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| FLO > SEC Filings for FLO > Form 10-Q on 4-Jun-2009 | All Recent SEC Filings |
4-Jun-2009
Quarterly Report
as select markets in California and Nevada through its direct store delivery
system. The warehouse delivery segment produces snack cakes for sale to retail,
vending and co-pack customers as well as frozen bread, rolls and buns for sale
to retail and foodservice customers primarily through warehouse distribution.
OVERVIEW:
Flowers Foods, Inc. is one of the nation's leading producers and marketers of
packaged bakery foods for retail and foodservice customers. The company produces
breads, buns, rolls, snack cakes and pastries that are distributed fresh in the
Southeast, Mid-Atlantic, and Southwest as well as select markets in California
and Nevada and frozen to customers nationwide. Our businesses are organized into
two reportable segments. The DSD segment focuses on the production and marketing
of bakery products to U.S. customers in the Southeast, Mid-Atlantic, and
Southwest, as well as select markets in California and Nevada primarily through
its direct-store-delivery system. The warehouse delivery segment produces snack
cakes for sale to retail vending and co-pack customers nationwide as well as
frozen bread, rolls and buns for sale to retail and foodservice customers
nationwide primarily through warehouse distribution. This organizational
structure is the basis of the operating segment data presented in this report.
We aim to achieve consistent and sustainable growth in sales and earnings by
focusing on improvement in the operating results of our existing businesses and,
after detailed analysis, acquiring businesses and properties that add value to
the company. We believe this consistent and sustainable growth will build value
for our shareholders. In August 2008, the company acquired ButterKrust Bakery
("ButterKrust") in Lakeland, Florida, adding additional production capacity in
the Florida market. Also in August 2008, the company acquired Holsum Holdings,
LLC ("Holsum") which operates two bakeries in the Phoenix, Arizona area and
expands the company into new geographic markets. In November 2007, the company
purchased property in Bardstown, Kentucky. In January 2008, the company began
construction of a bakery facility on this property that will produce fresh
breads and buns for markets in Tennessee, Kentucky, Ohio, and Indiana. The
facility began bread production on May 11, 2009.
Sales are principally affected by pricing, quality, brand recognition, new
product introductions and product line extensions, marketing and service. The
company manages these factors to achieve a sales mix favoring its higher-margin
branded products, while using private label products to absorb overhead costs
and maximize use of production capacity. Sales for the sixteen weeks ended
April 25, 2009 increased 19.3% as compared to the sixteen weeks ended April 19,
2008. Contributing to this increase were favorable pricing/mix, volume, and the
ButterKrust and Holsum acquisitions.
For the first quarter of fiscal 2009, diluted net income per share was $0.40
as compared to $0.39 per share for the first quarter of fiscal 2008, a 2.6%
increase. For the first quarter of fiscal 2009, net income attributable to
Flowers Foods, Inc. was $37.4 million, a 4.5% increase over $35.8 million
reported for the first quarter of fiscal 2008.
CRITICAL ACCOUNTING POLICIES:
Our financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP"). These principles are numerous and complex. Our
significant accounting policies are summarized in the company's Annual Report on
Form 10-K for the fiscal year ended January 3, 2009. In many instances, the
application of GAAP requires management to make estimates or to apply subjective
principles to particular facts and circumstances. A variance in the estimates
used or a variance in the application or interpretation of GAAP could yield a
materially different accounting result. In our Form 10-K for the fiscal year
ended January 3, 2009, we discuss the areas where we believe that the estimates,
judgments or interpretations that we have made, if different, would have yielded
the most significant differences in our financial statements and we urge you to
review that discussion. The following discussion provides the significant
changes to our critical accounting policies from those disclosed in our Form
10-K filed for the year ended January 3, 2009.
Earnings Per Share. In June 2008, the FASB issued FSP EITF No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities ("FSP 03-6-1"). FSP 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting and therefore need to be included in the earnings
allocation in calculating earnings per share under the two-class method
described in SFAS No. 128, Earnings per Share. The FSP 03-6-1 requires companies
to treat unvested share-based payment awards that have non-forfeitable rights to
dividend or dividend equivalents as a separate class of securities in
calculating earnings per share. The FSP 03-6-1 is effective for fiscal years
beginning after December 15, 2008; earlier application is not permitted.
The company adopted this standard as of January 4, 2009. See Note 10 of Notes to
Condensed Consolidated Financial Statements of this Form 10-Q for the required
disclosures and the impact upon adoption of this standard.
Derivatives and other Financial Instruments. In February 2008, the FASB
issued Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157
("FSP 157-2") which delayed the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 for all nonfinancial assets and liabilities
that are recognized or disclosed in the financial statements at fair value on a
nonrecurring basis only. These include nonfinancial assets and liabilities not
measured at fair value on an ongoing basis but subject to fair value adjustments
in certain circumstances, for example, assets that have been deemed to be
impaired. The company adopted this standard as of January 4, 2009 and it had no
impact upon adoption.
