Flowers Foods(FLO) - 2023 Q4 - Annual Report

PART I Business Flowers Foods, a major U.S. packaged bakery producer, manages inflation via pricing, pursues strategic growth, and is transforming operations through digital and ERP initiatives The Company and Macroeconomic Factors Flowers Foods, the second-largest U.S. packaged bakery producer, actively manages inflation, supply chain issues, and labor shortages through pricing and sales mix optimization - Flowers Foods is the second-largest U.S. packaged bakery producer, offering products under brands like Nature's Own, Dave's Killer Bread, and Wonder[48] - The company is mitigating ongoing cost pressures from inflation by implementing price increases in Fiscal 2023[50] - Operations in Fiscal 2023 and 2022 were hampered by supply chain disruptions, capacity constraints, and labor shortages, negatively impacting production and sales[51][52] Strategic Initiatives The company's strategy focuses on four priorities, aiming for long-term financial growth, and is undergoing a significant digital and ERP system transformation estimated at $350 million by 2026 Long-Term Financial Goals (Annually) | Metric | Growth Target | | :--- | :--- | | Sales | 1% to 2% | | EBITDA | 4% to 6% | | Earnings Per Share | 7% to 9% | - The company's four strategic priorities are: Develop team, Focus on brands, Prioritize margins, and Smart M&A[55][56] - A significant ERP system upgrade is underway, with an estimated total cost of approximately $350 million and anticipated completion in 2026, with $214 million incurred by December 30, 2023[65] - Digital strategy initiatives focus on e-commerce, autonomous planning, and digital logistics to improve data visibility, efficiency, and decision-making[64][68] Brands & Products The company's portfolio features leading brands like Nature's Own and Dave's Killer Bread, with Branded Retail sales at 64.1% in Fiscal 2023, and is expanding into snacking Key Brand Performance (Fiscal 2023) | Brand | Key Highlight | Estimated Retail Sales | | :--- | :--- | :--- | | Nature's Own | 1 selling loaf bread in the U.S. | $1.5 billion | | Dave's Killer Bread (DKB) | 1 selling organic brand in the U.S. | $1.0 billion | | Canyon Bakehouse | 1 selling gluten-free bread brand in the U.S. | $164 million | | Wonder | 97% brand awareness | $512 million | - In Fiscal 2023, Branded Retail sales represented 64.1% of total sales[72] - The company is expanding into the snacking category with the nationwide rollout of DKB Organic Snack Bars and the launch of DKB Crunchy Snack Bites[67] Customers and Distribution The company's top 10 customers, led by Walmart/Sam's Club, accounted for 55.5% of Fiscal 2023 sales, utilizing a DSD system with plans to repurchase 400 California territories - The top 10 customers accounted for 55.5% of sales in Fiscal 2023, with Walmart/Sam's Club as the largest at 22.3%[78] DSD Territory Breakdown (as of Dec 30, 2023) | Type of Territory | Number of Territories | | :--- | :--- | | Independent distributor-owned and operated | 5,105 | | Territories classified as available for sale | 567 | | Other company operated territories | 251 | | Total Territories | 5,923 | - The company plans to repurchase approximately 400 territories in California during Fiscal 2024, converting them to a company-operated model due to a litigation settlement[84] Competition Flowers Foods, the second-largest U.S. fresh baking company, faces intense competition from major brands and private labels, with store brands accounting for 21% of dollar sales - Flowers Foods is the second-largest company in the U.S. fresh baking industry, competing with Bimbo Bakeries USA and Campbell Soup Company (Pepperidge Farm)[94][95] - Competition is based on product quality, brand loyalty, price, promotions, and adapting to changing consumer preferences[97] - Store brands represent a significant competitive threat, accounting for about 21% of dollar sales and 31% of unit sales in the U.S. fresh packaged bread market, with increased demand due to inflation[98] Human Capital Resources As of December 30, 2023, Flowers had approximately 9,300 employees and 4,800 leased employees, focusing on diverse recruitment, employee development, and comprehensive benefits - As of December 30, 2023, the company had approximately 9,300 employees and 4,800 long-term leased employees[100] - Recruitment efforts include partnerships with HBCUs and initiatives as a second chance employer for individuals impacted by the criminal justice system[102] - The company provides competitive benefits including comprehensive health insurance, parental leave, adoption reimbursement up to $20,000, and a 401(k) plan with a company match[107][108] Risk Factors The company faces operational, technological, industry, and legal risks, including DSD disruptions, labor shortages, ERP implementation challenges, cost inflation, intense competition, and regulatory compliance Operational Risks Operational risks