ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
BASIS OF ACCOUNTING — The accompanying unaudited Condensed Consolidated Financial Statements of Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the unaudited Condensed Consolidated Financial Statements included herein contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the company’s financial position, results of operations and cash flows. The results of operations for the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018 are not necessarily indicative of the results to be expected for a full fiscal year. The Condensed Consolidated Balance Sheet at December 29, 2018 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Form 10-K.
ESTIMATES — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting estimates affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, derivative instruments, valuation of long-lived assets, goodwill and other intangible assets, self-insurance reserves, income tax expense and accruals, pension obligations, stock-based compensation, and commitments and contingencies. These estimates are summarized in the Form 10-K.
REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2019 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 20, 2019 (sixteen weeks), second quarter ended July 13, 2019 (twelve weeks), third quarter ending October 5, 2019 (twelve weeks) and fourth quarter ending December 28, 2019 (twelve weeks).
REPORTING SEGMENT — On May 3, 2017, the company announced an enhanced organizational structure designed to provide greater focus on the company’s long-term strategic objectives, emphasize brand growth and innovation in line with a national branded food company, drive enhanced accountability, and reduce costs. The new organizational structure establishes two business units (“BUs”), Fresh Packaged Bread and Snacking/Specialty, and realigns key leadership roles. The new structure also provides for centralized marketing, sales, supply chain, shared-services/administrative, and corporate strategy functions, each with clearly defined roles and responsibilities. The company has concluded that under the new organizational structure the company has one operating segment based on the nature of products the company sells, intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the chief executive officer (“CEO”), who is the chief operating decision maker, for the purpose of assessing performance and allocating resources. Capital allocations, such as building a new bakery or other investments, impact both BUs, as the two BUs are so intertwined in the production of products, sales, marketing and other functions. Beginning with the first quarter of 2019, the comparative periods are presented on a consolidated basis due to the change to a single operating segment.
SIGNIFICANT CUSTOMER — Following is the effect that our largest customer, Walmart/Sam’s Club, had on the company’s sales for the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018. Walmart/Sam’s Club is the only customer to account for greater than 10% of the company’s sales.
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
|
(% of Sales)
|
|
|
(% of Sales)
|
|
Total
|
|
|
22.0
|
|
|
|
20.8
|
|
|
|
21.1
|
|
|
|
20.3
|
|
Walmart/Sam’s Club is our only customer with greater than 10% of outstanding trade receivables, representing 21.2% and 17.8%, on a consolidated basis, as of July 13, 2019 and December 29, 2018, respectively, of our trade receivables.
9
SIGNIFICANT ACCOUNTING POLICIES — Significant changes to our critical accounting policies from those disclosed in the Form 10-K are presented below. The policy changes for
accounting for leases
during the first quarter of our fiscal 2019
are a result of adopting new guidance issued by the Financial Accounting Standards Board (the “FASB”). See Note
2
,
Recent Accounting Pronouncements
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the new guidance.
Leases
. Primarily, the company leases real estate for distribution, manufacturing and office use, along with production and IT equipment. The company applies the new guidance to individual leases of assets, except for certain leases that employ the portfolio method. See below for the company’s policy around application of the portfolio method.
When the company receives substantially all the economic benefits from and directs the use of specified property, plant and equipment, transactions give rise to leases. See Note 4,
Leases,
of Notes to Condensed Consolidated Financial Statements of this Form 10-Q
for further qualitative and quantitative information around the company’s lease portfolio. Our classes of assets include: land; buildings; machinery and equipment; furniture, fixtures and transportation equipment; and construction in progress.
The company has elected the practical expedient within the guidance to not separate lease and non-lease components within lease transactions for the following classes of assets: land; buildings; and furniture, fixtures and transportation equipment. The company has elected the short-term lease exception (lessee only) for all classes of assets and does not apply the recognition requirements for leases of 12 months or less. Lease payments for short-term leases are recognized as expense either straight-line over the lease term or as incurred depending on whether the lease payments are fixed or variable. These elections are applied consistently for all leases.
The company has elected to apply a portfolio approach for leases with similar terms and conditions, commencement dates, and executed at or near the same time as one another, as it is reasonably expected that application of the lease model to the portfolio would not differ materially from application to the individual leases.
The company allocates consideration (i.e., lease payments) to the lease and non-lease components within a transaction on a relative stand-alone price basis to lease and non-lease components within a transaction.
The company presents operating lease payments as cash outflows from operating activities and financing lease payments as cash outflows from financing activities in the Condensed Consolidated Statements of Cash Flows. The amortization of the right-of-use asset is presented in the same line item as the change in the operating lease liability in the other assets and accrued liabilities line item.
The company will use the applicable incremental borrowing rate at lease commencement to perform the lease classification tests on lease components and to measure the lease liabilities and right-of-use assets in situations when discount rates implicit in leases cannot be readily determined. We will also apply the “bright-line” thresholds within the guidance for lease classification for all classes of assets.
LOSS (RECOVERY) ON INFERIOR INGREDIENTS AND PRODUCT RECALL
Product Recall
On July 9, 2019, the company issued a voluntary product recall for certain hamburger and hot dog buns and other bakery products due to the potential presence of small pieces of hard plastic that may have been introduced during production. The products recalled were distributed to retail customers under a variety of brand names in 18 states.
Loss (recovery) on inferior ingredients
In June 2018, the company received from a supplier several shipments of inferior yeast, which reduced product quality and disrupted production and distribution of foodservice and retail bread and buns at several of the company’s bakeries during the second quarter. While the supplier confirmed that the inferior yeast used in the baking process was safe for consumption, customers and consumers reported instances of unsatisfactory product attributes, primarily involving smell and taste.
In addition, the company incurred costs associated with inferior whey during fiscal 2018. A voluntary recall was issued on July 18, 2018 due to the potential of tainted whey. Costs associated with these inferior ingredients were reclassified from material, supplies, labor and other production costs and selling, distribution and administrative expenses to the ‘Loss (recovery) on inferior ingredients’ line item in our Condensed Consolidated Statements of Income.
10
Beginning in the second quarter of fiscal 2018 and continuing through the first quarter of fiscal 2019, we have recognized identifiable and measurable costs associated with receiving inferior ingredients. We
have
received reimbursements for a portion of
previously incurred
costs.
These reimbursements are presented as recoveries on the ‘Loss (recovery) on inferior ingredients’ line item in our Condensed Consolidated Statements of Income.
Although we anticipate incurring additional losses, we are not currently able to estimate the amount of such loss
es
. We continue to seek recovery of all losses through appropriate means
.
The table below presents the loss
(recovery)
on inferior ingredients (amounts in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Loss on inferior ingredients
|
|
$
|
110
|
|
|
$
|
3,884
|
|
|
$
|
1,409
|
|
|
$
|
3,884
|
|
Recovery on inferior ingredients
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
(1,822
|
)
|
|
|
—
|
|
Loss (recovery) on inferior ingredients
|
|
$
|
—
|
|
|
$
|
3,884
|
|
|
$
|
(413
|
)
|
|
$
|
3,884
|
|
2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02 Leases (ASC Topic 842, the “new standard”) that requires an entity to recognize lease liabilities and a right-of-use asset (“ROU assets” and “ROU liabilities”) for virtually all leases (other than those that meet the definition of a short-term lease) on the balance sheet and to disclose key information about the entity’s leasing arrangements. This new standard was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods, with earlier adoption permitted. The company adopted the new standard as of December 30, 2018 and applied the modified retrospective transition method. The company also chose the optional transition relief provided in ASU No. 2018-11 which allows the company to apply the new standard in fiscal 2019 and to recognize a cumulative-effect adjustment to the adoption period opening balance of retained earnings.
The company elected the package of transition practical expedients within the new standard. As required by the new standard, these expedients were elected as a package, and consistently applied across the company’s lease portfolio. Given this election, the company did not reassess the following:
|
•
|
whether any expired or existing contracts are or contain leases;
|
|
•
|
the lease classification for any expired or existing leases; or
|
|
•
|
the treatment of initial direct costs relating to any existing leases.
|
We have chosen the option to not adjust prior comparative periods. The company recognized a cumulative effect adjustment to the opening balance of retained earnings of $2.9 million, net of tax, at adoption.
In applying the modified retrospective transition method to these leases, the company measured lease liabilities at the present value of the sum of remaining minimum rental payments. These lease liabilities have been measured using the company’s incremental borrowing rates at the later of (i) the earliest period presented or (ii) the commencement date of the applicable lease. The right-of-use assets for these operating leases have been measured as the initial measurement of applicable lease liabilities adjusted for any unamortized initial direct costs, prepaid/accrued rent, and unamortized lease incentives.
The adoption of this new standard and application of the modified retrospective transition approach resulted in the following additional impacts to the company’s Condensed Consolidated Balance Sheet at December 30, 2018: (1) assets increased by $387.3 million, primarily representing recognition of right-of-use assets for operating leases; and (2) liabilities increased by $391.9 million, primarily representing recognition of lease liabilities for operating leases. In addition, the company previously recorded right-of-use assets and liabilities of $21.9 million as property, plant, and equipment. At adoption, the company recorded right-of-use assets of $19.8 million and right-of-use liabilities of $23.6 million for these financing leases.
During the second quarter of fiscal 2019, the company adopted new guidance on accounting for a cloud computing arrangement that is hosted by a vendor. The company has elected the prospective transition method at adoption. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.
Accounting pronouncements not yet adopted
In June 2016, the FASB issued guidance that effects loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. Additional guidance for this topic was issued in April 2019. The company is determining what the impact, if any, will be on the trade and notes receivables recorded in our Condensed Consolidated Financial Statements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the company’s fiscal 2020). Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (the company’s fiscal 2019). The company is currently evaluating when this guidance will be adopted and the impact on our Condensed Consolidated Financial Statements.
11
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment. The guidance removed Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Companies will still have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. This guidance will be applied prospectively. Companies are required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure shall be provided in the first annual reporting period and in the interim period within the first annual reporting period when the company adopts this guidance. This change to the guidance is effective for fiscal years beginning after December 15, 2019
(the company’s fiscal 2020)
. Early adoption is permitted after January 1, 2017.
The company anticipates adopting this guidance in our fiscal 2020.
The company is currently evaluating the impact on our
Condensed
Consolidated Financial Statements.
In August 2018, the FASB issued guidance to modify the disclosure requirements on fair value measurements. The guidance removes, modifies, and adds certain disclosures related to Level 1, Level 2, and Level 3 assets. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the company’s fiscal 2020). The company is currently evaluating when this guidance will be adopted and the impact on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 (the company’s fiscal 2021). Disclosures were removed for the amounts in accumulated other comprehensive income (“AOCI”) expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of assets expected to be returned to the employer, certain related party disclosures, and the effects of a one-percentage-point change in the assumed health care cost trend rates. Additional disclosures include the weighted average interest crediting rate for plans with promised crediting interest rates and an explanation of the reasons for significant gains and losses related to the benefit obligation for the period. This guidance shall be applied on a retrospective basis and can be early adopted. The company is currently evaluating when this guidance will be adopted and the impact on our Condensed Consolidated Financial Statements.
We have reviewed other recently issued accounting pronouncements and concluded that either they are not applicable to our business or no material effect is expected upon future adoption.
3. RESTRUCTURING ACTIVITIES
On August 10, 2016, we announced the launch of Project Centennial, a comprehensive business and operational review. We identified opportunities to enhance revenue growth, streamline operations, improve efficiencies, and make investments that strengthen our competitive position and improve margins over the long term. We began Project Centennial with an evaluation of our brands, product mix, and organizational structure. We then developed strategic priorities to help us capitalize on retail and consumer changes. The primary objective is to improve margins and profitably grow revenue over time. These priorities are as follows:
Reduce costs to fuel growth
. The company is focusing on reducing costs in our purchased goods and services initiative and our supply chain optimization plan. Purchased goods and services operations have been centralized to create standardization and develop consistent policies and specifications. Supply chain optimization intends to reduce operational complexity and capitalize on scale. This initiative includes, and will continue to include, consulting and other third-party costs as we finalize the organizational structure. We incurred $2.2 million and $8.6 million for these non-restructuring consulting costs during the twelve and twenty-eight weeks ended July 14, 2018, respectively. There were no consulting costs during the twelve and twenty-eight weeks ended July 13, 2019.
Develop leading capabilities
. On May 3, 2017, the company announced an enhanced organizational structure designed to provide greater focus on the company’s strategic objectives, emphasize brand growth and innovation in line with a national branded food company, drive enhanced accountability, reduce costs, and strengthen our long-term strategy. The new organizational structure established two BUs, Fresh Bakery and Snacking/Specialty, and realigned key leadership roles. The new structure also provided for centralized marketing, sales, supply chain, shared-services/administrative, and corporate strategy functions, each with more clearly defined roles and responsibilities. Transition to the new reporting structure was completed in the first quarter of fiscal 2019 and the company is now reporting our financial results in one operating segment. See Note 1,
Basis of Presentation
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for a description of our segment presentation.
We began relocating certain employees during the third quarter of fiscal 2017 as we transitioned to the new structure. Reorganization costs are recognized in the restructuring charges line item on the Condensed Consolidated Statements of Income.
