Flowers Foods, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2015, the 12 weeks ended July 18, 2015; year-to-date results cover 28 weeks. Comparatives are for periods ended July 12, 2014. The filing’s actual period is 2015, notwithstanding the request metadata identifying 2014 Q2.
Business context and performance
Flowers Foods operates bakery businesses through direct-store-delivery (DSD) and warehouse-delivery segments. DSD accounted for about 84% of year-to-date sales. Walmart/Sam’s Club represented 19.7% of second-quarter sales, making it a significant customer concentration.
- Second quarter: Sales were $888.8 million, up 1.8%; management attributed the increase to 0.9% volume growth and 0.9% favorable pricing/mix. DSD sales rose 2.1%; warehouse sales rose 0.3%.
- Year to date: Sales were $2.035 billion, up 0.4%. DSD sales increased 1.1%, while warehouse sales declined 3.2%.
- Branded retail sales grew, while store-branded sales declined. Management cited growth in acquired Hostess brands and expansion markets, alongside exits from certain store-brand and tortilla businesses.
Financial results and liquidity
| Metric | 12 weeks ended July 18, 2015 | 12 weeks ended July 12, 2014 | 28 weeks ended July 18, 2015 | 28 weeks ended July 12, 2014 |
|---|---|---|---|---|
| Sales | $888.8m | $872.8m | $2,034.8m | $2,026.7m |
| Operating income | $80.0m | $65.4m | $176.6m | $163.6m |
| Operating margin | 9.0% | 7.5% | 8.7% | 8.1% |
| Net income | $51.8m | $42.1m | $113.1m | $103.1m |
| Diluted EPS | $0.24 | $0.20 | $0.53 | $0.48 |
| Net margin | 5.8% | 4.8% | 5.6% | 5.1% |
- For the quarter, production costs declined to 51.4% of sales from 52.5%; management cited lower flour and sweetener costs, lower stales, and improved efficiency. Selling, distribution and administrative costs were 35.9% of sales versus 36.1%.
- Net interest expense was $0.9 million for the quarter and $2.4 million year to date, down from $1.7 million and $4.9 million, respectively.
- Year-to-date operating cash flow was $215.9 million, versus $172.9 million. Property, plant and equipment purchases were $40.6 million; cash flow after those purchases was approximately $175.4 million. Dividends paid were $59.2 million.
- At July 18, cash was $46.5 million; total debt and capital lease obligations were $693.3 million, including $34.2 million current. Shareholders’ equity was $1.192 billion. Current assets of $516.3 million exceeded current liabilities of $344.3 million.
- No borrowings were outstanding under the $500 million revolving credit facility; $484.3 million was available after letters of credit. The receivables facility also had no borrowings and $176.5 million available. The company reported covenant compliance.
Changes, outlook, risks and unusual items
- Second-quarter impairment charges totaled $2.3 million: $1.5 million related to a production line closure and $0.8 million on properties held for sale. The line transition was expected in Q3 2015.
- The company amended its revolving credit facility in April 2015, extending maturity to April 2020 and reducing applicable margins and facility fees.
- Fiscal 2015 capital expenditures were estimated at approximately $85–$95 million; $40.6 million had been spent year to date. Management expected an additional $2.5 million of qualified pension contributions during the remainder of fiscal 2015.
- On August 12, 2015, after quarter-end, Flowers agreed to acquire Dave’s Killer Bread for approximately $275 million cash, subject to regulatory approval and customary closing conditions. The company expected to fund it with cash and its revolving facility; completion was expected in Q3 2015.
- Six distributor misclassification complaints were noted in addition to the certified class action. The company said it could not reasonably estimate any potential loss. It viewed the ultimate resolution of pending matters generally as unlikely to materially affect financial condition, results or cash flows, while acknowledging adverse developments could affect a future period.
- Risks include commodity-price volatility, competitive pricing, changing consumer preferences, dependence on key customers, distributor classification litigation, pension costs, and execution and impairment risks for acquired brands. Commodity hedges had a net fair-value liability of $8.9 million; a hypothetical 10% commodity-price move was estimated to change hedge fair value by $11.0 million, substantially offset by movements in underlying input costs.
- Prior-year sales were revised to present certain discounts as contra-revenue rather than selling expense. The revision reduced reported sales and selling expense equally and did not affect operating income, net income or EPS.
- The filing provides no specific full-year sales or earnings guidance. It reports effective tax rates of 35.0% year to date in both comparative periods; the quarter’s rate was 34.6% versus 33.9%.
Most important facts for investors to verify
- Whether Dave’s Killer Bread closed on the anticipated terms and how the $275 million purchase affected debt, interest costs and results.
- Whether sales and margin growth persisted, particularly given year-to-date warehouse sales declines and store-brand weakness.
- The outcome and potential financial exposure of distributor misclassification litigation.
- Walmart/Sam’s Club concentration and the company’s capacity to manage commodity costs, including hedge effectiveness and future input-price changes.
- Actual fiscal 2015 capital expenditures and pension contributions compared with management’s estimates, as well as progress on held-for-sale assets and the production-line transition.