Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 12 weeks ended July 17, 2010, and the 28 weeks ended July 17, 2010—not 2009 Q2 as stated in the request metadata. Comparative periods ended July 18, 2009. Dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
Flowers Foods produces and markets packaged bakery products, including bread, rolls, tortillas, snack cakes and pastries. It reports two segments: direct-store-delivery (DSD) and warehouse delivery. Fiscal 2010 Q2 was a 12-week period; the first 28 weeks are presented year to date.
Financial performance and liquidity
| Metric | 12 weeks ended Jul. 17, 2010 | 12 weeks ended Jul. 18, 2009 | 28 weeks ended Jul. 17, 2010 | 28 weeks ended Jul. 18, 2009 |
|---|---|---|---|---|
| Sales | $607.7 | $614.4 | $1,402.7 | $1,421.5 |
| Income from operations | $51.2 | $48.9 | $113.3 | $108.1 |
| Net income attributable to Flowers Foods | $33.8 | $30.3 | $74.4 | $67.7 |
| Diluted EPS | $0.37 | $0.33 | $0.81 | $0.73 |
| Operating margin | 8.4% | 8.0% | 8.1% | 7.6% |
| Net margin attributable to Flowers Foods | 5.6% | 4.9% | 5.3% | 4.8% |
- Quarterly sales declined 1.1%, while operating income rose 4.9%, net income attributable to Flowers Foods rose 11.3%, and diluted EPS increased 12.1%. Year-to-date sales fell 1.3%; attributable net income rose 9.9% and diluted EPS increased 11.0%.
- Quarterly production costs were 52.4% of sales versus 54.3% a year earlier; selling, distribution and administrative expenses rose to 35.9% of sales from 35.3%. Management cited lower ingredient costs as a key operating benefit.
- For the first 28 weeks, operating cash flow was $155.3, compared with $116.4 a year earlier. Investing used $61.3, including $54.9 of capital expenditures; financing used $106.4, including $74.6 of net debt repayments and $34.3 of dividends.
- Cash was $6.5 at July 17, 2010, down from $18.9 at January 2, 2010. Current assets were $328.7 and current liabilities $243.0.
- Total debt and capital leases were $162.6, including $25.3 current maturities, versus $251.7 at January 2, 2010. Revolver borrowings were $25.0 and term-loan borrowings $123.8. The company reported compliance with debt covenants and had a $250 million revolving facility expiring October 2012.
- Quarterly and year-to-date cash dividends were $0.20 and $0.375 per common share, respectively.
Material changes versus the prior comparable period
- Management attributed the quarterly sales decline primarily to unfavorable pricing and product mix (3.5 percentage points) and VIE deconsolidation (0.5 points), partly offset by volume growth (1.9 points) and acquisitions (1.0 point). Year-to-date drivers were pricing/mix (negative 2.9 points), VIE deconsolidation (negative 0.3), volume (positive 0.4) and acquisitions (positive 1.5).
- DSD sales declined 3.5% in Q2, while warehouse-delivery sales increased 10.1%, supported by acquisitions and volume. DSD operating income improved; warehouse-delivery operating income declined, in part because the prior-year period included a $3.0 gain on acquisition.
- Effective January 3, 2010, Flowers prospectively deconsolidated a transportation-related variable interest entity (VIE) under revised accounting guidance. This reduced reported sales and removed the VIE’s noncontrolling-interest presentation; the company said the VIE had no effect on attributable net income.
- Total debt and capital leases fell substantially from year-end, primarily reflecting net repayments. Capital expenditures were higher year over year: $54.9 versus $28.2 for the first 28 weeks.
Outlook, management commentary, risks and unusual items
- No earnings or sales guidance was provided in the supplied filing. Management estimated fiscal 2010 capital expenditures of approximately $95–$100 million.
- Management cited competitive pricing and elevated promotional activity as pressures on sales and mix. It also noted consumer shifts from white bread toward soft-variety products and weakness in foodservice sales.
- Ingredient, packaging and energy costs remain exposed to market volatility, weather, regulation and supply conditions. Commodity hedges had a net fair value of $12.0 million; management stated that changes in hedge values are expected to be substantially offset by changes in underlying input costs.
- Wal-Mart/Sam’s Club accounted for 22.1% of Q2 sales and 21.6% of first-half sales, creating customer concentration exposure.
- The company reported a $7.9 million negative fair value for interest-rate swaps. It said it believed operating cash flow, cash and available credit capacity would cover foreseeable requirements; it was in compliance with covenants at period end.
- Flowers is pursuing trademark litigation against Hostess concerning the Nature’s Own and Nature’s Pride marks. The company said ordinary-course legal matters were not expected to materially affect overall financial condition, results or cash flows, though adverse developments could affect a particular period.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing identifies no changes to the risk factors disclosed in the 2010 Form 10-K.
Important facts for investors to verify
- Confirm the period: the filing covers 2010 Q2 and 28-week year-to-date results, despite the request metadata indicating 2009 Q2.
- Track whether pricing and mix pressure persists and whether volume, branded product trends and acquisition contributions offset it.
- Assess the durability of margin improvement, particularly the benefit from lower ingredient costs versus higher workforce, advertising, packaging and depreciation costs.
- Review cash conversion, planned capital spending, low period-end cash and the pace of debt repayment against dividend commitments.
- Monitor customer concentration, commodity and interest-rate exposures, covenant compliance, and developments in the Hostess trademark litigation.