include economic impacts on demand, DSD system disruptions from litigation, labor shortages increasing costs, and challenges in executing complex strategies like acquisitions and technology deployments - A disruption or adverse ruling regarding the independent contractor classification of distributor partners could negatively affect the DSD distribution system, financial condition, and cash flows[119] - Labor shortages and increased turnover at bakeries could lead to increased costs and negatively affect operational efficiency[121] - The company's success depends on executing complex initiatives, including integrating acquisitions, deploying new systems like the ERP upgrade, and enhancing organizational structure[126] Technology Risks Technology risks include IT system failures, cybersecurity breaches, and challenges in implementing the major ERP system upgrade, potentially impacting operations, finances, and controls - The company's IT systems are vulnerable to cyber-attacks, potentially leading to financial and reputational damage from security breaches and interruptions[137][138] - The ERP system upgrade carries risks of delays, increased costs, and difficulties that could negatively impact internal controls and financial results[140] Industry Risks Industry risks include raw material cost increases, intense competition from brands and private labels, product recalls, inability to adapt to consumer preferences, and increased customer buying power due to consolidation - Raw materials like flour and sweeteners are subject to price fluctuations due to government policies, weather, and global conflicts, potentially impacting profitability[141] - The U.S. bakery industry is highly competitive, facing pressure from major brands and lower-priced store-branded products[144] - The loss of a large customer could adversely affect results, as the top ten customers accounted for 55.5% of sales in Fiscal 2023, with Walmart/Sam's Club alone at 22.3%[155] Legal and Regulatory Risks Legal and regulatory risks include extensive food production regulations, potential climate change impacts, and increasing litigation, particularly concerning independent distributor classification - As a food producer, the company is subject to extensive federal and state regulation, with non-compliance potentially leading to fines, recalls, or other sanctions[157][158] - Climate change presents risks, including potential negative effects on agricultural productivity and new regulations that could increase operational costs[159][160] - The company faces increasing legal complexity, including litigation involving its independent distributor model, which could increase costs and negatively impact the business if determined adversely[164] Unresolved Staff Comments There are no unresolved staff comments - Not applicable[173] Cybersecurity Flowers Foods integrates cybersecurity into its enterprise risk management, overseen by the audit committee, with a CSIRP and training, acknowledging future incident risks - The company has a cybersecurity program including employee training and a Computer Security Incident Response Plan (CSIRP) to manage and report material incidents[4] - The Board of Directors, specifically the audit committee, oversees the Information Security program and cybersecurity risks[7] - Management, including the CIO and VP of Information Security, regularly reports to the audit committee on cybersecurity risks and material incidents[8][177] - To date, no cybersecurity threats have materially affected the company's business strategy, results of operations, or financial condition[176] Properties The company owns its principal offices, operates 46 bakeries (44 company-owned), and manages 649 warehouse/distribution centers, with Fiscal 2023 bakery utilization ranging from 89% to 98% - The company operates 46 bakeries across the continental U.S., with all but two being company-owned[9] - The company owns approximately 140 and leases approximately 509 warehouse/distribution centers across its markets[9] - In Fiscal 2023, average quarterly production utilization ranged from 89% to 98% across all bakeries, considered adequate for current operations[10] Legal Proceedings Material pending legal proceedings are detailed in Note 23, Commitments and Contingencies, of the Notes to Consolidated Financial Statements - For details on material pending legal proceedings, refer to Note 23, Commitments and Contingencies, of the Notes to Consolidated Financial Statements[11] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[12] PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (FLO) trades on the NYSE, with 3,225 holders; it repurchased 0.7 million shares for $14.9 million in Q4 2023, and its cumulative return was 146.26 by year-end 2023 - The company's common stock (FLO) is traded on the NYSE, with approximately 3,225 holders of record as of February 15, 2024[14] Share Repurchase Activity (Twelve weeks ended Dec 