Flowers Foods, Inc. — Form 10-Q Summary
Period: The filing reports the 16 weeks ended April 20, 2013, compared with the 16 weeks ended April 21, 2012. The request metadata says “2012 Q1,” but that does not match the filing’s reporting period.
Business context and results
Flowers Foods produces bakery products through direct-store-delivery (DSD) and warehouse-delivery segments. DSD represented about 82% of sales. The company said sales growth reflected increased volume, acquisitions and demand shifts following Hostess’s shutdown.
| Metric | 16 weeks ended Apr. 20, 2013 | Prior comparable period | Change |
|---|---|---|---|
| Sales | $1,130.8 million | $898.2 million | +25.9% |
| Income from operations | $151.2 million | $59.2 million | +155.3% |
| Net income | $113.3 million | $37.9 million | +198.5% |
| Diluted EPS | $0.81 | $0.28 | +$0.53 |
| Cash from operating activities | $86.8 million | $60.1 million | Increased |
- Sales growth comprised 19.3 percentage points from volume, 7.7 points from acquisitions and a 1.1-point negative effect from pricing/mix. DSD sales rose 25.1%; warehouse sales rose 29.5%.
- Production costs were 51.8% of sales, versus 53.3% a year earlier; selling, distribution and administrative expenses were 36.4%, versus 36.8%.
- Reported operating margin was 13.4%, versus 6.6%. The 2013 result included a $51.3 million bargain-purchase gain from the Sara Lee/Earthgrains California transaction; excluding that gain, operating income was about $99.9 million, or 8.8% of sales.
- Effective tax rate was 22.8%, versus 35.9%; management attributed much of the reduction to the acquisition gain, which favorably affected the rate by about 12 percentage points.
Cash, debt and liquidity
- Cash and cash equivalents were $14.2 million at April 20, 2013. Operating cash flow of $86.8 million was more than offset by $92.3 million of investing outflows; financing activities provided $6.5 million.
- Total debt and capital lease obligations were $638.7 million, including $38.1 million of current maturities, compared with $607.0 million at December 29, 2012. The balance included $399.1 million of 4.375% senior notes due 2022, $176.7 million drawn on the revolving facility and $33.8 million on the existing term loan.
- The $500 million revolving credit facility had $307.7 million available after borrowings and letters of credit. The company reported compliance with debt covenants. Current assets were $504.6 million and current liabilities $332.3 million.
- Capital expenditures were $22.6 million in the period; the company estimated fiscal 2013 capital expenditures of $90–$100 million. It expected an additional $15.2 million in qualified pension contributions for the remainder of fiscal 2013.
Material developments, outlook and risks
- California acquisition: The company paid approximately $50 million for California licenses to Sara Lee and Earthgrains brands and a closed Stockton bakery. The transaction generated the $51.3 million bargain-purchase gain. A $10 million holdback is subject to conditions tied to ending a co-pack arrangement or reopening the bakery; its recorded fair value was $7.6 million.
- Pending Hostess transaction: Flowers’ $360 million bid for specified brands, 20 bakeries and approximately 38 depots was declared the highest and best bid and remained subject to regulatory review. Management expected completion in the second half of 2013. An $18 million deposit had been paid and would be applied to the purchase price or returned if the deal did not close. A separate $30 million Beefsteak bid was topped by another bidder and terminated; Flowers received a $0.9 million break-up fee.
- A delayed-draw term facility of up to $300 million was arranged to partially finance the Hostess purchase. The existing $33.8 million term loan was due to mature in August 2013. The revolving facility and term loan were amended to provide more favorable covenant terms.
- Management expected commodity costs to rise during 2013 and cited volatility in ingredients, packaging and energy. Derivatives were used for hedging, not speculation; the commodity hedge portfolio had a net fair-value liability of $6.8 million. Other risks include customer concentration (Wal-Mart/Sam’s Club accounted for 20.4% of sales), competition, acquisition execution and consumer demand changes.
- Management said it expected sales to grow but gave no quantified sales or earnings guidance and cautioned that growth was uncertain. The Oxford, Pennsylvania facility expansion was expected to require about $31 million over two years, with a possible additional $18 million bun line investment.
- The filing described ordinary-course legal matters and the stayed trademark litigation involving Hostess’s Nature’s Pride brand; the proposed Hostess transaction included a transfer of that brand and a settlement/release. Management said pending matters were not expected to materially harm overall financial condition, results or cash flows, though adverse developments could affect a future period.
Important facts for investors to verify
- Regulatory approval, closing timing, funding and integration costs for the Hostess acquisition, including the ultimate use of the $300 million term commitment.
- Underlying operating performance excluding the $51.3 million acquisition gain, and whether volume and margin improvements persist.
- Commodity-cost trends, hedge effectiveness and the timing of any effects on reported earnings and cash flow.
- Debt levels and covenant headroom after any acquisition financing, alongside planned capital expenditures and pension contributions.
- Whether the California holdback is recovered and how the co-pack and Stockton bakery decisions affect production capacity and costs.