12
On July 17, 2017, the company commenced a voluntary employee separation incentive plan (the “VSIP”). The VSIP was implemented as part of our effort to restructure and streamline operations and better position the company for profitable growth. The VSIP election period closed on September 25, 2017 and resulted in approximately 325 employees accepting the offer. The separations began on September 7, 2017, and were substantially complete by the end of fiscal 2017. We recorded a credit of $0.6 million during the twenty-eight weeks ended July 14, 2018. These charges consisted primarily of employee severance and benefits-related costs and are recorded in the restructuring charges line item on our Condensed Consolidated Statements of Income.
Reinvigorate core business
. This objective is to invest in our brands to align brands to consumers to maximize our return on investment. We expect to incur significant incremental marketing costs annually for brand development. These costs will not be restructuring and will be recognized as incurred. Project Centennial is expected to be completed by our fiscal 2021.
The company recognized impairment charges related to manufacturing line closures in the first quarter of fiscal 2019 and for a closed plant recorded in assets held for sale during the second quarter of fiscal 2019. The plant is being sold to streamline our core operations. This is recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income. The company continues to explore additional opportunities to streamline our core operations, but as of July 13, 2019, we cannot estimate the additional costs expected to be incurred for this initiative.
Capitalize on product adjacencies
. This initiative focuses on growing market share in underdeveloped markets. Adjacencies are geographic and/or product categories that are expected to leverage our competitive advantages. This can be achieved either organically with our high-potential brands or through strategic acquisitions. As of July 13, 2019, we cannot estimate the costs expected to be incurred for this initiative.
The tables below present the components of costs associated with Project Centennial for the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018 (amounts in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 13, 2019
|
|
Restructuring and related impairment charges:
|
|
|
|
|
|
|
|
|
Reorganization costs
|
|
$
|
42
|
|
|
$
|
253
|
|
Impairment of assets
|
|
|
1,252
|
|
|
|
1,781
|
|
Employee termination benefits
|
|
|
753
|
|
|
|
731
|
|
Total Project Centennial restructuring costs
|
|
$
|
2,047
|
|
|
$
|
2,765
|
|
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 14, 2018
|
|
|
July 14, 2018
|
|
Restructuring and related impairment charges:
|
|
|
|
|
|
|
|
|
Reorganization costs
|
|
$
|
801
|
|
|
$
|
2,313
|
|
VSIP
|
|
|
—
|
|
|
|
(597
|
)
|
Employee termination benefits
|
|
|
—
|
|
|
|
344
|
|
Restructuring and related impairment charges (1)
|
|
|
801
|
|
|
|
2,060
|
|
Project Centennial implementation costs (2)
|
|
|
2,215
|
|
|
|
8,647
|
|
Total Project Centennial restructuring and implementation costs
|
|
$
|
3,016
|
|
|
$
|
10,707
|
|
(1)
|
Presented on our Condensed Consolidated Statements of Income.
|
(2)
|
Costs are recorded in the selling, distribution and administrative expenses line item of our Condensed Consolidated Statements of Income.
|
The tables below present the components of, and changes in, our restructuring accruals for the twenty-eight weeks ended July 13, 2019 and July 14, 2018 (amounts in thousands):
|
|
VSIP
|
|
|
Employee
Termination
Benefits
(1)
|
|
|
Reorganization
Costs
(2)
|
|
|
Total
|
|
Liability balance at December 29, 2018
|
|
$
|
174
|
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
401
|
|
Charges
|
|
|
—
|
|
|
|
731
|
|
|
|
253
|
|
|
|
984
|
|
Cash payments
|
|
|
—
|
|
|
|
(205
|
)
|
|
|
(253
|
)
|
|
|
(458
|
)
|
Liability balance (3) at July 13, 2019
|
|
$
|
174
|
|
|
$
|
753
|
|
|
$
|
—
|
|
|
$
|
927
|
|
13
|
|
VSIP
|
|
|
Employee
Termination
Benefits
(1)
|
|
|
Reorganization
Costs
(2)
|
|
|
Total
|
|
Liability balance at December 30, 2017
|
|
$
|
25,022
|
|
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
25,490
|
|
Charges
|
|
|
(597
|
)
|
|
|
344
|
|
|
|
2,313
|
|
|
|
2,060
|
|
Cash payments
|
|
|
(24,188
|
)
|
|
|
(699
|
)
|
|
|
(2,313
|
)
|
|
|
(27,200
|
)
|
Liability balance (3) at July 14, 2018
|
|
$
|
237
|
|
|
$
|
113
|
|
|
$
|
—
|
|
|
$
|
350
|
|
(1)
|
Employee termination benefits are not related to the VSIP.
|
(2)
|
Reorganization costs include employee relocation expenses.
|
(3)
|
Recorded in the other accrued current liabilities line item of our Condensed Consolidated Balance Sheets.
|
4. LEASES
The company’s leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation and IT equipment (Debt is discussed separately in Note 13,
Debt and Other Obligations
).
Real estate and equipment contracts normally do not provide for substitution of assets. These contracts occasionally contain multiple lease and non-lease components. Generally, non-lease components represent maintenance and utility related charges, and are primarily minor to the overall value of applicable contracts. These contracts also contain fixed payments with stated rent escalation clauses or fixed payments based on an index such as CPI. Additionally, some contracts contain tenant improvement allowances, rent holidays, lease premiums, and contingent rent provisions (which are treated as variable lease payments). Building and/or office space leases generally require the company to pay for common area maintenance (CAM), insurance, and taxes that are not included in the base rental payments, with the majority of these leases treated as net leases, and the remainder treated as gross or modified gross leases.
The lease term for real estate leases primarily ranges from one to 27 years, with a few leases that are month to month, and accounted for as short-term leases. See discussion on short-term leases below. The term of bakery equipment leases primarily ranges from less than a year up to eight years. Transportation equipment generally has terms of less than one year up to seven years. IT equipment is typically leased from less than a year up to five years. Certain equipment (i.e., equipment subject to management contracts) and IT equipment leases have terms shorter than a year, and are accounted for as short-term leases. See discussion on short-term leases below.
These contracts may contain renewal options for periods of one month up to 10 years at fixed percentages of market pricing, with some that are reasonably certain of exercise. For those contracts that contain leases, the company recognizes renewal options as part of right-of-use assets and lease liabilities. All other renewal and termination options are not reasonably certain of exercise or occurrence as of July 13, 2019.
These contracts may also contain right of first offer purchase options, along with expansion options that are not reasonably certain of exercise. Additionally, these contracts do not contain residual value guarantees, and there are no other restrictions or covenants in the contracts.
For these real estate contracts, the company’s exclusive use of specified real estate for a specific term and for consideration resulted in the company treating these contracts as leases under the new standard.
For those contracts that contain leases of buildings and land, the company has elected to not separate land components from leases of specified property, plant, and equipment, as it was determined to have no effect on lease classification for any lease component, and the amounts recognized for the land lease components would have been immaterial.
These contracts may also contain end term purchase options, whereby, the company may purchase the assets for stated pricing at the lesser of fair market value or a percentage of original asset cost. Yet, these purchase options were determined to not be reasonably certain of exercise or occurrence as of July 13, 2019. Additionally, these contracts do not contain residual value guarantees, and there are no other restrictions or covenants in the contracts.
The company’s ability to make those decisions that most effect the economic benefits derived from the use of the equipment, accompanied by receiving substantially all outputs and utility from the use of the equipment resulted in the company accounting for these contracts as leases.
14
These leases are classified as operating leases under the new standard because real estate leases do not transfer ownership at
the end of the lease term
, assets are not of such a specialized nature that real estate would not have alternative uses to lessors at
the end of the lease term
, lease terms do not represent a major part of the total useful life of real estate, and the present value of lease payments do not represent substantially all the fair value of leased assets at commencement.
Short-term leases
The company has also entered into short-term leases of certain real estate assets, along with IT equipment, and various equipment used for short-term bakery needs through equipment placement or service contracts that require purchase of consumables. These leases extend for periods of 1-12 months. Lease term and amounts of payments are generally fixed. There are no purchase options present, however, there generally are renewals that could extend lease terms for additional periods. Generally, renewal options, as they cannot be unilaterally exercised, are not reasonably certain of exercise, do not contain residual value guarantees, and there are no other restrictions or covenants in the leases.
Therefore, the company recognizes lease payments from these short-term leases and variable payments on the Condensed Consolidated Statements of Income in the period in which obligation for those payments have been incurred.
Modifications and reassessments
During the twenty-eight weeks ended July 13, 2019, the company elected certain renewal options that were not previously certain of exercise. Election of these renewal options resulted in reassessment of lease terms for the applicable leases.
The company included the renewal periods in measurement of lease terms in fiscal 2019 for the applicable leases. Given that rental payments in the renewal periods were fixed, the company also remeasured the lease payments, and reallocated remaining contract consideration to the lease components within the applicable real estate leases. Although the triggering events did not result in changes to lease classification (i.e., all remained operating leases), they did affect the measurement of lease liabilities, ROU assets, and amounts recognized as lease expense for the applicable real estate leases.
The reassessments and modifications as of, and for, the twenty-eight weeks ended July 13, 2019 resulted in a net increase in lease assets and liabilities of $4.9 million.
There were no other circumstances and/or triggering events that required reassessment as of July 13, 2019.
Other significant judgments and assumptions
During the twenty-eight weeks ended July 13, 2019, for all classes of assets, the company primarily used our incremental borrowing rates (“IBR”) to perform lease classification tests and measure lease liabilities because discount rates implicit in the company’s leases were not readily determinable.
See Note 2,
Recent Pronouncements
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further details around adoption of the new lease standard, information around transition and effective date, along with the company’s significant accounting policies around the new standard.
Embedded leases
The company maintains a transportation agreement with an entity that transports a portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers.
The company has concluded that this agreement contains embedded leases for the trucks and trailers used to satisfy the service provider’s obligations to the company. As of July 13, 2019, there were $16.7 million of financing right-of-use lease assets and $20.7 million of financing right-of-use lease liabilities for these trucks and trailers. As of December 29, 2018, there was $21.9 million, respectively, in net property, plant and equipment and capital lease obligations associated with these trucks and trailers.
15
Quantitative disclosures
Lease costs incurred by lease type, and/or type of payment for the twelve and twenty-eight weeks ended July 13, 2019 were as follows (in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 13, 2019
|
|
Lease cost:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
1,541
|
|
|
$
|
3,599
|
|
Interest on lease liabilities
|
|
|
219
|
|
|
|
532
|
|
Operating lease cost
|
|
|
16,316
|
|
|
|
37,680
|
|
Short-term lease cost
|
|
|
548
|
|
|
|
1,362
|
|
Variable lease cost
|
|
|
6,086
|
|
|
|
13,991
|
|
Total lease cost
|
|
$
|
24,710
|
|
|
$
|
57,164
|
|
Other supplemental quantitative disclosures as of, and for, the twelve and twenty-eight weeks ended July 13, 2019 were as follows (in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 13, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from financing leases
|
|
$
|
219
|
|
|
$
|
532
|
|
Operating cash flows from operating leases
|
|
$
|
16,734
|
|
|
$
|
38,971
|
|
Financing cash flows from financing leases
|
|
$
|
1,431
|
|
|
$
|
3,303
|
|
Right-of-use assets obtained in exchange for new financing lease liabilities
|
|
$
|
36
|
|
|
$
|
7,177
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
9,967
|
|
|
$
|
16,633
|
|
Additional information on the IBR and remaining lease terms were as follows:
Weighted-average remaining lease term (years):
|
|
|
|
|
Financing leases
|
|
|
4.0
|
|
Operating leases
|
|
|
10.2
|
|
Weighted-average IBR (percentage):
|
|
|
|
|
Financing leases
|
|
|
3.5
|
|
Operating leases
|
|
|
4.1
|
|
Estimated undiscounted future lease payments under non-cancelable operating leases and financing leases, along with a reconciliation of the undiscounted cash flows to operating and financing lease liabilities, respectively, as of July 13, 2019 (in thousands) were as follows:
|
|
Operating lease
liabilities
|
|
|
Financing lease
liabilities
|
|
Remainder of 2019
|
|
$
|
28,556
|
|
|
$
|
2,786
|
|
2020
|
|
|
68,613
|
|
|
|
8,161
|
|
2021
|
|
|
54,604
|
|
|
|
5,883
|
|
2022
|
|
|
44,589
|
|
|
|
4,653
|
|
2023
|
|
|
39,471
|
|
|
|
6,232
|
|
2024 and thereafter
|
|
|
233,503
|
|
|
|
2,094
|
|
Total minimum lease payments
|
|
|
469,336
|
|
|
|
29,809
|
|
Less: amount of lease payments representing interest
|
|
|
91,418
|
|
|
|
2,317
|
|
Present value of future minimum lease payments
|
|
|
377,918
|
|
|
|
27,492
|
|
Less: current obligations under leases
|
|
|
51,625
|
|
|
|
5,782
|
|
Long-term lease obligations
|
|
$
|
326,293
|
|
|
$
|
21,710
|
|
16
Lease disclosures
prior to adoption of the new standard
The company leases certain property and equipment under various operating and capital lease arrangements that expire over the next 18 years. The property leases include distribution facilities, thrift store locations, and two manufacturing facilities. The equipment leases include production, sales, distribution, transportation, and office equipment. Initial lease terms range from two to 26 years. Many of the operating leases provide the company with the option, after the initial lease term, either to purchase the property at the then fair value or renew its lease at fair value rents for periods from one month to 10 years. Rent escalations vary in these leases, from no escalation over the initial lease term, to escalations linked to changes in economic variables such as the consumer price index. Rental expense is recognized on a straight-line basis over the terms of the leases. The capital leases are primarily used for distribution vehicle financing and are discussed in Note 14,
Variable Interest Entities
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Future minimum lease payments under scheduled capital leases that have initial or remaining non-cancelable terms more than one year are as follows (amounts in thousands):
|
|
Capital Leases
|
|
2019
|
|
$
|
6,392
|
|
2020
|
|
|
3,511
|
|
2021
|
|
|
4,191
|
|
2022
|
|
|
2,620
|
|
2023
|
|
|
2,263
|
|
Thereafter
|
|
|
4,631
|
|
Total minimum payments
|
|
|
23,608
|
|
Amount representing interest
|
|
|
1,666
|
|
Obligations under capital leases
|
|
|
21,942
|
|
Obligations due within one year
|
|
|
5,896
|
|
Long-term obligations under capital leases
|
|
$
|
16,046
|
|
The table below presents the total future minimum lease payments under scheduled operating leases that have initial or remaining non-cancelable terms more than one year as of December 29, 2018 (amounts in thousands):
|
|
Operating Leases
|
|
2019
|
|
$
|
65,071
|
|
2020
|
|
|
60,378
|
|
2021
|
|
|
50,744
|
|
2022
|
|
|
44,798
|
|
2023
|
|
|
36,308
|
|
Thereafter
|
|
|
232,423
|
|
Total minimum payments
|
|
$
|
489,722
|
|
5. ACQUISITION
On December 14, 2018, the company completed the acquisition of 100% of the outstanding membership interests of Canyon Bakehouse, LLC (“Canyon”), a leading gluten-free bread baker, from its members for total consideration of $205.2 million, including an earn-out recorded as contingent consideration. We believe the acquisition of Canyon strengthens our position as the second-largest baker in the U.S. by giving us access to the fast-growing gluten-free bread category. The acquisition has been accounted for as a business combination. The total goodwill recorded for this acquisition was $80.5 million and it is deductible for tax purposes.
