# Flowers Foods Inc: Form 10-Q for the period ended Apr 20, 2024

- Company: [Flowers Foods Inc](/companies/flo.md) (CIK 1128928)
- Form: 10-Q
- Filed: 2024-05-16
- Accepted by EDGAR: May 16, 2024, 20:11 ET
- Period: 2024-04-20
- Accession: 0000950170-24-061086
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1128928/000095017024061086/flo-20240420.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1128928/000095017024061086/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-04-20.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cash and equivalents | at 2024-04-20 | $15.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-04-20 | $688.4m | us-gaap:AssetsCurrent |
| Total assets | at 2024-04-20 | $3.43bn | us-gaap:Assets |
| Current liabilities | at 2024-04-20 | $622.4m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2024-04-20 | $1.04bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2024-04-20 | $1.38bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 51,520 characters.

The following discussion of the financial condition and results of operations of the company as of and for the sixteen weeks ended April 20, 2024 should be read in conjunction with the Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is segregated into four sections, including:

- *Executive overview —* provides a summary of our business, operating performance and cash flows, and strategic initiatives.
- *Critical accounting estimates —* describes the accounting areas where management makes critical estimates to report our financial condition and results of operations. There have been no changes to this section from the Form 10-K.
- *Results of operations —* an analysis of the company’s consolidated results of operations for the comparative period presented in our Condensed Consolidated Financial Statements.
- *Liquidity and capital resources —* an analysis of cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

### Matters Affecting Comparability

Comparative results from quarter to quarter are impacted by the company's fiscal reporting calendar. Internal financial results and key performance indicators are reported on a weekly basis to ensure the same number of Saturdays and Sundays in comparable months to allow for consistent four-week progression analysis. This structure results in our first quarter consisting of sixteen weeks while the remaining three quarters have twelve weeks (except in cases where there is an extra week every five or six years). Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.

Additionally, detailed below are expense items affecting comparability that will provide greater context while reading this discussion:

*(Amounts in thousands)*

|  | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Footnote Disclosure |
| --- | ---: | ---: | --- |
| Business process improvement costs | $3,683 | $6,219 | Note 1 |
| Restructuring charges | 598 | 4,195 | Note 3 |
| Restructuring-related implementation costs | 1,344 | — | Note 3 |
| Impairment of assets | 4,000 | — | Note 1 |
| Acquisition-related costs | — | 3,223 | Note 4 |
|  | $9,625 | $13,637 |  |

- *Business process improvement costs related to the transformation strategy initiatives* In the second half of Fiscal 2020, we launched initiatives to transform our business, including upgrading our information system to a more robust platform, as well as investments in e-commerce, autonomous planning, and our "bakery of the future" initiatives. Implementation of the ERP upgrade is anticipated to be completed in Fiscal 2026. These initiatives are further discussed in the “Transformation Strategy Initiatives” section below. The expensed portion of costs incurred related to these initiatives, which was primarily consulting costs, was $3.7 million during the sixteen weeks ended April 20, 2024 compared to $6.2 million in the first quarter of the prior year. These costs are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income. We currently expect costs (a portion of which may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract) related to the upgrade of our ERP system to be approximately $25.0 million to $35.0 million for Fiscal 2024.
- *Restructuring charges* In April 2024, the company announced a cost savings program to improve operational performance, which includes employee termination benefits associated with a reduction-in-force ("RIF") and other optimization initiatives. The company also incurred consulting costs of $1.3 million associated with implementing the restructuring program which are included in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income. In the first quarter of Fiscal 2024, the company incurred $0.6 million of restructuring charges for the RIF and made $0.2 million of RIF payments. The company expects to incur additional RIF and other restructuring costs of approximately $7.0 million to $10.0 million in Fiscal 2024.

In February 2023, to improve operational effectiveness, increase profitable sales, and better meet customer requirements, the company announced a restructuring of plant operation responsibilities from the sales function to the supply chain function. As part of that restructuring, we incurred costs for employee termination benefits and other cash charges, which were primarily related to the voluntary employee separation incentive plan (the "VSIP"), RIF, and employee relocation costs. During the first quarter of Fiscal 2023, we recorded VSIP-related charges of $3.9 million and made VSIP-related payments of $0.5 million. Relocation costs incurred and paid during the first quarter of Fiscal 2023 were $0.3 million. These costs are recorded in the restructuring charges line item of the Condensed Consolidated Statements of Income. In the first quarter of Fiscal 2024, we paid the remaining VSIP payments of $1.4 million.

