Edgar Filing: FLOWERS FOODS INC

flo-10q_20181006.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 6, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-16247

FLOWERS FOODS, INC.

(Exact name of registrant as specified in its charter)

GEORGIA

58-2582379

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA

(Address of principal executive offices)

31757

(Zip Code)

(229)-226-9110

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

TITLE OF EACH CLASS		OUTSTANDING AT NOVEMBER 2, 2018
Common Stock, $.01 par value		210,895,207

FLOWERS FOODS, INC.

INDEX

			PAGE NUMBER
PART I. Financial Information
	Item 1.	Financial Statements (unaudited)	3
		Condensed Consolidated Balance Sheets as of October 6, 2018 and December 30, 2017	3
		Condensed Consolidated Statements of Operations For the Twelve and Forty Weeks Ended October 6, 2018 and October 7, 2017	4
		Condensed Consolidated Statements of Comprehensive Income For the Twelve and Forty Weeks Ended October 6, 2018 and October 7, 2017	5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity For the Twelve and Forty Weeks Ended October 6, 2018	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity For the Twelve and Forty Weeks Ended October 7, 2017	7
		Condensed Consolidated Statements of Cash Flows For the Forty Weeks Ended October 6, 2018 and October 7, 2017	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
	Item 4.	Controls and Procedures	65
PART II. Other Information			66
	Item 1.	Legal Proceedings	66
	Item 1A.	Risk Factors	66
	Item 2.	Unregistered Sales of Securities and Use of Proceeds	66
	Item 3.	Defaults Upon Senior Securities	67
	Item 4.	Mine Safety Disclosures	67
	Item 5.	Other Information	67
	Item 6.	Exhibits	68
Signatures			69

Forward-Looking Statements

Statements contained in this filing and certain other written or oral statements made from time to time by Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our future financial condition and results of operations and are often identified by the use of words and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would,” “is likely to,” “is expected to” or “will continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are based upon assumptions we believe are reasonable.

Forward-looking statements are based on current information and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results, performance, liquidity, and achievements to differ materially from those projected are discussed in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and may include, but are not limited to:

•

unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with or increased costs related to our employees and third-party service providers; and (vi) laws and regulations (including environmental and health-related issues), accounting standards or tax rates in the markets in which we operate;

•

the loss or financial instability of any significant customer(s), including as a result of product recalls or safety concerns related to our products;

•

changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward more inexpensive store-branded products;

•

the level of success we achieve in developing and introducing new products and entering new markets;

•

our ability to implement new technology and customer requirements as required;

•

our ability to operate existing, and any new, manufacturing lines according to schedule;

•

our ability to execute our business strategies, including those strategies we have initiated under Project Centennial, which may involve, among other things, (i) the integration of acquisitions or the acquisition or disposition of assets at presently targeted values, (ii) the deployment of new systems and technology, and (iii) an enhanced organizational structure;

•

consolidation within the baking industry and related industries;

•

changes in pricing, customer and consumer reaction to pricing actions, and the pricing environment among competitors within the industry;

•

disruptions in our direct-store-delivery distribution model, including litigation or an adverse ruling by a court or regulatory or governmental body that could affect the independent contractor classifications of the independent distributors;

•

increasing legal complexity and legal proceedings that we are or may become subject to;

•

increases in employee and employee-related costs, including funding of pension plans;

•

the credit, business, and legal risks associated with independent distributors and customers, which operate in the highly competitive retail food and foodservice industries;

•

any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters, labor strikes or work stoppages, technological breakdowns, product contamination, product recalls or safety concerns related to our products, or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events;

•

the failure of our information technology systems to perform adequately, including any interruptions, intrusions or security breaches of such systems; and

•

regulation and legislation related to climate change that could affect our ability to procure our commodity needs or that necessitate additional unplanned capital expenditures.

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Refer to Part I, Item 1A., Risk Factors, of our Annual Report on Form 10-K for the year ended December 30, 2017 (the “Form 10-K”) for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the SEC or in company press releases) on related subjects.

