Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 12 weeks ended October 4, 2014, and the year-to-date 40 weeks ended October 4, 2014. It is fiscal 2014 third-quarter reporting, not 2013 Q3 as indicated in the request metadata. Comparative periods ended October 5, 2013. Amounts below are in millions unless stated otherwise.
Business context and reporting period
Flowers Foods operates fresh direct-store-delivery (DSD) and warehouse bakery businesses. DSD represented about 84% of year-to-date sales. The company reported 46 bakeries across 16 states. Walmart/Sam’s Club accounted for 19.4% of sales in both the quarter and year-to-date period, down from 20.1% and 20.2%, respectively.
Financial performance and position
| Metric | 12 weeks ended Oct. 4, 2014 | 12 weeks ended Oct. 5, 2013 | 40 weeks ended Oct. 4, 2014 | 40 weeks ended Oct. 5, 2013 |
|---|---|---|---|---|
| Sales | $849.4 | $878.5 | $2,886.5 | $2,907.5 |
| Income from operations | $70.4 | $53.3 | $234.0 | $278.1 |
| Net income | $44.6 | $33.9 | $147.7 | $192.4 |
| Diluted EPS | $0.21 | $0.16 | $0.69 | $0.91 |
| Operating margin | 8.3% | 6.1% | 8.1% | 9.6% |
| Net margin | 5.3% | 3.9% | 5.1% | 6.6% |
- Quarterly sales declined 3.3%; management attributed the decline primarily to lower volumes, partly offset by favorable pricing and mix. Year-to-date sales declined 0.7%.
- Quarterly operating income increased 32.0%, helped by lower ingredient costs, reduced corporate expenses and prior-year acquisition costs. Year-to-date operating income fell 15.9%, reflecting the absence of a prior-year $50.1 million bargain-purchase gain, Hostess asset carrying costs, a $4.5 million impairment charge and weaker warehouse sales.
- Operating cash flow was $220.2 million for the 40 weeks, essentially unchanged year over year. Capital expenditures were $58.6 million; operating cash flow less capital expenditures was approximately $161.7 million.
- Cash was $8.1 million at October 4, 2014. Current assets were $505.1 million and current liabilities $336.1 million, implying working capital of about $169.0 million.
- Total debt and capital lease obligations were $816.6 million, versus $923.8 million at December 28, 2013. The company reported $458.0 million available under its revolving credit facility and $130.0 million under its receivables facility. It was in compliance with debt covenants.
- Dividends paid were $0.3525 per share year to date, versus $0.3317 in the prior-year period. The company repurchased $19.8 million of shares year to date.
Material changes versus prior comparable periods
- Quarterly DSD sales declined 1.6%, while warehouse sales declined 11.8%. For the 40 weeks, DSD sales increased 1.5% and warehouse sales declined 10.9%.
- Management cited renewed Hostess cake competition, lower store-brand and foodservice volumes, and heavy branded-category promotions. Year-to-date branded retail sales grew 2.0%, but store-brand retail declined 6.0%.
- Quarterly production costs fell to 52.2% of sales from 53.3%, largely on lower ingredient costs. Year-to-date production costs were 51.9% of sales versus 52.4%.
- The 40-week effective tax rate rose to 35.1% from 28.1%; the prior year benefited from the bargain-purchase gain’s tax treatment. Year-to-date net income declined 23.2%.
Outlook, risks, contingencies and unusual items
- Management estimated fiscal 2014 capital expenditures of approximately $90–$95 million. The filing does not provide a specific revenue or earnings forecast.
- A voluntary pension lump-sum offer had an initial acceptance rate of 60%. The company expected a one-time, non-cash fourth-quarter settlement charge of $14–$15 million; the final amount remained subject to completed acceptances and actuarial assumptions. Management estimated the offer could reduce pension obligations by about 10%.
- The sale of the Fort Worth tortilla disposal group closed for $8.4 million. The company recorded $4.5 million of impairments, a $1.8 million divestiture gain, and stated total fiscal 2014 costs related to the divestiture of $3.5 million. It also reported subsequent sales of three plants and two depots for $12.0 million.
- Commodity derivatives had a net fair-value liability of about $27.1 million. A hypothetical 10% commodity-price movement would change the portfolio’s fair value by $15.1 million; management expected movements to be substantially offset by changes in underlying input costs. Hedges extended primarily into fiscal 2016.
- Key risks include commodity-price volatility and hedge availability, competition and consumer demand shifts, dependence on major customers, execution and integration of acquisitions, labor and distributor costs, interest-rate exposure on variable-rate debt, and operational or regulatory disruptions.
- Management said pending litigation was not expected to have a material adverse effect overall, though adverse developments could affect a particular period. No changes to the company’s previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the quarterly sales and volume weakness, particularly in warehouse, cake, foodservice and store-brand products, continued after the reporting period.
- How much year-to-date operating-income and EPS comparisons reflect the prior-year $50.1 million bargain-purchase gain versus current operating trends.
- The final pension settlement charge, participation rate and effect on pension obligations and future cash funding.
- Debt balances, available borrowing capacity, covenant headroom and sensitivity to variable interest rates.
- Progress and proceeds from planned Hostess facility and depot sales, and the impact of remaining carrying costs and impairments.
- Realized commodity costs and hedge performance, including whether derivative fair-value movements are offset by underlying input costs.