Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the twelve weeks ended July 14, 2012, and the year-to-date twenty-eight weeks ended July 14, 2012—not Q2 2011. Comparatives are the corresponding 2011 periods. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context and reporting period
Flowers Foods operates direct-store-delivery (DSD) and warehouse-delivery bakery businesses. The DSD segment markets fresh and frozen breads, rolls, tortillas and snack products; the warehouse segment serves retail, foodservice, vending and co-pack customers. Walmart/Sam’s Club represented 21.7% of Q2 sales, versus 22.1% a year earlier.
Financial performance
| Metric | 12 weeks ended July 14, 2012 | 12 weeks ended July 16, 2011 | 28 weeks ended July 14, 2012 | 28 weeks ended July 16, 2011 |
|---|---|---|---|---|
| Sales | $681.6 | $642.6 | $1,579.8 | $1,444.4 |
| Income from operations | $47.4 | $43.1 | $106.6 | $104.6 |
| Operating margin | 7.0% | 6.7% | 6.7% | 7.2% |
| Net income | $28.4 | $28.2 | $66.3 | $69.4 |
| Diluted EPS | $0.21 | $0.21 | $0.48 | $0.51 |
| Net interest expense (income) | $2.9 | ($0.6) | $3.0 | ($2.4) |
| Operating cash flow | Not separately reported for the quarter | $126.8 | $66.2 |
Q2 sales rose 6.1%; management attributed 4.5 percentage points to the Tasty acquisition, 2.3 points to pricing and mix, and a 0.7-point decline to volume. YTD sales increased 9.4%, including 6.4 points from Tasty, 2.4 from pricing and mix, and 0.6 from volume. Q2 net margin was approximately 4.2% versus 4.4%; YTD net margin was approximately 4.2% versus 4.8%.
At July 14, cash was $222.3, total debt and capital leases were $488.0, and stockholders’ equity was $813.7. Current assets of $594.9 and current liabilities of $294.7 imply a current ratio of approximately 2.0. The $500 million revolving facility had no borrowings outstanding at quarter-end; $485.6 was available after letters of credit. The company reported compliance with debt covenants. Cash dividends paid were $42.3 for the 28-week period.
Operating cash flow was $126.8 for the 28 weeks, compared with $66.2 in 2011. Investing activities used $27.3, including $29.2 of capital expenditures; management estimated full-year 2012 capital spending of $75–$85. Financing activities provided $115.0. Cash increased from $7.8 at year-end 2011 to $222.3 at July 14, primarily reflecting financing activity.
Material changes versus the comparable periods
- Q2 operating income increased 10.0%, while net income rose just 0.6%; higher interest expense following the senior-note issuance offset operating improvement.
- YTD net income declined 4.4% and diluted EPS declined from $0.51 to $0.48. YTD operating margin fell from 7.2% to 6.7%, as production costs rose to 53.5% of sales from 52.2%, primarily reflecting higher ingredient and packaging costs.
- DSD contributed most sales growth; Q2 DSD sales rose 7.6%. Warehouse-delivery Q2 sales declined 0.7%, with volume down 4.5 points partly offset by favorable pricing and mix.
- On April 3, 2012, the company issued $400 million of 4.375% senior notes due 2022, using part of the proceeds to repay $207.2 million of revolving debt. The term loan balance was $75 million at quarter-end, down from $90 million at year-end.
Outlook, commentary, risks and unusual items
- Management expected commodity costs to be higher in 2012 than in 2011, particularly for ingredients such as flour and sweeteners. Derivatives and forward purchases are used to hedge commodity exposure; the company cautioned that reduced availability of these instruments could increase costs.
- No formal earnings or sales guidance is stated in the supplied filing. Management said existing cash, operating cash flow and available credit capacity should support foreseeable financial requirements.
- On July 21, after quarter-end, Flowers acquired Lepage Bakeries and affiliates for an aggregate purchase price of $383 million. Consideration included cash, deferred payments, shares and a tax-related payment subject to a possible return. The company reported $318.4 million of cash consideration and tax-related payments, plus $4.5 million of transaction costs; credit-facility borrowings were $82.5 million as of August 8. Purchase-price allocation remained preliminary.
- The company had contributed $16.1 million to qualified pension plans in 2012 and was assessing the effect of new pension funding legislation on remaining-year contributions. Pension funding requirements were expected to decline in the near term.
- Commodity and interest-rate movements, promotional competition, volume trends, input costs, customer concentration, and execution and financing of acquisitions are key risks. A trademark lawsuit against Hostess was stayed following Hostess’s bankruptcy filing; management considered a material adverse effect from pending matters remote, while noting adverse developments could affect a future period.
- Management stated that disclosure controls were effective and there were no material changes in internal control over financial reporting. The filing reported no changes to the risk factors in the company’s 2011 Form 10-K.
Important facts for investors to verify
- Confirm the filing period: this is Q2 2012, despite the request metadata indicating 2011.
- Assess whether price and mix can offset expected higher commodity costs and the reported weakness in some bread and warehouse-delivery volumes.
- Track interest expense, leverage and credit-facility usage after the $400 million note issuance and the Lepage acquisition.
- Review Lepage’s final purchase-price allocation, financing impact, integration results and the condition on the $18.4 million tax-related payment.
- Monitor pension contributions, dividend commitments, capital spending and the company’s dependence on Walmart/Sam’s Club, which accounted for 21.7% of Q2 sales.