- *Impairment of assets* During the second quarter of the Fiscal 2022, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility. We made an additional investment of $2.0 million in the second quarter of Fiscal 2023. Base Culture's product offerings include better-for-you, gluten-free, and grain-free sliced breads and baked goods and are all-natural, 100% Paleo-certified, kosher-certified, dairy-free, soy-free, and non-GMO verified. These investments are being accounted for at cost, less any impairment, as we do not control, nor do we have the ability to significantly influence Base Culture. In the fourth quarter of Fiscal 2023, we recognized an impairment loss of $5.5 million on this investment and recognized an additional impairment of $4.0 million in the first quarter of Fiscal 2024.
- *Acquisition-related costs* On February 17, 2023, the company completed the acquisition of the Papa Pita bakery business ("Papa Pita") for total consideration of approximately $274.8 million, inclusive of a net working capital purchase price adjustment. We funded the purchase price with cash on-hand and from our existing credit facilities. Papa Pita is a manufacturer and distributor of bagels, tortillas, breads, buns, English muffins, and flat breads with one production facility in West Jordan, Utah and, prior to the acquisition, Papa Pita co-manufactured certain products for us. Papa Pita has direct-store-delivery distribution in the western United States ("U.S."), expanding our geographic reach. We incurred additional acquisition costs during the sixteen weeks ended April 23, 2023 of $3.2 million and these costs are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income.

### Executive Overview

#### Business

Flowers is the second-largest producer and marketer of packaged bakery foods in the U.S. Our principal products include breads, buns, rolls, snack items, bagels, English muffins, and tortillas and are sold under a variety of brand names, including *Nature’s Own, Dave's Killer Bread ("DKB"), Wonder, Canyon Bakehouse, Tastykake,* and *Mrs. Freshley’s.* Our brands are among the best known in the U.S. baking industry. Many of our brands have a major presence in the product categories in which they compete. We manage our business as one operating segment. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization.

Flowers’ strategic priorities include developing our team, focusing on our brands, prioritizing our margins, and proactively seeking smart, disciplined acquisitions in the grain-based foods category. We believe executing on our strategic priorities will drive future growth and margin expansion and deliver meaningful shareholder value over time allowing us to achieve our long-term financial targets of 1% to 2% sales growth, 4% to 6% EBITDA growth, and 7% to 9% EPS growth.

Optimization initiatives in our procurement, distribution, operations, and administrative functions are projected to save $40 million to $50 million in Fiscal 2024. In the second quarter of Fiscal 2023, we completed the build phase of our ERP upgrade project and began the deployment, which is anticipated to be completed in Fiscal 2026. Additionally, we continue to implement our digital strategy initiatives as discussed further in the “Transformation Strategy Initiatives” section below.

#### Highlights

- *Nature’s Own* is the best-selling loaf bread in the U.S., *DKB* is the #1 selling organic brand in the U.S., and *Canyon Bakehouse* is the #1 selling gluten-free bread brand in the U.S. (Source: *Circana Total US MultiOutlet+C-Store 16 Weeks Ended 4/21/24).*
- Our branded retail sales comprised 64.4% of total sales for the sixteen weeks ended April 20, 2024 as compared to 63.9% for the sixteen weeks ended April 22, 2023.
- As of April 20, 2024, we operated 46 bakeries, which produce fresh and frozen breads, buns, and rolls, as well as snack items, bagels, English muffins, and tortillas.
- We distribute our fresh bakery foods through a direct-store-delivery ("DSD") distribution system, whereby product is primarily sold by a network of independent distributor partners to retail and foodservice customers with access to more than 85% of the U.S. population. In certain markets, we utilize a sales employee model to facilitate the distribution of product through our DSD distribution system.
- We offer nationwide distribution of certain fresh snack items and frozen breads and rolls via contract carriers.

#### Impact of the Inflationary Economic Environment and Other Macroeconomic Factors on Our Business

We continue to monitor the impact of a variety of factors on our business, including the inflationary economic environment, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East. Our results through the first quarter of Fiscal 2024 have continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. However, we experienced significant input cost inflation during the previous two fiscal years which has partially offset the improved sales mix. We implemented price increases to mitigate these cost pressures during the first quarter of Fiscal 2023 and midway through the second quarter of Fiscal 2023. Commodity cost inflation began to moderate in the latter half of Fiscal 2023, though it remains above pre-pandemic levels, and we expect that trend to continue throughout the remainder of Fiscal 2024.

Additionally, in the prior year period, capacity constraints, largely for gluten-free production, resulted in lower production volumes and sales. These supply chain and other disruptions could continue to negatively impact production volumes as the global and U.S. supply chain remains uncertain. Although the conflict between Russia and Ukraine and the conflict in the Middle East have not impacted our operations directly, we are closely monitoring the impact of these conflicts on the broader economy, including on the availability and price of commodities used in or for the production of our products. Disruptions in our operations, related to factors including, but not limited to, the procurement of raw materials and packaging items, transport of our products, and available workforce, have negatively impacted, and could continue to negatively impact, our operations, results of operations, cash flows, and liquidity.

Labor shortages and turnover at some bakeries has negatively impacted our results in the current and prior year periods. These and other factors, including, but not limited to, high employment rates and additional government regulations, may continue to adversely affect labor availability and labor costs. These challenges may negatively impact the efficiency of our production lines and our ability to operate at, or near, full capacity, and could result in increased labor costs, including additional overtime to meet demand, and higher wage rates to attract and retain workers. An overall labor shortage, lack of skilled labor, or increased turnover has and could continue to have a negative impact on the company’s operations, results of operations, liquidity, or cash flows.

We believe we have sufficient liquidity to satisfy our cash needs and we continue to execute on our strategic priorities, including our transformation strategy initiatives, as further discussed in the “Liquidity and Capital Resources” section below.

