Flowers Foods(FLO) - 2019 Q4 - Annual Report

Part I Business Flowers Foods is the second-largest U.S. packaged bakery food producer, operating a single segment with two business units and a direct-store-delivery system - Flowers Foods is the second-largest producer and marketer of packaged bakery foods in the U.S., offering a wide range of breads, buns, rolls, snack cakes, and tortillas[18] - The company operates as a single segment with two business units: Fresh Packaged Bread and Snacking/Specialty. This structure was designed to enhance focus on strategic objectives, brand growth, and cost reduction[19] - Project Centennial is an enterprise-wide initiative focused on four strategic priorities: reinvigorating the core business, reducing costs to fuel growth, capitalizing on adjacencies through acquisitions, and investing in capabilities[21] Fiscal 2019 Sales by Channel | Channel | Percentage of Sales | | :--- | :--- | | Branded retail | 60.2% | | Store branded retail | 15.6% | | Non-retail and other | 24.2% | - The company's top 10 customers accounted for 51.0% of sales in fiscal 2019, with Walmart/Sam's Club being the largest customer at 21.1% of sales[36] - Flowers Foods primarily uses a direct-store-delivery (DSD) system, which relies on approximately 5,590 independent distributor-owned territories to deliver products directly to customer stores[38][41] - The U.S. fresh baking industry is highly competitive, with key players including Bimbo Bakeries USA, Flowers Foods, and Campbell Soup Company (Pepperidge Farm). Competition is based on product quality, brand loyalty, price, and promotions[55][57] Risk Factors The company faces risks from economic conditions, volatile costs, intense competition, DSD disruptions, customer concentration, strategy execution, consumer preference shifts, and cybersecurity threats - Economic downturns could negatively impact consumer demand, leading to shifts toward lower-priced products or reduced purchases, which would adversely affect sales and profitability[64][65] - The company is exposed to price fluctuations and potential shortages of raw materials (flour, sweeteners, shortening) and fuel, which could significantly impact profitability[67][69] - The U.S. bakery industry is highly competitive, with pressure from other major brands and lower-priced store brands. The growth of e-commerce has also intensified competition[70] - Disruptions to the direct-store-delivery (DSD) system, including litigation or adverse rulings regarding the independent contractor classification of distributors, could negatively affect operations and financial results[71] - The company relies on several large customers, with the top ten accounting for 51.0% of sales in fiscal 2019. The loss of a major customer like Walmart/Sam's Club (21.1% of sales) could have a material adverse effect[73] - Failure to successfully execute business strategies, particularly the complex initiatives under Project Centennial, could adversely affect the company's ability to grow margins[75] - The inability to anticipate and respond to changing consumer preferences, including health and wellness trends, may result in decreased demand for products[76] - The company faces risks related to cybersecurity, as a failure or breach of its IT systems could disrupt business operations, result in data loss, and cause financial and reputational damage[94][95][97] Unresolved Staff Comments The company reports no unresolved staff comments - None[112] Properties Flowers Foods operates 46 bakeries, mostly owned, across 18 U.S. states, along with corporate and shared services properties - The company operates 46 bakeries, with 44 owned and 2 leased, which are considered to be in good condition and sufficient for current operations[113] Legal Proceedings Information on material pending legal proceedings is incorporated by reference from Note 24, Commitments and Contingencies - For a description of all material pending legal proceedings, refer to Note 24, Commitments and Contingencies, of Notes to Consolidated Financial Statements[114] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[115] Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'FLO', with details on stockholders, dividends, equity compensation plans, and a five-year stock performance comparison - The company's common stock is traded on the NYSE under the symbol "FLO". As of February 13, 2020, there were approximately 3,435 holders of record[117] - As of December 28, 2019, there were 5,080,672 securities remaining available for future issuance under the company's equity compensation plans approved by security holders[120] Five-Year Cumulative Total Return Comparison | Index | Jan 3, 2015 | Dec 28, 2019 | | :--- | :--- | :--- | | FLOWERS FOODS INC | 100.00 | 134.46 | | S&P 500 INDEX | 100.00 | 174.36 | | S&P 500 PACKAGED FOODS & MEAT INDEX | 100.00 | 137.73 | | S&P MIDCAP 400 INDEX | 100.00 | 154.09 | Selected Financial Data This section summarizes five years of key financial data, including sales, net income, and balance sheet items, with notes on comparability factors like restructuring and accounting