Flowers Foods, Inc. — Form 10-K Summary
Reporting period: The filing is the annual report for the 52 weeks ended December 31, 2011, filed February 29, 2012. Although the request metadata says “2010 Q4,” the filing itself reports fiscal 2011 results and includes fourth-quarter information.
Business context
Flowers Foods produces and markets bakery products through direct-store-delivery (DSD) and warehouse-delivery segments. In May 2011, it acquired Tasty Baking Company, adding the Tastykake brand and two Pennsylvania bakeries, expanding its reach and snack-cake capacity. The company reported 42 bakeries and approximately 9,400 employees.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Sales | $2.773 billion | $2.574 billion |
| Income from operations | $189.0 million | $205.9 million |
| Operating margin | 6.8% | 8.0% |
| Net income | $123.4 million | $137.0 million |
| Diluted earnings per share | $0.90 | $0.99 |
| Cash from operating activities | $134.3 million | $306.1 million |
| Capital expenditures | $79.2 million | $98.4 million |
- Sales rose 7.8%, reflecting 5.0 percentage points from acquisitions and 3.7 points from pricing/mix, partly offset by a 0.9-point volume decline. Tasty contributed $127.2 million in sales and $3.0 million in operating income after its acquisition.
- Production costs increased to 53.1% of sales from 52.3%, primarily because of higher ingredient costs. Net income fell 9.9%; lower operating income and higher interest expense contributed.
- Year-end cash was $7.8 million. Current assets were $378.6 million and current liabilities $268.4 million. Total debt and capital leases were $326.2 million, versus $127.3 million a year earlier. The company had $225.0 million outstanding on its revolving facility and reported $260.3 million available under credit facilities, net of letters of credit.
- Cash dividends were $0.583 per share for the year. The company repurchased $26.6 million of stock. A 3-for-2 stock split occurred in 2011; per-share figures are adjusted for the split.
Material changes and unusual items
- Warehouse-segment operating income declined 42.9% to $27.4 million, mainly due to higher ingredient and distribution costs. DSD operating income increased 4.2% to $203.2 million.
- Operating cash flow dropped from $306.1 million to $134.3 million, including working-capital and hedging-related cash movements and $12.2 million of pension contributions.
- The Tasty acquisition involved $172.1 million of stated consideration; acquisition-related costs were $6.2 million. The company funded the transaction primarily through borrowings.
- The pension and postretirement liability increased to $155.3 million from $76.1 million. The qualified pension plans’ funded deficit was $142.7 million at year-end.
Outlook, risks and contingencies
- Management’s long-term sales growth objective is 5%–10% annually, including 3%–5% organic growth and 2%–5% from acquisitions and mergers. It also targets DSD brand availability to at least 75% of the U.S. population by 2016.
- Management expected commodity costs to rise in 2012; the filing does not provide a specific full-year earnings or revenue forecast. Planned 2012 capital expenditures were approximately $65–$75 million, and expected qualified pension contributions were $18.2 million.
- Key risks include volatile flour, sugar, shortening and fuel costs; competition and promotional pricing; reliance on major customers (Walmart/Sam’s Club represented 21.6% of sales); and potential disruption to the DSD distributor network. Hedging may not fully offset input-cost increases.
- Hostess’s Chapter 11 filing in January 2012 automatically stayed Flowers’ trademark lawsuit concerning the Nature’s Own and Nature’s Pride marks. The company said other ordinary-course legal matters were not expected to materially affect its overall financial condition, though adverse developments could affect a period’s earnings.
- Flowers reported compliance with credit covenants and effective disclosure controls and internal control over financial reporting. Tasty, representing 4.6% of revenue and 13.5% of assets, was excluded from management’s internal-control assessment after its acquisition.
Important facts for investors to verify
- Whether pricing and acquisition contributions can offset weaker volume and elevated commodity costs without further margin deterioration.
- How Tasty performs after integration, including whether its reported $3.0 million of operating income develops into expected returns.
- Cash-flow durability, borrowing levels, revolving-credit availability and compliance with debt covenants.
- Future pension funding needs and sensitivity to discount rates and investment returns.
- Exposure to Walmart/Sam’s Club and other large customers, and the status and potential impact of the stayed trademark litigation.