17
During fiscal 2018, the company incurred $4.5 million of acquisition-related costs for Canyon. This table is based on preliminary valuations for the assets acquired, liabilities assumed, and the allocated intangible assets and goodwill. The open valuations primarily relate to deferred taxes. The acquisition-related costs were recorded in the selling, distribution and administrative expense line item in our Condensed Consolidated Statements of Income. The following table summarizes the consideration paid for Canyon based on the fair value at the acquisition date (amounts in thousands):
Fair Value of consideration transferred:
|
|
|
|
|
Cash consideration paid
|
|
$
|
200,208
|
|
Working capital adjustments
|
|
|
314
|
|
Contingent consideration
|
|
|
4,700
|
|
Total consideration
|
|
$
|
205,222
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and
liabilities assumed:
|
|
|
|
|
Property, plant, and equipment
|
|
$
|
42,165
|
|
Identifiable intangible assets
|
|
|
78,380
|
|
Financial assets
|
|
|
4,211
|
|
Net recognized amounts of identifiable assets acquired
|
|
|
124,756
|
|
Goodwill
|
|
$
|
80,466
|
|
Goodwill decreased $0.1 million from December 29, 2018 to July 13, 2019 due to changes in working capital, property, plant, and equipment, and the financial assets. See Note 7,
Goodwill and Other Intangible Assets
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for changes in goodwill.
The following table presents the acquired intangible assets subject to amortization (amounts in thousands, except amortization periods):
|
Total
|
|
|
Weighted average
amortization years
|
|
|
Attribution Method
|
Trademarks
|
$
|
41,700
|
|
|
|
40.0
|
|
|
Straight-line
|
Customer relationships
|
|
36,400
|
|
|
|
25.0
|
|
|
Sum of year digits
|
Noncompete agreements
|
|
280
|
|
|
|
1.7
|
|
|
Straight-line
|
Total intangible assets
|
$
|
78,380
|
|
|
|
32.9
|
|
|
|
The fair value of trade receivables was $3.6 million. The gross amount of the receivables was $3.7 million with $0.1 million determined to be uncollectible. We did not acquire any other class of receivables as a result of the Canyon acquisition.
The contingent consideration liability was reviewed as of July 13, 2019 to determine the probable payment. Changes in the fair value of the contingent consideration liability since acquisition are recognized as a selling, distribution, and administrative expense in the Condensed Consolidated Statements of Income. The contingent consideration liability is recorded in other accrued liabilities on our Condensed Consolidated Balance Sheets.
Acquisition pro formas
We determined that the consolidated results of operations for Canyon were immaterial in the aggregate and the pro forma financial statements are not required for fiscal 2019. The purchase price allocation attributable to Canyon is preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be adjusted to reflect new information obtained about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates.
18
6. ACCUMULATED OTHER COMPREHENSIVE INCOME
The company’s total comprehensive income (loss) presently consists of net income, adjustments for our derivative financial instruments accounted for as cash flow hedges, and various pension and other postretirement benefit related items.
During the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018, reclassifications out of AOCI were as follows (amounts in thousands):
|
|
Amount Reclassified from AOCI
|
|
|
|
|
|
For the Twelve Weeks Ended
|
|
|
Affected Line Item in the Statement
|
Details about AOCI Components (Note 2)
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
Where Net Income is Presented
|
Gains and losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(33
|
)
|
|
$
|
(33
|
)
|
|
Interest expense
|
Commodity contracts
|
|
|
1,298
|
|
|
|
(135
|
)
|
|
Cost of sales, Note 3
|
Total before tax
|
|
|
1,265
|
|
|
|
(168
|
)
|
|
Total before tax
|
Tax (expense) benefit
|
|
|
(320
|
)
|
|
|
42
|
|
|
Income tax expense
|
Total net of tax
|
|
|
945
|
|
|
|
(126
|
)
|
|
Net of tax
|
Amortization of defined benefit pension items:
|
|
|
|
|
|
|
|
|
|
|
Prior-service costs
|
|
|
(80
|
)
|
|
|
(46
|
)
|
|
Note 1
|
Settlement loss
|
|
|
—
|
|
|
|
(1,035
|
)
|
|
Note 1
|
Actuarial losses
|
|
|
(1,575
|
)
|
|
|
(1,157
|
)
|
|
Note 1
|
Total before tax
|
|
|
(1,655
|
)
|
|
|
(2,238
|
)
|
|
Total before tax
|
Tax benefit
|
|
|
418
|
|
|
|
565
|
|
|
Income tax expense
|
Total net of tax
|
|
|
(1,237
|
)
|
|
|
(1,673
|
)
|
|
Net of tax
|
Total reclassifications
|
|
$
|
(292
|
)
|
|
$
|
(1,799
|
)
|
|
Net of tax
|
|
|
Amount Reclassified from AOCI
|
|
|
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
Affected
Line
Item
in
the Statement
|
Details about AOCI Components (Note 2)
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
Where Net Income is Presented
|
Gains and losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(77
|
)
|
|
$
|
(77
|
)
|
|
Interest income (expense)
|
Commodity contracts
|
|
|
4,255
|
|
|
|
(488
|
)
|
|
Cost of sales, Note 3
|
Total before tax
|
|
|
4,178
|
|
|
|
(565
|
)
|
|
Total before tax
|
Tax (expense) benefit
|
|
|
(1,055
|
)
|
|
|
142
|
|
|
Income tax expense
|
Total net of tax
|
|
|
3,123
|
|
|
|
(423
|
)
|
|
Net of tax
|
Amortization of defined benefit pension items:
|
|
|
|
|
|
|
|
|
|
|
Prior-service credits
|
|
|
(186
|
)
|
|
|
(81
|
)
|
|
Note 1
|
Settlement loss
|
|
|
—
|
|
|
|
(5,703
|
)
|
|
Note 1
|
Actuarial losses
|
|
|
(3,673
|
)
|
|
|
(2,597
|
)
|
|
Note 1
|
Total before tax
|
|
|
(3,859
|
)
|
|
|
(8,381
|
)
|
|
Total before tax
|
Tax benefit
|
|
|
974
|
|
|
|
2,116
|
|
|
Income tax expense
|
Total net of tax
|
|
|
(2,885
|
)
|
|
|
(6,265
|
)
|
|
Net of tax
|
Total reclassifications
|
|
$
|
238
|
|
|
$
|
(6,688
|
)
|
|
Net of tax
|
Note 1:
|
These items are included in the computation of net periodic pension cost and are reported in the other components of net periodic pension and postretirement benefits credit line item on the Condensed Consolidated Statements of Income. See Note 18,
Postretirement Plans
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information.
|
Note 2:
|
Amounts in parentheses indicate debits to determine net income.
|
Note 3:
|
Amounts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.
|
19
During the twenty-eight weeks ended July 13, 2019, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):
|
|
Cash Flow
Hedge Items
|
|
|
Defined
Benefit
Pension
Plan Items
|
|
|
Total
|
|
AOCI at December 29, 2018
|
|
$
|
(4,135
|
)
|
|
$
|
(105,036
|
)
|
|
$
|
(109,171
|
)
|
Other comprehensive income before reclassifications
|
|
|
2,547
|
|
|
|
—
|
|
|
|
2,547
|
|
Reclassified to earnings from AOCI
|
|
|
(3,123
|
)
|
|
|
2,885
|
|
|
|
(238
|
)
|
AOCI at July 13, 2019
|
|
$
|
(4,711
|
)
|
|
$
|
(102,151
|
)
|
|
$
|
(106,862
|
)
|
During the twenty-eight weeks ended July 14, 2018, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):
|
|
Cash Flow
Hedge Items
|
|
|
Defined
Benefit
Pension
Plan Items
|
|
|
Total
|
|
AOCI at December 30, 2017
|
|
$
|
(6,483
|
)
|
|
$
|
(78,076
|
)
|
|
$
|
(84,559
|
)
|
Other comprehensive income before reclassifications
|
|
|
1,661
|
|
|
|
12,756
|
|
|
|
14,417
|
|
Reclassified to earnings from AOCI
|
|
|
423
|
|
|
|
6,265
|
|
|
|
6,688
|
|
Reclassified to retained earnings from AOCI
|
|
|
(1,709
|
)
|
|
|
(17,097
|
)
|
|
|
(18,806
|
)
|
AOCI at July 14, 2018
|
|
$
|
(6,108
|
)
|
|
$
|
(76,152
|
)
|
|
$
|
(82,260
|
)
|
Amounts reclassified out of AOCI to net income that relate to commodity contracts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The following table presents the net of tax amount of the loss reclassified from AOCI for our commodity contracts (amounts in thousands and positive value indicates debits to determine net income):
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Gross (gain) loss reclassified from AOCI into income
|
|
$
|
(4,255
|
)
|
|
$
|
488
|
|
Tax (benefit) expense
|
|
|
1,074
|
|
|
|
(123
|
)
|
Net of tax
|
|
$
|
(3,181
|
)
|
|
$
|
365
|
|
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The table below summarizes our goodwill and other intangible assets at July 13, 2019 and December 29, 2018, respectively, each of which is explained in additional detail below (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Goodwill
|
|
$
|
545,244
|
|
|
$
|
545,379
|
|
Amortizable intangible assets, net of amortization
|
|
|
572,539
|
|
|
|
588,329
|
|
Indefinite-lived intangible assets
|
|
|
206,600
|
|
|
|
206,600
|
|
Total goodwill and other intangible assets
|
|
$
|
1,324,383
|
|
|
$
|
1,340,308
|
|
Changes in the carrying amount of goodwill during the twenty-eight weeks ended July 13, 2019 are presented in the table below and relate to the Canyon acquisition discussed in Note 5,
Acquisition,
of Notes to Condensed Consolidated Financial Statements of this Form 10-Q (amounts in thousands):
|
|
Total
|
|
Outstanding at December 29, 2018
|
|
$
|
545,379
|
|
Change in goodwill related to acquisition
|
|
|
(135
|
)
|
Outstanding at July 13, 2019
|
|
$
|
545,244
|
|
20
As of July 13, 2019 and December 29, 2018, respectively, the company had the following amounts related to amortizable intangible assets (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Asset
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Value
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Value
|
|
Trademarks
|
|
$
|
413,092
|
|
|
$
|
50,653
|
|
|
$
|
362,439
|
|
|
$
|
413,092
|
|
|
$
|
44,711
|
|
|
$
|
368,381
|
|
Customer relationships
|
|
|
318,021
|
|
|
|
109,560
|
|
|
|
208,461
|
|
|
|
318,021
|
|
|
|
99,904
|
|
|
|
218,117
|
|
Non-compete agreements
|
|
|
5,154
|
|
|
|
4,917
|
|
|
|
237
|
|
|
|
5,154
|
|
|
|
4,874
|
|
|
|
280
|
|
Distributor relationships
|
|
|
4,123
|
|
|
|
2,721
|
|
|
|
1,402
|
|
|
|
4,123
|
|
|
|
2,572
|
|
|
|
1,551
|
|
Total
|
|
$
|
740,390
|
|
|
$
|
167,851
|
|
|
$
|
572,539
|
|
|
$
|
740,390
|
|
|
$
|
152,061
|
|
|
$
|
588,329
|
|
Aggregate amortization expense for the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018 was as follows (amounts in thousands):
|
|
Amortization
Expense
|
|
For the twelve weeks ended July 13, 2019
|
|
$
|
6,767
|
|
For the twelve weeks ended July 14, 2018
|
|
$
|
5,975
|
|
For the twenty-eight weeks ended July 13, 2019
|
|
$
|
15,790
|
|
For the twenty-eight weeks ended July 14, 2018
|
|
$
|
13,942
|
|
Estimated amortization of intangibles for each of the next five years is as follows (amounts in thousands):
|
|
Amortization of
Intangibles
|
|
Remainder of 2019
|
|
$
|
13,430
|
|
2020
|
|
$
|
28,606
|
|
2021
|
|
$
|
27,893
|
|
2022
|
|
$
|
27,189
|
|
2023
|
|
$
|
26,309
|
|
There were $206.6 million of indefinite-lived intangible trademark assets separately identified from goodwill at July 13, 2019 and December 29, 2018. These trademarks are classified as indefinite-lived because we believe they are well established brands with a long history and well-defined markets. In addition, we are continuing to use these brands both in their original markets and throughout our expansion territories. We believe these factors support an indefinite-life. We perform an annual impairment analysis, or on an interim basis if the facts and circumstances change, to determine if the trademarks are realizing their expected economic benefits.