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this Form 10-Q are listed without the^© , ^® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, trade names and copyrights.

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

(Unaudited)

	October 6, 2018			December 30, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	49,727		$	5,129
Accounts and notes receivable, net of allowances of $5,833 and $3,154, respectively		298,218			280,050
Inventories, net:
Raw materials		43,922			41,710
Packaging materials		22,330			19,638
Finished goods		52,807			49,697
Inventories, net		119,059			111,045
Spare parts and supplies		64,103			61,330
Other		38,528			49,637
Total current assets		569,635			507,191
Property, plant and equipment, net:
Property, plant and equipment, gross		1,969,293			1,906,979
Less: accumulated depreciation		(1,249,096	)		(1,174,953	)
Property, plant and equipment, net		720,197			732,026
Notes receivable from independent distributor partners		203,576			187,737
Assets held for sale		4,589			15,323
Other assets		7,839			10,228
Goodwill		464,777			464,777
Other intangible assets, net		722,524			742,442
Total assets	$	2,693,137		$	2,659,724
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations	$	11,286		$	12,095
Accounts payable		246,185			181,388
Other accrued liabilities		143,940			200,468
Total current liabilities		401,411			393,951
Long-term debt:
Total long-term debt and capital lease obligations		814,090			820,141
Other liabilities:
Postretirement/post-employment obligations		41,075			60,107
Deferred taxes		103,298			82,976
Other long-term liabilities		55,695			51,872
Total other long-term liabilities		200,068			194,955
Commitments and Contingencies
Stockholders’ equity:
Preferred stock — $100 stated par value, 200,000 authorized shares and none issued		—			—
Preferred stock — $.01 stated par value, 800,000 authorized shares and none issued		—			—
Common stock — $.01 stated par value and $.001 current par value, 500,000,000 authorized shares and 228,729,585 shares and 228,729,585 shares issued, respectively		199			199
Treasury stock — 17,846,171 shares and 18,203,381 shares, respectively		(231,802	)		(235,493	)
Capital in excess of par value		652,375			650,872
Retained earnings		962,536			919,658
Accumulated other comprehensive loss		(105,740	)		(84,559	)
Total stockholders’ equity		1,277,568			1,250,677
Total liabilities and stockholders’ equity	$	2,693,137		$	2,659,724

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 6, 2018			October 7, 2017			October 6, 2018			October 7, 2017
Sales	$	923,449		$	932,822		$	3,071,185		$	3,047,110
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		485,680			476,264			1,599,673			1,552,578
Selling, distribution and administrative expenses		353,051			356,826			1,167,879			1,175,434
Depreciation and amortization		32,662			32,972			111,949			114,288
Loss (recovery) on inferior ingredients		(1,891	)		—			1,993			—
Impairment of assets		—			—			2,483			—
Multi-employer pension plan withdrawal costs		—			18,268			2,322			18,268
Restructuring and related impairment charges		497			100,549			2,557			100,549
Gain on divestiture		—			—			—			(28,875	)
Income (loss) from operations		53,450			(52,057	)		182,329			114,868
Interest expense		8,180			8,194			27,390			28,255
Interest income		(6,615	)		(5,464	)		(21,176	)		(17,199	)
Pension plan settlement loss		930			3,030			6,633			3,030
Other components of net periodic pension and postretirement benefits credit		(171	)		(1,321	)		(1,204	)		(4,687	)
Income (loss) before income taxes		51,126			(56,496	)		170,686			105,469
Income tax expense (benefit)		11,496			(22,925	)		34,367			33,882
Net income (loss)	$	39,630		$	(33,571	)	$	136,319		$	71,587
Net income (loss) per common share:
Basic:
Net income (loss) per common share	$	0.19		$	(0.16	)	$	0.65		$	0.34
Weighted average shares outstanding		211,082			209,606			210,994			209,376
Diluted:
Net income (loss) per common share	$	0.19		$	(0.16	)	$	0.64		$	0.34
Weighted average shares outstanding		211,564			209,606			211,452			210,231
Cash dividends paid per common share	$	0.1800		$	0.1700		$	0.5300		$	0.5000

