Flowers Foods, Inc. — Form 10-Q Summary
Period: The filing covers the sixteen weeks ended April 21, 2018, compared with the sixteen weeks ended April 22, 2017. Although the request metadata labels this “2017 Q1,” the filing itself is for fiscal 2018 first quarter.
Business context and results
Flowers Foods produces and markets packaged bakery products through its Direct-Store-Delivery (DSD) and Warehouse segments. DSD represented approximately 84% of sales and Warehouse approximately 16%. The company was transitioning to a new organizational structure, with full implementation expected at the beginning of fiscal 2019.
| Metric | 16 weeks ended Apr. 21, 2018 | 16 weeks ended Apr. 22, 2017 | Change |
|---|---|---|---|
| Sales | $1,206.5 million | $1,187.6 million | Up 1.6% |
| Income from operations | $76.6 million | $98.2 million | Down 22.0% |
| Operating margin | 6.4% | 8.3% | Down 1.9 percentage points |
| Net income | $51.2 million | $60.4 million | Down 15.2% |
| Net margin | 4.2% | 5.1% | Down 0.9 percentage points |
| Diluted EPS | $0.24 | $0.29 | Down $0.05 |
| Operating cash flow | $97.1 million | $81.9 million | Up $15.2 million |
| Capital expenditures | $26.6 million | $17.5 million | Up $9.1 million |
| Cash dividends paid | $36.2 million | $33.9 million | Up $2.4 million |
Sales growth reflected branded organic product growth and more favorable pricing/mix, partly offset by volume softness in some categories. Production costs rose to 51.8% of sales from 51.2%, with higher flour costs, outside product purchases and lower manufacturing efficiencies. Selling, distribution and administrative expense declined to 37.7% of sales from 39.0%, supported by lower workforce-related costs and reduced Project Centennial consulting costs.
DSD sales increased 1.6%; operating income declined 3.3%, reflecting higher costs and one-time charges. Warehouse sales increased 1.7%, but operating income fell 67.4%, principally because the prior-year period included a $28.9 million divestiture gain and current-period product mix shifted toward lower-margin categories.
Financial position and liquidity
- At April 21, 2018, cash was $34.2 million, total assets were $2.67 billion and stockholders’ equity was $1.29 billion.
- Debt and capital lease obligations had a carrying amount of $829.9 million, including $11.8 million current maturities; long-term debt and capital leases were $818.1 million. Cash less total reported debt and capital leases was approximately negative $795.7 million.
- No borrowings were outstanding under the $500 million revolving credit facility or the accounts receivable securitization facility. Reported availability was $491.5 million and $190.2 million, respectively, or $681.7 million combined, subject to facility terms and borrowing-base conditions. The company reported compliance with debt covenants.
- Operating cash flow less capital expenditures was approximately $70.6 million. Financing cash outflows were $40.6 million, including dividends; cash increased by $29.1 million over the period.
- Accounts receivable securitization facility maturity was extended to September 2019; the revolving credit facility matures in November 2022. Senior notes include $400 million due 2022 at 4.375% and $400 million due 2026 at 3.5% face value.
Material changes, outlook and commentary
- Net income declined despite sales growth and a lower effective tax rate. The comparison was affected by the prior-year $28.9 million divestiture gain and current-quarter pension settlement loss, multi-employer pension withdrawal costs, restructuring charges and an asset impairment.
- The effective tax rate was 26.6%, versus 36.5%, primarily due to the federal corporate tax rate reduction under U.S. tax reform. A previously recorded $48.2 million tax benefit remained provisional; the company said its final impact could differ, potentially materially.
- Project Centennial’s long-term goals are sales growth of 2%–4% and EBITDA margins of 12%–14%. Management expected the new operating model and strategic investments to support progress toward the upper end of those goals in fiscal 2019 and beyond. These are long-term goals, not specific fiscal 2018 quarterly guidance.
- Management targeted cumulative gross savings of $70–$80 million by the end of fiscal 2018 from purchased-goods and services savings, supply-chain optimization and organizational changes; approximately $32 million had been realized in fiscal 2017. The filing does not specify realized fiscal 2018 year-to-date savings.
- Management expected fiscal 2018 capital expenditures of $95–$105 million, additional Project Centennial consulting costs of $3–$4 million, and relocation costs of $3.5–$4 million for the remainder of the year. Ingredient costs were expected to remain higher for the rest of fiscal 2018. Additional pension settlement charges were possible, depending on lump-sum elections.
- The company reported 35 pending distributor misclassification complaints; it could not estimate possible losses for unresolved cases. A securities class action was proceeding to fact discovery in part, and potential losses were not estimable. Certain distributor settlements were agreed or preliminarily approved. The company also reported a Department of Labor compliance review.
- Other risks include customer concentration (Walmart/Sam’s Club accounted for 20.0% of sales and 19.2% of trade receivables), commodity-price volatility, consumer and competitive shifts, independent-distributor model litigation, and execution of restructuring and growth plans.
- The company recognized a $2.5 million impairment on a non-distributor note receivable after counterparty default, a $4.7 million pension settlement loss, $2.3 million of additional multi-employer pension withdrawal costs, and $1.3 million of restructuring charges. The prior-year period included the $28.9 million gain on sale of the Cedar Rapids mix business.
- The filing says 2017 comparative cash flow figures were revised to correct classification of certain territory and note-receivable cash flows. Management concluded the error was not material and said it did not affect previously reported balance sheets, income statements or equity statements.
Important facts for investors to verify
- Confirm the period: this filing reports fiscal 2018 Q1, not 2017 Q1 as stated in the request metadata.
- Track branded sales, volume, pricing/mix and category trends, especially branded breads versus buns, rolls and cakes, as well as Warehouse Segment margins.
- Assess whether cost inflation, outside product purchases and manufacturing efficiencies offset Project Centennial savings and lower labor costs.
- Monitor cash conversion, capital spending, dividend commitments, pension contributions and use of available borrowing facilities.
- Follow the status and potential cost of distributor classification litigation, the securities action, the DOL review and the multi-employer pension withdrawal liability.
- Review progress toward savings and long-term sales and EBITDA-margin goals, and whether the provisional tax-reform estimate requires adjustment.