21
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, and short-term debt approximates fair value because of the short-term maturity of the instruments. Notes receivable are entered into in connection with the purchase of independent distributors’ distribution rights by independent distributor partners (“IDPs”). These notes receivable are recorded in the Condensed Consolidated Balance Sheets at carrying value, which represents the closest approximation of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As a result, the appropriate interest rate that should be used to estimate the fair value of the distributor notes receivable is the prevailing market rate at which similar loans would be made to IDPs with similar credit ratings and for the same maturities. However, the company financed approximately 4,300 IDPs’ distribution rights as of July 13, 2019 and December 29, 2018, all with varied financial histories and credit risks. Considering the diversity of credit risks among the IDPs, the company has no method to accurately determine a market interest rate to apply to the notes. The distribution rights are generally purchased by the IDP with a 5% down payment with the remainder financed for up to 10 years. The distributor notes receivable are collateralized by the IDPs’ distribution rights. The company maintains a wholly-owned subsidiary to assist in financing the distribution rights purchase activities if requested by new IDPs, using the distribution rights and certain associated assets as collateral. These notes receivable earn interest at a fixed rate.
Interest income was primarily related to the IDPs’ notes receivable and was as follows (amounts in thousands):
|
|
Interest
Income
|
|
For the twelve weeks ended July 13, 2019
|
|
$
|
6,423
|
|
For the twelve weeks ended July 14, 2018
|
|
$
|
6,466
|
|
For the twenty-eight weeks ended July 13, 2019
|
|
$
|
15,070
|
|
For the twenty-eight weeks ended July 14, 2018
|
|
$
|
14,561
|
|
At July 13, 2019 and December 29, 2018, respectively, the carrying value of the distributor notes receivable was as follows (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Distributor notes receivable
|
|
$
|
229,130
|
|
|
$
|
230,470
|
|
Current portion of distributor notes receivable recorded in
accounts and notes receivable, net
|
|
|
27,401
|
|
|
|
26,345
|
|
Long-term portion of distributor notes receivable
|
|
$
|
201,729
|
|
|
$
|
204,125
|
|
At July 13, 2019 and December 29, 2018, respectively, the company has evaluated the collectability of the distributor notes receivable and determined that a reserve is not necessary. Payments on these distributor notes receivable are collected by the company weekly in conjunction with the distributor settlement process.
The fair value of the company’s variable rate debt at July 13, 2019 approximates the recorded value. The fair value of the company’s 3.5% senior notes due 2026 (“2026 notes”) and 4.375% senior notes due 2022 (“2022 notes”), as discussed in Note 13,
Debt and Other Obligations
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q are estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements and are considered a Level 2 valuation. The fair value of the 2026 notes and 2022 notes are presented in the table below (amounts in thousands, except level classification):
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Level
|
2026 notes
|
|
$
|
395,858
|
|
|
$
|
397,380
|
|
|
2
|
2022 notes
|
|
$
|
398,683
|
|
|
$
|
416,752
|
|
|
2
|
For fair value disclosure information about our derivative assets and liabilities see Note 9,
Derivative Financial Instruments,
of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
22
9. DERIVATIVE FINANCIAL INSTRUMENTS
The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:
Level 1:
|
Fair value based on unadjusted quoted prices for identical assets or liabilities at the measurement date
|
Level 2:
|
Modeled fair value with model inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
|
Level 3:
|
Modeled fair value with unobservable model inputs that are used to estimate the fair value of the asset or liability
|
Commodity Risk
The company enters into commodity derivatives designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, and diesel fuel are also important commodity inputs.
As of July 13, 2019, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current
|
|
$
|
179
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
179
|
|
Other long-term
|
|
|
140
|
|
|
|
—
|
|
|
|
—
|
|
|
|
140
|
|
Total
|
|
|
319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current
|
|
|
(5,819
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,819
|
)
|
Other long-term
|
|
|
(842
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(842
|
)
|
Total
|
|
|
(6,661
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,661
|
)
|
Net Fair Value
|
|
$
|
(6,342
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,342
|
)
|
As of December 29, 2018, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current
|
|
$
|
501
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
501
|
|
Other long-term
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
501
|
|
|
|
—
|
|
|
|
—
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current
|
|
|
(7,732
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,732
|
)
|
Other long-term
|
|
|
(1,203
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,203
|
)
|
Total
|
|
|
(8,935
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,935
|
)
|
Net Fair Value
|
|
$
|
(8,434
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8,434
|
)
|
The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix, or limit increases in, prices for a period extending into fiscal 2021. These instruments are designated as cash-flow hedges. The change in the fair value for these derivatives is reported in AOCI. All the company-held commodity derivatives at July 13, 2019 and December 29, 2018, respectively, qualified for hedge accounting.
Interest Rate Risk
The company previously entered into treasury rate locks at the time we executed the 2022 and 2026 notes. These rate locks were designated as a cash flow hedge and the fair value at termination was deferred in AOCI. The deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the related notes through the maturity date.
23
Derivative Assets and Liabilities
The company has the following derivative instruments located on the Condensed Consolidated Balance Sheets, which are utilized for the risk management purposes detailed above (amounts in thousands):
|
|
Derivative Assets
|
|
|
Derivative Liabilities
|
|
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Derivatives Designated as
Hedging Instruments
|
|
Balance
Sheet
Location
|
|
Fair Value
|
|
|
Balance
Sheet
Location
|
|
Fair Value
|
|
|
Balance
Sheet
Location
|
|
Fair Value
|
|
|
Balance
Sheet
Location
|
|
Fair Value
|
|
Commodity contracts
|
|
Other
current
assets
|
|
$
|
179
|
|
|
Other
current
assets
|
|
$
|
501
|
|
|
Other
accrued
liabilities
|
|
$
|
5,819
|
|
|
Other
accrued
liabilities
|
|
$
|
7,732
|
|
Commodity contracts
|
|
Other
assets
|
|
|
140
|
|
|
Other
assets
|
|
|
—
|
|
|
Other
long-term
liabilities
|
|
|
842
|
|
|
Other
long-term
liabilities
|
|
|
1,203
|
|
Total
|
|
|
|
$
|
319
|
|
|
|
|
$
|
501
|
|
|
|
|
$
|
6,661
|
|
|
|
|
$
|
8,935
|
|
Derivative AOCI transactions
The company had the following derivative instruments for deferred gains and (losses) on closed contracts and the effective portion for changes in fair value recorded in AOCI (no amounts were excluded from the effectiveness test), all of which are utilized for the risk management purposes detailed above (amounts in thousands and net of tax):
|
|
Amount of Gain or (Loss)
|
|
|
|
|
Amount of (Gain) or Loss
|
|
|
|
Recognized in AOCI on Derivatives
|
|
|
|
|
Reclassified from AOCI
|
|
|
|
(Effective Portion)
|
|
|
Location of (Gain) or Loss
|
|
into Income (Effective Portion)
|
|
Derivatives in Cash Flow
|
|
For the Twelve Weeks Ended
|
|
|
Reclassified from AOCI
|
|
For the Twelve Weeks Ended
|
|
Hedge Relationships(1)
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
into Income (Effective Portion)(2)
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Interest rate contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest expense
|
|
$
|
25
|
|
|
$
|
25
|
|
Commodity contracts
|
|
|
12,140
|
|
|
|
(8,809
|
)
|
|
Production costs(3)
|
|
|
(970
|
)
|
|
|
101
|
|
Total
|
|
$
|
12,140
|
|
|
$
|
(8,809
|
)
|
|
|
|
$
|
(945
|
)
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
|
|
|
|
|
Amount of (Gain) or Loss
|
|
|
|
Recognized in AOCI on Derivatives
|
|
|
|
|
Reclassified from AOCI
|
|
|
|
(Effective Portion)
|
|
|
Location of (Gain) or Loss
|
|
into Income (Effective Portion)
|
|
Derivatives in Cash Flow
|
|
For the Twenty-Eight Weeks Ended
|
|
|
Reclassified from AOCI
|
|
For the Twenty-Eight Weeks Ended
|
|
Hedge Relationships(1)
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
into Income (Effective Portion)(2)
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Interest rate contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest expense
|
|
$
|
58
|
|
|
$
|
58
|
|
Commodity contracts
|
|
|
2,547
|
|
|
|
1,661
|
|
|
Production costs(3)
|
|
|
(3,181
|
)
|
|
|
365
|
|
Total
|
|
$
|
2,547
|
|
|
$
|
1,661
|
|
|
|
|
$
|
(3,123
|
)
|
|
$
|
423
|
|
1.
|
Amounts in parentheses indicate debits to determine net income (loss).
|
2.
|
Amounts in parentheses, if any, indicate credits to determine net income (loss).
|
3.
|
Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).
|
There was no hedging ineffectiveness, and no amounts were excluded from the ineffectiveness testing, during the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018, respectively, related to the company’s commodity risk hedges.
24
At July 13, 2019, the balance in AOCI related to commodity price risk and interest rate risk derivative transactions that closed or will expire over the following years are as follows (amounts in thousands and net of tax) (amounts in parenthesis indicate a debit balance):
|
|
Commodity
Price Risk
Derivatives
|
|
|
Interest
Rate Risk
Derivatives
|
|
|
Totals
|
|
Closed contracts
|
|
$
|
(44
|
)
|
|
$
|
73
|
|
|
$
|
29
|
|
Expiring in 2019
|
|
|
(3,765
|
)
|
|
|
—
|
|
|
|
(3,765
|
)
|
Expiring in 2020
|
|
|
(846
|
)
|
|
|
—
|
|
|
|
(846
|
)
|
Expiring in 2021
|
|
|
(95
|
)
|
|
|
—
|
|
|
|
(95
|
)
|
Expiring in 2022
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
(34
|
)
|
Total
|
|
$
|
(4,784
|
)
|
|
$
|
73
|
|
|
$
|
(4,711
|
)
|
Derivative Transactions Notional Amounts
As of July 13, 2019, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):
|
|
Notional
Amount
|
|
Wheat contracts
|
|
$
|
119,780
|
|
Soybean oil contracts
|
|
|
16,135
|
|
Natural gas contracts
|
|
|
14,236
|
|
Corn contracts
|
|
|
7,857
|
|
Total
|
|
$
|
158,008
|
|
The company’s derivative instruments contain no credit-risk related contingent features at July 13, 2019. As of July 13, 2019 and December 29, 2018, the company had $14.8 million and $15.4 million, respectively, in other current assets representing collateral for hedged positions. There were no amounts representing collateral recorded in other accrued liabilities for hedged positions as of July 13, 2019 and December 29, 2018.
10. OTHER CURRENT AND NON-CURRENT ASSETS
Other current assets consist of (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Prepaid assets
|
|
$
|
17,937
|
|
|
$
|
22,286
|
|
Recovery from legal settlement in principle
|
|
|
21,000
|
|
|
|
—
|
|
Fair value of derivative instruments
|
|
|
179
|
|
|
|
501
|
|
Collateral to counterparties for derivative positions
|
|
|
14,774
|
|
|
|
15,408
|
|
Income taxes receivable
|
|
|
1,870
|
|
|
|
3,917
|
|
Other
|
|
|
2,188
|
|
|
|
1,125
|
|
Total
|
|
$
|
57,948
|
|
|
$
|
43,237
|
|
25
The recovery from legal settlement in principle represents funds in the amount of $21.0 million that are expected to be paid by the company’s insurance provider to the plaintiffs at final settlement of a lawsuit. See Note 15,
Commitments and Contingencies
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on this settlement in principle.
Other non-current assets consist of (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Unamortized financing fees
|
|
$
|
1,159
|
|
|
$
|
1,391
|
|
Investments
|
|
|
3,223
|
|
|
|
3,125
|
|
Fair value of derivative instruments
|
|
|
140
|
|
|
|
—
|
|
Deposits
|
|
|
2,000
|
|
|
|
2,257
|
|
Other
|
|
|
759
|
|
|
|
154
|
|
Total
|
|
$
|
7,281
|
|
|
$
|
6,927
|
|
The company recognized an impairment of $2.5 million for the notes receivable (not related to IDPs) because the counterparty defaulted on the note during the first quarter of fiscal 2018. This amount is recorded in the impairment of assets line item on the Condensed Consolidated Statements of Income.
11. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Employee compensation
|
|
$
|
24,927
|
|
|
$
|
19,469
|
|
VSIP liabilities
|
|
|
174
|
|
|
|
174
|
|
Employee vacation
|
|
|
25,128
|
|
|
|
23,345
|
|
Employee bonus
|
|
|
10,878
|
|
|
|
7,931
|
|
Fair value of derivative instruments
|
|
|
5,819
|
|
|
|
7,732
|
|
Self-insurance reserves
|
|
|
29,889
|
|
|
|
29,353
|
|
Bank overdraft
|
|
|
9,416
|
|
|
|
10,550
|
|
Accrued interest
|
|
|
9,092
|
|
|
|
8,152
|
|
Accrued other taxes
|
|
|
12,775
|
|
|
|
5,661
|
|
Accrued advertising
|
|
|
7,321
|
|
|
|
3,145
|
|
Accrued legal settlements
|
|
|
21,000
|
|
|
|
9,053
|
|
Accrued legal costs
|
|
|
3,552
|
|
|
|
3,874
|
|
Contingent acquisition consideration
|
|
|
4,862
|
|
|
|
4,700
|
|
Accrued short-term deferred income
|
|
|
5,617
|
|
|
|
5,525
|
|
Other
|
|
|
7,397
|
|
|
|
8,695
|
|
Total
|
|
$
|
177,847
|
|
|
$
|
147,359
|
|
See Note 15,
Commitments and Contingencies
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the legal settlements.
12. ASSETS HELD FOR SALE
The company repurchases distribution rights from IDPs in circumstances when the company decides to exit a territory or, in some cases, when the IDP elects to terminate its relationship with the company. In most of the distributor agreements, if the company decides to exit a territory or stop using the independent distribution model in a territory, the company is contractually required to purchase the distribution rights from the IDP. In the event an IDP terminates its relationship with the company, the company, although not legally obligated, may repurchase and operate those distribution rights as a company-owned territory. The IDPs may also sell their distribution rights to another person or entity. Distribution rights purchased from IDPs and operated as company-owned territories are recorded on the Condensed Consolidated Balance Sheets in the line item assets held for sale while the company actively seeks another IDP to purchase the distribution rights for the territory. Distribution rights held for sale and operated by the company are sold to IDPs at fair market value pursuant to the terms of a distributor agreement. There are multiple versions of the distributor agreement in place at any given time and the terms of such distributor agreements vary.
26
Additional assets recorded in assets held for sale are for property, plant and equipment. The carrying values of assets held for sale are not amortized and are evaluated for impairment as required at the end of the reporting period.
The table below presents the assets held for sale as of
July 13, 2019
and
December 29, 2018
, respectively (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Distributor territories
|
|
$
|
2,934
|
|
|
$
|
3,188
|
|
Property, plant and equipment
|
|
|
2,365
|
|
|
|
3,418
|
|
Total assets held for sale
|
|
$
|
5,299
|
|
|
$
|
6,606
|
|
13. DEBT AND OTHER OBLIGATIONS
Long-term debt (net of issuance costs and debt discounts excluding line-of-credit arrangements) (leases are separately discussed in Note 4,
Leases
) consisted of the following at July 13, 2019 and December 29, 2018, respectively (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Unsecured credit facility
|
|
$
|
60,000
|
|
|
$
|
—
|
|
2026 notes
|
|
|
395,858
|
|
|
|
395,550
|
|
2022 notes
|
|
|
398,683
|
|
|
|
398,423
|
|
Accounts receivable securitization facility
|
|
|
34,000
|
|
|
|
177,000
|
|
Other notes payable
|
|
|
4,942
|
|
|
|
8,621
|
|
|
|
|
893,483
|
|
|
|
979,594
|
|
Current maturities of long-term debt
|
|
|
4,942
|
|
|
|
5,000
|
|
Total long-term debt
|
|
$
|
888,541
|
|
|
$
|
974,594
|
|
Bank overdrafts occur when checks have been issued but have not been presented to the bank for payment. Certain of our banks allow us to delay funding of issued checks until the checks are presented for payment. The delay in funding results in a temporary source of financing from the bank. The activity related to bank overdrafts is shown as a financing activity in our Condensed Consolidated Statements of Cash Flows. Bank overdrafts are included in other accrued liabilities on our Condensed Consolidated Balance Sheets.
The company also had standby letters of credit (“LOCs”) outstanding of $8.4 million at July 13, 2019 and December 29, 2018 which reduce the availability of funds under the credit facility (as defined below). The outstanding LOCs are for the benefit of certain insurance companies and lessors. None of the outstanding LOCs are recorded as a liability on the Condensed Consolidated Balance Sheets.
2026 Notes, Accounts Receivable Securitization Facility, 2022 Notes, and Credit Facility
2026 Notes
. On September 28, 2016, the company issued $400.0 million of senior notes. The company pays semiannual interest on the 2026 notes on each April 1 and October 1 and the 2026 notes will mature on October 1, 2026. The notes bear interest at 3.500% per annum. The 2026 notes are subject to interest rate adjustments if either Moody’s or S&P downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the 2026 notes. On any date prior to July 1, 2026, the company may redeem some or all of the notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal and interest on the 2026 notes to be redeemed that would be due if such notes matured July 1, 2026 (exclusive of interest accrued to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the indenture governing the notes), plus 30 basis points, plus in each case accrued and unpaid interest. At any time on or after July 1, 2026, the company may redeem some or all of the 2026 notes at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and the related rating of the notes below investment grade), it is required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the notes in whole. The 2026 notes are also subject to customary restrictive covenants for investment grade debt, including certain limitations on liens and sale and leaseback transactions.
27
The face value of the 2026 notes is $400.0 million. There was a debt discount representing the difference between the net proceeds, after expenses, received upon issuance of debt and the amount repayable at its maturity. The company also paid issuance costs of $3.6 million (including underwriting fees and legal fees) on the 2026 notes. Debt issuance costs and the debt discount are being amortized to interest expense over the term of the 2026 notes. As of July 13, 2019, and December 29, 2018, respectively, the company was in compliance with all restrictive covenants under the indenture governing the 2026 notes. The table below presents the debt discount, underwriting fees and the legal and other fees for issuing the 2026 notes (amounts in thousands):
|
|
Amount
at Issuance
|
|
Debt discount
|
|
$
|
2,108
|
|
Underwriting, legal, and other fees
|
|
|
3,634
|
|
Total fees
|
|
$
|
5,742
|
|
Accounts Receivable Securitization Facility
.
On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). The company has amended the facility six times since execution, most recently on September 27, 2018. These amendments include provisions which (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million, (ii) added a leverage pricing grid, (iii) added an additional bank to the lending group, (iv) made certain other conforming changes, and (v) extended the term, most recently one additional year to September 27, 2020. The amendment that added the additional bank was accounted for as an extinguishment of the debt. The remaining amendments were accounted for as modifications.
Under the facility, a wholly-owned, bankruptcy-remote subsidiary purchases, on an ongoing basis, substantially all trade receivables. As borrowings are made under the facility, the subsidiary pledges the receivables as collateral. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions of collections to the company. We include the subsidiary in our Condensed Consolidated Financial Statements. The facility contains certain customary representations and warranties, affirmative and negative covenants, and events of default
. There was $34.0 million and $177.0 million outstanding under the facility on July 13, 2019 and December 29, 2018, respectively. As of July 13, 2019 and December 29, 2018, respectively, the company was in compliance with all restrictive covenants under the facility. The company currently has $155.8 million available under its facility for working capital and general corporate purposes. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables
.
Optional principal repayments may be made at any time without premium or penalty. Interest is due two days after our reporting periods end in arrears on the outstanding borrowings and is computed as the cost of funds rate plus an applicable margin of 85 basis points. An unused fee of 30 basis points is applicable on the unused commitment at each reporting period.
Financing costs paid at inception of the facility and at the time amendments are executed are being amortized over the life of the facility. The balance of unamortized financing costs was $0.1 million on July 13, 2019 and $0.2 million on December 29, 2018, respectively, and are recorded in other assets on the Condensed Consolidated Balance Sheets.
2022 Notes
. On April 3, 2012, the company issued $400.0 million of senior notes. The company pays semiannual interest on the 2022 notes on each April 1 and October 1 and the 2022 notes will mature on April 1, 2022. The 2022 notes bear interest at 4.375% per annum. On any date prior to January 1, 2022, the company may redeem some or all of the 2022 notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal thereof (not including any interest accrued thereon to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the indenture governing the notes), plus 35 basis points, plus in each case, unpaid interest accrued thereon to, but not including, the date of redemption. At any time on or after January 1, 2022, the company may redeem some or all of the 2022 notes at a price equal to 100% of the principal amount of the 2022 notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and the related rating of the notes below investment grade), it is required to offer to purchase the 2022 notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the 2022 notes in whole. The 2022 notes are also subject to customary restrictive covenants for investment grade debt, including certain limitations on liens and sale and leaseback transactions.
The face value of the 2022 notes is $400.0 million and the debt discount on the 2022 notes at issuance was $1.0 million. The company paid issuance costs (including underwriting fees and legal fees) on the 2022 notes of $3.9 million. The issuance costs and the debt discount are being amortized to interest expense over the term of the 2022 notes. As of July 13, 2019 and December 29, 2018, the company was in compliance with all restrictive covenants under the indenture governing the 2022 notes.
28
Credit Facility
.
The company is party to an amended and restated credit agreement, dated as of October 24, 2003, with the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, the swingline lender and issuing lender. Under the amended and restated credit agreement, our credit facility (the “credit facility”) is a five-year, $500.0 million senior unsecured revolving loan facility with the following terms and conditions: (i) a maturity date of November 29, 2022; (ii) an applicable margin for revolving loans maintained as (1) base rate loans and swingline loans with a range of 0.00% to 0.575% and (2) Eurodollar loans with a range of 0.575% to 1.575%, in each case, based on the leverage ratio of the company and its subsidiaries; (iii) an applicable facility fee with a range of 0.05% to 0.30%, due quarterly on all commitments under the amended and restated credit agreement, based on the leverage ratio of the company and its subsidiaries; and (iv) a maximum leverage ratio covenant to permit the company, at its option, in connection with certain acquisitions and investments and subject to the terms and conditions provided in the amended and restated credit agreement, to increase the maximum ratio permitted thereunder on one or more occasions to 4.00 to 1.00 for a period of four consecutive fiscal quarters, including and/or immediately following the fiscal quarter in which such acquisitions or investments were completed (the “covenant holiday”), provided that each additional covenant holiday will not be available to the company until it has achieved and maintained a leverage ratio of at least 3.75 to 1.00 and has been complied with for at least two fiscal quarters
.
In addition, the
credit facility contains a provision that permits the company to request up to $200.0 million in additional revolving commitments, for a total of up to $700.0 million, subject to the satisfaction of certain conditions. Proceeds from the credit facility may be used for working capital and general corporate purposes, including capital expenditures, acquisition financing, refinancing of indebtedness, dividends and share repurchases. The credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the amended credit facility and can meet its presently foreseeable financial requirements.
As of July 13, 2019 and December 29, 2018, respectively, the company was in compliance with all restrictive covenants under the credit facility.
Financing costs paid at inception of the credit facility and at the time amendments are executed are being amortized over the life of the credit facility. The balance of unamortized financing costs was $1.0 million and $1.2 million on July 13, 2019 and December 29, 2018, respectively, and are recorded in other assets on the Condensed Consolidated Balance Sheets.
Amounts outstanding under the credit facility vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions, which are part of the company’s overall risk management strategy as discussed in Note 9,
Derivative Financial Instruments
,
of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. The table below presents the borrowings and repayments under the credit facility during the twenty-eight weeks ended July 13, 2019.
|
|
Amount
(thousands)
|
|
Balance at December 29, 2018
|
|
$
|
—
|
|
Borrowings
|
|
|
154,400
|
|
Payments
|
|
|
(94,400
|
)
|
Balance at July 13, 2019
|
|
$
|
60,000
|
|
The table below presents the net amount available under the credit facility as of July 13, 2019:
|
|
Amount
(thousands)
|
|
Gross amount available
|
|
$
|
500,000
|
|
Outstanding
|
|
|
(60,000
|
)
|
Letters of credit
|
|
|
(8,400
|
)
|
Available for withdrawal
|
|
$
|
431,600
|
|
The table below presents the highest and lowest outstanding balance under the credit facility during the twenty-eight weeks ended July 13, 2019:
|
|
Amount
(thousands)
|
|
High balance
|
|
$
|
122,200
|
|
Low balance
|
|
$
|
—
|
|
29
Aggregate maturities of debt outstanding
as of
July 13, 2019
are as follows (excluding unamortized debt discount and issuance costs) (amounts in thousands):
Remainder of 2019
|
|
$
|
1,250
|
|
2020
|
|
|
37,750
|
|
2021
|
|
|
—
|
|
2022
|
|
|
460,000
|
|
2023
|
|
|
—
|
|
2024 and thereafter
|
|
|
400,000
|
|
Total
|
|
$
|
899,000
|
|
Debt discount and issuance costs are being amortized straight-line (which approximates the effective method) over the term of the underlying debt outstanding. The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at July 13, 2019 (amounts in thousands):
|
|
|
|
|
|
Debt Issuance Costs
|
|
|
|
|
|
|
|
Face Value
|
|
|
and Debt Discount
|
|
|
Net Carrying Value
|
|
2026 notes
|
|
$
|
400,000
|
|
|
$
|
4,142
|
|
|
$
|
395,858
|
|
2022 notes
|
|
|
400,000
|
|
|
|
1,317
|
|
|
|
398,683
|
|
Other notes payable
|
|
|
5,000
|
|
|
|
58
|
|
|
|
4,942
|
|
Total
|
|
$
|
805,000
|
|
|
$
|
5,517
|
|
|
$
|
799,483
|
|
The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at December 29, 2018 (amounts in thousands):
|
|
|
|
|
|
Debt Issuance Costs
|
|
|
|
|
|
|
|
Face Value
|
|
|
and Debt Discount
|
|
|
Net Carrying Value
|
|
2026 notes
|
|
$
|
400,000
|
|
|
$
|
4,450
|
|
|
$
|
395,550
|
|
2022 notes
|
|
|
400,000
|
|
|
|
1,577
|
|
|
|
398,423
|
|
Other notes payable
|
|
|
8,750
|
|
|
|
129
|
|
|
|
8,621
|
|
Total
|
|
$
|
808,750
|
|
|
$
|
6,156
|
|
|
$
|
802,594
|
|
14. VARIABLE INTEREST ENTITIES
Transportation agreement variable interest entity (the “VIE”) analysis
The company maintains a transportation agreement with an entity that transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. As of December 29, 2018, this entity qualified as a VIE, but the company determined it was not the primary beneficiary of the VIE because the company did not (i) have the ability to direct the significant activities of the VIE and (ii) provide any implicit or explicit guarantees or other financial support to the VIE for specific return or performance benchmarks. In addition, we did not provide, nor did we intend to provide, financial or other support to the entity
.
