% | 8.0% |
| Net income | $56.4 million | $57.9 million | $128.0 million | $52.1 million |
| Diluted EPS | $0.26 | $0.27 | $0.60 | $0.25 |
| Operating cash flow | Not stated for the quarter | $223.4 million | $275.8 million |
- Quarterly sales fell 0.8%; pricing/mix contributed 3.1 percentage points, while volume declined 3.9 points. Branded retail sales fell 2.0%, store-branded retail fell 9.4%, and non-retail and other sales rose 9.9%.
- Quarterly operating income declined 6.7%, as moderating sales and higher selling, distribution and administrative costs more than offset lower production costs and reduced prior-year restructuring charges.
- First-half net income increased substantially versus 2020, chiefly because the prior-year period included a $116.2 million non-cash pension settlement and curtailment loss. The current period included a $16.1 million loss from early debt redemption.
- First-half operating cash flow decreased $52.4 million year over year. Capital expenditures were $58.3 million; dividends paid were $87.0 million.
Financial position and liquidity
- At July 17, 2021, cash was $292.3 million, total assets were $3.326 billion, and stockholders’ equity was $1.425 billion.
- Long-term debt was $889.9 million, excluding lease liabilities. Debt and right-of-use lease liabilities totaled $1.193 billion; no long-term debt maturities were scheduled before 2026.
- Total available liquidity was $955.4 million: $292.3 million cash plus $663.1 million available under the receivables facility and revolving credit facility. The company reported compliance with debt covenants.
- The company issued $500 million of 2.400% notes due 2031 and used proceeds to redeem $400 million of 4.375% notes due 2022 and repay revolving and receivables-facility borrowings. The July 30, 2021 credit agreement amendment extended the revolving facility maturity to 2026.
Outlook, commentary, and risks
- Management expects fiscal 2021 sales to be below fiscal 2020 if pandemic-era consumer buying patterns continue to normalize; it could not estimate the timing or magnitude. Non-retail sales were recovering but remained below pre-pandemic levels.
- Management’s long-term targets are annual sales growth of 1%–2%, EBITDA growth of 4%–6%, and EPS growth of 7%–9%. It targeted $30–$40 million of fiscal 2021 savings from optimization initiatives and expected $125–$135 million of fiscal 2021 capital expenditures.
- Digital strategy consulting costs were $18.2 million in the first half; management expected another $15–$20 million in the remainder of fiscal 2021, with a portion potentially capitalized. The multiyear program includes an ERP upgrade, e-commerce, autonomous planning, and bakery modernization.
- Key uncertainties include COVID-19 developments and changing product mix, labor shortages and wage inflation, volatile ingredient and packaging costs, transportation costs, customer concentration, and disruptions to production or distribution. The filing identifies 17 pending distributor misclassification complaints; the company says unresolved-case losses cannot currently be reasonably estimated.
- Other notable items include a $3.4 million acquisition-related tax consideration charge, and $13.2 million of digital-strategy consulting costs in the quarter. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting-year mismatch in the request: this filing reports fiscal 2021 Q2, not 2020 Q2.
- Track whether branded retail demand and non-retail recovery, including product mix and returns, support management’s sales and margin expectations.
- Assess whether commodity, labor, transportation, digital-program, and other operating costs pressure margins and cash generation.
- Review execution and spending on the ERP and broader digital initiative, alongside planned capital expenditures and targeted savings.
- Monitor liquidity, debt reduction and refinancing, and developments in distributor classification litigation and the acquisition-related tax matter.