30, 2023) | Metric | Value | | :--- | :--- | | Shares Repurchased | 0.7 million | | Total Cost | $14.9 million | | Shares Remaining for Repurchase | 22.5 million | Cumulative Total Return Comparison (Indexed to 100 at Dec 29, 2018) | Index | Dec 30, 2023 Value | | :--- | :--- | | FLOWERS FOODS INC | 146.26 | | S&P 500 INDEX | 209.00 | | S&P 500 PACKAGED FOODS & MEATS INDEX | 156.66 | | S&P MIDCAP 400 INDEX | 183.01 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section details financial performance, highlighting $137.5 million in legal settlement costs, a 5.9% sales increase driven by pricing, a decline in operating income to $172.9 million, and strong cash flow funding acquisitions and dividends Matters Affecting Comparability Fiscal 2023 and 2022 results were impacted by significant items affecting comparability, including $137.5 million in legal settlements in Fiscal 2023 and $33.2 million in business process improvement costs in Fiscal 2022 Expense Items Affecting Comparability (in millions) | Item | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Business process improvement costs | $21.5M | $33.2M | | Restructuring charges | $7.1M | — | | Plant closure costs and impairment of assets | $7.3M | $7.8M | | Acquisition-related costs | $3.7M | $12.5M | | Legal settlements and related costs | $137.5M | $7.5M | | Total | $177.2M | $56.9M | - In Fiscal 2023, the company recorded $137.5 million in legal settlements and related costs, primarily from a California distributor litigation settlement involving the repurchase of approximately 400 distribution territories[201][20] - In Fiscal 2022, the company incurred $11.6 million in costs from a failed acquisition, including an $8.4 million realized foreign currency exchange loss[24] Executive Overview Fiscal 2023 sales grew 5.9% to $5.1 billion due to pricing, but operating income fell to $172.9 million due to legal settlements, while $349.4 million in operating cash flow funded acquisitions and shareholder returns - Fiscal 2023 sales reached $5.1 billion, an increase of 5.9% from the prior year, primarily due to pricing actions[202][789] - Income from operations decreased to $172.9 million in Fiscal 2023 from $303.2 million in Fiscal 2022, mainly due to a significant increase in legal settlement costs[760] - Net income for Fiscal 2023 was $123.4 million, down from $228.4 million in the prior year[790] - Key uses of cash in Fiscal 2023 included the $274.8 million Papa Pita acquisition, $129.1 million in capital expenditures, $45.8 million in stock repurchases, and $195.2 million in dividends[761] Critical Accounting Estimates Management identifies critical accounting estimates including revenue recognition, goodwill valuation, and self-insurance reserves; the Fiscal 2023 goodwill impairment test showed fair value exceeded carrying value by over $3.4 billion - The company's critical accounting estimates involve significant judgment in areas such as revenue recognition, goodwill and intangible asset valuation, self-insurance reserves, and income taxes[763][792] - The annual goodwill impairment test indicated the fair value of the single reporting unit exceeded its carrying value by more than $3.4 billion in Fiscal 2023, with a 1% increase in discount rate decreasing fair value by $0.7 billion[767] - A sensitivity analysis on workers' compensation liabilities estimates that a 1% change in claim severity and frequency would result in an approximately $0.6 million change in the liability[770] Results of Operations Fiscal 2023 total sales increased 5.9% to $5.09 billion due to pricing and acquisitions, despite volume declines, but operating income decreased 43.0% to $172.9 million due to increased SD&A expenses and legal settlements Consolidated Results Summary (Fiscal 2023 vs. 2022) | Metric | Fiscal 2023 | Fiscal 2022 | % Change | | :--- | :--- | :--- | :--- | | Sales | $5,090.8M | $4,805.8M | 5.9% | | Income from Operations | $172.9M | $303.2M | (43.0%) | | Net Income | $123.4M | $228.4M | (46.0%) | Sales Change Attribution (Fiscal 2023 vs. 2022) | Component | Branded Retail | Other | Total | | :--- | :--- | :--- | :--- | | Pricing/Mix | +5.5% | +16.3% | +10.1% | | Volume | (2.6%) | (7.8%) | (5.3%) | | Acquisition | +1.0% | +1.2% | +1.1% | | Total Change | +3.9% | +9.7% | +5.9% | - SD&A expenses increased from 38.5% to 41.6% of sales, largely due to a $130.0 million increase in legal settlements and related costs, impacting by 260 basis points[241][815] Liquidity, Capital Resources and Financial Position The company maintains strong liquidity with $349.4 million in Fiscal 2023 operating cash flow, funding the $274.8 million Papa Pita acquisition, capital expenditures, dividends, and share repurchases, with $559.1 million total available liquidity Cash Flow Summary (in millions) | Cash Flow Component | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Cash from Operating Activities | $349.4M | $360.9M | | Cash for Investing