Flowers Foods, Inc. — Form 10-Q Summary
Reporting-period note: The filing is for the 12 and 28 weeks ended July 12, 2014, not 2013 Q2 as stated in the request metadata. Financial statements are unaudited.
Business context
Flowers Foods operates direct-store-delivery (DSD) and warehouse bakery segments. DSD represented 84% of year-to-date sales; warehouse delivery represented 16%. The filing discusses the integration and reintroduction of Hostess bread brands acquired in July 2013, as well as additional bakery capacity opened in Nevada, California, and Tennessee.
Financial performance
- Second quarter (12 weeks): Sales were $877.4 million, down 2.3% year over year. Operating income was $65.4 million, down 12.7%; net income was $42.1 million, down 9.5%. Diluted EPS was $0.20 versus $0.22. Operating margin was 7.5% versus 8.3%; net margin was 4.8% versus 5.2%.
- Year to date (28 weeks): Sales were $2.037 billion, up 0.4%. Operating income was $163.6 million, down 27.2%; net income was $103.1 million, down 34.9%. Diluted EPS was $0.48 versus $0.75. Operating margin was 8.0% versus 11.1%; net margin was 5.1% versus 7.8%.
- Segment trends: Second-quarter DSD sales were essentially flat, while warehouse sales fell 13.3%. Year-to-date DSD sales increased 2.8%; warehouse sales declined 10.5%. Management attributed the warehouse weakness mainly to volume declines, including competition from the reintroduced Hostess cake products.
- Cash flow: Year-to-date operating cash flow was $172.9 million, compared with $175.6 million a year earlier. Capital expenditures were $45.0 million. Investing activities used $30.9 million; financing activities used $142.0 million. Cash ended at $8.5 million, essentially unchanged from year-end.
- Balance sheet and debt: Total assets were $2.484 billion. Current assets of $500.8 million and current liabilities of $339.1 million imply a current ratio of about 1.48. Debt and capital lease obligations totaled $826.1 million, including $34.3 million current; cash was $8.5 million. Debt obligations were down from $923.8 million at December 28, 2013. The company reported $464.8 million available under its $500 million revolving credit facility after letters of credit.
- Other metrics: Year-to-date dividends paid were $49.3 million; cash dividends per share were $0.2325. Walmart/Sam’s Club accounted for 19.4% of year-to-date sales. The effective tax rate was 35.0%, compared with 27.1% in the prior year-to-date period.
Changes, outlook, risks, and unusual items
- Year-to-date prior-period results included a $50.1 million bargain-purchase gain related to the Sara Lee California and Earthgrains acquisition. Its absence in 2014 materially affects comparisons; the prior-year gain also reduced the comparative effective tax rate.
- Flowers recorded $4.5 million of second-quarter asset impairment charges: $2.6 million for goodwill and $1.9 million for assets to be scrapped at its Fort Worth tortilla facility. The company classified $7.5 million of facility assets as held for sale and expected the sale to close in fiscal Q3 2014.
- Hostess acquired-asset carrying costs were approximately $4.5 million in the quarter and $11.2 million year to date, including depreciation. The company expected sales of certain acquired plants and depots to continue through fiscal 2014 and into fiscal 2015.
- Management said it expects sales to grow but gave no quantified sales or earnings guidance and cautioned that growth is not assured. Fiscal 2014 capital expenditures were estimated at $95–$100 million. The company expected an additional $7.8 million of qualified pension contributions during the rest of 2014.
- Commodity costs remained volatile; management expected volatility through the rest of 2014 and used hedges to manage exposure. A 10% hypothetical commodity-price move would change the derivatives portfolio’s fair value by about $19.0 million, which management expected to be substantially offset by movements in underlying input costs.
- Key risks include competitive pricing and promotions, changing consumer demand, raw-material availability and prices, customer concentration, execution of acquisitions and new production lines, labor and pension costs, and variable-rate borrowing exposure. The filing reported no material changes to its previously disclosed risk factors. Management considered pending litigation unlikely to materially affect overall financial condition, results, or cash flows, while noting adverse developments could affect a particular period.
- After quarter-end, the receivables securitization facility was amended on August 7, 2014, increasing commitments from $150 million to $200 million and extending its term by one year. The company reported compliance with applicable debt covenants and effective disclosure controls.
Investor verification priorities
- Confirm the reporting period and compare results on a like-for-like basis, especially the prior-year $50.1 million acquisition gain and Hostess acquisition timing.
- Track warehouse-segment volumes, Hostess cake competition, promotional intensity, and whether DSD growth offsets warehouse weakness.
- Verify progress and proceeds from planned asset sales, including the Fort Worth disposal group and acquired Hostess plants and depots.
- Monitor commodity hedges, input-cost trends, debt balances, variable-rate exposure, facility availability, and covenant compliance.
- Assess whether operating cash flow can support planned capital spending, pension contributions, dividends, and other capital allocation needs.