#### Summary of Operating Results, Cash Flows and Financial Condition

Sales increased 2.8% for the sixteen weeks ended April 20, 2024 compared to the same quarter in the prior year, with price/mix contributing 3.1% and the Papa Pita acquisition contributing 0.5% (cycled on February 17, 2024), partially offset by volume declines of 0.8%. The benefits of inflation-driven pricing actions implemented in the prior year were partially offset by softer volumes. Volume declines were concentrated in our Other sales category, where we exited certain lower margin foodservice business in the second half of Fiscal 2023. Those declines were partially offset by volume increases in Branded Retail sales from execution in the marketplace. Sales of *DKB* continued to grow on higher volumes and sales of *Nature's Own* improved on positive price/mix, partially offset by lower volumes.

For the sixteen weeks ended April 20, 2024, income from operations was $101.5 million compared to $93.8 million in the prior year quarter. The improvement resulted from moderating input costs, sales price increases implemented in the prior year, and the prior year acquisition costs, partially offset by increased workforce-related, repairs and maintenance, and depreciation expenses and lower production volumes (excluding the acquisition impact) quarter over quarter.

Net income for the sixteen weeks ended April 20, 2024 was $73.0 million compared to $70.7 million in the prior year period. The increase resulted primarily from the increase in income from operations, as described above, net of increased interest expense and a higher effective tax rate quarter over quarter.

During the sixteen weeks ended April 20, 2024, we generated net cash flows from operations of $105.1 million, invested $33.3 million in capital expenditures, decreased our indebtedness by $5.0 million, and paid $51.1 million in dividends to our shareholders. On April 15, 2024, we amended the two-year $200.0 million accounts receivable repurchase facility (the "repurchase facility") to extend the scheduled facility expiration date to April 14, 2026. During the sixteen weeks ended April 22, 2023, we generated net cash flows from operations of $58.0 million, paid $270.5 million for the Papa Pita acquisition (an additional $4.3 million net working capital purchase price adjustment was paid in the second quarter of Fiscal 2023), invested $34.0 million in capital expenditures, increased our indebtedness $171.0 million, and paid $49.1 million in dividends to our shareholders.

#### Transformation Strategy Initiatives

In the second half of Fiscal 2020, we launched initiatives to transform our business operations. The primary goals of these initiatives are: (1) enable a more agile business model, empowering the organization by fundamentally redesigning core business processes; (2) embed digital capabilities and transform the way we engage with our consumers, customers and employees; and (3) modernize and simplify our application and technology infrastructure landscape, inclusive of the upgrade of our ERP system.

As discussed above, in February 2023, we announced a restructuring of plant operation responsibilities from the sales function to the supply chain function to improve operational effectiveness, increase profitable sales, and better meet customer requirements. This restructuring has transitioned to digitally enabling these key functions, driving accountability, and improving operational performance and sales execution.

#### Digital Strategy Initiatives

Our digital strategy initiatives include investments in digital domains of e-commerce, autonomous planning, bakery of the future, digital logistics, and digital sales. In e-commerce, we strive to become a category and market share leader, engage with the consumer through digital platforms and marketplaces, and support our retail partners’ omnichannel strategies. The autonomous planning domain encompasses predictive ordering, cost-to-serve modeling, integrated business planning, and supply and demand forecasting, among other areas. Bakery of the future involves transforming our current manufacturing processes and operational visibility to apply industry-leading digital manufacturing tools, such as real-time performance management and visibility, automation of repetitive processes, standardization of processes and procedures, and sensor-based quality monitoring tools to improve consistency and quality. Digital logistics includes real-time operational visibility, improving our routing efficiency, and automating the freight bill pay audit process. Finally, digital sales is focused on improving our sales execution through improved visibility to in-store activities, streamlined reporting, focusing in-store priorities, and improved collaboration tools across our sales ecosystem.

These digital domains are expected to improve data visibility and efficiencies while automating many of our processes. When fully implemented, we expect this work will further our brand efforts, bring us closer to the consumer, increase operational efficiencies, and deliver higher-quality, real-time insights, which will in turn enable more predictive business decision-making. We transitioned into the implementation phase for the e-commerce, autonomous planning, and bakery of the future domains and selected two bakeries for the pilot program for bakery of the future and autonomous planning in Fiscal 2021. To date, we have rolled out bakery of the future to 35 bakeries, digital logistics to all bakery locations, and autonomous planning and our digital sales tools across our entire sales organization. Costs related to the digital initiatives are fluid and cannot be currently estimated.

#### ERP Upgrade

Our ERP initiative, which includes upgrading our information system platform, is expected to improve data management and efficiencies while automating many of our processes. We completed the initial planning and road mapping phase of the ERP upgrade at the end of Fiscal 2020. In the first quarter of Fiscal 2021, we transitioned into the design phase and engaged a leading, global consulting firm to assist us in designing and implementing the upgrade of our ERP platform and to serve as the system integrator for the project. We transitioned into the build phase at the beginning of Fiscal 2022 and during the second quarter of Fiscal 2023, we began deploying the ERP upgrade. The deployment is anticipated to be completed in Fiscal 2026. We currently estimate total costs for the upgrade of our ERP system will be approximately $350 million (of which approximately 34% has been or is anticipated to be capitalized). As of April 20, 2024, we have incurred costs related to the project of approximately $223 million.

