FLOWERS FOODS INC quarterly report, Q3 FY2011

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Flowers Foods, Inc. — Form 10-Q Summary

Period note: The request identifies 2010 Q3, but the supplied filing is for the 12 and 40 weeks ended October 8, 2011, compared with periods ended October 9, 2010. Fiscal 2011 third quarter was 12 weeks. Amounts below are USD millions unless noted.

Business context and reporting period

Flowers Foods produces and markets packaged bakery products through direct-store-delivery (DSD) and warehouse-delivery segments. The filing includes Tasty Baking Company from its May 20, 2011 acquisition, within DSD. The acquisition expanded Flowers’ Northeast presence and added the TastyKake brand.

Financial performance and position

  • Third-quarter sales: $675.4, up 13.0% year over year. Management attributed the increase to Tasty (8.7 percentage points) and favorable pricing/mix (4.9 points), partly offset by lower volume (0.6 points).
  • Third-quarter earnings: Operating income was $47.8, up 2.2%; net income was $31.0, down 0.5%. Diluted EPS was $0.23, unchanged. Operating margin was 7.1%, versus 7.8%; net margin was 4.6%, versus 5.2%.
  • Forty-week results: Sales were $2,119.8, up 6.0%; operating income was $152.4, down 4.8%; net income was $100.4, down 4.9%; and diluted EPS was $0.73, versus $0.76. Operating margin was 7.2%, versus 8.0%; net margin was 4.7%, versus 5.3%.
  • Segment performance: Third-quarter DSD sales rose 16.3% and operating income rose 11.2%; warehouse-delivery sales were essentially flat while operating income fell 40.2%. For 40 weeks, DSD operating income increased 7.8%, while warehouse-delivery operating income declined 36.8%.
  • Cash flow: Forty-week operating cash flow was $94.8, down from $228.8. Capital expenditures were $65.3, implying operating cash flow less capital expenditures of $29.5, versus $154.6 in the prior period. Investing activities used $233.0, including $164.5 net cash paid for Tasty. Cash ended at $8.2.
  • Debt and liquidity: Debt and capital leases totaled $338.6 at October 8, 2011, versus $127.3 at January 1, 2011; cash was $8.2. The company had $229.0 drawn under its $500.0 million revolving facility and $97.5 outstanding on its term loan. It reported compliance with debt covenants and said available cash, operating cash flow and credit capacity should meet foreseeable requirements.
  • Balance sheet: Current assets were $407.1 and current liabilities $311.7. Total assets were $1,604.2, versus $1,325.5 at year-end. Stockholders’ equity was $793.0, versus $795.8.

Material changes versus the prior comparable period

  • Sales growth was substantially acquisition- and pricing/mix-driven; volume declined 0.6% in the quarter and 1.3% over 40 weeks.
  • Profitability weakened over 40 weeks despite higher sales. Production costs rose to 52.8% of sales from 52.5%, with management citing higher ingredient and packaging costs and Tasty-related costs. Quarterly commodity costs rose sharply, particularly flour, shortening/oils and cocoa.
  • Warehouse-delivery operating performance deteriorated, with higher ingredient and distribution costs among the stated factors. Higher debt for the Tasty acquisition also increased interest expense.
  • Tasty’s acquisition consideration was $172.1; the filing reports $20.8 of goodwill. Tasty contributed $72.4 of sales and $0.1 of operating income from acquisition through October 8, and $52.2 of sales with a $0.1 operating loss in the quarter.
  • The company amended and expanded its revolving credit facility to $500.0 million for five years, with two one-year extension options and a potential increase to $700.0 million subject to conditions.

Outlook, commentary, risks and unusual items

  • Management expected commodity costs to continue rising through the remainder of fiscal 2011. The filing estimates fiscal 2011 capital expenditures of approximately $85–$90; it provides no quantified earnings or revenue guidance.
  • Key stated risks include commodity-price and supply volatility, competition and promotional activity, consumer demand and mix shifts, customer concentration, distributor and customer credit risks, employee benefit costs, and successful integration of acquisitions. Wal-Mart/Sam’s Club represented 21.3% of quarterly sales and 21.8% of 40-week sales.
  • Commodity hedges had a net fair value liability of $21.0; a hypothetical 10% commodity-price change would change that portfolio’s fair value by $11.9, with management expecting offsets from the underlying purchases. Interest-rate swaps had a $4.2 fair value liability.
  • Following MF Global’s October 31, 2011 bankruptcy, $3.8 of collateral related to a commodity-hedge account remained outstanding as of November 8. Recovery was uncertain.
  • Flowers’ trademark lawsuit against Hostess over the Nature’s Pride name was expected to proceed to trial in 2012. Management said it considered a material adverse outcome from pending matters remote, while noting adverse developments could affect a particular period’s earnings.
  • The company paid $58.8 in dividends and repurchased $26.6 of shares during the 40 weeks. A 3-for-2 stock split was effected in June 2011; prior share and per-share figures were restated.

Important facts for investors to verify

  • Confirm the intended reporting year: the supplied filing covers Q3 2011, not Q3 2010.
  • Track whether pricing can offset further input-cost inflation without worsening volume or competitive position.
  • Assess Tasty’s integration, profitability, and ability to deliver anticipated distribution and brand benefits.
  • Monitor cash generation, working-capital needs, capital spending, debt levels, and covenant headroom after the acquisition.
  • Follow recovery of the $3.8 MF Global collateral and developments in the Hostess trademark litigation.