Flowers Foods, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 16 weeks ended April 22, 2017; comparable period ended April 23, 2016. The filing is dated May 17, 2017. Flowers produces packaged bakery foods through direct-store-delivery (DSD) and warehouse segments. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | 16 weeks ended Apr. 22, 2017 | Comparable 2016 period |
|---|---|---|
| Sales | $1,187.6 | $1,204.4 |
| Income from operations | $100.1 | $95.2 |
| Operating margin | 8.4% | 7.9% |
| Net income | $60.4 | $59.4 |
| Diluted earnings per share | $0.29 | $0.28 |
| Net cash provided by operating activities | $76.0 | $118.7 |
- Production costs were $607.9 million, or 51.2% of sales, versus $621.2 million, or 51.6%. Selling, distribution and administrative expenses rose to $461.3 million, or 38.8% of sales, from $444.5 million, or 36.9%.
- Reported operating income included a $28.9 million gain on sale of the Cedar Rapids mix manufacturing business. Project Centennial consulting costs were $15.4 million in the period.
- Net interest expense was $5.0 million, up from $2.8 million. The effective tax rate was 36.5%, compared with 35.7%. Cash dividends paid were $0.16 per share, up from $0.145.
- Cash and cash equivalents were $6.5 million at April 22, 2017. Total debt and capital lease obligations were $892.3 million, down from $958.2 million at December 31, 2016. The company reported $625.6 million available across its receivables facility and revolving credit facility; it was in compliance with debt covenants.
- Investing activities provided $28.4 million, including $41.2 million in net sale proceeds; capital expenditures were $17.5 million. Financing activities used $104.3 million, including dividends and net debt repayments. Management expected fiscal 2017 capital expenditures of $95–$105 million.
Changes versus the prior comparable period
- Sales decreased 1.4%, driven by lower volume and the mix-business divestiture, partly offset by growth in DKB products. Fresh packaged bread category softness and competition also weighed on sales.
- DSD sales were essentially flat at $999.9 million; Warehouse sales declined 8.6% to $187.8 million. Warehouse operating income rose substantially, primarily because it included the divestiture gain; DSD operating income declined 5.0%.
- Net income increased 1.8%, but the reported improvement benefited from the one-time divestiture gain and was partly offset by Project Centennial costs and lower sales volumes.
- Operating cash flow declined to $76.0 million from $118.7 million. The filing attributes much of the year-over-year movement to working-capital changes, including hedging-related cash movements. The 2016 cash-flow figures were revised for errors and accounting adoption; the revisions did not affect reported income or balance sheets.
Outlook, commentary and risks
- For fiscal 2017–2018, management’s Project Centennial targets were sales growth of 0%–2% and EBITDA margins of 12%–13%. For 2019 and beyond, targets were sales growth of 3%–4% and EBITDA margins of 13%–14%; longer-term goals were sales growth of 2%–4% and EBITDA margins of 12%–14%. These are strategic targets, not a guarantee of results.
- Management expected an additional $10–$15 million of Project Centennial consulting costs during the remainder of fiscal 2017. A new structure organized around Fresh Bakery and Specialty/Snacking was announced after quarter-end, with full implementation expected in fiscal 2018.
- Key risks include softness and competition in bakery products, commodity and interest-rate exposure, reliance on the DSD model, and the concentration of Walmart/Sam’s Club, which represented 19.8% of sales and 18.9% of trade receivables.
- The company was defending 28 distributor misclassification complaints, 20 seeking class or collective treatment. For unresolved distributor cases, a potential loss was considered reasonably possible, but the company could not estimate a loss range. A securities class action was also pending, and the company could not estimate any potential loss.
- Management said a pension settlement charge could arise in later 2017 quarters if lump-sum payments meet the applicable threshold; none had been triggered through April 22. The ongoing brand rationalization study could also affect future trademark values; no intangible-asset impairment was recorded in the quarter.
Important facts for investors to verify
- How much of operating performance excluding the $28.9 million divestiture gain and $15.4 million of Project Centennial costs reflects recurring operations.
- Whether sales trends, especially in fresh bread and the Warehouse segment, improve and whether DKB growth can offset category softness.
- Future cash conversion, working-capital and hedging-related cash swings, debt reduction, and funding for planned capital expenditures and dividends.
- Developments and potential financial exposure in distributor classification litigation and the securities class action.
- Progress and costs of Project Centennial, including the effect of brand rationalization on trademark impairment risk and delivery of stated targets.