### CRITICAL ACCOUNTING POLICIES:

Our financial statements are prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"). These principles are numerous and complex. Our significant accounting policies are summarized in the Form 10-K. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Refer to the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K.

### RESULTS OF OPERATIONS:

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively, are set forth in the table below (dollars in thousands):

|  | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Percentage of Sales April 20, 2024 | April 22, 2023 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $1,576,818 | $1,534,493 | 100.0 | 100.0 | $42,325 | 2.8 |
| Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) | 797,186 | 800,852 | 50.6 | 52.2 | (3,666) | (0.5) |
| Selling, distribution and administrative expenses | 625,251 | 591,943 | 39.7 | 38.6 | 33,308 | 5.6 |
| Restructuring charges | 598 | 4,195 | 0.0 | 0.3 | (3,597) | NM |
| Impairment of assets | 4,000 | — | 0.3 | — | 4,000 | NM |
| Depreciation and amortization | 48,235 | 43,735 | 3.1 | 2.9 | 4,500 | 10.3 |
| Income from operations | 101,548 | 93,768 | 6.4 | 6.1 | 7,780 | 8.3 |
| Other components of net periodic pension and postretirement benefit plans credit | (158) | (83) | (0.0) | (0.0) | (75) | NM |
| Interest expense, net | 5,611 | 3,886 | 0.4 | 0.3 | 1,725 | 44.4 |
| Income before income taxes | 96,095 | 89,965 | 6.1 | 5.9 | 6,130 | 6.8 |
| Income tax expense | 23,052 | 19,255 | 1.5 | 1.3 | 3,797 | 19.7 |
| Net income | $73,043 | $70,710 | 4.6 | 4.6 | $2,333 | 3.3 |
| Comprehensive income | $72,954 | $68,547 | 4.6 | 4.5 | $4,407 | 6.4 |

NM - the computation is not meaningful.

Percentages may not add due to rounding.

SIXTEEN WEEKS ENDED APRIL 20, 2024 COMPARED TO SIXTEEN WEEKS ENDED APRIL 22, 2023

### Sales (dollars in thousands)

|  | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Percentage of Sales April 20, 2024 | April 22, 2023 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Branded Retail | $1,014,901 | $980,479 | 64.4 | 63.9 | $34,422 | 3.5 |
| Other | 561,917 | 554,014 | 35.6 | 36.1 | 7,903 | 1.4 |
| Total | $1,576,818 | $1,534,493 | 100.0 | 100.0 | $42,325 | 2.8 |

(The table above presents certain sales by category that have been reclassified from amounts previously reported to conform to the current period presentation.)

The change in sales was generally attributable to the following:

| Percentage Point Change in Sales Attributed to: | Branded Retail Favorable (Unfavorable) | Other | Total |
| --- | ---: | ---: | ---: |
| Pricing/Mix\* | 2.6 | 3.3 | 3.1 |
| Volume\* | 0.3 | (2.2) | (0.8) |
| Acquisition until cycled on February 17, 2024 | 0.6 | 0.3 | 0.5 |
| Total percentage change in sales | 3.5 | 1.4 | 2.8 |
| \* Computations above are calculated as follows (the Total column is consolidated and is not adding the Branded Retail and Other columns): |  |  |  |
| Price/Mix $ = Current year period units x change in price per unit |  |  |  |
| Price/Mix % = Price/Mix $ ÷ Prior year period Sales $ |  |  |  |
| Volume $ = Prior year period price per unit x change in units |  |  |  |
| Volume % = Volume $ ÷ Prior year period Sales $ |  |  |  |

The company disaggregates its sales into two categories, Branded Retail and Other. These categories align with our brand-focused strategy to drive above-market growth via innovation and focusing on higher-margin products. The Other category includes store branded retail and non-retail sales (foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing).

Sales increased quarter over quarter due to positive pricing actions implemented in the first and second quarters of the prior year to mitigate considerable cost inflation, and, to a lesser extent, the Papa Pita acquisition contribution. These increases were partially offset by volume declines, largely for non-retail items and, to a lesser extent, for branded retail traditional loaf breads. Our promotional activity increased quarter over quarter largely due to inflationary pressure on consumer spending but remained lower than pre-pandemic levels.

#### Branded Retail Sales

Branded retail sales grew 3.5% quarter over quarter due to favorable price/mix, the acquisition contribution, and volume growth. Price/mix benefitted from inflation-driven pricing actions taken in the second quarter of the prior year and improved mix from greater branded organic product sales. Volumes improved mainly as a result of efficient sales execution in a competitive marketplace. Volume growth in branded organic products, branded buns and rolls, and branded Keto bread was partially offset by softer volumes primarily for branded traditional loaf breads. Our *Nature's Own* and *DKB* brands continued to perform well benefiting from inflation-driven price increases and growth from more recently introduced products, such as *Nature's Own* Keto bread and Hawaiian and Everything bun varieties, all introduced in the second quarter of Fiscal 2023, and *DKB* snack bars and bites. *Nature's Own* did experience volume declines quarter over quarter largely due to inflationary pressure on consumer spending.

