Flowers Foods, Inc. — Form 10-Q Summary
Reporting-period note: Although the request metadata says 2012 Q3, this filing covers the 12 weeks ended October 5, 2013, and the 40 weeks ended October 5, 2013. Comparatives are the periods ended October 6, 2012. Dollar figures below are in millions unless stated otherwise.
Business context and reporting period
Flowers Foods operates direct-store-delivery (DSD) and warehouse bakery businesses. DSD represented about 82% of sales and warehouse delivery about 18%. The filing is unaudited; fiscal 2013 is a 52-week year.
Major 2013 transactions included the $355 million Hostess asset acquisition, completed July 19, and the approximately $50 million Sara Lee/Earthgrains California transaction, completed in February. The Hostess brands were reintroduced near quarter-end, so their sales contribution in the quarter was not material. Flowers also acquired a Modesto bun line for $10.3 million.
Financial performance and liquidity
| Metric | 12 weeks ended Oct. 5, 2013 | 12 weeks ended Oct. 6, 2012 | 40 weeks ended Oct. 5, 2013 | 40 weeks ended Oct. 6, 2012 |
|---|---|---|---|---|
| Sales | $878.5 | $717.3 | $2,907.5 | $2,297.0 |
| Operating income | $53.3 | $52.7 | $278.1 | $159.3 |
| Net income | $33.9 | $31.2 | $192.4 | $97.6 |
| Diluted EPS | $0.16 | $0.15 | $0.91 | $0.47 |
| Operating margin | 6.1% | 7.3% | 9.6% | 6.9% |
| Net margin | 3.9% | 4.4% | 6.6% | 4.2% |
Quarterly sales rose 22.5%, primarily on volume growth; management attributed 20.1 percentage points to volume, 3.6 points to acquisition, and a 1.2-point decline to pricing/mix. For the 40-week period, sales rose 26.6%, reflecting 20.3 points from volume, 7.3 points from acquisitions, and a 1.0-point pricing/mix decline. YTD operating income included a $50.1 million bargain-purchase gain from the Sara Lee/Earthgrains transaction; excluding that item, operating income was approximately $228.1 million.
For the 12-week quarter, operating income was nearly flat despite higher sales, and operating margin narrowed. Production costs were 53.3% of sales, unchanged year over year; selling, distribution and administrative expenses increased to 37.3% of sales from 35.9%. For the 40-week period, production costs improved to 52.4% of sales from 53.4%, while selling, distribution and administrative expenses rose slightly to 36.6% from 36.3%.
- Cash flow: Forty-week operating cash flow was $220.3 million, compared with $182.2 million. Investing activities used $477.7 million, including acquisitions; financing activities provided $254.8 million. Cash declined $2.6 million to $10.7 million. Capital expenditures were $71.8 million; management estimated full-year 2013 capital expenditures of approximately $90–$100 million.
- Debt and liquidity: Debt and capital lease obligations totaled $926.6 million at October 5, versus $607.0 million at December 29, 2012. This included $296.3 million on the new term loan, $125 million under the receivables securitization facility, $71 million on the revolver, and $399.2 million of senior notes. The company reported $413 million available on its $500 million revolving credit facility, plus $25 million undrawn under the $150 million securitization facility. Current assets were $487.2 million and current liabilities $320.6 million. The company reported compliance with applicable debt covenants.
- Other metrics: YTD net interest expense was $10.4 million, up from $6.5 million. The effective tax rate was 28.1% versus 36.2%, helped by the acquisition gain and discrete tax benefits. Dividends paid were $0.3317 per share for the 40-week period.
Material changes versus the prior comparable period
- Growth reflects volume gains following Hostess’ liquidation, acquisitions (including Lepage and the California assets), and expansion across branded retail, store-branded, and non-retail categories. Hostess-related revenue itself was not material through the reporting date.
- YTD reported profit benefited materially from the $50.1 million bargain-purchase gain. The effective tax rate also benefited from that item and discrete tax benefits.
- Debt increased substantially to fund acquisitions. Interest expense increased, and the company added a two-year receivables securitization facility.
- Quarterly DSD operating income increased, but warehouse operating income declined; consolidated quarterly operating income rose only 1.2% as corporate costs and Hostess facility carrying costs increased.
Outlook, management commentary, risks and unusual items
- Management expected sales to grow but provided no quantified sales or earnings guidance. It cautioned that growth levels were uncertain given economic conditions and baking-industry competition. Hostess brand reintroduction was expected to continue over the following months and throughout fiscal 2014.
- Management said commodity prices had increased and expected that trend to continue through 2013. Wheat, sweeteners, shortening, packaging, energy, and the availability or effectiveness of hedges could affect costs and margins.
- Hostess facility carrying costs were $5.3 million during the quarter; the filing also identifies $2.8 million of carrying costs affecting production costs. YTD acquisition-related costs were $17.3 million. The Sara Lee/Earthgrains deal generated the $50.1 million bargain-purchase gain; a $1.4 million Hostess legal-settlement gain was also recorded in quarterly selling, distribution and administrative expense.
- Walmart/Sam’s Club represented 20.1% of quarterly sales and 20.2% of 40-week sales, making customer concentration an important exposure. Risks also include customer and distributor credit, changing consumer preferences, integration and execution of acquisitions, competition, and interest-rate increases on variable-rate debt.
- The company said ordinary-course litigation was not expected to have a material adverse effect based on currently available facts, though adverse developments could affect a future period. The Hostess trademark litigation was settled at the acquisition closing. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the requested period: this is a 2013 Q3 filing, not a 2012 Q3 filing.
- Assess underlying earnings excluding the $50.1 million bargain-purchase gain and the effect of tax benefits; verify acquisition costs and carrying costs.
- Track Hostess brand relaunch sales, acquired-facility utilization, integration costs, and the transition of Lepage and California operations to DSD routes.
- Monitor debt, variable-rate exposure, covenant headroom, and remaining availability under revolving and securitization facilities.
- Check whether volume growth persists and whether commodity inflation or pricing/mix changes pressure margins; evaluate Walmart/Sam’s Club concentration.
- Compare actual capital expenditures and subsequent operating results with management’s stated $90–$100 million full-year capital expenditure estimate and qualitative outlook.