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 6, 2018			October 7, 2017			October 6, 2018			October 7, 2017
Net income (loss)	$	39,630		$	(33,571	)	$	136,319		$	71,587
Other comprehensive loss, net of tax:
Pension and postretirement plans:
Settlement loss		696			1,863			4,959			1,863
Net loss for the period		(32,639	)		(2,707	)		(19,883	)		(2,707	)
Amortization of prior service cost included in net income		35			21			96			79
Amortization of actuarial loss included in net income		768			769			2,709			2,712
Pension and postretirement plans, net of tax		(31,140	)		(54	)		(12,119	)		1,947
Derivative instruments:
Net change in fair value of derivatives		7,394			(9,652	)		9,055			(5,932	)
Loss reclassified to net income		266			372			689			1,166
Derivative instruments, net of tax		7,660			(9,280	)		9,744			(4,766	)
Other comprehensive loss, net of tax		(23,480	)		(9,334	)		(2,375	)		(2,819	)
Comprehensive income (loss)	$	16,150		$	(42,905	)	$	133,944		$	68,768

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	For the Forty Weeks Ended October 6, 2018
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at December 30, 2017		228,729,585	$	199	$	650,872		$	919,658		$	(84,559	)		(18,203,381	)	$	(235,493	)	$	1,250,677
Net income									136,319												136,319
Derivative instruments, net of tax												9,744									9,744
Pension and postretirement plans, net of tax												(12,119	)								(12,119	)
Exercise of stock options						(151	)								72,785			942			791
Amortization of share-based compensation awards						6,892															6,892
Issuance of deferred compensation						(122	)								9,411			122			—
Performance-contingent restricted stock awards issued (Note 17)						(4,062	)								313,906			4,062			—
Issuance of deferred stock awards						(1,054	)								81,255			1,054			—
Stock repurchases															(120,147	)		(2,489	)		(2,489	)
Dividends paid on vested share-based payment awards									(492	)											(492	)
Dividends paid — $.5300 per common share									(111,755	)											(111,755	)
Reclassification of stranded income tax effects to retained earnings (Note 1)									18,806			(18,806	)								—
Balances at October 6, 2018		228,729,585	$	199	$	652,375		$	962,536		$	(105,740	)		(17,846,171	)	$	(231,802	)	$	1,277,568

	For the Twelve Weeks Ended October 6, 2018
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at July 14, 2018		228,729,585	$	199	$	650,934		$	960,865		$	(82,260	)		(17,846,284	)	$	(231,803	)	$	1,297,935
Net income									39,630												39,630
Derivative instruments, net of tax												7,660									7,660
Pension and postretirement plans, net of tax												(31,140	)								(31,140	)
Amortization of share-based compensation awards						1,442															1,442
Issuance of deferred compensation						(1	)								113			1			—
Dividends paid — $0.1800 per common share									(37,959	)											(37,959	)
Balances at October 6, 2018		228,729,585	$	199	$	652,375		$	962,536		$	(105,740	)		(17,846,171	)	$	(231,802	)	$	1,277,568

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	For the Forty Weeks Ended October 7, 2017
	Common Stock				Capital in					Accumulated
	Number of				Excess					Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings		Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at December 31, 2016		228,729,585	$	199	$	644,456		$	910,520	$	(83,283	)		(20,306,784	)	$	(261,812	)	$	1,210,080
Net income									71,587											71,587
Derivative instruments, net of tax											(4,766	)								(4,766	)
Pension and postretirement plans, net of tax											1,947									1,947
Exercise of stock options						(1,702	)							851,801			10,998			9,296
Amortization of share-based compensation awards						11,708														11,708
Issuance of deferred compensation						(37	)							2,788			37			—
Performance-contingent restricted stock awards issued (Note 17)						(4,240	)							328,947			4,240			—