#### Other Sales

Sales in the Other category increased 1.4% due to positive price/mix from price increases implemented in the prior year, and the acquisition contribution, partially offset by volume declines. Store branded retail sales increased largely due to volume growth in store branded traditional loaf breads, partially offset by negative price/mix. Non-retail sales increased quarter over quarter due to inflation-driven pricing actions in the prior year and the acquisition contribution, offset mostly by volume declines. Foodservice drove most of the volume decrease as we exited certain lower margin business in the second half of Fiscal 2023. Declines in vending also contributed to lower volumes, partially offset by increased contract manufacturing volume.

We anticipate our Fiscal 2024 sales will be flat to higher than Fiscal 2023 sales due to price increases implemented in Fiscal 2023, however, this benefit could be offset by changes in consumer buying patterns, changes in promotional activity, and the impact of cycling certain exits of lower margin business that occurred in Fiscal 2023.

### Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)

| Line Item Component | For the Sixteen Weeks Ended April 20, 2024 % of Sales | April 22, 2023 % of Sales | Increase (Decrease) as a % of Sales |
| --- | ---: | ---: | ---: |
| Ingredients and packaging | 30.0 | 32.7 | (2.7) |
| Workforce-related costs | 14.3 | 13.5 | 0.8 |
| Other | 6.3 | 6.0 | 0.3 |
| Total | 50.6 | 52.2 | (1.6) |

Materials, supplies, labor and other production costs as a percent of sales decreased quarter over quarter due to the benefit of prior year inflation-driven pricing actions, moderating ingredient and packaging costs, and decreased product returns. Lower production volumes (excluding the acquisition impact) and higher workforce-related and bakery maintenance costs, reflected in the Other line item, partially offset the overall improvement. The decrease in ingredient and packaging costs was mostly attributed to lower pricing for commodities such as flour, fats and oils, and eggs, and packaging items including bags and corrugated containers. Wage inflation, higher employee compensation costs, and lower production volumes resulted in the increase in workforce-related costs as a percent of sales. We expect the impact of lower production volumes (excluding the acquisition impact) and the competitive labor market to continue to negatively impact our operations.

Prices of ingredient and packaging materials fluctuate due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances, and we monitor these markets closely. Ingredient and packaging costs continued to experience volatility in the current quarter and are expected to remain volatile for the remainder of Fiscal 2024. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the cost of these raw materials and significantly affect our earnings.

### Selling, Distribution and Administrative Expenses (as a percent of sales)

| Line Item Component | For the Sixteen Weeks Ended April 20, 2024 % of Sales | April 22, 2023 % of Sales | Increase (Decrease) as a % of Sales |
| --- | ---: | ---: | ---: |
| Workforce-related costs | 11.9 | 10.8 | 1.1 |
| Distributor distribution fees | 13.8 | 14.1 | (0.3) |
| Other | 14.0 | 13.7 | 0.3 |
| Total | 39.7 | 38.6 | 1.1 |

Workforce-related costs increased as a percent of sales due to higher employee compensation costs quarter over quarter, a shift from distributor distribution fees, and a competitive labor market. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. We anticipate a continued shift from distributor distribution fees to workforce-related costs and territory-related logistics costs, among others, as the company completes a phased repurchase of the California distribution rights and converts to an employee-based model in that state. The repurchases began at the end of the first quarter of Fiscal 2024 and are anticipated to be completed by the end of the first quarter of Fiscal 2025. The increase in the Other line item mostly reflects increased amortization of cloud-based applications, increased rent expense, and lower scrap dough income, partially offset by reduced transportation costs and the prior year quarter acquisition costs. See the “Matters Affecting Comparability” section above for a discussion of the acquisition-related costs.

### Restructuring Charges and Impairment of Assets

Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.

### Depreciation and Amortization Expense

Depreciation and amortization expense for the first quarter of Fiscal 2024 increased in dollars and as a percent of sales as compared to the prior year period primarily due to ERP assets being placed in service in the second quarter of Fiscal 2023 and, to a lesser extent, the Papa Pita assets acquired midway through the first quarter of Fiscal 2023, partially offset by assets becoming fully depreciated.

### Income from Operations

Income from operations for the sixteen weeks ended April 20, 2024 increased as a percent of sales compared to the prior year quarter due primarily to moderating input costs, partially offset by lower production volumes (excluding the acquisition impact), increased selling, distribution, and administrative expenses, and increased depreciation and amortization expense, as discussed above.

### Net Interest Expense

Net interest expense increased in dollars and as a percent of sales as compared to the prior year quarter largely due to higher average amounts outstanding under our borrowing arrangements primarily from funding the Papa Pita acquisition in the first quarter of Fiscal 2023 and increased interest rates on our variable rate debt. Decreased interest income also contributed to the overall increase in net interest expense. We anticipate higher net interest expense year over year due to funding payments associated with the legal settlement and related costs, all accrued for in Fiscal 2023, and lower interest income resulting from decreases in distributor notes receivable outstanding.