The company reconsidered our relationship with the entity during the second quarter of fiscal 2019 because the entity was sold and have concluded the entity is no longer a VIE.
Distribution rights agreement VIE analysis
The incorporated IDPs qualify as VIEs. The IDPs who are formed as sole proprietorships are excluded from the following VIE accounting analysis and discussion
.
30
Incorporated IDPs acquire distribution rights and enter into a contract with the company to sell the company’s products in the IDPs’ defined geographic territory. The incorporated IDPs have the option to finance the acquisition of their distribution rights with the company. They can also pay cash or obtain external financing at the time they acquire the distribution rights. The combination of the company’s loans to the incorporated IDPs and the ongoing distributor arrangements with the incorporated IDPs provide a level of funding to the equity owners of the various incorporated IDPs that would not otherwise be available
.
As of
July 13, 2019
and
December 29, 2018
, there was $
182.5
million and $
154.4
million, respectively,
in gross distribution rights notes receivable outstanding from incorporated IDPs
.
The company is not considered to be the primary beneficiary of the VIEs because the company does not (i) have the ability to direct the significant activities of the VIEs that would affect their ability to operate their respective businesses and (ii) provide any implicit or explicit guarantees or other financial support to the VIEs, other than the financing described above, for specific return or performance benchmarks. The activities controlled by the incorporated IDPs that are deemed to most significantly impact the ultimate success of the incorporated IDP entities relate to those decisions inherent in operating the distribution business in the territory, including acquiring trucks and trailers, managing fuel costs, employee matters and other strategic decisions. In addition, we do not provide, nor do we intend to provide, financial or other support to the IDP. The IDPs are responsible for the operations of their respective territories
.
The company’s maximum contractual exposure to loss for the incorporated IDP relates to the distributor rights note receivable for the portion of the territory the incorporated IDPs financed at the time they acquired the distribution rights. The incorporated IDPs remit payment on their distributor rights note receivable each week during the settlement process of their weekly activity. The company will operate a territory on behalf of an incorporated IDP in situations where the IDP has abandoned its distribution rights. Any remaining balance outstanding on the distribution rights notes receivable is relieved once the distribution rights have been sold on the IDPs behalf. The company’s collateral from the territory distribution rights mitigates the potential losses
.
15. COMMITMENTS AND CONTINGENCIES
Self-insurance reserves and other commitments and contingencies
The company records self-insurance reserves, excluding the distributor litigation discussed below, as an other accrued liability on our Condensed Consolidated Balance Sheets.
The reserves include an estimate of expected settlements on pending claims, defense costs and a provision for claims incurred but not reported. These estimates are based on the company’s assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and current cost trends. The amount of the company’s ultimate liability in respect of these matters may differ materially from these estimates
.
In the event the company ceases to utilize the independent distributor model or exits a geographic market, the company is contractually required in some situations to purchase the distribution rights from the independent distributor. The company expects to continue operating under this model and has concluded that the possibility of a loss is remote
.
The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these laws and regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition, results of operations, cash flows or the competitive position of the company. The company believes it is currently in substantial compliance with all material environmental laws and regulations affecting the company and its properties
. In August 2016, the U.S. Department of Labor (the “Department”) notified the company that it was scheduled for a compliance review under the Fair Labor Standards Act. On November 5, 2018, the company was advised by the Department that the compliance review has been closed.
Litigation
The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, including personal injury, commercial, contract, environmental, antitrust, product liability, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period
.
31
At this time, the company is defending 15 complaints filed by distributors alleging that such distributors were misclassified as independent contractors. Twelve of these lawsuits seek class and/or collective action treatment. The remaining three cases either allege individual claims or do not seek class or collective action treatment or, in cases in which class treatment was sought, the court denied class certification. The respective courts have ruled on plaintiffs’ motions for class certification in eight of the pending cases, each of which is discussed below.
Unless otherwise noted, a class was conditionally certified under the FLSA in each of the cases described below, although the company has the ability to petition the court to decertify that class at a later date
:
Case Name
|
|
Case No.
|
|
Venue
|
|
Date Filed
|
|
Status
|
Rosinbaum et al. v. Flowers Foods,
Inc. and Franklin Baking Co., LLC
|
|
7:16-cv-00233
|
|
U.S. District Court Eastern
District of North Carolina
|
|
12/1/2015
|
|
|
Neff et al. v. Flowers Foods, Inc.,
Lepage Bakeries Park Street, LLC,
and CK Sales Co., LLC
|
|
5:15-cv-00254
|
|
U.S. District Court District of
Vermont
|
|
12/2/2015
|
|
On May 16, 2019, the Court
denied defendants’ motion to
decertify the FLSA class and
granted Plaintiff’s motion to
certify under Federal Rule of
Civil Procedure 23 a state law
class of distributors who
operated in the state of Vermont.
|
Noll v. Flowers Foods, Inc., Lepage
Bakeries Park Street, LLC, and CK
Sales Co., LLC
|
|
1:15-cv-00493
|
|
U.S. District Court District of
Maine
|
|
12/3/2015
|
|
On January 15, 2019, the Court
denied defendants’ motion to
decertify the FLSA class and
granted Plaintiff’s motion to
certify under Federal Rule of
Civil Procedure 23 a state law
class of distributors who
operated in the state of Maine.
|
Richard et al. v. Flowers Foods, Inc.,
Flowers Baking Co. of Lafayette,
LLC, Flowers Baking Co. of Baton
Rouge, LLC, Flowers Baking Co. of
Tyler, LLC and Flowers Baking Co.
of New Orleans, LLC
|
|
6:15-cv-02557
|
|
U.S. District Court Western
District of Louisiana
|
|
10/21/2015
|
|
|
Carr et al. v. Flowers Foods, Inc.
and Flowers Baking Co.
of Oxford, Inc.
|
|
2:15-cv-06391
|
|
U.S. District Court Eastern
District of Pennsylvania
|
|
12/1/2015
|
|
On May 7, 2019, the Court
denied defendants' motion to
decertify the FLSA class and
granted Plaintiffs' motion to
certify under Federal Rule of
Civil Procedure 23 three state
law classes of distributors who
operated in the states of
Maryland, Pennsylvania,
and New Jersey.
|
Boulange v. Flowers Foods, Inc.
and Flowers Baking Co.
of Oxford, Inc.
|
|
2:16-cv-02581
|
|
U.S. District Court Eastern
District of Pennsylvania
|
|
3/25/2016
|
|
This matter has been
consolidated with the
Carr litigation described
immediately above.
|
Medrano v. Flowers Foods, Inc.
and Flowers Baking Co.
of El Paso, LLC
|
|
1:16-cv-00350
|
|
U.S. District Court District of
New Mexico
|
|
4/27/2016
|
|
|
Martins v. Flowers Foods, Inc.,
Flowers Baking Co. of Bradenton,
LLC and Flowers Baking Co.
of Villa Rica, LLC
|
|
8:16-cv-03145
|
|
U.S. District Court Middle
District of Florida
|
|
11/8/2016
|
|
|
The company and/or its respective subsidiaries contests the allegations and are vigorously defending all of these lawsuits. Given the stage of the complaints and the claims and issues presented, except for lawsuits disclosed herein that have reached a settlement or agreement in principle, the company cannot reasonably estimate at this time the possible loss or range of loss that may arise from the unresolved lawsuits
.
32
Since the beginning of our fiscal 2018
, the company has settled, and the appropriate court has approved, the following collective and/or class action lawsuits filed by distributors alleging that such distributors were misclassified as independent contractors. In each of these settlements, in addition to the monetary terms noted below, the settlements also included certain non-economic terms intended to strengthen and enhance the independent contractor model:
Case Name
|
|
Case No.
|
|
Venue
|
|
Date Filed
|
|
Comments
|
Coyle v. Flowers Foods, Inc. and
Holsum Bakery, Inc.
|
|
2:15-cv-01372
|
|
U.S. District Court District
of Arizona
|
|
7/20/2015
|
|
On March 23, 2018, the court
dismissed this lawsuit and
approved an agreement to settle
this matter for $4.3 million,
comprised of $1.2 million in
settlement funds, $2.9 million in
attorneys’ fees, and $0.2 million
as an incentive for class
members who are active
distributors not to opt out of
certain portions of the new
distributor agreement. The
settlement consisted of
approximately 190 class
members. This settlement charge
was recorded as a selling,
distribution and administrative
expense in our Condensed Consolidated
Statements of Income during the
third quarter of fiscal 2017 and
was paid during the first quarter
of fiscal 2018.
|
McCurley v. Flowers Foods, Inc.
and Derst Baking Co., LLC
|
|
5:16-cv-00194
|
|
U.S. District Court District
of South Carolina
|
|
1/20/2016
|
|
On September 10, 2018, the
court approved the parties’
agreement to settle
this matter
for a payment of $1.5 million,
comprised of $0.8 million in
settlement funds, $0.6 million
in attorneys’ fees, and a
collective $0.1 million for a
service award and as an
incentive for class members
who are active distributors not
to opt out of certain portions of
the new distributor agreement.
The settlement class consisted
of 106 class members. This
settlement charge was recorded
as a selling, distribution and
administrative expense in our
Condensed Consolidated
Statements of Operations
during the fourth quarter
of fiscal 2017. This settlement
was paid on November 1, 2018.
|
33
Zapata et al. v. Flowers Foods, Inc.
and Flowers Baking Co. of Houston,
LLC (the "Zapata litigation")
|
|
4:16-cv-00676
|
|
U.S. District Court Southern
District of Texas
|
|
3/14/2016
|
|
On September 12, 2018, the
court dismissed the Zapata
litigation and the Rodriguez
litigation (defined below) and
approved an agreement to
settle both matters for
$740,700, including attorneys’
fees, on behalf of 43
distributors. This settlement
was paid and recorded as a
selling, distribution and
administrative expense in our
Condensed Consolidated Statements of
Income during the third quarter
of fiscal 2018.
|
Rodriguez et al. v. Flowers Foods, Inc.
and Flowers Baking Co.
of Houston, LLC
(the "Rodriguez litigation")
|
|
4:16-cv-00245
|
|
U.S. District Court Southern
District of Texas
|
|
1/28/2016
|
|
See the Zapata litigation
discussion immediately above.
|
Schucker et al. v. Flowers Foods, Inc.,
Lepage Bakeries Park St., LLC,
and C.K. Sales Co., LLC
|
|
1:16-cv-03439
|
|
U.S. District Court Southern
District of New York
|
|
5/9/2016
|
|
On September 5, 2018, the court
dismissed this lawsuit and
approved an agreement to settle
this matter for approximately
$1.3 million, comprised of $0.4
million in settlement funds, $0.9
million in attorneys’ fees, and a
collective $0.1 million for
service awards and incentives
for class members who are
active distributors not to opt
out of certain portions of the
new distributor agreement.
The settlement consisted of 27
class members. This settlement
charge was recorded as a selling,
distribution and administrative
expense in our Condensed Consolidated
Statements of Income during
the first quarter of fiscal 2018.
