Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The filing is for fiscal second quarter ended July 16, 2011—not 2010 Q2 as stated in the request metadata. The quarter comprised 12 weeks; year-to-date figures cover 28 weeks. Financial amounts below are in millions unless noted.
Business context and reporting period
Flowers Foods produces and markets packaged bakery products through direct-store-delivery (DSD) and warehouse-delivery segments. Results include Tasty Baking Company from its May 20, 2011 acquisition date. The filing is unaudited and notes interim results are not necessarily indicative of full-year performance. Share and per-share figures reflect the May 2011 3-for-2 stock split.
Financial performance
| Metric | 12 weeks ended July 16, 2011 | Prior-year quarter | 28 weeks ended July 16, 2011 | Prior-year 28 weeks |
|---|---|---|---|---|
| Sales | $642.6 | $607.7 | $1,444.4 | $1,402.7 |
| Operating income | $43.1 | $51.2 | $104.6 | $113.3 |
| Operating margin | 6.7% | 8.4% | 7.2% | 8.1% |
| Net income | $28.2 | $33.8 | $69.4 | $74.4 |
| Net margin | 4.4% | 5.6% | 4.8% | 5.3% |
| Diluted EPS | $0.21 | $0.24 | $0.51 | $0.54 |
Quarterly sales increased 5.7%, supported by pricing and mix (+4.5 percentage points) and Tasty (+3.3 points), partly offset by lower volume (−2.1 points). Year-to-date sales increased 3.0%, with pricing/mix contributing 3.2 points and Tasty 1.4 points, offset by volume decline of 1.6%. Branded and store-branded retail sales grew, while non-retail sales weakened. Wal-Mart/Sam’s Club accounted for 22.1% of quarterly sales and 22.0% year to date.
Profitability declined despite higher revenue. Quarterly materials and production costs rose to 53.2% of sales from 52.4%; SG&A rose to 36.8% from 35.9%. Management cited higher ingredient costs, distribution costs, Tasty’s cost structure, and acquisition expenses. Warehouse-delivery operating income fell 56.8% in the quarter; DSD operating income increased 7.4%.
Cash flow, debt and liquidity
- For the 28 weeks, operating cash flow was $66.2, down from $155.3 in the prior-year period. Investing used $211.4, including $164.5 net cash for Tasty and $43.4 in capital expenditures. Financing provided $152.2, including $190.1 net debt issuance; dividends were $38.4 and share repurchases $18.0.
- Cash was $13.7 at July 16, 2011, versus $6.8 at January 1, 2011. Current assets were $390.9 and current liabilities $297.9, or working capital of approximately $93.0.
- Total debt and capital leases were $318.9, including $204.0 outstanding on the revolving facility and $103.1 on the term loan. The comparable January 1 balance was $127.3. The company reported compliance with debt covenants.
- The amended senior unsecured revolving facility is $500.0, with two one-year extension options and potential increases to $700.0 subject to conditions. The term loan matures August 1, 2013. Management stated that cash, operating cash flow, and available credit should meet foreseeable financial needs.
- Capital spending guidance was approximately $85–$90 for fiscal 2011. The company paid $0.283 per share in dividends during the 28-week period.
Material changes, outlook and risks
- Tasty acquisition: Acquired May 20 for aggregate consideration of $172.1; the filing reports $164.5 net cash used for the acquisition. Tasty contributed $20.2 of revenue and $0.2 of operating income after acquisition. Flowers recorded $20.3 of goodwill and $51.4 of identifiable intangible assets. Acquisition-related costs were $5.3 year to date.
- Costs and outlook: Management said commodity costs increased in Q2 and expected them to continue rising during the rest of fiscal 2011. It cited competitive conditions and elevated promotional activity as ongoing sales pressures. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Other unusual items: First-quarter manufacturing-facility closure costs were $2.8 in production costs and $2.4 in SG&A. Commodity hedges had a net fair value liability of $12.6 at July 16; management said hedges reduce, but do not eliminate, exposure to input-cost volatility. The company also reported a $5.1 fair-value liability on interest-rate swaps.
- Risks and contingencies: Key risks include commodity availability and pricing, competitive promotions and consumer demand, employee and benefit costs, customer/distributor credit risk, acquisition integration, and regulatory or environmental changes. Wal-Mart/Sam’s concentration is material. A trademark lawsuit against Hostess concerning Nature’s Own/Nature’s Pride was expected to proceed to trial in late 2011 or 2012; Flowers’ summary-judgment motion had been denied. Management considered other ordinary-course legal matters unlikely to materially affect the company overall, while noting adverse developments could affect a particular period.
- Management judged disclosure controls effective and reported no material change in internal control, while excluding Tasty from its internal-control assessment as it evaluated Tasty’s control environment.
Important facts for investors to verify
- Confirm the correct reporting period: this is fiscal Q2 2011, ended July 16, 2011, despite the 2010 Q2 request label.
- Track whether pricing and mix can offset volume declines and ongoing ingredient-cost inflation, particularly in warehouse delivery.
- Assess Tasty’s integration, profitability, acquisition-related costs, and the assumptions behind acquired goodwill and intangible assets.
- Monitor operating cash flow, leverage, revolving-facility availability, covenant headroom, and planned capital spending.
- Review the impact of commodity and interest-rate hedges, including cash collateral and amounts ultimately reclassified into earnings.
- Follow the Hostess trademark litigation and Flowers’ concentrated exposure to Wal-Mart/Sam’s Club.