Flowers Foods, Inc. — Form 10-Q Summary
Period: The filing covers the 12 and 40 weeks ended October 9, 2010, with comparisons to October 10, 2009. Although the request metadata says 2009 Q3, the filing itself is for fiscal 2010 Q3.
Business context
Flowers Foods produces and markets packaged bakery products through direct-store-delivery (DSD) and warehouse delivery segments. DSD covers fresh and frozen bakery products in selected U.S. regions; warehouse delivery includes snack cakes, tortillas, and frozen bakery products sold nationally.
Financial performance
Amounts below are in millions of dollars, except per-share data. Fiscal 2010 Q3 was 12 weeks; year-to-date was 40 weeks.
| Metric | 12 weeks ended Oct. 9, 2010 | Prior-year 12 weeks | 40 weeks ended Oct. 9, 2010 | Prior-year 40 weeks |
|---|---|---|---|---|
| Sales | $597.9 | $602.6 | $2,000.6 | $2,024.0 |
| Income from operations | $46.8 | $51.1 | $160.0 | $159.2 |
| Operating margin | 7.8% | 8.5% | 8.0% | 7.9% |
| Net income attributable to Flowers Foods | $31.2 | $31.9 | $105.6 | $99.6 |
| Diluted EPS | $0.34 | $0.34 | $1.14 | $1.07 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $228.8 | $166.2 |
- Quarterly sales fell 0.8%; the company attributed the decline principally to unfavorable pricing and mix (2.4 percentage points) and VIE deconsolidation (0.6 points), partly offset by volume growth (1.4 points) and acquisitions (0.8 points).
- Year-to-date sales declined 1.2%, reflecting unfavorable pricing/mix (2.7 points) and VIE deconsolidation (0.4 points), partly offset by acquisitions (1.2 points) and volume (0.7 points).
- Quarterly operating income declined 8.5%, and operating margin contracted 0.7 percentage points. For the 40-week period, operating income increased slightly; year-to-date diluted EPS rose 6.5%.
- Operating cash flow increased to $228.8 million from $166.2 million. Investing used $79.7 million, including $74.2 million in capital expenditures; financing used $160.9 million, including dividends, repurchases, and net debt repayments.
- Cash was $7.1 million at October 9, 2010, down from $18.9 million at January 2, 2010. Current assets were $331.2 million and current liabilities $249.8 million.
- Total debt and capital leases were $143.4 million, including $26.8 million current maturities, versus $251.7 million at year-end. The company had $9.5 million drawn on its $250 million revolving facility and $235.7 million available; it reported compliance with debt covenants.
- Cash dividends paid per share were $0.20 for the quarter and $0.575 year to date, compared with $0.175 and $0.50, respectively, in the comparable periods.
Changes, outlook, risks, and unusual items
- DSD sales declined 2.5% for the quarter and 3.1% year to date; warehouse delivery sales increased 6.5% and 7.9%, respectively, supported in part by acquisitions and store-brand cake programs. Management cited heavy promotional activity and competitive pricing.
- Lower ingredient costs helped production-cost ratios, especially in DSD. Higher workforce, packaging, distribution, and advertising costs weighed on results; warehouse delivery also faced higher cocoa and sugar costs and new-line start-up costs.
- Effective January 3, 2010, revised VIE accounting rules led Flowers to deconsolidate a transportation entity. Management said the entity has no effect on Flowers’ attributable net income; deconsolidation reduced reported sales and affected comparability. The 2009 comparison also included a $3.0 million acquisition gain.
- Management estimated fiscal 2010 capital expenditures of approximately $95–$100 million. The filing provides no quantified earnings or sales guidance. Management stated it expected current cash, operating cash flow, and available credit to meet foreseeable financial requirements.
- Commodity costs, availability of hedging instruments, consumer demand and pricing, customer concentration, labor and distribution costs, and execution of acquisitions and production-line start-ups are material risks. Wal-Mart/Sam’s Club represented 22.3% of quarterly sales and 21.9% year to date.
- Commodity hedge portfolio net fair value was $24.5 million; interest-rate swaps had a negative fair value of $8.1 million. Management said hypothetical 10% commodity-price changes would change hedge fair value by $19.2 million, expected to be substantially offset by changes in underlying input costs.
- Flowers’ trademark lawsuit against Hostess remained pending after summary judgment was denied; the company expected trial in 2011 unless reconsideration changed the ruling. Management considered material adverse outcomes from ordinary-course legal matters remote. A potential contingent acquisition payment of up to $5.0 million could arise in fiscal 2011.
- The company reported effective disclosure controls and no material changes to internal controls; it said risk factors were unchanged from its 2010 Form 10-K.
Important facts for investors to verify
- Confirm the applicable reporting period: the filing is fiscal 2010 Q3, not 2009 Q3.
- Assess whether pricing pressure, promotional activity, and weaker DSD sales persist, and whether warehouse growth is sustainable after acquisition comparisons roll off.
- Review operating cash flow quality, including the effect of working-capital movements, and compare planned capital spending with actual spending.
- Track debt, revolving-facility availability, covenant compliance, and the effects of share repurchases and dividend payments on liquidity.
- Monitor commodity-price exposure, hedge positions, and the concentration of sales with Wal-Mart/Sam’s Club.
- Follow the Hostess trademark litigation and the terms and likelihood of the potential contingent consideration payment.