Flowers Foods, Inc. — Form 10-Q Summary
Period: The filing covers the 12 weeks ended July 16, 2016 and the 28 weeks ended July 16, 2016, with comparisons to periods ended July 18, 2015. The request metadata says “2015 Q2,” but the filing itself is for fiscal 2016 Q2. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Flowers Foods operates two bakery segments: direct-store-delivery (DSD), which represented about 84% of year-to-date sales, and Warehouse delivery. During the quarter, the company continued the national DSD rollout of Dave’s Killer Bread (DKB); by July 16, it had reached about 9,000 stores. Acquisitions of DKB and Alpine Valley, completed in 2015, contributed materially to sales growth.
Financial performance
| Metric | 12 weeks ended July 16, 2016 | 12 weeks ended July 18, 2015 | 28 weeks ended July 16, 2016 | 28 weeks ended July 18, 2015 |
|---|---|---|---|---|
| Sales | $935.0 | $888.8 | $2,139.4 | $2,034.8 |
| Operating income | $81.4 | $80.0 | $176.6 | $176.6 |
| Operating margin | 8.7% | 9.0% | 8.3% | 8.7% |
| Net income | $51.2 | $51.8 | $110.5 | $113.1 |
| Diluted EPS | $0.24 | $0.24 | $0.52 | $0.53 |
| Operating cash flow | Not presented for the 12-week period | Not presented for the 12-week period | $193.9 | $215.9 |
- Sales rose 5.2% in the quarter and 5.1% year to date. Acquisitions contributed 5.6 and 5.4 percentage points, respectively; pricing/mix was unfavorable overall.
- For the quarter, DSD sales increased 4.5% and Warehouse sales 9.1%. Year to date, DSD sales increased 3.9% and Warehouse sales 12.0%.
- Quarterly operating income increased 1.7%, but operating margin declined 0.3 percentage points. Year-to-date operating income was essentially flat, with margin down 0.4 percentage points.
- Quarterly net income declined 1.2%; year-to-date net income declined 2.3%. Net margin was 5.5% for the quarter versus 5.8%, and 5.2% year to date versus 5.6%.
- Year-to-date interest expense was $16.7 million, up from $14.4 million; interest income was $10.9 million, down from $11.9 million. The company attributed higher net interest expense mainly to higher average debt following acquisitions and the share repurchase.
- Year-to-date operating cash flow fell $22.1 million. Capital expenditures were $41.7 million; investing cash outflow was $36.7 million and financing cash outflow was $159.9 million. Dividends paid were $64.6 million and share repurchases were $126.3 million.
Balance sheet, debt and liquidity
- At July 16, cash was $11.6 million; current assets were $512.3 million and current liabilities $470.1 million (current ratio about 1.09). Total assets were $2.818 billion.
- Debt and capital lease obligations had a carrying value of about $1.026 billion, including $130.4 million of current maturities. This compares with $1.005 billion at January 2, 2016.
- The company reported $452.2 million available under its $500 million revolving credit facility, after letters of credit, and $6.2 million available under its receivables securitization facility. It stated that it was in compliance with debt covenants.
- In April 2016, the company drew the full $150 million under a new five-year unsecured term loan. It also had $190 million outstanding under the receivables facility and $397.2 million carrying value of 4.375% senior notes due 2022.
Changes, outlook and material items
- Management estimated fiscal 2016 capital expenditures of approximately $90 million to $100 million. No earnings or revenue guidance was provided in the supplied filing text.
- Project Centennial, an enterprise-wide operational review launched in Q2, is expected to generate consulting costs in subsequent quarters. Management said the review is assessing opportunities to streamline operations, improve efficiencies and invest in strategic capabilities.
- The company recorded a $4.6 million pension settlement charge after lump-sum distributions exceeded the settlement-accounting threshold. Further settlement charges could occur in later quarters depending on elections and plan amounts. No qualified pension contributions were anticipated for fiscal 2016.
- The Tuscaloosa bakery conversion to organic production was completed at the end of Q1; related start-up costs were about $2.5 million year to date. Management said added capacity had begun moderating outside purchases of DKB products.
- In March, the company entered a $120 million accelerated share repurchase agreement; 6.5 million shares were repurchased under the ASR, and total year-to-date repurchases were 6.9 million shares for $126.3 million.
- Raw-material price volatility, labor costs, competitive pressure and customer concentration remain relevant risks. Commodity hedges had a net fair-value liability of about $13.0 million; management estimated a hypothetical 10% commodity-price move would change that derivative value by $8.6 million, with expected offsets from underlying input costs.
- Walmart/Sam’s Club accounted for 19.6% of year-to-date sales and 20.7% of trade receivables at July 16. The company is defending 24 distributor misclassification complaints, including a conditionally certified class action, and said potential losses could not be reasonably estimated. On August 9, 2016, the Department of Labor notified the company of a Fair Labor Standards Act compliance review.
- Management said ordinary-course litigation was not expected, based on information then available, to have a material adverse effect overall, while acknowledging developments could affect earnings in a particular period. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is fiscal Q2 2016, not 2015 Q2.
- Assess how much sales growth and future profitability depend on DKB and Alpine acquisitions, and whether organic growth and DSD volumes improve.
- Track margins, operating costs, Project Centennial spending and any additional pension settlement charges.
- Review debt maturities, variable-rate exposure, facility availability, covenant headroom and refinancing needs.
- Monitor outcomes and potential financial exposure from distributor classification litigation and the Department of Labor review.
- Evaluate the sustainability of dividends and repurchases alongside cash generation, capital spending and leverage.