Flowers Foods, Inc. — Form 10-Q Summary
Period: Quarter ended October 5, 2019; results compare the 12 and 40 weeks ended October 5, 2019 with the corresponding periods ended October 6, 2018. Metadata discrepancy: The request identifies “2018 Q3,” but the supplied filing is for fiscal 2019 Q3.
Business context and reporting period
Flowers Foods is a U.S. packaged bakery foods producer, selling fresh and frozen breads, rolls, snack cakes, tortillas, and related products. Its brands include Nature’s Own, Dave’s Killer Bread, Wonder, and Tastykake. The company reported one operating segment beginning in fiscal 2019. Fiscal 2019’s third quarter was 12 weeks.
Financial and operating performance
| Metric | 12 weeks ended October 5, 2019 | 40 weeks ended October 5, 2019 |
|---|---|---|
| Sales | $966.6 million, up 4.7% | $3,206.2 million, up 4.4% |
| Operating income | $58.7 million, up 9.7%; 6.1% of sales | $221.6 million, up 21.5%; 6.9% of sales |
| Net income | $43.4 million, up 9.4% | $162.3 million, up 19.1% |
| Diluted EPS | $0.20, versus $0.19 | $0.77, versus $0.64 |
| Operating cash flow | Not separately reported for the quarter | $278.1 million, versus $232.1 million |
| Capital expenditures | Not separately reported for the quarter | $70.6 million, versus $75.0 million |
For the quarter, production costs were 52.7% of sales versus 52.6%; selling, distribution and administrative expenses were 37.5% versus 38.2%. For the 40-week period, those ratios were 52.1% and 37.4%, respectively, versus 52.1% and 38.0%. The effective tax rate was 22.3% for the quarter and 23.0% year to date, compared with 22.5% and 20.1% in the prior periods.
Cash and cash equivalents were $7.0 million at October 5, 2019, down from $25.3 million at December 29, 2018. The company had $481.6 million available under its $500 million unsecured revolving credit facility and $128.0 million available under its receivables facility. Reported long-term debt was $878.0 million before current maturities; total debt and right-of-use lease liabilities were $1.288 billion, including $410.3 million of lease obligations. The company reported compliance with debt covenants.
The company paid $119.8 million in dividends and reduced total indebtedness by $102.5 million during the 40 weeks. Quarterly dividends were $0.19 per share in the third quarter; dividends paid per share year to date were $0.56.
Material changes versus prior comparable periods
- Sales growth reflected the Canyon Bakehouse acquisition, branded breakfast products, branded and store-brand breads, and favorable price/mix. Canyon contributed 2.2 percentage points to third-quarter sales growth and 1.9 points year to date; pricing/mix contributed 2.1 and 2.5 points, respectively.
- Branded retail sales rose 6.7% in the quarter and 5.8% year to date; store-brand retail sales rose 8.7% and 10.7%. Non-retail and other sales declined 2.4% and 2.5%, primarily reflecting weaker foodservice sales.
- Operating income and net income improved. Management cited higher sales and lower prior-year legal settlements and other costs; higher workforce-related costs and restructuring charges partially offset gains. Year-to-date comparisons also benefited from prior-year inferior-ingredient losses, pension settlement charges, and Project Centennial consulting costs.
- Operating cash flow increased by $46.0 million year over year. The prior-year period included $40.7 million of voluntary pension contributions, compared with $2.5 million in 2019. Financing cash outflow rose, principally reflecting greater net debt repayments and higher dividends.
- Adoption of the new lease standard in fiscal 2019 brought substantial lease assets and liabilities onto the balance sheet; prior-year figures were not restated. This limits direct balance-sheet comparison.
Outlook, commentary, risks, and unusual items
- Management’s stated long-term goals remain sales growth of 2%–4% and EBITDA margins of 12%–14%, supported by Project Centennial, which is expected to be completed by fiscal 2021. These are long-term goals, not a specific fiscal 2019 earnings forecast.
- Fiscal 2019 capital expenditures were expected to be $100 million–$110 million. Management expected ingredient prices to be moderately lower for the remainder of fiscal 2019.
- Flowers expects a $5 million–$35 million cash contribution to complete termination of its principal defined-benefit pension plan, anticipated in early 2020, and estimated a final non-cash settlement charge of approximately $119 million.
- A July 2019 voluntary recall of certain buns and bakery products in 18 states followed the potential presence of hard plastic. The company reported approximately $0.8 million of recall costs year to date and no confirmed injuries or illnesses; future effects were not estimated.
- The company recorded $3.3 million of third-quarter restructuring and related impairment charges, including impairment and severance tied largely to the announced Opelika, Alabama bakery closure. It expected additional severance charges in Q4 and could not estimate costs of further streamlining.
- A securities-litigation settlement in principle totaled $21.0 million and was expected to be funded by the insurer; court approval remained pending. The filing also describes distributor misclassification litigation, including class-certification rulings in several cases. Management said it could not reasonably estimate losses for unresolved distributor cases.
- Key risks include labor and workforce costs, commodity prices and hedge exposures, dependence on the independent-distributor model, customer concentration, food safety and recalls, supply-chain disruption, litigation, and execution of strategic initiatives. Walmart/Sam’s Club represented 21.5% of quarterly sales and 20.6% of trade receivables at October 5, 2019.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended October 5, 2019, not 2018 Q3.
- Track organic sales and volume trends separately from Canyon acquisition and price/mix effects, especially the continuing weakness in foodservice.
- Assess whether labor-cost pressure, marketing investment, and restructuring charges affect margin progress toward the company’s long-term goals.
- Monitor pension-plan termination funding, the estimated $119 million non-cash charge, and the timing and terms of the insurer-funded legal settlements.
- Review liquidity and leverage alongside dividends, capital spending, lease obligations, and the company’s dependence on available revolving and receivables facilities.