Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2016 Q3, but the filing is for the third quarter of fiscal 2017, the 12 weeks ended October 7, 2017, and compares results with the 12 weeks ended October 8, 2016. Year-to-date figures cover 40 weeks.
Business context and reporting period
Flowers Foods produces and markets packaged bakery foods through direct-store-delivery (DSD) and warehouse-delivery segments. DSD generated about 85% of year-to-date sales. The company was implementing Project Centennial, a multi-year business and operational review, and planned a new Fresh Bakery and Specialty/Snacking organizational structure, expected to be fully implemented at the beginning of fiscal 2019.
Financial performance
| Metric | 12 weeks ended Oct. 7, 2017 | 12 weeks ended Oct. 8, 2016 | 40 weeks ended Oct. 7, 2017 | 40 weeks ended Oct. 8, 2016 |
|---|---|---|---|---|
| Sales | $932.8 million | $918.8 million | $3,047.1 million | $3,058.2 million |
| Operating income (loss) | $(53.8) million | $66.1 million | $116.5 million | $242.7 million |
| Net income (loss) | $(33.6) million | $40.2 million | $71.6 million | $150.7 million |
| Diluted EPS | $(0.16) | $0.19 | $0.34 | $0.72 |
| Operating margin | (5.8)% | 7.2% | 3.8% | 7.9% |
- Quarterly sales rose 1.5%, supported by branded organic product growth and, to a lesser extent, hurricane-related volume; year-to-date sales declined 0.4%, reflecting category softness and the mix-business divestiture.
- Production costs were 51.0% of sales in the quarter versus 51.9% a year earlier; selling, distribution and administrative expenses rose to 38.1% of sales from 37.2%. For the 40-week period, these ratios were 50.9% versus 51.5% and 38.4% versus 36.8%, respectively.
- Quarter and year-to-date results included $100.5 million of restructuring and impairment charges and $18.3 million of multi-employer pension withdrawal costs. Year-to-date results also included a $28.9 million gain on divestiture. These items materially affect comparisons.
- Operating cash flow was $211.3 million for the 40 weeks, down from $285.8 million. Investing cash flow was a net outflow of $0.03 million, including $51.2 million of capital expenditures and $41.2 million of divestiture proceeds. Financing cash outflow was $210.6 million, including $105.2 million in dividends; net debt and capital-lease obligations declined $101.3 million.
Balance sheet and liquidity
- At October 7, 2017, cash was $7.1 million; current assets were $524.0 million and current liabilities were $408.5 million.
- Total debt and capital-lease obligations were $856.1 million, compared with $958.2 million at December 31, 2016. Stockholders’ equity was $1,192.0 million.
- The company reported $484.8 million available under its $500 million revolving credit facility and $185.0 million available under its receivables securitization facility. It was in compliance with debt covenants.
- Debt includes $400 million of 3.5% senior notes due 2026 and $400 million of 4.375% notes due 2022. Variable-rate facility borrowings expose the company to higher interest costs if rates rise.
Outlook, management commentary, and risks
- Project Centennial’s stated long-term goals are annual sales growth of 2%–4% and EBITDA margins of 12%–14%. During the fiscal 2017–2018 transition phase, management expected flat to 2% sales growth and 12%–13% EBITDA margins; for 2019 and beyond, it expected 3%–4% sales growth and 13%–14% EBITDA margins. These are management targets, not guarantees.
- Management targeted $70 million–$80 million of cumulative gross savings from three cost initiatives by the end of fiscal 2018, including $25 million–$30 million expected in fiscal 2017. Fiscal 2017 capital expenditures were expected to be $85 million–$90 million. Project Centennial consulting costs were expected at $5.5 million–$6.5 million in fiscal Q4 2017 and $10 million–$12 million in fiscal 2018.
- Project charges included a $29.0 million voluntary separation plan for 323 employees, $66.2 million of trademark impairments following a brand review, and $3.4 million of property impairments related to the planned closure of a Winston-Salem snack-cake plant. Management expected additional reorganization costs of about $1.5 million in fiscal Q4 2017 and $7 million–$8 million in fiscal 2018; further streamlining costs were not estimable.
- The Lakeland, Florida union pension-fund withdrawal resulted in $18.3 million of charges, including a $15.2 million withdrawal liability and $3.1 million of transition payments. Additional withdrawal liability may arise from the final assessment or a qualifying mass withdrawal.
- Walmart/Sam’s Club accounted for 20.1% of sales in both the quarter and year-to-date period, creating customer concentration risk. The filing also cites competitive and category pressures, consumer shifts toward store brands, commodity and energy costs, and potential disruption or adverse legal outcomes involving the independent-distributor model.
- The company was defending 32 distributor misclassification complaints; potential losses on unresolved cases were reasonably possible but not reasonably estimable. A securities class action was also pending, with potential loss not estimable. The filing states that other pending litigation was not expected, based on then-available facts, to materially affect the company, although adverse developments could affect a particular period.
- Management reported effective disclosure controls and procedures as of period-end and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether branded organic growth can offset weakness in other bakery products and the Warehouse Segment’s year-to-date sales decline.
- How much of the reported earnings decline reflects one-time restructuring, impairment, and pension charges, and whether Project Centennial savings materialize on schedule.
- Progress on the Winston-Salem closure, separation payments, additional restructuring costs, and the planned organizational transition.
- The final cost and legal outcomes of distributor classification cases and any additional pension-fund withdrawal liability.
- Debt reduction, cash generation, available borrowing capacity, and the sustainability of dividends amid low cash balances and planned investment.