Business context and reporting period
Flowers Foods, Inc. is a U.S. bakery company operating direct-store-delivery (DSD) and warehouse-delivery segments. This filing is its Form 10-K for the 52 weeks ended December 29, 2012, comparing with the 52 weeks ended December 31, 2011. This does not match the request metadata of “2011 Q4”; the filing reports fiscal 2012 and includes quarterly data for both 2012 and 2011.
DSD generated 82.4% of fiscal 2012 sales and warehouse delivery 17.6%. The company completed its Lepage acquisition in July 2012; the acquired business contributed $80.7 million of sales and $12.4 million of operating income for the year.
Financial performance and position
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Sales | $3,046.5 million | $2,773.4 million |
| Income from operations | $218.5 million | $189.0 million |
| Operating margin | 7.2% | 6.8% |
| Net income | $136.1 million | $123.4 million |
| Net margin | 4.5% | 4.5% |
| Diluted EPS | $0.98 | $0.90 |
| Cash from operating activities | $216.9 million | $134.3 million |
| Capital expenditures | $67.3 million | $79.2 million |
| Cash and cash equivalents at year-end | $13.3 million | $7.8 million |
Operating cash flow less capital expenditures was approximately $149.6 million in 2012. Year-end total debt and capital lease obligations were approximately $607.0 million, versus $326.2 million a year earlier. The company had $110.5 million drawn on its $500 million revolving credit facility and reported $373.7 million available, net of letters of credit. Current assets were $464.5 million and current liabilities $355.0 million.
Fiscal 2012 segment operating income was $233.2 million for DSD and $36.2 million for warehouse delivery; unallocated corporate costs were $50.9 million. The company paid $0.63 per share in dividends during fiscal 2012.
Material changes versus the prior comparable period
- Sales rose 9.8%; management attributed 6.2 percentage points to acquisitions, 2.1 points to volume and 1.5 points to pricing/mix. DSD sales increased 10.8% and warehouse sales 5.8%.
- Operating income increased 15.6% and net income increased 10.3%. DSD and warehouse operating income improved, while corporate expenses rose 22.5%, largely reflecting Lepage acquisition costs and higher workforce costs.
- Ingredient costs increased to 27.5% of sales from 26.6%, primarily due to higher flour costs. Total production costs remained 53.1% of sales, with efficiency and volume gains offsetting higher ingredient costs.
- Net interest expense increased as the company issued $400 million of 4.375% senior notes in April 2012 and carried acquisition-related borrowing. Operating cash flow improved, while investing outflows rose to $385.4 million, mainly reflecting the $318.5 million Lepage acquisition.
- Fiscal 2012 fourth-quarter sales were $749.4 million versus $653.6 million, up 14.7%; net income was $38.6 million versus $23.0 million and diluted EPS was $0.28 versus $0.17.
Outlook, risks, contingencies and unusual items
- Management expected commodity costs to rise in 2013 and said it expected sales to grow, but provided no quantified sales or earnings guidance in the supplied filing text.
- Management estimated fiscal 2013 capital expenditures of $70–$80 million and pension contributions of $15.7 million to qualified plans. A $31 million Oxford, Pennsylvania bread-capacity expansion was expected to be completed in spring 2013; a further approximately $18 million bun line was contemplated.
- Potential acquisitions announced after year-end included Hostess assets bid at $390 million in total, subject to bankruptcy auction, regulatory clearance and court approval, and California Sara Lee/Earthgrains brand licenses expected to cost approximately $50 million. The filing said these purchases would be financed with cash and debt and would entail significant acquisition costs. The Hostess auction was scheduled for February 28, 2013.
- Customer concentration is material: Walmart/Sam’s Club accounted for 20.7% of 2012 sales; the ten largest customers accounted for 45.1%. Customers generally do not have long-term sales contracts.
- Other key exposures include volatile flour and other commodity prices, competitive pricing and promotions, the independent-distributor model, pension funding and market assumptions, interest rates on variable-rate borrowing, and product-safety, regulatory and supply-chain risks. The company reported a $149.0 million underfunded status for its defined-benefit pension plans at year-end.
- The company said pending legal matters were not expected to have a material overall effect, though adverse developments could affect a particular period. Hostess-related trademark litigation was stayed during bankruptcy; an announced Hostess asset agreement included a settlement and release, contingent on the transaction proceeding.
- Management and the auditor reported effective internal control over financial reporting, but Lepage was excluded from the assessment and audit scope because it was acquired in July 2012; Lepage represented 20.0% of consolidated assets at year-end.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing covers fiscal 2012, not 2011 Q4; check the fiscal 2012 fourth-quarter figures against the intended comparison period.
- Track the final outcome, price, financing and integration costs of the Hostess and California brand-asset transactions, and the resulting debt and credit-rating effects.
- Assess whether sales growth and operating-margin gains persist after separating acquisition contributions from organic volume and pricing/mix.
- Monitor commodity-cost inflation, pricing recovery, Walmart/Sam’s Club exposure and the planned conversion of Lepage routes to independent distributors.
- Review pension funding needs and the assumptions behind pension expense and liabilities; note the acquired Lepage business was excluded from year-end internal-control testing.