RESULTS OF OPERATIONS:
Results of operations, expressed as a percentage of sales and the dollar and
percentage change from period to period, for the sixteen week periods ended
April 25, 2009 and April 19, 2008, are set forth below (Dollars in thousands):
For the sixteen weeks ended
Percentage of Sales Increase (Decrease)
April 25, 2009 April 19, 2008 April 25, 2009 April 19, 2008 Dollars %
Sales
DSD $ 668,275 $ 553,881 82.8 81.8 $ 114,394 20.7
Warehouse delivery 138,732 122,826 17.2 18.2 15,906 13.0
Total $ 807,007 $ 676,707 100.0 100.0 $ 130,300 19.3
Gross margin1
DSD 2 $ 335,648 $ 291,382 50.2 52.6 $ 44,266 15.2
Warehouse delivery2 41,897 35,354 30.2 28.8 6,543 18.5
Total $ 377,545 $ 326,736 46.8 48.3 $ 50,809 15.6
Selling, marketing and
administrative expenses
DSD2 $ 259,181 $ 222,033 38.8 40.1 $ 37,148 16.7
Warehouse delivery2 23,027 22,373 16.6 18.2 654 2.9
Corporate3 11,814 7,269 - - 4,545 62.5
Total $ 294,022 $ 251,675 36.4 37.2 $ 42,347 16.8
Depreciation and Amortization
DSD2 $ 19,537 $ 15,957 2.9 2.9 $ 3,580 22.4
Warehouse delivery2 4,646 4,722 3.3 3.8 (76 ) (1.6 )
Corporate3 94 233 - - (139 ) (59.7 )
Total $ 24,277 $ 20,912 3.0 3.1 $ 3,365 16.1
Income from operations
DSD2 $ 56,930 $ 53,392 8.5 9.6 $ 3,538 6.6
Warehouse delivery2 14,224 8,259 10.3 6.7 5,965 72.2
Corporate3 (11,908 ) (7,502 ) - - (4,406 ) (58.7 )
Total $ 59,246 $ 54,149 7.3 8.0 $ 5,097 9.4
Interest income, net $ 459 $ 3,497 .1 .5 $ (3,038 ) (86.9 )
Income taxes $ 21,872 $ 20,562 2.7 3.0 $ 1,310 6.4
Net income $ 37,833 $ 37,084 4.7 5.5 $ 749 2.0
Net income attributable to
noncontrolling interest $ (452 ) $ (1,301 ) (.1 ) (.2 ) $ (849 ) (65.3 )
Net income attributable to
Flowers Foods, Inc. $ 37,381 $ 35,783 4.6 5.3 $ 1,598 4.5
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1. Gross margin is defined as sales less materials, supplies, labor and other production costs, excluding depreciation, amortization and distributor discounts
2. As a percentage of revenue within the reporting segment
3. The corporate segment has no revenues
CONSOLIDATED AND SEGMENT RESULTS
SIXTEEN WEEKS ENDED APRIL 25, 2009 COMPARED TO SIXTEEN WEEKS ENDED APRIL 19,
2008
Consolidated Sales.
For the 16 Weeks Ended For the 16 Weeks Ended
April 25, 2009 April 19, 2008
$ % $ % % Increase
(Amounts in (Amounts in
thousands) thousands)
Branded Retail $ 414,233 51.3 % $ 360,923 53.3 % 14.8 %
Store Branded Retail 127,927 15.9 87,266 12.9 46.6 %
Foodservice and Other 264,847 32.8 228,518 33.8 15.9 %
Total $ 807,007 100.0 % $ 676,707 100.0 % 19.3 %
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The 19.3% increase in sales was attributable to the following:
Favorable
Percentage Point Change in Sales Attributed to: (Unfavorable)
Pricing/Mix 6.8 %
Volume 0.5 %
Acquisitions 12.0 %
Total Percentage Change in Sales 19.3 %
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The increase in branded retail sales was due primarily to increased sales of
branded soft variety and branded multi-pack cake, as well as the contribution
from acquisitions. The company's Nature's Own products and its branded white
bread labels were the key components of these sales. The increase in store
branded retail sales was primarily due to the acquisitions and, to a lesser
extent, store brand cake and buns and rolls increases. The increase in
foodservice and other sales was due primarily to the acquisitions and
foodservice, partially offset by decreased contract manufacturing.
Direct-Store-Delivery Sales.