This settlement was paid on
November 19, 2018.
|
Green et al. v. Flowers Foods, Inc. et al.
|
|
1:19-cv-01021
|
|
U.S. District Court Western
District of Tennessee
|
|
2/1/2019
|
|
*
|
*
|
On September 7, 2018, the company negotiated a global settlement to resolve 12 pending collective action lawsuits against the company for a payment in the amount of $9.0 million, comprised of $5.4 million in settlement funds and $3.6 million in attorneys’ fees. The proposed settlement class consisted of approximately 900 members. The settlement also contained certain non-economic terms intended to strengthen and enhance the independent contractor model, which remains in place. On February 1, 2019, plaintiffs' counsel filed a consolidated complaint with the United States District Court for the Western District of Tennessee to obtain judicial approval of the parties' global settlement. The court approved the global settlement on February 27, 2019. Thereafter, the parties moved to dismiss the 12 settled lawsuits with prejudice. This settlement was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the third quarter of fiscal 2018. A total of $4.2 million was paid in March 2019, and a second payment of $3.5 million was made in June 2019. The remainder of the settlement funds ($1.3 million) reverted to Flowers per the terms of the settlement, and was recorded as a reduction of selling, distribution and administrative expense in our Condensed Consolidated Statements of Income for the twelve and twenty-eight weeks ended July 13, 2019.
|
34
On August 12, 2016, a class action complaint was filed in the U.S. District Court for the Southern District of New York by Chris B. Hendley (the “Hendley complaint”) against the company and certain senior members of management (collectively, the “defendants”). On August 17, 2016, another class action complaint was filed in the U.S. District Court for the Southern District of New York by Scott Dovell, II (the “Dovell complaint” and together with the Hendley complaint, the “complaints”) against the defendants. Plaintiffs in the complaints are securities holders that acquired company securities between February 7, 2013 and August 10, 2 016. The complaints generally allege that the defendants made materially false and/or misleading statements and/or failed to disclose that (1) the company’s labor practices were not in compliance with applicable federal laws and regulations; (2) such non-compliance exposed the company to legal liability and/or negative regulatory action; and (3) as a result, the defendants’ statements about the company’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis. The counts of the complaints are asserted against the defendants pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 under the Exchange Act. The complaints seek (1) class certification under the Federal Rules of Civil Procedure, (2) compensatory damages in favor of the plaintiffs and all other class members against the defendants, jointly and severally, for all damages sustained as a result of wrongdoing, in an amount to be proven at trial, including interest, and (3) awarding plaintiffs and the class their reasonable costs and expenses incurred in the actions, including counsel and expert fees. On October 21, 2016, the U.S. District Court for the Southern District of New York consolidated the complaints into one action captioned “In re Flowers Foods, Inc. Securities Litigation” (the “consolidated securities action”), appointed Walter Matthews as lead plaintiff (“lead plaintiff”), and appointed Glancy Prongay & Murray LLP and Johnson & Weaver, LLP as co-lead counsel for the putative class. On November 21, 2016, the court granted defendants’ and lead plaintiff’s joint motion to transfer the consolidated securities action to the U.S. District Court for the Middle District of Georgia. Lead plaintiff filed his Consolidated Class Action Complaint on January 12, 2017, raising the same counts and general allegations and seeking the same relief as the Dovell and Hendley complaints. On March 13, 2017, the defendants filed a motion to dismiss the lawsuit which was granted in part and denied in part on March 23, 2018. The court dismissed certain allegedly false or misleading statements as nonactionable under federal securities laws, and will allow others to proceed to fact discovery. On July 23, 2018, lead plaintiff filed his motion for class certification. The defendants filed their memorandum of law in opposition to class certification on October 5, 2018. The court scheduled a hearing on the class certification motion for February 28, 2019
.
On May 10, 2019, the parties filed a notice of settlement informing the court that a settlement in principle of the case had been reached.
On July 12, 2019, lead plaintiff and Plaintiff Chris B. Hendley filed an unopposed motion for (1) preliminary approval of the class action settlement; (2) certification of the settlement class; and (3) approval of notice to the settlement class. Also on July 12, 2019, the parties entered into a Stipulation and Agreement of Settlement (the “Stipulation”), which (along with its exhibits) sets forth in detail the terms of the settlement and the releases of all claims against the Defendants. The Stipulation
and settlement
remain subject to court approval. The settlement
in principle
is for $
21.0
million and
is expected to
be paid by the company’s insurance provider. This amount is recorded on the company’s Condensed Consolidated Balance Sheet as of
July 13, 2019
as an other current asset due from the insurer and an other accrued liability due for the settlement
in principle
. Recording this transaction resulted in no impact to the company’s Condensed Consolidated
Statements of Income
because the expense for the settlement
in principle
was offset by the
expected
recovery from the insurer.
On June 8, 2018, a verified shareholder derivative complaint was filed in the U.S. District Court for the Middle District of Georgia by William D. Wrigley, derivatively on behalf of the company (the “Wrigley complaint”), against certain current and former directors and officers of the company. On June 14, 2018, a related shareholder derivative complaint was filed in the U.S. District Court for the Middle District of Georgia by Stephen Goldberger, derivatively on behalf of the company (the “Goldberger complaint” and together with the Wrigley complaint, the “federal derivative complaints”), against the same current and former directors and officers of the company. The federal derivative complaints allege, among other things, breaches of fiduciary duties and violations of federal securities laws relating to the company’s labor practices, and seek unspecified damages, disgorgement, and other relief. On June 27, 2018, these derivative actions were consolidated and stayed until the earlier of (1) an order from the court on any summary judgment motions that may be filed in the consolidated securities action, or (2) notification that there has been a settlement reached in the consolidated securities action, or until otherwise agreed to by the parties.
On June 21, 2018, two verified shareholder derivative complaints were filed in The Superior Court of Thomas County, State of Georgia, by Margaret Cicchini Family Trust and Frank Garnier, separately, derivatively on behalf of the company (together the “state derivative complaints”), against certain current and former directors and officers of the company. The state derivative complaints allege, among other things, breaches of fiduciary duties relating to the company’s labor practices, and seek unspecified damages, disgorgement, and other relief. On July 12, 2018, these derivative actions were consolidated and stayed until the earlier of (1) an order from the court on any summary judgment motions that may be filed in the consolidated securities action, or (2) notification that there has been a settlement reached in the consolidated securities action, or until otherwise agreed to by the parties.
The company and/or its respective subsidiaries are vigorously defending these lawsuits. Given the stage of the complaints and the claims and issues presented, the company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from the unresolved lawsuits.
See Note 13,
Debt and Other Obligations
, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the company’s commitments.
35
16. EARNINGS PER SHARE
The following is a reconciliation of net income and weighted average shares for calculating basic and diluted earnings per common share for the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018, respectively (amounts and shares in thousands, except per share data):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Net income
|
|
$
|
53,095
|
|
|
$
|
45,442
|
|
|
$
|
118,961
|
|
|
$
|
96,689
|
|
Basic Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding for common stock
|
|
|
211,685
|
|
|
|
211,048
|
|
|
|
211,517
|
|
|
|
210,956
|
|
Basic earnings per common share
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
|
$
|
0.56
|
|
|
$
|
0.46
|
|
Diluted Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding for common stock
|
|
|
211,685
|
|
|
|
211,048
|
|
|
|
211,517
|
|
|
|
210,956
|
|
Add: Shares of common stock assumed issued upon exercise of
stock options and vesting of restricted stock
|
|
|
272
|
|
|
|
459
|
|
|
|
407
|
|
|
|
487
|
|
Diluted weighted average shares outstanding for common stock
|
|
|
211,957
|
|
|
|
211,507
|
|
|
|
211,924
|
|
|
|
211,443
|
|
Diluted earnings per common share
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.56
|
|
|
$
|
0.46
|
|
There were 54,360 and 65,390 anti-dilutive shares during the twelve and twenty-eight weeks ended July 13, 2019, respectively. There were no anti-dilutive shares during the twelve and twenty-eight weeks ended July 14, 2018.
17. STOCK-BASED COMPENSATION
On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”). The Omnibus Plan was approved by our shareholders on May 21, 2014. The Omnibus Plan authorizes the compensation committee of the Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other awards to provide our officers, key employees, and non-employee directors’ incentives and rewards for performance. The Omnibus Plan replaced the Flowers Foods’ 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (“EPIP”), the stock appreciation right plan, and the bonus plan. Equity awards granted after May 21, 2014 are governed by the Omnibus Plan. No additional awards were issued under the EPIP after May 21, 2014 and the last issued awards were fully exercised during the first quarter of fiscal 2018. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares.
The following is a summary of stock options, restricted stock, and deferred stock outstanding under the plans described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below. The company typically grants awards at the beginning of its fiscal year. There were no grants to employees during fiscal 2018. Information on grants to employees during fiscal 2019 is discussed below.
Stock Options
The company issued non-qualified stock options (“NQSOs”) during fiscal years 2011 and prior that were vested and fully exercised by the end of our first quarter of fiscal 2018. The company’s final 72,785 stock options, with an exercise price of $10.87, outstanding on December 30, 2017 were exercised during the first quarter of fiscal 2018. There are no outstanding NQSOs as of July 13, 2019.
The cash received, the windfall tax benefit, and intrinsic value from stock option exercises for the twenty-eight weeks ended July 14, 2018 were as follows (amounts in thousands):
|
|
July 14, 2018
|
|
Cash received from option exercises
|
|
$
|
791
|
|
Tax benefit at exercise, net
|
|
$
|
111
|
|
Intrinsic value of stock options exercised
|
|
$
|
609
|
|
36
Performance-Contingent Restricted Stock Awards
Performance-Contingent Total Shareholder Return Shares (“TSR Shares”)
Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of TSR Shares. The awards vest approximately three years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date the vesting conditions are satisfied. The total shareholder return (“TSR”) is the percent change in the company’s stock price over the measurement period plus the dividends paid to shareholders. The performance payout is calculated at the end of each of the last four quarters (averaged) in the measurement period. Once the TSR is determined for the company (“Company TSR”), it is compared to the TSR of our food company peers (“Peer Group TSR”). The Company TSR compared to the Peer Group TSR will determine the payout as set forth below:
Percentile
|
|
Payout as %
of Target
|
|
90th
|
|
|
200
|
%
|
70th
|
|
|
150
|
%
|
50th
|
|
|
100
|
%
|
30th
|
|
|
50
|
%
|
Below 30th
|
|
|
0
|
%
|
For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2017 award, which vested in fiscal 2019, vested at 153% of target.
The TSR shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the TSR shares that ultimately vest. The fair value estimate was determined using a
Monte Carlo
simulation model, which utilizes multiple input variables to estimate the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) TSR from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ TSR. The inputs are based on historical capital market data.
On May 23, 2019, the company’s CEO received an award of TSR Shares that brings his total grant equal to the CEO’s target award (“promotion award”). This grant will be measured under the same guidelines as the December 30, 2018 grant of TSR Shares described above. The company’s former CEO forfeited 112,840 TSR shares at his retirement on May 23, 2019.
The following performance-contingent TSR Shares have been granted under the Omnibus Plan and have service period remaining (amounts in thousands, except price data):
Grant Date
|
|
December 30,
2018
|
|
|
May 23,
2019
|
|
Shares granted
|
|
|
440
|
|
|
|
11
|
|
Vesting date
|
|
3/1/2022
|
|
|
3/1/2022
|
|
Fair value per share
|
|
$
|
21.58
|
|
|
$
|
27.23
|
|
Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”)
Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of ROIC Shares. The awards generally vest approximately three years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date, the vesting conditions are satisfied. Return on Invested Capital (“ROIC”) is calculated by dividing our profit, as defined, by the invested capital. Generally, the performance condition requires the company’s average ROIC to exceed its average weighted cost of capital (“WACC”) by between 1.75 to 4.75 percentage points (the “ROI Target”) over the three fiscal year performance period. If the lowest ROI Target is not met, the awards are forfeited. The ROIC Shares can be earned based on a range from 0% to 125% of target as defined below:
|
•
|
ROIC above WACC by less than 1.75 percentage points pays 0% of ROI Target;
|
|
•
|
ROIC above WACC by 1.75 percentage points pays 50% of ROI Target;
|
|
•
|
ROIC above WACC by 3.75 percentage points pays 100% of ROI Target; or
|
|
•
|
ROIC above WACC by 4.75 percentage points pays 125% of ROI Target.
|
37
For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2017 award, which vested in fiscal 2019, actual attainment was 75% of ROI Target.
The ROIC Shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of ROIC Shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC Shares will immediately vest at the target level. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the ROIC Shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. Since these awards have a performance condition feature, the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. The 2019 award is being expensed at 100% of ROI Target.
On May 23, 2019, the company’s CEO received a promotion award of ROIC Shares. This grant will be measured under the same guidelines as the December 30, 2018 grant of ROIC Shares described above. The company’s former CEO forfeited 112,840 ROIC shares at his retirement on May 23, 2019.
The following performance-contingent ROIC Shares have been granted under the Omnibus Plan and have service period remaining (amounts in thousands, except price data):
Grant Date
|
|
December 30,
2018
|
|
|
May 23,
2019
|
|
Shares granted
|
|
|
440
|
|
|
|
11
|
|
Vesting date
|
|
3/1/2022
|
|
|
3/1/2022
|
|
Fair value per share
|
|
$
|
18.29
|
|
|
$
|
23.08
|
|
Performance-Contingent Restricted Stock Summary
The table below presents the TSR modifier share adjustment, ROIC modifier share adjustment, accumulated dividends on vested shares, and the tax benefit/(expense) at vesting of the performance-contingent restricted stock awards (amounts in thousands, except per share data).
Award Granted
|
|
|
Fiscal Year
Vested
|
|
|
TSR Modifier
Increase/(Decrease)
Shares
|
|
|
ROIC Modifier
Increase/(Decrease)
Shares
|
|
|
Dividends at
Vesting
(thousands)
|
|
|
Tax
Benefit/(Expense)
|
|
|
Fair Value at
Vesting
|
|
|
2017
|
|
|
|
2019
|
|
|
|
205,686
|
|
|
|
(97,131
|
)
|
|
$
|
1,219
|
|
|
$
|
936
|
|
|
$
|
18,570
|
|
|
2016
|
|
|
|
2018
|
|
|
|
(333,112
|
)
|
|
|
(114,190
|
)
|
|
$
|
405
|
|
|
$
|
(2,130
|
)
|
|
$
|
6,504
|
|
Performance-Contingent Restricted Stock
The company’s performance-contingent restricted stock activity for the twenty-eight weeks ended July 13, 2019 is presented below (amounts in thousands, except price data):
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested shares at December 29, 2018
|
|
|
779
|
|
|
$
|
21.64
|
|
Initial grant at target
|
|
|
903
|
|
|
$
|
20.06
|
|
Grant reduction for not achieving the ROIC modifier
|
|
|
(97
|
)
|
|
$
|
19.97
|
|
Grant increase for achieving the TSR modifier
|
|
|
206
|
|
|
$
|
23.31
|
|
Vested
|
|
|
(885
|
)
|
|
$
|
22.21
|
|
Forfeited
|
|
|
(241
|
)
|
|
$
|
20.18
|
|
Nonvested shares at July 13, 2019
|
|
|
665
|
|
|
$
|
20.11
|
|
As of July 13, 2019, there was $11.2 million of total unrecognized compensation cost related to nonvested restricted stock granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 2.63 years. The total intrinsic value of shares vested during the twelve and twenty-eight weeks ended July 13, 2019 was $18.6 million.
