Flowers Foods, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2011 Q3, but the filing is for the third quarter of fiscal 2012, the 12 weeks ended October 6, 2012, and includes year-to-date results for the 40 weeks ended that date. Comparatives are the periods ended October 8, 2011. Amounts below are in millions except per-share data. Financial statements are unaudited.
Business context and reporting period
Flowers Foods produces and markets bakery products through two segments: direct-store-delivery (DSD) and warehouse delivery. The July 21, 2012 acquisition of Lepage Bakeries expanded the DSD business into New England and New York. The filing includes Lepage results from the start of the third quarter.
Financial results and liquidity
| Metric | 12 weeks to Oct. 6, 2012 | 12 weeks to Oct. 8, 2011 | 40 weeks to Oct. 6, 2012 | 40 weeks to Oct. 8, 2011 |
|---|---|---|---|---|
| Sales | $717.3 | $675.4 | $2,297.0 | $2,119.8 |
| Income from operations | $52.7 | $47.8 | $159.3 | $152.4 |
| Net income | $31.2 | $31.0 | $97.6 | $100.4 |
| Diluted EPS | $0.22 | $0.23 | $0.71 | $0.73 |
| Operating margin | 7.3% | 7.1% | 6.9% | 7.2% |
| Net margin | 4.4% | 4.6% | 4.2% | 4.7% |
- Quarterly sales rose 6.2%; management attributed 5.8 percentage points to Lepage, 2.7 points to pricing and mix, offset by a 2.3-point volume decline. For the 40-week period, sales grew 8.4%, including 6.2 points from acquisitions, 2.5 points from pricing and mix, and a 0.3-point volume decline.
- Quarterly operating income increased 10.3%, while net income increased 0.7%. For the 40 weeks, operating income increased 4.5%, but net income fell 2.8%. Higher interest expense associated with financing and higher debt weighed on earnings.
- Operating cash flow for the 40 weeks was $182.2, versus $94.8 a year earlier. Investing outflows were $365.1, including $318.4 for acquisitions and $49.2 for capital expenditures. Financing provided $189.2. Cash was $14.1 at October 6, compared with $7.8 at year-end 2011.
- At October 6, total debt and capital lease obligations were $603.9, including $72.0 current maturities, compared with $326.2 at December 31, 2011. The company had $377.8 of credit-facility availability, net of letters of credit, and reported compliance with its debt covenants. Current assets were $412.0 and current liabilities $334.3.
- Dividends paid were $64.4 for the 40 weeks; cash dividends per share were $0.47. The company repurchased 600,000 shares in the quarter for $12.2.
Material changes versus prior comparable periods
- The Lepage acquisition was completed for preliminary consideration of $382.1, comprising cash, deferred payments, and Flowers shares. Lepage contributed $39.2 in quarterly sales and $6.7 in quarterly operating income. Acquisition-related costs were $5.1 in the quarter and $8.5 year to date.
- The company issued $400.0 of 4.375% senior notes due 2022. Proceeds helped repay revolving debt and fund the Lepage acquisition. Debt increased materially from year-end, and quarterly net interest expense shifted from net interest income in the prior-year quarter.
- Quarterly materials and production costs declined to 53.3% of sales from 54.1%, but year-to-date costs rose to 53.4% from 52.8%, reflecting higher ingredient costs, particularly flour, sweeteners and oils. Quarterly SD&A rose to 35.9% of sales from 35.4%, partly due to acquisition costs and workforce-related expenses.
- DSD quarterly operating income was $58.6, compared with $47.0; warehouse delivery operating income was $7.6, compared with $7.3. Year to date, warehouse delivery operating income declined slightly to $23.5 from $23.8.
Outlook, commentary, risks and contingencies
- Management expected commodity costs in 2012 to exceed 2011 levels and used derivatives and forward purchase agreements to manage input-price volatility. It estimated fiscal 2012 capital expenditures of approximately $75–$85.
- No earnings or revenue guidance is provided in the supplied filing text. Management cited high promotional activity and competitive pressure in the baking industry, as well as lower volume in the quarter.
- After quarter-end, Flowers announced an agreement to acquire assets and brand licenses from BBU for approximately $50.0. The licenses cover Sara Lee and Earthgrains products in California, with stated annual sales of approximately $134, and Earthgrains products in the Oklahoma City market. Closings were expected in phases.
- Walmart/Sam’s Club represented 19.8% of quarterly sales and 21.0% of 40-week sales, creating customer concentration exposure. Other stated risks include raw-material costs and availability, competition and consumer preferences, customer and distributor credit risks, integration and execution of acquisitions, and operational disruptions.
- The company described ordinary-course legal matters as unlikely, based on currently available facts, to materially affect overall financial condition, results or cash flows, while noting that adverse developments could affect a particular period. A trademark lawsuit involving Hostess was stayed following Hostess’s Chapter 11 filing.
- Management said disclosure controls were effective. The company excluded Lepage from its internal-control assessment while evaluating its control environment; Lepage represented 20.8% of consolidated assets at October 6.
Most important facts for investors to verify
- Confirm the requested period: this filing reports Q3 2012, not Q3 2011.
- Assess whether Lepage’s contribution and expected integration benefits support continued growth, and review the final acquisition purchase-price allocation.
- Track debt, interest expense, covenant headroom, and refinancing needs, including the term loan due August 2013 and the $400.0 senior notes.
- Monitor sales volumes, promotional intensity, pricing and mix, ingredient costs, and the company’s ability to maintain margins.
- Review progress and actual economics of the announced BBU licenses and asset transactions, including the timing of phased closings.
- Evaluate customer concentration, pension funding requirements, and the status of the stayed Hostess trademark litigation.