For the 16 Weeks Ended For the 16 Weeks Ended
April 25, 2009 April 19, 2008
$ % $ % % Increase
(Amounts in (Amounts in
thousands) thousands)
Branded Retail $ 373,619 55.9 % $ 329,773 59.5 % 13.3 %
Store Branded Retail 109,404 16.4 72,767 13.1 50.3 %
Foodservice and Other 185,252 27.7 151,341 27.4 22.4 %
Total $ 668,275 100.0 % $ 553,881 100.0 % 20.7 %
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The 20.7% increase in sales was attributable to the following:
Favorable
Percentage Point Change in Sales Attributed to: (Unfavorable)
Pricing/Mix 4.6 %
Volume 1.5 %
Acquisitions 14.6 %
Total Percentage Change in Sales 20.7 %
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The increase in branded retail sales was due primarily to the acquisitions and growth in branded soft variety. Nature's Own products and branded white bread labels were the key components of these sales. The increase in store branded retail sales was primarily due to the acquisitions. The increase in foodservice and other sales was primarily due to the acquisitions and increases in fast food.
Warehouse Delivery Sales.
For the 16 Weeks Ended For the 16 Weeks Ended
April 25, 2009 April 19, 2008 % Increase
$ % $ % (Decrease)
(Amounts in (Amounts in
thousands) thousands)
Branded Retail $ 40,614 29.3 % $ 31,150 25.4 % 30.4 %
Store Branded Retail 18,523 13.4 14,499 11.8 27.8 %
Foodservice and Other 79,595 57.3 77,177 62.8 3.1 %
Total $ 138,732 100.0 % $ 122,826 100.0 % 13.0 %
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The 13.0% increase in sales was attributable to the following:
Favorable
Percentage Point Change in Sales Attributed to: (Unfavorable)
Pricing/Mix 14.9 %
Volume (1.9 )%
Total Percentage Change in Sales 13.0 %
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The increase in branded retail sales was primarily the result of favorable
multi-pak cake volume. The increase in store branded retail sales was primarily
due to favorable pricing/mix and, to a lesser extent, volume increases. The
increase in foodservice and other sales, which include contract production and
vending, was due to a positive mix shift from lower margin contract to higher
margin foodservice volume.
Gross Margin (defined as sales less materials, supplies, labor and other
production costs, excluding depreciation, amortization and distributor
discounts). The decrease as a percent of sales was primarily due to significant
increases in ingredient costs, as well as lower margins for the Holsum and
ButterKrust acquisitions, partially offset by sales gains, improved
manufacturing efficiency, and lower labor costs as a percent of sales. The
Bardstown, Kentucky plant incurred start-up costs of $1.0 million, of which
$0.8 million was included in cost of sales.
The DSD segment gross margin decreased as a percent of sales primarily as a
result of significant increases in ingredient costs and lower margins for the
Holsum and ButterKrust acquisitions. These were offset by sales gains, improved
manufacturing efficiency, and reduced waste. The Bardstown, Kentucky plant
incurred start-up costs of $1.0 million, of which $0.8 million was included in
cost of sales.
The warehouse delivery segment's gross margin increased as a percent of sales
primarily a result of lower labor and freezer storage and rent costs, offset by
higher ingredient costs.
Selling, Marketing and Administrative Expenses. The decrease as a percent of
sales was due to sales gains and lower labor and distribution costs as a percent
of sales, partially offset by higher distributor discounts and significantly
higher pension costs. Sales gains and the Holsum acquisition resulted in the
increase in distributor discounts.
The DSD segment's selling, marketing and administrative expenses decreased as
a percent of sales primarily due to sales gains, lower labor and distribution
costs as a percent of sales, partially offset by higher distributor discounts
and marketing expense as a percent of sales.
The warehouse delivery segment's selling, marketing and administrative
expenses decreased as a percent of sales primarily due to sales gains and lower
labor costs as a percent of sales, partially offset by higher freezer costs as a
percent of sales.
Depreciation and Amortization. Depreciation and amortization increased
primarily due to increased depreciation expense related to capital expenditures
subsequent to the first quarter of fiscal 2008 and the Holsum and ButterKrust
acquisitions.
The DSD segment's depreciation and amortization expense increased primarily
due to the acquisitions. The warehouse delivery segment's depreciation and
amortization expense increased primarily as a result of increased depreciation
expense due to capital expenditures subsequent to the first quarter of fiscal
2008.
Income from operations. The increase in the DSD segment income from
operations was primarily attributable to higher sales and improved manufacturing
efficiencies. The increase in the warehouse delivery segment income from
operations was primarily a result of higher branded retail and foodservice
sales, partially offset by lower sales volume in contract manufacturing. The
increase in unallocated corporate expenses was primarily due to significantly
higher pension and postretirement plan costs.
Net Interest Income. The decrease was related to higher interest expense on
the credit facility and term loans used for the Holsum and ButterKrust
acquisitions.
