Flowers Foods, Inc. — Form 10-Q summary
Period note: The supplied filing is for the 12 and 28 weeks ended July 13, 2019 (fiscal 2019 Q2), not 2018 Q2 as stated in the request metadata. The financial statements are unaudited; comparative periods ended July 14, 2018.
Business context
Flowers Foods is a U.S. packaged bakery producer and marketer, selling fresh and frozen breads, rolls, snack cakes, and tortillas. It operates 47 plants and distributes fresh products primarily through independent distributors. The company now reports one operating segment. Canyon Bakehouse, acquired in December 2018, added gluten-free products and contributed to sales growth.
Key financial metrics
| Metric | 12 weeks ended July 13, 2019 | 12 weeks ended July 14, 2018 | 28 weeks ended July 13, 2019 | 28 weeks ended July 14, 2018 |
|---|---|---|---|---|
| Sales | $975.8 million | $941.3 million | $2,239.7 million | $2,147.7 million |
| Income from operations | $72.3 million | $52.3 million | $162.9 million | $128.9 million |
| Operating margin | 7.4% | 5.6% | 7.3% | 6.0% |
| Net income | $53.1 million | $45.4 million | $119.0 million | $96.7 million |
| Diluted EPS | $0.25 | $0.21 | $0.56 | $0.46 |
| Net margin | 5.4% | 4.8% | 5.3% | 4.5% |
For the 28-week period, operating cash flow was $208.1 million, capital expenditures were $47.4 million, and cash dividends paid were $79.6 million. Cash declined to $9.8 million from $25.3 million at December 29, 2018. Current assets were $569.5 million and current liabilities $494.9 million at July 13.
Debt, net of issuance costs, was $893.5 million, down from $979.6 million at year-end; the company reported an $86.8 million reduction in total indebtedness. Lease liabilities were $405.4 million, following adoption of the new lease accounting standard. Combined availability under the receivables facility and revolving credit facility was $587.4 million. The company reported covenant compliance.
Material changes versus prior comparable periods
- Sales rose 3.7% in the quarter and 4.3% year to date. Management attributed growth to Canyon, branded and store-brand breads, new products, and positive price/mix; foodservice declines and softer cake volumes partly offset gains.
- Quarterly operating income increased 38.4% and net income 16.8%; year-to-date operating income increased 26.4% and net income 23.0%. Comparisons benefited from prior-year inferior-ingredient costs, consulting costs, legal settlements, and pension-related charges. Prior-year tax benefits also affect the comparisons.
- Quarterly production costs increased to 52.1% of sales from 51.9%, reflecting workforce costs, lower production volumes, and reduced manufacturing efficiency, partly offset by lower ingredient costs and improved price/mix. Year-to-date production costs were 51.8% of sales versus 51.9%.
- SD&A fell to 36.8% of quarterly sales from 38.3%, and to 37.3% year to date from 37.9%, helped by lower prior-year consulting and legal expenses and, in the quarter, a settlement benefit.
- The effective tax rate was 23.1% for the quarter and 23.3% year to date, versus 8.7% and 19.1%, respectively. The prior-year periods included a $5.6 million tax benefit related to tax reform.
Outlook, risks, contingencies, and unusual items
- Long-term Project Centennial goals are sales growth of 2%–4% and EBITDA margins of 12%–14%; these are stated long-term targets, not specific fiscal 2019 guidance. Fiscal 2019 capital expenditures are expected to be $110 million–$120 million.
- Management expects ingredient prices to be higher for the remainder of fiscal 2019. Workforce-related costs continue to outpace price/mix gains. The company expects a $2.5 million pension contribution in the second half of fiscal 2019.
- The July 9, 2019 voluntary recall covered certain buns and other bakery products distributed in 18 states because of possible hard-plastic contamination. The company reported approximately $0.5 million of costs in the quarter, no confirmed injuries or illnesses, and said future effects could not yet be estimated.
- Termination of a defined-benefit pension plan is expected to require a $5 million–$35 million cash contribution and produce an estimated $125 million non-cash settlement charge. Timing and final amounts depend on plan assets and participant lump-sum elections.
- A securities-litigation settlement in principle of $21 million remained subject to court approval; the company expected insurance to fund it and recorded an offsetting receivable and liability, with no income-statement impact. Distributor classification lawsuits remain ongoing; losses for unresolved cases generally could not be estimated.
- The company continues to seek recovery of inferior-ingredient costs and said additional losses may occur, but could not estimate them. Principal risks include commodity and interest-rate exposure, customer concentration, product safety and recalls, distributor-model litigation, supply-chain disruption, and execution of Project Centennial.
- Walmart/Sam’s Club represented 22.0% of quarterly sales and 21.1% of year-to-date sales, and 21.2% of trade receivables at July 13, 2019.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal 2019 Q2, despite the request’s 2018 Q2 label.
- Track whether growth from Canyon, branded products, and price/mix persists, and whether weaker foodservice and cake volumes recover.
- Monitor production efficiency, labor costs, commodity prices, and the financial effects of the recall and any continuing inferior-ingredient claims.
- Verify the final pension termination funding requirement and settlement charge, and the resolution and insurance coverage of the securities litigation.
- Assess leverage and liquidity including lease obligations, facility availability, upcoming debt maturities, dividends, and planned capital expenditures.