Flowers Foods, Inc. — Form 10-Q Summary
Period: The filing reports the sixteen weeks ended April 23, 2011, compared with the sixteen weeks ended April 24, 2010. Although the request metadata says 2010 Q1, the filing itself is for fiscal 2011’s first quarter.
Business context
Flowers Foods produces and markets packaged bakery products through its direct-store-delivery (DSD) and warehouse-delivery segments. It reported consolidated sales of $801.8 million. Wal-Mart/Sam’s Club accounted for 21.9% of sales, up from 21.3% in the comparable period.
Financial performance
| Metric | 16 weeks ended Apr. 23, 2011 | Comparable 2010 period | Change |
|---|---|---|---|
| Sales | $801.8 million | $795.0 million | Up 0.9% |
| Income from operations | $61.5 million | $62.0 million | Down 0.8% |
| Operating margin | 7.7% | 7.8% | Down 0.1 percentage point |
| Net income | $41.2 million | $40.7 million | Up 1.2% |
| Diluted EPS | $0.45 | $0.44 | Up $0.01 |
| Operating cash flow | $72.6 million | $82.5 million | Down $10.0 million |
| Capital expenditures | $22.1 million | $29.1 million | Down $7.1 million |
Net margin was 5.1% in both periods. Sales growth reflected favorable pricing and mix of 2.1%, partly offset by a 1.2% volume decline. DSD sales were nearly flat (+0.1%); warehouse-delivery sales rose 4.1%. DSD operating income increased to $64.2 million from $60.7 million, while warehouse-delivery operating income fell to $11.3 million from $13.5 million. Corporate costs also increased.
Financial position and liquidity
- At April 23, 2011, cash was $8.7 million; total current assets were $329.2 million and current liabilities were $260.4 million.
- Total debt and capital leases were $119.7 million, including $29.1 million current maturities; the term loan balance was $108.8 million. There were no borrowings outstanding under the $250 million revolving credit facility.
- Operating cash flow of $72.6 million was offset by $26.0 million of investing outflows and $44.7 million of financing outflows. Financing outflows included $18.1 million in dividends, $18.0 million in share repurchases, and net debt repayments.
- The company reported compliance with its debt covenants and said available cash, operating cash flow and credit capacity should meet foreseeable financing needs.
Material changes, outlook and risks
- Materials and production costs declined as a share of sales, principally due to lower ingredient costs, but higher ingredient costs pressured warehouse-delivery results. Selling, distribution and administrative expenses rose as a share of sales.
- A manufacturing facility closure resulted in approximately $5.7 million of costs net of operational savings: $2.8 million in production costs and $2.4 million in selling, distribution and administrative expenses, with accelerated depreciation also contributing.
- On April 11, 2011, Flowers announced an agreement to acquire Tasty Baking for $4.00 per share in cash, with an estimated total purchase price of approximately $165 million including debt. The company expected the transaction to close in fiscal Q2 and planned to use cash and revolving-credit availability. It cited potential brand, geographic, capacity and synergy benefits; completion and realization of those benefits were not assured.
- Management estimated fiscal 2011 capital expenditures of $90 million to $100 million. The filing provides no specific full-year sales or earnings guidance.
- Management said commodity prices had risen since the second half of 2010 and were expected to continue rising in 2011. Hedging reduces—but does not eliminate—exposure to ingredient and packaging costs. A hypothetical 10% commodity-price move would change the derivative portfolio’s fair value by $20.5 million; management expected substantially offsetting changes in underlying input costs.
- Other risks include competition and promotions, lower volume, dependence on major customers, employee benefit costs, acquisition execution, and interest-rate and commodity-market movements. A trademark lawsuit against Hostess was expected to proceed to trial in 2011; the company said pending matters were not expected to materially harm overall financial condition, results or cash flows, though adverse developments could affect a particular period.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Tasty Baking offer closed as expected, its final financing and purchase price, and whether anticipated synergies materialized.
- Whether price increases can offset continued commodity inflation without further volume losses or promotional pressure.
- Whether operating cash flow and the estimated $90–$100 million capital-spending program support dividends, repurchases, debt service and acquisition funding.
- How the warehouse-delivery segment’s weaker operating income and the facility closure affect subsequent-period margins.
- Developments in the Hostess trademark litigation and Flowers’ exposure to customer concentration, pension and other employee-related costs.