### Income Tax Expense

The effective tax rate for the sixteen weeks ended April 20, 2024 was 24.0% compared to 21.4% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to a decrease in windfall tax benefits on stock-based compensation. For both periods presented, the primary differences in the effective rate and statutory rate were state income taxes and windfall/shortfall tax impacts related to stock-based compensation.

### Comprehensive Income

The increase in comprehensive income quarter over quarter resulted primarily from increased net earnings and changes in the fair value of derivatives.

### LIQUIDITY AND CAPITAL RESOURCES:

#### Strategy and Update on Impact of the Inflationary Economic Environment and Other Macroeconomic Factors on Our Business

We believe that our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. Furthermore, we strive to maintain a conservative financial position as we believe it allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, and obligated debt repayments. We believe that we currently have access to available funds and financing sources to meet our short and long-term capital requirements. The company’s strategy for use of its excess cash flows includes:

- implementing our strategic priorities, including our transformation strategy initiatives;
- paying dividends to our shareholders;
- maintaining a conservative financial position;
- making strategic acquisitions; and
- repurchasing shares of our common stock.

Although there has been no material adverse impact on our results of operations, liquidity or cash flows for the sixteen weeks ended April 20, 2024, volatility in global and U.S. economic environments, as a result of, among other things, the inflationary economic environment, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East, could significantly impact our ability to generate future cash flows and we continue to evaluate these various potential business risks. Potential risks include the possibility of future economic downturns that could shift consumer demand away from our branded retail products to store branded products, supply chain disruptions that have impacted, and could continue to impact, the procurement of raw materials and packaging items, the available workforce, and our ability to implement additional pricing actions to offset inflation.

The macroeconomic-related factors discussed above remain fluid and the future impact on our business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. In the event of a significant reduction in revenues, we would have additional alternatives to maintain liquidity, including the availability on our debt facilities, capital expenditure reductions, adjustments to our capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds. During the first quarter of Fiscal 2024, we amended the two-year $200.0 million trade receivable repurchase facility (the "repurchase facility") to extend the maturity date to April 14, 2026. We believe that we have sufficient liquidity on hand to continue business operations during this time of volatility in the global and U.S. economic environments. As of April 20, 2024, we had total available liquidity of $557.4 million, consisting of cash on hand and the available balances under the senior unsecured revolving credit facility (the "credit facility") and repurchase facility.

### Liquidity Discussion for the Sixteen Weeks Ended April 20, 2024 and April 22, 2023

Cash and cash equivalents were $15.8 million at April 20, 2024 and $22.5 million at December 30, 2023. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands):

| Cash Flow Component | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by operating activities | $105,149 | $57,952 | $47,197 |
| Cash disbursed for investing activities | (35,927) | (301,207) | 265,280 |
| Cash (disbursed for) provided by financing activities | (75,931) | 105,841 | (181,772) |
| Total change in cash | $(6,709) | $(137,414) | $130,705 |

41

*Cash Flows Provided by Operating Activities*. Net cash provided by operating activities consisted of the following items for non-cash adjustments to net income (amounts in thousands):

|  | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Change |
| --- | ---: | ---: | ---: |
| Depreciation and amortization | $48,235 | $43,735 | $4,500 |
| Impairment of assets | 4,000 | — | 4,000 |
| Loss reclassified from accumulated other comprehensive income to net income | 886 | 1,407 | (521) |
| Allowances for accounts receivable | 2,445 | 4,341 | (1,896) |
| Stock-based compensation | 11,129 | 9,836 | 1,293 |
| Deferred income taxes | 6,951 | 1,868 | 5,083 |
| Other non-cash items | 4,575 | 1,788 | 2,787 |
| Net non-cash adjustment to net income | $78,221 | $62,975 | $15,246 |

- Refer to the *Impairment of assets* discussion in the “Matters Affecting Comparability” section above for additional information regarding this item.
- For the sixteen weeks ended April 20, 2024, deferred income tax activity was composed of changes in temporary differences year over year, including the current year impact of a payment for a previously accrued legal settlement for the repurchase of distribution rights. For the current and prior year quarters ended April 20, 2024 and April 22, 2023, deferred income tax activity was composed of changes in temporary differences year over year, including the impact of the vesting of stock equity awards and activity related to the capitalization of research and development expenses as defined under Internal Revenue Code Section 174.
- Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs (including $0.3 million related to the write-off of unamortized loan costs upon the early extinguishment of the accounts receivable securitization facility in the first quarter of Fiscal 2023) and gains or losses on the sale of assets.

