Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 12 weeks ended July 13, 2013, and year-to-date 28 weeks ended July 13, 2013, with comparisons to periods ended July 14, 2012. This does not match the request metadata of “2012 Q2.”
Business context and reporting period
Flowers Foods operates direct-store-delivery (DSD) and warehouse-delivery bakery businesses. DSD represented about 82% of sales. The filing attributes substantial sales growth to volume gains following Hostess’s liquidation and to the Lepage and Sara Lee/Earthgrains acquisitions. A 3-for-2 stock split was effective June 19, 2013; comparative share and per-share data were restated.
Key financial metrics
| Metric | 12 weeks ended July 13, 2013 | 28 weeks ended July 13, 2013 |
|---|---|---|
| Sales | $898.2 million, up 31.8% | $2,029.0 million, up 28.4% |
| Income from operations | $74.9 million; 8.3% of sales | $226.1 million; 11.1% of sales |
| Net income | $46.5 million, up 63.7% | $159.7 million, up 140.8% |
| Diluted EPS | $0.22 vs. $0.14 | $0.76 vs. $0.32 |
| Operating cash flow | $175.6 million for 28 weeks, compared with $126.8 million |
Quarterly operating margin improved from 7.0% to 8.3%; year-to-date margin was materially lifted by a $51.3 million bargain-purchase gain from the Sara Lee/Earthgrains acquisition. Excluding that gain, year-to-date operating income was approximately $174.7 million, or 8.6% of sales. The year-to-date effective tax rate was 27.0%, versus 36.0%, largely because the acquisition gain reduced the reported rate.
For 28 weeks, investing activities used $114.8 million and financing activities used $62.0 million. Cash declined $1.2 million to $12.1 million. Capital expenditures were $46.3 million. At July 13, current assets were $505.2 million and current liabilities $325.5 million. Debt and capital lease obligations totaled $582.1 million, including $399.2 million of 4.375% senior notes due 2022 and $138.7 million outstanding on the revolving credit facility.
Material changes versus prior comparable periods
- Sales rose 31.8% in the quarter and 28.4% year to date, primarily from volume growth and acquisitions; pricing/mix was unfavorable overall year to date.
- Year-to-date operating income more than doubled, but the comparison includes the $51.3 million acquisition gain. DSD and warehouse operating income also benefited from higher volumes.
- Year-to-date interest expense increased, reflecting the 2012 senior-note issuance and higher revolving-credit borrowings.
- Operating cash flow increased $48.8 million year to date, while investing outflows rose with acquisitions, distributor-territory activity, and higher capital spending.
- Walmart/Sam’s Club represented 20.3% of sales in both 2013 comparison periods, down from 21.7% for the 12-week 2012 period and 21.5% for the 28-week 2012 period.
Outlook, risks, contingencies, and unusual items
- The company said it expects sales to grow but gave no specific financial guidance and cautioned that growth is uncertain given economic and competitive conditions. Management expected commodity costs to rise during 2013.
- Estimated 2013 capital expenditures were $90–$100 million. The company expected an additional $13.2 million in pension contributions during the remainder of 2013.
- On July 19, 2013, after quarter-end, Flowers completed the Hostess-assets acquisition for $355 million, purchasing specified bread brands, 20 bakeries, and 36 depots. It drew the full $300 million new term loan on July 18 and also used cash and the receivables securitization facility. Management expected more than $5 million of related acquisition costs in the third quarter.
- Commodity-price exposure, availability and cost of hedging, variable interest rates, customer concentration, distributor and customer credit risks, and integration of acquisitions are significant risks. A hypothetical 10% commodity-price move would change the derivative portfolio’s fair value by approximately $17.2–$17.3 million; management expected changes to be substantially offset by underlying input-price movements.
- The company reported compliance with debt covenants and effective disclosure controls. It said pending legal matters were not expected to materially affect overall financial condition, results, or cash flows; the Nature’s Pride trademark litigation was settled at the Hostess acquisition closing.
Important facts for investors to verify
- How much of sales and earnings growth is sustainable volume growth versus acquired revenue, Hostess-related market share gains, and the one-time bargain-purchase gain.
- The Hostess acquisition’s integration costs, financing mix, operating contribution, and effect on leverage and liquidity.
- Whether rising commodity costs and pricing/mix trends pressure margins, and how effectively hedges offset input-cost changes.
- Exposure to Walmart/Sam’s Club and the credit quality of customers and independent distributors.
- Capital spending, pension funding, and future cash generation relative to dividends, acquisition obligations, and debt service.