Flowers Foods(FLO) - 2021 Q4 - Annual Report

PART I Business Flowers Foods, Inc. is the second-largest U.S. packaged bakery food producer, with pandemic-driven sales shifts and strategic focus on brand, margin, and ERP upgrades - Flowers Foods is the second-largest producer of packaged bakery foods in the U.S., with principal products including breads, buns, rolls, snack cakes, and tortillas under well-known brands like Nature's Own, Dave's Killer Bread (DKB), Wonder, and Tastykake[20] - The COVID-19 pandemic led to a significant shift in consumer buying patterns, resulting in favorable growth in branded retail products, with the company paying $12.3 million in appreciation bonuses to frontline workers in Fiscal 2020[22][23] Long-Term Financial Goals | Goal | Target Growth (Annually) | | :--- | :--- | | Sales | 1% to 2% | | EBITDA | 4% to 6% | | Earnings Per Share | 7% to 9% | - The company has launched a multi-year digital strategy initiative to upgrade its ERP system, aiming to improve business agility, embed digital capabilities, and modernize its application landscape[38] Fiscal 2020 Sales by Category | Sales Category | Percentage of Sales | | :--- | :--- | | Branded Retail | 66.4% | | Store Branded Retail | 13.9% | | Non-retail and Other | 19.7% | - The company has a significant customer concentration, with its top 10 customers accounting for 53.6% of sales in Fiscal 2020, and Walmart/Sam's Club as the largest customer, representing 21.2% of total sales[47] - As of January 2, 2021, the company had approximately 9,200 employees and 4,200 long-term leased employees, emphasizing diversity, safety, and Second Chance Employment[68][72][74] Risk Factors The company faces significant risks from COVID-19 uncertainties, potential DSD model disruptions due to contractor classification litigation, reliance on large customers, intense competition, cybersecurity threats, and challenges with new ERP system implementation - The COVID-19 pandemic presents a primary risk, with its impact on consumer buying patterns, foodservice customer operations, and potential for facility closures being highly uncertain and difficult to predict[86][87][89] - A material negative change or adverse legal ruling regarding the independent contractor classification of its distributors could significantly disrupt the company's DSD distribution system and negatively affect financial results[93] - The company relies on a few large customers for a significant portion of its sales, with the top ten customers accounting for 53.6% of sales in Fiscal 2020, and Walmart/Sam's Club alone representing 21.2%, where the loss of a major customer could adversely affect business[96] - The company is in the process of implementing a new ERP system, which carries risks of implementation difficulties, delays, and increased costs that could divert management's attention and negatively impact financial controls and operations[109] - The U.S. bakery industry is highly competitive, with pressure from other large branded competitors as well as lower-priced store brands, where increased competition could result in reduced sales, margins, and market share[115] Properties Flowers Foods operates 46 bakeries across 18 states, with 44 owned and 2 leased, and maintains corporate offices in Thomasville, Georgia, and a shared services center in Phoenix, Arizona - The company operates 46 bakeries, with 44 owned and 2 leased, located across 18 states[137] Legal Proceedings For a description of all material pending legal proceedings, the company refers to Note 23, Commitments and Contingencies, of the Notes to Consolidated Financial Statements within this Form 10-K - Details on material legal proceedings are provided in Note 23 of the Notes to Consolidated Financial Statements[138] PART II Market for Common Equity, Stockholder Matters, and Issuer Purchases The company's common stock is traded on the NYSE under the symbol "FLO", with approximately 3,385 holders of record as of February 18, 2021, and its stock performance graph compares cumulative total return against key indices - The company's common stock is listed on the NYSE under the trading symbol "FLO"[141] - As of February 18, 2021, there were approximately 3,385 holders of record of the company's common stock[141] Stock Performance Comparison (Indexed to $100 at Jan 2, 2016) | Index | Jan 2, 2016 | Jan 2, 2021 | | :--- | :--- | :--- | | Flowers Foods Inc. | $100.00 | $125.77 | | S&P 500 Index | $100.00 | $203.04 | | S&P 500 Packaged Foods & Meat Index | $100.00 | $122.82 | | S&P Midcap 400 Index | $100.00 | $179.00 | Selected Financial Data This section presents a five-year summary of key consolidated financial data, highlighting Fiscal 2020 sales of $4.39 