Income Taxes. The effective tax rate for the first quarter of fiscal 2009 was
36.6% compared to 35.7% in the first quarter of the prior year. The increase in
the rate is due mainly to the favorable discrete items that were recognized
during the prior year quarter and the decreased earnings of the variable
interest entity in the current quarter compared to the prior year quarter. The
difference in the effective rate and the statutory rate is primarily due to
state income taxes, the non-taxable earnings of the consolidated variable
interest entity and the Section 199 qualifying production activities deduction.
Net Income Attributable to Noncontrolling Interest. Noncontrolling interest
represents all the earnings of the company's variable interest entity ("VIE")
under the consolidation provisions of Financial Accounting Standards Board
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities.
All the earnings of the VIE are eliminated through noncontrolling interest due
to the company not having any equity ownership in the VIE. The company is
required to consolidate this VIE due to the VIE being capitalized with a less
than substantive amount of legal form capital investment and the company
accounting for a significant portion of the VIE's revenues. See Note 8 of Notes
to Condensed Consolidated Financial Statements of this Form 10-Q for further
information regarding the company's VIE.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity represents our ability to generate sufficient cash flows from
operating activities to meet our obligations and commitments as well as our
ability to obtain appropriate financing and convert into cash those assets that
are no longer required to meet existing strategic and financing objectives.
Therefore, liquidity cannot be considered separately from capital resources that
consist primarily of current and potentially available funds for use in
achieving long-range business objectives. Currently, the company's liquidity
needs arise primarily from working capital requirements, capital expenditures
and stock repurchases. The company's strategy for use of its cash flow includes
paying dividends to shareholders, making acquisitions, growing internally and
repurchasing shares of its common stock when appropriate.
Cash Flows
Flowers Foods' cash and cash equivalents decreased to $18.5 million at
April 25, 2009 from $20.0 million at January 3, 2009. The decrease resulted from
$58.3 million provided by operating activities, offset by $14.2 million and
$45.6 million disbursed for investing activities and financing activities,
respectively.
Included in cash and cash equivalents at April 25, 2009 and January 3, 2009
was $6.2 million and $5.6 million, respectively, related to the company's VIE,
which is not available for use by the company.
Cash Flows Provided by Operating Activities. Net cash of $58.3 million
provided by operating activities during the sixteen weeks ended April 25, 2009
consisted primarily of $37.8 million in net income, adjusted for the following
non-cash items (amounts in thousands):
Depreciation and amortization $ 24,277
Non cash effect of derivative activity 9,144
Stock-based compensation 3,527
Deferred income taxes (1,723 )
Provision for inventory obsolescence 325
Allowances for accounts receivable 1,614
Pension and postretirement plans expense 1,573
Other 76
Total $ 38,813
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Cash disbursed for working capital and other activities was $18.3 million. As
of April 25, 2009, the company had $17.9 million recorded in other current
assets representing collateral for hedged positions. As of April 19, 2008, the
company had $17.5 million recorded in other current assets representing
collateral for hedged positions.
Cash Flows Disbursed for Investing Activities. Net cash disbursed for
investing activities during the sixteen weeks ended April 25, 2009 of
$14.2 million consisted primarily of capital expenditures of $14.9 million.
Capital expenditures in the DSD segment and the warehouse delivery segment were
$12.8 million and $1.5 million, respectively. The company estimates capital
expenditures of
approximately $75.0 million during fiscal 2009. The company also leases certain
production machinery and equipment through various operating leases.
Cash Flows Disbursed for Financing Activities. Net cash disbursed for
financing activities of $45.6 million during the sixteen weeks ended April 25,
2009 consisted primarily of dividends paid of $14.0 million, stock repurchases
of $21.6 million, and net debt repayments of $14.3 million, partially offset by
proceeds of $1.4 million from the exercise of stock options and the related
share-based payments income tax benefit of $1.4 million.
Credit Facility and Term Loan
Credit Facility. The company has a five-year, $250.0 million unsecured
revolving loan facility (the "credit facility") that expires October 5, 2012.
The company may request to increase its borrowings under the credit facility up
to an aggregate of $350.0 million upon the satisfaction of certain conditions.
Proceeds from the credit facility may be used for working capital and general
corporate purposes, including acquisition financing, refinancing of indebtedness
and share repurchases. The credit facility includes certain customary
restrictions, which, among other things, require maintenance of financial
covenants and limit encumbrance of assets and creation of indebtedness.
Restrictive financial covenants include such ratios as a minimum interest
coverage ratio and a maximum leverage ratio. The company believes that, given
its current cash position, its cash flow from operating activities and its
available credit capacity, it can comply with the current terms of the credit
facility and can meet presently foreseeable financial requirements. As of
April 25, 2009 and January 3, 2009, the company was in compliance with all
. . .
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