Flowers Foods, Inc. — Form 10-Q Summary
Reporting-period clarification: The request identifies 2011 Q1, but the filing is for the sixteen weeks ended April 21, 2012, compared with the sixteen weeks ended April 23, 2011. The filing was signed May 24, 2012. Flowers Foods operates direct-store-delivery (DSD) and warehouse-delivery bakery businesses.
Financial results
| Metric | 16 weeks ended Apr. 21, 2012 | Comparable 2011 period | Change |
|---|---|---|---|
| Sales | $898.2 million | $801.8 million | +12.0% |
| Income from operations | $59.2 million | $61.5 million | -3.7% |
| Operating margin | 6.6% | 7.7% | -1.1 percentage points |
| Net income | $37.9 million | $41.2 million | -7.8% |
| Diluted EPS | $0.28 | $0.30 | -6.7% |
| Operating cash flow | $60.1 million | $72.6 million | -17.2% |
Materials, supplies, labor and other production costs rose 16.2%, faster than sales, and increased to 53.3% of sales from 51.4%. Management attributed the pressure mainly to higher ingredient costs, which added 260 basis points to production costs as a share of sales, and higher packaging costs. Selling, distribution and administrative expenses declined to 36.8% of sales from 37.4%, partly offsetting the cost pressure. Net income margin was 4.2%, versus 5.1%.
Sales growth reflected the Tasty Baking acquisition (7.9 percentage points), favorable pricing and mix (2.4 points), and volume (1.7 points). Branded retail sales rose 16.1%; store-branded retail rose 11.5%; non-retail and other sales rose 6.0%. DSD sales increased 14.0%, while warehouse-delivery sales increased 3.8%. DSD operating income was $63.8 million, down from $64.2 million; warehouse-delivery operating income was $9.6 million, down from $11.3 million.
Cash, debt and liquidity
- Cash and cash equivalents were $186.1 million at April 21, 2012, up from $7.8 million at year-end. Operating activities provided $60.1 million; investing activities used $13.4 million; financing activities provided $131.7 million.
- Capital expenditures were $14.3 million for the period. Management estimated fiscal 2012 capital expenditures of approximately $75 million to $85 million.
- Total debt and capital lease obligations were $496.6 million, including $53.6 million current maturities; long-term debt was $443.0 million. Cash less debt and capital leases was approximately negative $310.4 million.
- On April 3, 2012, the company issued $400 million of 4.375% senior notes due 2022. Proceeds partly repaid revolving-credit borrowings. At period-end, there were no revolver borrowings, $82.5 million outstanding under the term loan, and $485.7 million of available credit capacity after letters of credit.
- The company reported compliance with its debt covenants. The term loan matures August 1, 2013. Total current assets were $562.7 million and current liabilities $278.2 million.
- Dividends paid were $20.6 million, or $0.15 per common share. Stock repurchases totaled $1.4 million.
Material changes, outlook and risks
- The Tasty Baking acquisition, completed in May 2011 for an aggregate purchase price of $172.1 million, expanded Flowers’ presence in the Northeast and contributed materially to year-over-year sales growth. Tasty contributed $63.4 million of current-period sales.
- Management expected commodity costs to be higher in 2012 than in 2011. The company hedges exposure to ingredients and packaging, but adverse raw-material prices or reduced availability of hedging instruments could pressure margins. Management cited competitive conditions and high industry promotional activity.
- The filing provides no specific full-year sales or earnings guidance. It does provide the capital-expenditure estimate above and states that available cash, operating cash flow and credit capacity should support foreseeable financial requirements.
- Wal-Mart/Sam’s Club accounted for 21.3% of sales, down from 21.9% in the comparable period, making customer concentration a key exposure. No other customer represented 10% or more.
- Commodity derivatives had a net fair-value liability of $9.5 million; interest-rate swaps had a $2.6 million liability. The company reported using derivatives for hedging, not speculation. Pension contributions were $12.1 million in the period, with an additional $6.1 million expected during the remainder of fiscal 2012.
- Flowers’ trademark litigation against Hostess over the Nature’s Pride mark was stayed following Hostess’ Chapter 11 filing. The company said pending matters were not expected to materially affect overall financial condition, results or cash flows, though adverse developments could affect a future period.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. Tasty was excluded from the period-end internal-control assessment and was to be included in the second-quarter assessment.
Most important facts for investors to verify
- Confirm the reporting period: this filing covers Q1 fiscal 2012, not Q1 2011.
- Assess whether acquisition-related sales growth and pricing can offset ingredient-cost inflation and the decline in operating margin.
- Review the $400 million note issuance, remaining term-loan balance, covenant headroom and refinancing needs around the 2013 term-loan maturity.
- Monitor cash conversion, the $75 million to $85 million capital-spending estimate, pension contributions and dividend commitments.
- Track Wal-Mart/Sam’s Club concentration, commodity-hedge exposure, and developments in the Hostess trademark dispute.