billion and net income of $152.3 million, with comparability affected by significant restructuring charges, pension plan settlement losses, and legal settlements Selected Financial Data (2018-2020) | (in thousands, except per share data) | Fiscal 2020 (53 wks) | Fiscal 2019 (52 wks) | Fiscal 2018 (52 wks) | | :--- | :--- | :--- | :--- | | Sales | $4,387,991 | $4,123,974 | $3,951,852 | | Net income | $152,318 | $164,538 | $157,160 | | Diluted EPS | $0.72 | $0.78 | $0.74 | | Cash dividends per share | $0.7900 | $0.7500 | $0.7100 | | Total assets | $3,323,023 | $3,177,776 | $2,845,537 | - Fiscal 2020 included 53 weeks, while Fiscal 2019 and 2018 included 52 weeks[152] - Comparability in Fiscal 2020 was affected by a $108.8 million pension plan settlement loss and $35.5 million in restructuring charges[152] - Comparability in Fiscal 2019 was affected by $23.5 million in restructuring charges and $28.0 million in legal settlements[153][154] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management's discussion highlights a 6.4% sales increase in Fiscal 2020 driven by a shift to branded retail, a 7.4% net income decrease due to a $108.8 million pension charge, and strong liquidity with $808.2 million available - Fiscal 2020 sales increased 6.4% to $4.4 billion, primarily due to a favorable shift in sales mix to branded retail products resulting from the COVID-19 pandemic[189] - Net income for Fiscal 2020 decreased by 7.4% to $152.3 million, largely due to a non-cash pension plan settlement and curtailment charge of $108.8 million[190] - The company generated $454.5 million in net cash from operations in Fiscal 2020 and ended the year with $307.5 million in cash and cash equivalents[191] - Critical accounting estimates include revenue recognition, valuation of long-lived assets and goodwill, self-insurance reserves, and postretirement plan assumptions[193][195] Results of Operations For Fiscal 2020 compared to Fiscal 2019, sales increased 6.4% to $4.39 billion, driven by a 17.5% surge in branded retail sales, while income from operations rose 42.6% to $321.5 million, despite a $108.8 million pension settlement loss leading to a 7.4% decrease in net income Consolidated Results of Operations (Fiscal 2020 vs. 2019) | (in thousands) | Fiscal 2020 (53 wks) | Fiscal 2019 (52 wks) | % Change | | :--- | :--- | :--- | :--- | | Sales | $4,387,991 | $4,123,974 | 6.4% | | Income from operations | $321,488 | $225,428 | 42.6% | | Net income | $152,318 | $164,538 | (7.4%) | Sales by Category (Fiscal 2020 vs. 2019) | (in thousands) | Fiscal 2020 | Fiscal 2019 | % Change | | :--- | :--- | :--- | :--- | | Branded retail | $2,912,096 | $2,478,669 | 17.5% | | Store branded retail | $609,887 | $647,056 | (5.7%) | | Non-retail and other | $866,008 | $998,249 | (13.2%) | - The change in sales was attributed to a 7.5% favorable impact from pricing/mix and a 1.8% benefit from the 53rd week, partially offset by a 2.9% decline in volume[225] - Materials, supplies, labor, and other production costs decreased as a percentage of sales from 52.3% in 2019 to 50.0% in 2020, largely due to the positive shift in product mix and lower product returns[231] - A non-cash pension plan settlement and curtailment loss of $108.8 million was a primary driver of the decrease in net income[242] Liquidity, Capital Resources and Financial Position The company maintains a strong liquidity position, ending Fiscal 2020 with $808.2 million in total available liquidity, including $307.5 million in cash, and generated robust operating cash flow of $454.5 million, believing it has sufficient funds for capital requirements - The company's strategy for use of excess cash includes implementing strategic priorities, paying dividends, maintaining a conservative financial position, making strategic acquisitions, and repurchasing shares[251] Key Liquidity Items (Fiscal 2020) | Item | Amount (in millions) | | :--- | :--- | | Net cash from operating activities | $454.5 | | Capital expenditures | $97.9 | | Dividends paid | $167.3 | | Net increase in debt | $92.5 | - As of January 2, 2021, the company had total available liquidity of $808.2 million, consisting of cash on hand and available balances under its credit and AR facilities[252] Capital Structure Summary (as of Jan 2, 2021) | (in thousands) | Amount | | :--- | :--- | | Long-term debt and right-of-use lease obligations | $1,253,957 | | Total stockholders' equity | $1,372,994 | Quantitative and Qualitative Disclosures About Market Risk The company utilizes derivative financial instruments to manage market risks associated with commodity prices and interest rates, with a sensitivity analysis indicating a hypothetical 10% change in commodity prices would