38
Time-Based Restricted Stock Units
Certain key employees have been granted time-based restricted stock units (“TBRSU Shares”). The executive officers of the company did not receive any TBRSU Shares. These awards vest on January 5th each year in equal installments over a three-year period beginning in fiscal 2020. Dividends earned on shares will be held by the company during the vesting period and paid in cash when the awards vest and shares are distributed.
On May 23, 2019, the company’s CEO was granted TBRSU Shares of approximately $1.0 million pursuant to the Omnibus Plan. This award will vest 100% on the fourth anniversary of the date of grant provided the CEO remains employed by the company during this period. Vesting will also occur in the event of the CEO’s death or disability, but not his retirement if prior to the fourth anniversary of the grant date. Dividends will accrue on the award and will be paid to the CEO on the vesting date for all shares that vest. There were 43,330 shares issued for this award at a fair value of $23.08 per share.
The following TBRSU Shares have been granted under the Omnibus Plan and have service periods remaining (amounts in thousands, except price data):
Grant Date
|
|
December 30, 2018
|
|
|
May 23, 2019
|
|
Shares granted
|
|
|
244
|
|
|
|
43
|
|
Vesting date
|
|
Equally over 3 years
|
|
|
5/23/2023
|
|
Fair value per share
|
|
$
|
18.29
|
|
|
$
|
23.08
|
|
The TBRSU Shares activity
for the twenty-eight weeks ended July 13, 2019 is set forth below (amounts in thousands, except price data):
|
|
TBRSU Shares
|
|
|
Weighted
Average
Fair
Value
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Unrecognized
Compensation
Cost
|
|
Nonvested shares at December 29, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
288
|
|
|
|
19.01
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(9
|
)
|
|
|
18.29
|
|
|
|
|
|
|
|
|
|
Nonvested shares at July 13, 2019
|
|
|
279
|
|
|
$
|
19.03
|
|
|
|
2.78
|
|
|
$
|
5,471
|
|
Deferred Stock
Non-employee directors may convert their annual board retainers into deferred stock equal in value to 100% of the cash payments directors would otherwise receive and the vesting period is a one-year period to match the period that cash would have been received if no conversion existed. Accumulated dividends are paid upon delivery of the shares. During fiscal 2019, non-employee directors elected to receive an aggregate of 2,707 common shares for board retainer deferrals pursuant to the Omnibus Plan. A total of 5,180 common shares were vested and issued for previous board retainer deferrals.
Non-employee directors also receive annual grants of deferred stock. This deferred stock vests one year from the grant date. The deferred stock will be distributed to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one-year minimum vesting period. During fiscal 2018, non-employee directors received an aggregate of 65,000 shares for their annual grant pursuant to the Omnibus Plan that vested during the twelve weeks ended July 13, 2019. During fiscal 2019, non-employee directors received an aggregate of 46,240 shares for their annual grant pursuant to the Omnibus Plan.
39
The deferred stock activity for the twenty-eight weeks ended July 13, 2019 is set forth below (amounts in thousands, except price data):
|
|
Shares
|
|
|
Weighted
Average
Fair
Value
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Nonvested shares at December 29, 2018
|
|
|
66
|
|
|
$
|
19.93
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(66
|
)
|
|
$
|
19.93
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
49
|
|
|
$
|
22.31
|
|
|
|
|
|
|
|
|
|
Nonvested shares at July 13, 2019
|
|
|
49
|
|
|
$
|
22.31
|
|
|
|
0.87
|
|
|
$
|
1,092
|
|
As of July 13, 2019, there was $0.9 million of total unrecognized compensation cost related to deferred stock awards granted under the Omnibus Plan that will be recognized over a weighted-average period of 0.87 years. The total intrinsic value of shares vested during the twelve and twenty-eight weeks ended July 13, 2019 was $1.4 million.
Stock-Based Payments Compensation Expense Summary
The following table summarizes the company’s stock-based compensation expense for the twelve and twenty-eight weeks ended July 13, 2019 and July 14, 2018, respectively (amounts in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Performance-contingent restricted stock awards
|
|
$
|
508
|
|
|
$
|
1,720
|
|
TBRSU Shares
|
|
|
354
|
|
|
|
—
|
|
Deferred stock awards
|
|
|
270
|
|
|
|
356
|
|
Total stock-based compensation
|
|
$
|
1,132
|
|
|
$
|
2,076
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Performance-contingent restricted stock awards
|
|
$
|
2,865
|
|
|
$
|
4,573
|
|
TBRSU Shares
|
|
|
802
|
|
|
|
—
|
|
Deferred and restricted stock
|
|
|
644
|
|
|
|
877
|
|
Total stock-based compensation
|
|
$
|
4,311
|
|
|
$
|
5,450
|
|
18. POSTRETIREMENT PLANS
The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at July 13, 2019 compared to accounts at December 29, 2018 (amounts in thousands):
|
|
July 13, 2019
|
|
|
December 29, 2018
|
|
Current liability
|
|
$
|
1,283
|
|
|
$
|
1,283
|
|
Noncurrent liability
|
|
$
|
36,535
|
|
|
$
|
39,149
|
|
Accumulated other comprehensive loss, net of tax
|
|
$
|
102,151
|
|
|
$
|
105,036
|
|
Defined Benefit Plans and Nonqualified Plan
On September 28, 2018, the Board of Directors approved a resolution to terminate the Flowers Foods, Inc. Retirement Plan No. 1 (“Plan No. 1”), effective December 31, 2018. The company has commenced the plan termination process and expects to distribute a portion of the pension plan assets as lump sum payments during early 2020 with the remaining balance transferred to an insurance company in the form of an annuity. The total payments distributed will depend on the lump sum offer participation rate of eligible participants. Based on the estimated value of assets held in the plan, the company currently estimates that a cash contribution of approximately $5.0 million to $35.0 million will be required to fully fund the plan’s liabilities at termination. In addition, based on current assumptions, the Company estimates a final non-cash settlement charge of approximately $125.0 million.
40
The company amended our qualified defined benefit plans in October 2015 to allow pension plan participants not yet receiving benefit payments the option to elect to receive their benefit as a single lump sum payment. This amendment was effective as of January 1, 2016. The company continues to recognize settlement accounting charges each year as a result of the ongoing lump sum payments from the plan. Settlement accounting, which accelerates recognition of a plan’s unrecognized net gain or loss, is triggered if the lump sums paid during a year exceeds the sum of the plan’s service and interest cost. The company determined it was probable a settlement would occur and paid lump sums that exceeded that threshold during our first quarter of fiscal 2018 and, as a result, recorded settlement charges in each quarter of fiscal 2018. There
were
no
settlement
charge
s
during the
twenty-eight
weeks ended
July 13, 2019
.
The company used a measurement date of December 31, 2018 for the defined benefit and postretirement benefit plans described below.
The company voluntarily contributed $10.0 million during our first quarter of fiscal 2018 and an additional $30.0 million during the second quarter of fiscal 2018. There were no contributions made during the first or second quarters of fiscal 2019. We expect to contribute $2.5 million during the third quarter of fiscal 2019.
The net periodic pension cost (income) for the company’s plans include the following components (amounts in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Service cost
|
|
$
|
163
|
|
|
$
|
216
|
|
|
$
|
378
|
|
|
$
|
504
|
|
Interest cost
|
|
|
2,752
|
|
|
|
3,123
|
|
|
|
6,425
|
|
|
|
6,247
|
|
Expected return on plan assets
|
|
|
(3,957
|
)
|
|
|
(4,678
|
)
|
|
|
(9,233
|
)
|
|
|
(10,085
|
)
|
Settlement loss
|
|
|
—
|
|
|
|
1,035
|
|
|
|
—
|
|
|
|
5,703
|
|
Amortization of prior service cost
|
|
|
89
|
|
|
|
95
|
|
|
|
208
|
|
|
|
195
|
|
Amortization of net loss
|
|
|
1,638
|
|
|
|
1,256
|
|
|
|
3,822
|
|
|
|
2,829
|
|
Total net periodic pension cost (income)
|
|
$
|
685
|
|
|
$
|
1,047
|
|
|
$
|
1,600
|
|
|
$
|
5,393
|
|
The components of net periodic benefit cost (income) other than the service cost are included in the other components of net periodic pension and postretirement benefits credit line item on our Condensed Consolidated Statements of Income.
Postretirement Benefit Plan
The company provides certain medical and life insurance benefits for eligible retired employees covered under the active medical plans. The plan incorporates an up-front deductible, coinsurance payments and retiree contributions at various premium levels. Eligibility and maximum period of coverage is based on age and length of service.
The net periodic postretirement income for the company includes the following components (amounts in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Service cost
|
|
$
|
65
|
|
|
$
|
66
|
|
|
$
|
153
|
|
|
$
|
155
|
|
Interest cost
|
|
|
69
|
|
|
|
54
|
|
|
|
160
|
|
|
|
127
|
|
Amortization of prior service credit
|
|
|
(9
|
)
|
|
|
(49
|
)
|
|
|
(22
|
)
|
|
|
(114
|
)
|
Amortization of net gain
|
|
|
(63
|
)
|
|
|
(99
|
)
|
|
|
(149
|
)
|
|
|
(232
|
)
|
Total net periodic postretirement income
|
|
$
|
62
|
|
|
$
|
(28
|
)
|
|
$
|
142
|
|
|
$
|
(64
|
)
|
The components of net periodic postretirement benefits income other than the service cost are included in the other components of net periodic pension and postretirement benefits credit line item on our Condensed Consolidated Statements of Income.
41
401(k) Retirement Savings Plan
The Flowers Foods, Inc. 401(k) Retirement Savings Plan (“401(k) plan”) covers substantially all the company’s employees who have completed certain service requirements. The total cost and employer contributions were as follows (amounts in thousands):
|
|
For the Twelve Weeks Ended
|
|
|
For the Twenty-Eight Weeks Ended
|
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
|
July 13, 2019
|
|
|
July 14, 2018
|
|
Total cost and employer contributions
|
|
$
|
6,370
|
|
|
$
|
6,213
|
|
|
$
|
14,873
|
|
|
$
|
13,545
|
|
Multi-employer Pension Plan
On August 18, 2017, the union participants of the Bakery and Confectionary Union and Industry International Pension Fund (the “MEPP Fund”) at our Lakeland, Florida plant voted to withdraw from the MEPP Fund in the most recent collective bargaining agreement. The withdrawal was effective, and the union participants were eligible to participate in the 401(k) plan, on November 1, 2017. During the third quarter of fiscal 2017, the company recorded a liability of $15.2 million related to the withdrawal from the MEPP Fund. During the first quarter of fiscal 2018, the company recorded an additional liability of $2.3 million for the final settlement amount of the withdrawal liability. The withdrawal liability was computed as the net present value of 20 years of monthly payments derived from the company’s share of unfunded vested benefits. The company began making payments during the first quarter of fiscal 2018. While this is our best estimate of the ultimate cost of the withdrawal from the MEPP Fund, additional withdrawal liability may be incurred based on the final fund assessment or in the event of a mass withdrawal, as defined by statute following our complete withdrawal. Transition payments, including related tax payments, were made on November 3, 2017 to, and for the benefit of, union participants as part of the collective bargaining agreement. An additional $3.1 million was recorded for these transition payments
. The withdrawal liability charge and the transition payments were recorded in the multi-employer pension plan withdrawal costs line item on our Condensed Consolidated Statements of Income. The liability on December 30, 2017 was recorded in other accrued current liabilities on the Condensed Consolidated Balance Sheets. We paid $0.2 million during the first quarter of fiscal 2018 and the balance was paid early in the second quarter of fiscal 2018.
19. INCOME TAXES
The company’s effective tax rate for the twenty-eight weeks ended July 13, 2019 was 23.3% compared to 19.1% for the twenty-eight weeks ended July 14, 2018. The increase in the rate was primarily due to a prior year tax benefit of $5.6 million recorded to adjust provisional taxes for tax reform enacted in December 2017. During the twenty-eight weeks ended July 13, 2019, the primary differences in the effective rate and the statutory rate are state income taxes, and windfall tax benefits on stock-based compensation.
During the twenty-eight weeks ended July 13, 2019, the company’s activity with respect to its uncertain tax positions and related interest expense accrual was not significant to the Condensed Consolidated Financial Statements. As of July 13, 2019, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.
20. SUBSEQUENT EVENTS
The company has evaluated subsequent events since July 13, 2019, the date of these financial statements. We believe there were no material events or transactions discovered during this evaluation that require recognition or disclosure in the financial statements.
42