changes Selected Financial Data (2015-2019) | (in thousands, except per share data) | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $4,123,974 | $3,951,852 | $3,920,733 | $3,926,885 | $3,778,505 | | Net income | $164,538 | $157,160 | $150,120 | $163,776 | $189,191 | | Diluted EPS | $0.78 | $0.74 | $0.71 | $0.78 | $0.89 | | Cash dividends per common share | $0.7500 | $0.7100 | $0.6700 | $0.6250 | $0.5675 | | Total assets | $3,177,776 | $2,845,537 | $2,659,724 | $2,761,068 | $2,844,051 | | Long-term debt and right-of-use lease liabilities | $1,206,299 | $990,640 | $820,141 | $946,667 | $930,022 | - Comparability of financial data is affected by several items, including restructuring charges of $23.5 million in 2019, $9.8 million in 2018, and $104.1 million in 2017. Legal settlements also impacted results, amounting to $28.0 million in 2019 and $21.5 million in 2018[127][129][130][132] - The company adopted the new lease accounting standard (ASC Topic 842) in fiscal 2019, which resulted in a significant increase in reported assets and liabilities, specifically adding $387.3 million in assets and $391.9 million in liabilities at adoption[128] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses operating performance, strategic initiatives, and financial condition, covering fiscal 2019 sales growth, net income, critical accounting estimates, comparative results, and liquidity Executive Overview In fiscal 2019, Flowers Foods achieved sales growth and increased net income, generating strong operating cash flow used for capital expenditures, debt reduction, and dividends - Fiscal 2019 sales increased 4.4% to $4.1 billion, driven by the Canyon acquisition, growth in DKB branded products, and positive price/mix[160] - Net income for fiscal 2019 increased 4.7% compared to fiscal 2018, attributed to higher sales and reduced costs related to Project Centennial and inferior ingredients, partially offset by higher legal settlements and restructuring charges[161] - In fiscal 2019, the company generated $367.0 million in operating cash flow, invested $103.7 million in capital expenditures, reduced debt by $114.3 million, and paid $160.0 million in dividends[162] Critical Accounting Estimates Critical accounting estimates include revenue recognition, long-lived asset and goodwill valuation, lease accounting, self-insurance, income taxes, and postretirement and pension plan obligations - Key areas requiring critical estimates include revenue recognition, derivative financial instruments, valuation of long-lived assets, goodwill, leases, self-insurance reserves, income taxes, postretirement plans, and stock-based compensation[165][166] - The company evaluates goodwill for impairment annually. For the fiscal 2019 test, the estimated fair value of the single reporting unit exceeded its carrying value by over $3.3 billion, resulting in no impairment charge[173] - As of the end of fiscal 2019, an indefinite-lived trademark with a carrying value of $79.5 million was reclassified to a finite-lived asset and will be amortized over 33 years starting in fiscal 2020[176] - The company's pension plan obligations are sensitive to changes in discount rates and the expected long-term rate of return on assets (EROA). A 0.25% change in the discount rate would impact the year-end benefit obligation by approximately $10 million[195] Results of Operations This section details comparative consolidated results for fiscal 2019 vs. 2018 and 2018 vs. 2017, explaining sales growth drivers, cost trends, and margin changes Fiscal 2019 vs. 2018 Sales Change Attribution | Component | Percentage Point Change | | :--- | :--- | | Pricing/mix | 2.4% | | Volume | (0.2%) | | Acquisition | 2.2% | | Total Change | 4.4% | - In fiscal 2019, branded retail sales increased 5.7% and store branded retail sales increased 10.0%, driven by the Canyon acquisition, growth in DKB products, and new product introductions[202][205] - Selling, Distribution and Administrative (SD&A) expenses increased to 38.2% of sales in fiscal 2019 from 38.1% in 2018. The increase was driven by higher workforce-related costs and marketing investments, partially offset by lower Project Centennial consulting costs[210] - The effective tax rate for fiscal 2019 was 22.4%, compared to 20.3% in 2018. The prior year's rate was lower primarily due to a $5.6 million benefit recognized as an adjustment related to the 2017 Tax Cuts and Jobs Act[217] Fiscal 2018 vs. 2017 Sales Change Attribution | Component | Percentage Point Change | | :--- | :--- | | Pricing/mix | 1.8% | | Volume | (1.0%) | | Total Change | 0.8% | Liquidity, Capital Resources and Financial Position The company maintains strong liquidity from operating cash flows, used for dividends, capital expenditures, and debt reduction, with a capital structure including senior notes and credit facilities, while complying with debt covenants - The company's strategy for using excess cash flow includes paying dividends, maintaining a conservative financial position, making strategic acquisitions, and repurchasing shares[236] Summary of Cash Flows (in thousands) | Cash Flow