alter the fair value of its derivative portfolio by $10.1 million - The company uses derivative financial instruments to hedge exposure to changes in interest rates and commodity prices, including wheat, soybean oil, corn, and natural gas[280][281] - A sensitivity analysis showed that a hypothetical 10% change in commodity prices would result in a $10.1 million change in the fair value of the company's derivative portfolio as of January 2, 2021[282] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal years 2021, 2019, and 2018, including the Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP), Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, Cash Flows, and detailed Notes to the Consolidated Financial Statements - The financial statements were audited by PricewaterhouseCoopers LLP, which issued an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting[289][328] - A critical audit matter identified was the estimation of workers' compensation reserves due to the significant management judgment involved in determining assumptions like loss development factors and expected loss rates[337][338] Notes to Consolidated Financial Statements The notes provide detailed disclosure on the company's accounting policies, restructuring activities, debt, leases, pension plans, and legal contingencies, including the adoption of new lease accounting standards in 2019, significant restructuring charges related to Project Centennial, details of the company's $960.1 million in long-term debt, and the status of 19 pending lawsuits from independent distributors alleging misclassification - The company adopted the new lease accounting standard (ASC 842) at the beginning of Fiscal 2019, resulting in the recognition of $387.3 million in right-of-use assets and $391.9 million in lease liabilities on the balance sheet[395] - Restructuring charges related to Project Centennial totaled $35.5 million in Fiscal 2020, including costs for employee termination, lease termination, and asset impairments from brand rationalization and plant closures[482] - As of January 2, 2021, the company is defending 19 complaints filed by independent distributors alleging they were misclassified as independent contractors, with ten seeking class and/or collective action treatment[666] - In Fiscal 2020, the company settled the termination of its largest pension plan (Plan No. 1) by transferring remaining obligations to an insurance company, resulting in a non-cash settlement and curtailment charge of $108.8 million[613] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of January 2, 2021, an assessment audited and confirmed by PricewaterhouseCoopers LLP, with no material changes reported in the last fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[286] - Management concluded that the company's internal control over financial reporting was effective as of January 2, 2021, which was audited and confirmed by PricewaterhouseCoopers LLP[288][289] PART III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Shareholders - Information required by this item is incorporated by reference from the company's 2021 proxy statement[294] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Shareholders - Information required by this item is incorporated by reference from the company's 2021 proxy statement[297] Security Ownership and Related Stockholder Matters Information regarding securities authorized for issuance under equity compensation plans is located in Item 5 of this report, with all other security ownership information incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Shareholders - Information required by this item is incorporated by reference from the company's 2021 proxy statement[298] Certain Relationships, Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Shareholders - Information required by this item is incorporated by reference from the company's 2021 proxy statement[299] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for the 2021 Annual Meeting of Shareholders - Information required by this item is incorporated by reference from the company's 2021 proxy statement[300] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K report, including the consolidated financial statements of the registrant and an index of all exhibits such as material contracts, credit agreements, and certifications - This section contains a list of all financial statements and schedules filed with the report, including the Report of Independent Registered Public Accounting Firm and all consolidated statements[303][304] - An exhibit index is provided, listing all filed documents such as acquisition agreements, credit agreements, compensation plans, and required certifications[306][307][308]