Flowers Foods, Inc. — Form 10-Q Summary
Reporting period: The filing covers the unaudited sixteen weeks ended April 19, 2014, compared with the sixteen weeks ended April 20, 2013. The request metadata says “2013 Q1,” which does not match the filing period.
Business context and results
Flowers Foods operates direct-store-delivery (DSD) and warehouse-delivery bakery businesses. DSD represented 84% of total sales in the period. The company continued integrating the Hostess bread assets acquired in July 2013, expanding California production capacity, and selling acquired facilities deemed outside its strategy.
- Sales were $1.160 billion, up 2.6%. Management attributed the increase to favorable pricing and mix (+2.9 percentage points) and acquisitions (+1.2 points), partly offset by lower volume (-1.5 points).
- DSD sales rose 5.0% to $969.0 million; warehouse sales fell 8.3% to $190.8 million. Warehouse weakness was primarily volume-related, including declines in cake and vending.
- Production costs were 51.4% of sales versus 51.8%. Selling, distribution and administrative expenses were 36.8% versus 36.4%; depreciation and amortization was 3.4% versus 3.0%.
- Operating income was $98.2 million, down from $150.0 million; operating margin was 8.5% versus 13.3%. The prior-year period included a $50.1 million bargain-purchase gain related to the Sara Lee California acquisition. Excluding that gain, prior-year operating income was approximately $99.9 million.
- Net income was $61.1 million versus $112.0 million; diluted EPS was $0.29 versus $0.53. The effective tax rate rose to 35.7% from 23.0%, largely because the prior-year acquisition gain reduced that period’s rate.
Cash flow, balance sheet and capital
- Operating cash flow was $121.8 million, up from $86.8 million. Investing used $13.9 million, compared with $92.3 million, which included the prior-year Sara Lee California acquisition. Financing used $107.7 million versus $6.5 million provided.
- Cash was $8.8 million at April 19, 2014. Total debt and capital lease obligations were $841.7 million, including $30.7 million in current maturities, down from $923.8 million at December 28, 2013.
- The company had $463.9 million available under its $500 million revolving credit facility after letters of credit. It reported compliance with debt covenants. The facility was amended to extend maturity to February 2019 and improve certain terms; the term-loan amendment reduced applicable interest rates.
- Capital expenditures were $23.6 million in the period; management estimated fiscal 2014 capital expenditures of approximately $95–$100 million. The company paid $24.0 million in dividends and repurchased $9.5 million of stock. The quarterly dividend was $0.1125 per share.
- Assets held for sale totaled $61.6 million, including acquired plants and depots and distributor territories. Management said sales of certain acquired facilities could continue through fiscal 2014 and into fiscal 2015.
Outlook, risks and unusual items
- Management expected sales to grow but did not guarantee growth given the economic environment and competitive conditions. Commodity costs were expected to remain volatile in 2014; hedges were intended to reduce, not eliminate, exposure.
- The filing identifies risks from commodity prices and availability, competition and consumer demand, customer concentration, independent distributors, acquisitions and integration, production capacity, labor and pension costs, interest rates, and operational disruptions.
- Wal-Mart/Sam’s Club accounted for 19.5% of sales, down from 20.4% a year earlier.
- Hostess-related facilities generated approximately $6.8 million of carrying costs, including depreciation, during the period. Commodity hedges had a net fair value of $14.9 million; changes in hedge values can affect other comprehensive income and cash requirements.
- Management considered the ultimate resolution of ordinary-course litigation unlikely to materially affect the company overall, while noting adverse developments could affect earnings in a particular period. No material environmental proceedings were reported. Management stated that disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Confirm the intended period: this filing is for Q1 2014, not Q1 2013.
- Assess underlying earnings apart from the prior-year $50.1 million acquisition gain, and track whether DSD growth offsets continuing warehouse volume declines.
- Monitor Hostess integration, facility carrying costs, disposition proceeds and timing, and the performance of newly opened production lines.
- Review debt reduction, variable-rate exposure, covenant headroom, upcoming maturities, and the availability of the receivables facility and revolver.
- Track commodity costs and hedge coverage, pension contributions, and concentration in Wal-Mart/Sam’s Club.