Business context and reporting period
Flowers Foods, Inc. filed this Form 10-K for the 52 weeks ended December 28, 2013, with fiscal 2012 ended December 29, 2012. Although the request metadata says “2012 Q4,” the supplied filing is the annual report for fiscal 2013; the filing does not provide a separate 2012 Q4 filing. Flowers operates a Direct-Store-Delivery (DSD) segment and a Warehouse segment, selling breads, buns, rolls, snack cakes, and related products. DSD represented about 83% of fiscal 2013 sales.
Financial performance and position
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Sales | $3,751.0 million | $3,046.5 million | +23.1% |
| Operating income | $335.2 million | $218.5 million | +53.4% |
| Net income | $230.9 million | $136.1 million | +69.6% |
| Diluted EPS | $1.09 | $0.66 | +65.2% |
| Cash from operations | $270.5 million | $216.9 million | +$53.6 million |
| Capital expenditures | $99.2 million | $67.3 million | +$31.9 million |
- Operating margin rose to 8.9% from 7.2%; net margin rose to 6.2% from 4.5%. Fiscal 2013 operating income included a $50.1 million bargain-purchase gain from the Sara Lee California asset acquisition.
- Production costs were 52.6% of sales versus 53.1%; selling, distribution and administrative expenses increased to 36.7% of sales from 36.4%.
- Fiscal 2013 sales growth reflected 16.8 percentage points from volume, 6.2 points from acquisitions and 0.1 point from pricing/mix. Management attributed volume growth substantially to market share shifts after Hostess ceased operations.
- Quarterly comparison: fiscal 2013 fourth-quarter sales were $843.6 million versus $749.4 million, up 12.6%; net income was $38.5 million versus $38.6 million. The 2013 fourth quarter included a $2.7 million after-tax benefit from an out-of-period environmental-liability adjustment.
- Year-end cash was $8.5 million, down from $13.3 million. Current assets were $487.4 million and current liabilities $327.8 million. Operating cash flow less capital expenditures was approximately $171.3 million, calculated from reported figures.
- Debt and capital lease obligations totaled $923.8 million, including $31.3 million current and $892.5 million long-term, compared with $607.0 million in total at the prior year-end. Borrowings included a $300 million new term loan and $150 million receivables securitization facility used in connection with the Hostess acquisition. Revolver borrowings were $44.2 million; $440.3 million remained available after letters of credit.
- Dividends paid were $0.444 per share, up from $0.420. Pension and postretirement obligations on the balance sheet totaled $44.2 million, down from $159.2 million, principally reflecting pension remeasurement and plan-asset performance.
Material changes versus the prior comparable period
- Fiscal 2013 included the $355.3 million Hostess bread-assets acquisition, the $50.0 million Sara Lee/Earthgrains California transaction and a $10.3 million Modesto bun-line acquisition. The Hostess brands were reintroduced in September; the company reported $26.6 million of Hostess-assets sales in 2013.
- DSD sales increased 23.5% to $3,098.0 million; Warehouse sales increased 21.5% to $653.0 million. Operating income increased in both segments, with the DSD result benefiting materially from the acquisition gain.
- Net interest expense rose to $12.9 million from $9.7 million, reflecting higher borrowings. Effective tax rate fell to 28.4% from 34.8%, largely due to the bargain-purchase gain and discrete tax benefits.
- Total assets increased to $2,504.0 million from $1,995.8 million, including higher goodwill and intangible assets associated with acquisitions. The company completed a 3-for-2 stock split; historical per-share data in the filing are adjusted for it.
Outlook, commentary, and risks
- Management expected fiscal 2014 to comprise 53 weeks and estimated capital expenditures of approximately $95 million to $100 million. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management said commodity costs were expected to remain volatile in 2014 and used forward purchases and derivatives to manage exposure. The derivative portfolio had a net fair value liability of $11.5 million at year-end; the company cautioned that hedges may not fully offset cost increases.
- Management planned continued Hostess-brand reintroduction and integration of recent acquisitions, and expected to transition acquired California and Lepage routes toward the independent-distributor model.
- Key exposures include customer concentration (Walmart/Sam’s Club represented 20.1% of sales; the top ten customers 43.5%), intense branded and private-label competition, raw-material and fuel prices, interest-rate sensitivity on variable-rate debt, acquisition integration, distributor relationships, and pension funding requirements.
- The company reported compliance with debt covenants. It said pending legal matters were not expected to materially affect overall financial condition, results or cash flows, while noting adverse developments could affect earnings in a particular period. Management and the auditor concluded internal control over financial reporting was effective.
- Unusual items included the $50.1 million bargain-purchase gain and the $4.4 million pre-tax ($2.7 million after-tax) out-of-period environmental-liability adjustment in fourth-quarter 2013. Management stated that the latter and acquisition-related goodwill corrections were not material to the periods affected.
Important facts for investors to verify
- How much of the 2013 earnings increase is sustainable excluding the $50.1 million acquisition gain and tax-rate benefits.
- Whether sales and margins can be maintained as Hostess-related market shifts normalize and acquired brands and operations are integrated.
- Debt repayment capacity, variable-rate exposure, securitization-facility terms, and covenant headroom after the acquisition-led increase in debt.
- Customer concentration and the durability of the relationship with Walmart/Sam’s Club, alongside private-label and promotional pricing pressure.
- Exposure to commodity and fuel volatility, hedge coverage and results, and future pension contributions.
- The timing and outcomes of the Sara Lee California escrow holdback and any remaining acquisition purchase-price adjustments.