Activity | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $366,952 | $295,893 | $297,389 | | Net cash for investing activities | $(97,093) | $(301,805) | $(35,395) | | Net cash from (for) financing activities | $(284,121) | $26,089 | $(263,275) | - Capital expenditures for fiscal 2019 were $103.7 million, and the company estimates capital expenditures of $105.0 million to $115.0 million for fiscal 2020[249] Contractual Obligations at Dec 28, 2019 (in thousands) | Obligation Type | Total | Due in 2020 | Due in 2021-2022 | Due in 2023-2024 | Due 2025 & Beyond | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $871,500 | $3,750 | $467,750 | $0 | $400,000 | | Interest payments | $134,750 | $31,500 | $54,250 | $28,000 | $21,000 | | Financing leases | $29,625 | $9,032 | $12,077 | $7,827 | $689 | | Operating leases | $466,309 | $67,885 | $108,313 | $79,882 | $210,229 | | Purchase obligations | $330,526 | $330,526 | $0 | $0 | $0 | Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from commodity prices and interest rates using derivative financial instruments for hedging, with sensitivity analysis indicating potential fair value changes - The company uses derivative financial instruments (forwards, futures, swaps, options) to hedge exposure to changes in interest rates and commodity prices, not for speculative purposes[267] - A sensitivity analysis showed that a hypothetical 10% change in commodity prices would change the fair value of the company's derivative portfolio by $13.8 million as of December 28, 2019[269] Financial Statements and Supplementary Data This section refers to the Index to Consolidated Financial Statements and the Financial Statement Schedule for required information - This item refers to the Index to Consolidated Financial Statements for the required information[270] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[270] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 28, 2019, confirmed by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report (December 28, 2019)[273] - Management concluded that the company's internal control over financial reporting was effective as of December 28, 2019. This has been audited by PricewaterhouseCoopers LLP[274][275] Other Information The company reports no other information for this item - None[277] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Accounting Matters Items 10 through 14, covering directors, executive officers, corporate governance, compensation, security ownership, and accounting fees, are incorporated by reference from the 2020 Proxy Statement - Information required by Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's Proxy Statement for the 2020 Annual Meeting of Shareholders[280][283][284] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and provides a detailed index of all exhibits filed with the Form 10-K report - This item lists the financial statements and provides an index of all exhibits filed with the Form 10-K[289][290] Form 10-K Summary The company has elected not to provide a summary for this item - The company has elected not to provide summary information[297] Financial Statements and Notes Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on Flowers Foods' financial statements and internal controls, noting a lease accounting change and identifying indefinite-lived trademark recoverability as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 28, 2019[312] - The report notes a change in accounting principle in 2019 related to the company's accounting for leases[313] - A critical audit matter was identified concerning the recoverability assessments of indefinite-lived trademarks, which involved significant auditor judgment in evaluating management's assumptions on discount rates, sales growth, and operating margins[321][322] Notes to Consolidated Financial Statements The notes provide detailed disclosures supporting the consolidated financial statements, covering accounting policies, lease adoption, restructuring, acquisitions, debt, pension plans, and distributor litigation - In fiscal 2019, the company adopted the new lease standard (ASC 842), resulting in the recognition of $387.3 million in right-of-use assets and $391.9 million in lease liabilities on the balance sheet[448][452] - Restructuring charges related to Project Centennial totaled $23.5 million in fiscal 2019, primarily from asset and trademark impairments. This compares to charges of $9.8 million in 2018 and $104.1 million in 2017[481] - On December 14, 2018, the company acquired Canyon Bakehouse for total consideration of $205.2 million, which included $80.5 million of goodwill[503] - The company is defending 18 complaints from independent distributors alleging misclassification as independent contractors. Several cases have been settled, including agreements in principle in Q4 2019 to settle three matters for a total of $29.15 million[663][665] - The company is terminating its largest pension plan (Plan No. 1) and estimates a final non-cash settlement charge of approximately $125.0 million to $143.0 million will be triggered in the first quarter of fiscal 2020[608]