Net changes in working capital consisted of the following items (amounts in thousands):

|  | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Change |
| --- | ---: | ---: | ---: |
| Changes in accounts receivable | $(32,833) | $(18,201) | $(14,632) |
| Changes in inventories | 4,523 | (14,552) | 19,075 |
| Changes in hedging activities | (1,202) | (2,334) | 1,132 |
| Changes in accounts payable | (16,499) | (9,285) | (7,214) |
| Changes in other assets and accrued liabilities | (104) | (31,361) | 31,257 |
| Net changes in working capital | $(46,115) | $(75,733) | $29,618 |

- Changes in accounts receivable were mainly attributable to sales increases period over period. Changes in inventories resulted primarily from volatility in input costs. Changes in accounts payable were mainly attributable to higher capital spending in the prior year period largely due to the upgrade of the ERP system and volatility in input costs.
- Hedging activities change due to market movements that affect the fair value and the associated required collateral of positions and the timing and recognition of deferred gains or losses. We expect these changes will continue to occur as part of our hedging program, though the degree and financial impact cannot be currently estimated.
- The change in other assets primarily resulted from changes in prepaid assets and income tax receivables in each respective period. Changes in employee compensation and legal settlement accruals primarily resulted in the change in other accrued liabilities. During the first quarter of Fiscal 2024 and Fiscal 2023, we paid $31.9 million and $32.1 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plans. An additional $1.9 million and $2.2 million was paid during the first quarter of Fiscal 2024 and Fiscal 2023, respectively, for our share of employment taxes on the vesting of employee restricted stock awards in each respective year. During the sixteen weeks ended April 20, 2024, the company paid $1.3 million related to territory repurchase obligations recognized as part of a legal settlement recognized in the third quarter of Fiscal 2023, and on May 9, 2024, subsequent to the first quarter of Fiscal 2024, paid $55.0 million to the legal settlement fund. The company expects to complete the territory repurchases by the end of the first quarter of Fiscal 2025. During the sixteen weeks ended April 22, 2023, the company paid $5.5 million of legal settlements that had been accrued for in a prior period.

*Cash Flows Disbursed for Investing Activities*. The table below presents net cash disbursed for investing activities for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively (amounts in thousands):

|  | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Change |
| --- | ---: | ---: | ---: |
| Purchases of property, plant, and equipment | $(33,332) | $(33,958) | $626 |
| Principal payments from notes receivable, net of repurchases of independent distribution rights | (2,655) | 3,106 | (5,761) |
| Proceeds from sale of property, plant and equipment | 60 | 96 | (36) |
| Acquisition of business | — | (270,451) | 270,451 |
| Net cash disbursed for investing activities | $(35,927) | $(301,207) | $265,280 |

- We currently anticipate capital expenditures of $145.0 million to $155.0 million for Fiscal 2024 (inclusive of expenditures for the ERP upgrade of $3.0 million to $6.0 million).
- As discussed in the Executive Overview section above, on February 17, 2023, we completed the Papa Pita acquisition. We paid $270.5 million of the total purchase price in the first quarter of Fiscal 2023 and $4.3 million in the second quarter of Fiscal 2023 for a net working capital purchase price adjustment. Papa Pita operates one manufacturing facility in West Jordan, Utah.

*Cash Flows Disbursed for Financing Activities*. The table below presents net cash disbursed for financing activities for the sixteen weeks ended April 20, 2024 and April 22, 2023, respectively (amounts in thousands):

|  | For the Sixteen Weeks Ended April 20, 2024 | April 22, 2023 | Change |
| --- | ---: | ---: | ---: |
| Dividends paid, including dividends on stock-based payment awards | $(51,106) | $(49,100) | $(2,006) |
| Payments for financing fees | (150) | (218) | 68 |
| Stock repurchases | (8,879) | (10,981) | 2,102 |
| Change in bank overdrafts | (10,701) | (4,261) | (6,440) |
| Net change in debt obligations | (5,000) | 171,000 | (176,000) |
| Payments on financing leases | (95) | (599) | 504 |
| Net cash (disbursed for) provided by financing activities | $(75,931) | $105,841 | $(181,772) |

- Our Board of Directors declared the following quarterly dividend during the sixteen weeks ended April 20, 2024 (amounts in thousands, except per share data):

| Date Declared | Record Date | Payment Date | Dividend per Common Share | Dividends Paid |
| --- | --- | --- | ---: | ---: |
| February 16, 2024 | March 1, 2024 | March 15, 2024 | $0.2300 | $48,560 |

Additionally, we paid dividends of $2.5 million at the time of vesting of certain restricted stock awards. The increase in dividends paid resulted from an increase in the dividend rate compared to the prior year. While there are no requirements to increase our dividend rate, we have shown a recent historical trend to do so. We anticipate funding future dividend payments from cash flows from operations.

- During the sixteen weeks ended April 20, 2024, we paid financing fees for the amendment of the repurchase facility. In the prior year period, we paid financing fees associated with executing the repurchase facility and for the amendment to the credit facility.
- Stock repurchase decisions are made based on our stock price, our belief of relative value, and our cash projections at any given time. During the sixteen weeks ended April 20, 2024 and April 22, 2023, we repurchased 388,291 and 385,882 shares of our common stock for $8.9 million and $11.0 million, respectively, under a share repurchase plan approved by our Board of Directors. These shares were acquired to satisfy employees’ tax withholding and payment obligations in connection with the vesting of restricted stock awards, which are repurchased by the company based on the fair market value on the vesting date.
- Changes in debt obligations primarily related to drawdowns made to fund the Papa Pita acquisition in the first quarter of Fiscal 2023. See the discussion below under the “Capital Structure” section for additional details regarding changes in debt obligations.

### Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at April 20, 2024 and December 30, 2023, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 5, *Leases*, and Note 13, *Debt and Other Obligations,* of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

*(Amounts in thousands)*

| Long-term debt and right-of-use lease obligations | Balance at April 20, 2024 | December 30, 2023 | Fixed or Variable Rate | Final Maturity |
| --- | ---: | ---: | --- | --- |
| 2031 notes | $494,947 | $494,723 | Fixed Rate | 2031 |
| 2026 notes | 398,596 | 398,421 | Fixed Rate | 2026 |
| Unsecured credit facility | — | — | Variable Rate | 2026 |
| Accounts receivable repurchase facility | 150,000 | 155,000 | Variable Rate | 2026 |
| Right-of-use lease obligations | 305,190 | 284,501 |  | 2036 |
|  | 1,348,733 | 1,332,645 |  |  |
| Less: Current maturities of long-term debt and right- of-use lease obligations | (57,763) | (47,606) |  |  |
| Long-term debt and right-of-use lease obligations | $1,290,970 | $1,285,039 |  |  |
| **Total stockholders' equity** |  |  |  |  |
| Total stockholders' equity | $1,375,880 | $1,351,782 |  |  |

The repurchase facility and the credit facility are generally used for short-term liquidity needs. On April 15, 2024, we amended the repurchase facility to extend the scheduled facility expiration date to April 14, 2026. See Note 13, *Debt and Other Obligations,* of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to closely monitor our liquidity in light of the continued economic uncertainty in the U.S. and throughout the world due to, among other things, the impact of the inflationary economic environment, supply chain disruptions, increased labor costs, the conflict between Russia and Ukraine, and the conflict in the Middle East on our business. There is no current portion payable over the next year for our debt obligations. Amounts available for withdrawal under the repurchase facility are determined as the lesser of the total facility limit and a formula derived amount based on qualifying trade receivables.

The following table details the amounts available under the repurchase facility and the credit facility and the highest and lowest balances outstanding under these arrangements during the sixteen weeks ended April 20, 2024:

*(Amounts in thousands)*

| Facility | Amount Available for Withdrawal at April 20, 2024 | For the Sixteen Weeks Ended April 20, 2024 Highest Balance | Lowest Balance |
| --- | ---: | ---: | ---: |
| Accounts receivable repurchase facility | $50,000 | $175,000 | $105,000 |
| Unsecured credit facility (1) | 491,600 | 17,500 | — |
|  | $541,600 |  |  |

(1) Amount excludes a provision in the credit facility agreement which allows the company to request an additional $200.0 million in additional revolving commitments.

Amounts outstanding under the credit facility can 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. During the sixteen weeks ended April 20, 2024, the company made $37.5 million in revolving borrowings and $37.5 million in payments on revolving borrowings under the credit facility. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

The repurchase facility and the credit facility are variable rate debt and provide us the greatest direct exposure to changing interest rates. In periods of rising interest rates, like we experienced in Fiscal 2023 and Fiscal 2022, the cost of using these facilities becomes more expensive and results in increased interest expense.

Restrictive financial covenants for our borrowings can include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. 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 debt agreements and can meet presently foreseeable financial requirements. As of April 20, 2024, the company was in compliance with all restrictive covenants under our debt agreements.

At April 20, 2024, the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Under our share repurchase plan, the company may repurchase its common stock in the open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the sixteen weeks ended April 20, 2024, 388,291 shares, at a cost of $8.9 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through April 20, 2024, 72.4 million shares, at a cost of $742.2 million, have been repurchased.

### Accounting Pronouncements Recently Adopted and Not Yet Adopted

See Note 2, *Recent Accounting Pronouncements*, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding recently adopted accounting pronouncements and accounting pronouncements not yet adopted.

## Market risk

As filed, 1,833 characters.

The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forward, futures, swap and option contracts to hedge existing or future exposure to changes in interest rates and commodity prices. The company does not enter into these derivative financial instruments for trading or speculative purposes. If actual market conditions are less favorable than those anticipated, raw material prices could increase significantly, adversely affecting the margins from the sale of our products.

### Commodity Price Risk

The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of April 20, 2024, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $(1.7) million, based on quoted market prices. All of this amount relates to instruments that will be utilized in Fiscal 2024 except for an immaterial amount that will be utilized in Fiscal 2025.

A sensitivity analysis has been prepared to quantify the company’s potential exposure to commodity price risk with respect to the derivative portfolio. Based on the company’s derivative portfolio as of April 20, 2024, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $2.2 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.

## Controls and procedures

As filed, 1,597 characters.

### Management’s Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to ensure that material information relating to the company, which is required to be timely disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is accumulated and communicated to management in a timely fashion and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer and Chief Accounting Officer ("CFO and CAO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the CEO and the CFO and CAO concluded that the company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the company files or submits to the SEC under the Exchange Act.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended April 20, 2024 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

## Risk factors

As filed, 469 characters.

Refer to Part I, Item 1A., Risk Factors, in the Form 10-K for information regarding factors that could affect the company’s results of operations, financial condition and liquidity. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse ultimate impact on our business, financial condition, or results of operations.

Filed May 16, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-061086. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.