Flowers Foods, Inc. — Form 10-Q Summary
Reporting-period note: The supplied filing is for the twelve and forty weeks ended October 3, 2020, not 2019 Q3 as stated in the request. Fiscal 2020 has 53 weeks; the quarter was 12 weeks.
Business context and period
Flowers Foods is a U.S. packaged bakery company operating one segment, with 46 bakeries and a direct-store-delivery network. Its brands include Nature’s Own, Dave’s Killer Bread, Wonder, Canyon Bakehouse, Mrs. Freshley’s and Tastykake. Walmart/Sam’s Club accounted for 21.1% of quarterly sales and 21.3% of sales for the forty-week period.
Key financial metrics
| Metric | 12 weeks ended Oct. 3, 2020 | Comparable 2019 period | 40 weeks ended Oct. 3, 2020 | Comparable 2019 period |
|---|---|---|---|---|
| Sales | $989.7 million | $966.6 million | $3,365.0 million | $3,206.2 million |
| Income from operations | $53.0 million; 5.4% margin | $58.7 million; 6.1% margin | $244.1 million; 7.3% margin | $221.6 million; 6.9% margin |
| Net income | $44.3 million | $43.4 million | $96.5 million | $162.3 million |
| Diluted EPS | $0.21 | $0.20 | $0.45 | $0.77 |
- Cash flow: Operating cash flow was $364.4 million for the forty weeks, versus $278.1 million a year earlier. Capital expenditures were $68.3 million, dividends paid were $124.9 million, and cash increased by $314.8 million to $325.8 million.
- Liquidity: Total available liquidity was $803.4 million, including cash and available capacity on revolving and receivables facilities. Those facilities had $477.6 million available for withdrawal at quarter-end.
- Debt: Reported long-term debt was $1.010 billion, compared with $862.8 million at December 28, 2019. Debt face value was $1.014 billion. Long-term debt and lease liabilities together totaled $1.325 billion. The company reported compliance with debt covenants.
- Dividends: Quarterly dividends paid were $0.20 per share, up from $0.19 in the year-earlier quarter. Forty-week dividends were $0.59 per share, versus $0.56.
Material changes versus prior periods
- Quarterly sales rose 2.4%; branded retail sales increased 12.2%, while store-branded retail fell 9.5% and non-retail and other sales fell 14.7%. For the forty weeks, sales rose 5.0%, led by 16.0% growth in branded retail.
- Management attributed retail strength to COVID-19-related shifts toward at-home consumption, less promotion and fewer product returns. Foodservice weakness and other non-retail declines partly offset that growth.
- Quarterly operating income declined 9.7%, with margin down 0.7 percentage points, as higher restructuring and selling, distribution and administrative costs offset favorable sales mix and lower ingredient and packaging costs. Forty-week operating income rose 10.2% and margin improved 0.4 percentage points.
- Forty-week net income fell 40.6%, principally because of $109.1 million of non-cash pension settlement and curtailment charges. The quarter included a $7.2 million pension settlement gain.
- Forty-week restructuring and related impairment charges were $30.6 million, versus $6.0 million in 2019. Project Centennial and ERP road-mapping consulting costs were $14.0 million and $3.1 million, respectively.
Outlook, commentary, risks and unusual items
- Management stated long-term targets of 1%–2% sales growth, 4%–6% EBITDA growth and 7%–9% adjusted EPS growth. It targeted more than $20 million of fiscal 2020 savings from procurement, distribution, operations and administrative optimization; these are targets, not a guarantee.
- Fiscal 2020 capital expenditures were projected at $85 million–$95 million. Management expected remaining fiscal 2020 consulting costs of $1.2 million–$1.5 million for Project Centennial and $1.1 million–$1.3 million for ERP road mapping.
- Management said COVID-19’s future effects were uncertain. It expected foodservice sales to remain pressured until restaurant operations recover; retail sales growth had moderated, and management could not estimate when or whether sales would return to pre-pandemic levels. Bakery closures, customer financial distress and collection delays were identified as risks.
- The company borrowed an additional $200 million under its credit facility in Q1 as a precaution, then made net debt repayments of $61.3 million through Q3. It also deferred employer payroll taxes under the CARES Act; $19.8 million was deferred through Q3, with repayment scheduled over 2021–2022.
- Restructuring included employee reductions affecting about 250 positions, distribution depot exits, bakery and equipment impairments, and discontinuation of the Alpine Valley finite-lived trademark. Management said additional streamlining opportunities remained under review, with costs not yet estimable.
- The company was defending 19 distributor misclassification complaints, 11 seeking class or collective treatment. It disclosed settlements or agreements in principle, including $13.25 million for Carr/Boulange, $8.3 million for Rosinbaum and $2.55 million for Caddick and a companion case. The company said possible losses on unresolved matters could not be reasonably estimated.
Important facts for investors to verify
- Confirm the intended period: the filing supplied is Q3 2020, although the request says 2019 Q3.
- Track whether branded retail growth persists as pandemic-related buying patterns change and whether foodservice demand recovers.
- Assess the effect of restructuring, consulting, legal and pension-related items on reported versus underlying earnings.
- Monitor debt, available facility capacity, covenant compliance, cash generation and the 2022 maturities of the 2022 notes and revolving facilities.
- Review distributor classification litigation, settlement approvals and potential exposure from unresolved claims.