Activities | ($403.8M) | ($151.1M) | | Cash for Financing Activities | ($88.1M) | ($222.2M) | | Total Change in Cash | ($142.6M) | ($20.7M) | - Key uses of cash in Fiscal 2023 included the $274.8 million Papa Pita acquisition, $129.1 million in capital expenditures, $195.2 million in dividends, and $45.8 million in share repurchases[271] - Total available liquidity was $559.1 million as of December 30, 2023, consisting of cash and available balances under credit and repurchase facilities[245] - The company's ERP system upgrade is now estimated to cost approximately $350 million, an increase from $275 million, with completion expected in 2026[326] Quantitative and Qualitative Disclosures About Market Risk The company uses derivative financial instruments to manage commodity price risk, with a $(1.9) million fair value liability as of December 30, 2023, and a 10% price change would impact the portfolio by $1.9 million - The company uses derivative financial instruments to hedge exposure to changes in commodity prices and interest rates, not for speculation[319] - As of December 30, 2023, the company's commodity derivative portfolio had a fair value liability of $(1.9) million[260] - A sensitivity analysis indicates that a hypothetical 10% change in commodity prices would impact the fair value of the derivative portfolio by $1.9 million[261] Financial Statements and Supplementary Data This section refers to the Index to Consolidated Financial Statements and the Financial Statement Schedule for required information - Refer to the Index to Consolidated Financial Statements for required information[262] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - Not applicable[223] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 30, 2023, excluding the recently acquired Papa Pita business - Management concluded that the company's disclosure controls and procedures were effective as of December 30, 2023[320] - Management concluded that the company's internal control over financial reporting was effective as of December 30, 2023[225] - The assessment of internal control over financial reporting excluded the Papa Pita business, acquired during Fiscal 2023[227] Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fiscal quarter ended December 30, 2023 - None of the company's directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fiscal quarter ended December 30, 2023[228] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[229] PART III Directors, Executive Officers and Corporate Governance This section provides information on executive officers, including A. Ryals McMullian (CEO), R. Steve Kinsey (CFO), and Heeth Varnedoe IV (President), and details the company's Code of Business Conduct and Ethics - Information regarding the company's executive officers, including their roles and extensive industry experience, is provided[166][168] - The company has adopted a Code of Business Conduct and Ethics for its officers and directors, publicly available on its website[233] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the company's proxy statement under the captions "Corporate Governance — Director Compensation" and "Executive Compensation"[234] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 30, 2023, the company had 3,945,303 securities to be issued under approved equity compensation plans, with 9,030,128 remaining available for future issuance Equity Compensation Plan Information (as of Dec 30, 2023) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,945,303 | 9,030,128 | | Equity compensation plans not approved by security holders | — | — | | Total | 3,945,303 | 9,030,128 | Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the company's proxy statement under the captions "Corporate Governance — Transactions with Management and Others" and "Proposal I Election of Directors — Director Independence"[208] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for the 2024 Annual Meeting of Shareholders - Information is incorporated by reference from the company's proxy statement under the caption "Proposal III Ratification of Appointment of Independent Registered Public Accounting Firm — Fiscal 2023 and Fiscal 2022 Audit Firm Fee Summary"[209][287] PART IV Exhibits and Financial Statement Schedules This section lists financial statements and exhibits filed as part of the Form 10-K report, including consolidated financial statements and a comprehensive index of corporate documents - This section lists all documents filed as part of the report, including the Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows[212][213] - An extensive exhibit index is provided, referencing key corporate documents such as credit agreements, acquisition agreements, articles of incorporation, bylaws, and management compensation plans[215][217][259] Form 10-K Summary The company has elected not to provide a summary for the Form 10-K - The company has elected not to provide summary information[258]