Flowers Foods Inc. (NYSE: FLO), the second-largest producer and marketer of fresh packaged bakery foods in the United States, reported results for its 16-week first quarter ended April 20, 2013. Sales increased 25.9 percent to $1.13 billion. Diluted EPS, excluding certain benefit/costs, was $0.46, up 64.3 percent from last year's first quarter. The company recorded a benefit of $0.37 per diluted share related to a bargain purchase accounting gain on the Sara Lee/California acquisition and acquisition-related costs of $0.02 per diluted share. Including the benefit and costs, diluted EPS was $0.81. Other highlights for the quarter include:
- Volume increased 19.3 percent, acquisitions contributed 7.7 percent, and net price/mix was unfavorable 1.1 percent, driven by a change in product mix;
- Gross margin was 48.2 percent, compared to 46.7 percent for the first quarter of fiscal 2012;
- EBITDA margin, excluding the benefit/costs, was 12.3 percent for the quarter;
- Operating margin (EBIT), excluding the benefit/costs, was 9.2 percent;
- Generated $86.8 million in cash flow from operations;
- In January, announced an agreement to acquire certain Hostess bread assets. The agreement was approved by the bankruptcy court in March and is currently under regulatory review;
- In February, completed acquisition of the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California from BBU, Inc. The new business is being rolled out in stages through early summer;
- Announced the election by the board of directors of Allen L. Shiver, current president of Flowers Foods, as chief executive officer and George E. Deese, current chairman of the board and chief executive officer, as executive chairman, effective May 22, 2013 at the annual shareholders meeting;
- In April, entered into a new term loan with a commitment of up to $300.0 million and amended existing $500.0 million senior unsecured credit facility and existing term loan to reflect more favorable terms in anticipation of funding for acquisitions and other needs.
Commenting on first quarter results, Chairman and CEO George Deese said, "We believe the results we reported today reflect the best performance in the company's history. We achieved substantial sales increases in both segments, across all channels, and in our primary product categories. We also delivered outstanding earnings. Throughout our company, team members performed incredibly well as they worked to serve customers' needs following Hostess' departure from the market last fall. Our investments in our bakeries and our distribution systems over several decades, combined with the strength and determination of our team, allowed us to take on new business and meet the needs of existing and new customers.
"This is an exciting time for Flowers Foods as we focus on integrating Lepage Bakeries in the Northeast and Sara Lee in California, while maintaining the gains we have achieved in markets throughout the country in recent months," Deese continued. "Looking ahead, we expect to have growth opportunities in our newer markets as customers and consumers gain confidence in Nature's Own, Tastykake, and our other strong brands."
First quarter 2013 results
For the 16-week first quarter of 2013, sales increased 25.9 percent to $1.13 billion from $898.2 million in last year's first quarter. This increase was attributable to increased volumes of 19.3 percent and contributions from the Lepage Bakeries and Sara Lee/California acquisitions of 7.7 percent, partially offset by unfavorable net price/mix of 1.1 percent. Dollar sales and volume increased across all channels. Increases in soft variety, white bread, buns and rolls, and cake primarily drove volume increases in the branded retail channel. The volume increases in the store brand channel were driven by increases in the white bread, buns and rolls, and cake categories. The non-retail channel volume increases were primarily in the foodservice and vending categories. The unfavorable net price/mix was driven primarily by a mix shift in the cake business.
Net income for the quarter, adjusted for a bargain purchase accounting gain and acquisition-related costs, was $64.9 million, or $0.46 per diluted share compared to $37.9 million or $0.28 per diluted share in the first quarter of fiscal 2012. During the first quarter this year, the company recorded a benefit of $51.3 million, net of tax, or $0.37 per diluted share reflecting a bargain purchase accounting gain related to the Sara Lee/California acquisition. Also during the first quarter, Flowers incurred acquisition-related costs of $2.9 million, net of tax, or $0.02 per diluted share. Including these items, net income was $113.3 million, or $0.81 per diluted share.
Gross margin as a percentage of sales for the quarter was 48.2 percent, up 150 basis points from 46.7 percent in the first quarter of 2012. This increase was due primarily to higher sales volumes and decreased workforce-related costs as a percent of sales.
Selling, distribution, and administrative costs as a percent of sales for the quarter were 36.4 percent, down 40 basis points from 36.8 percent of sales in the first quarter of fiscal 2012. Higher sales volumes and lower workforce-related costs as a percent of sales were the main drivers of the decrease. Acquisition-related costs negatively impacted selling, distribution, and administrative costs by $4.5 million, or 40 basis points as a percent of sales, in the first quarter of this year.
Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year's first quarter. Net interest expense increased in this year's first quarter as compared to last year's first quarter primarily as a result of the issuance of $400.0 million of senior notes late in the first quarter of last year. The effective tax rate for the quarter was 22.8 percent as compared to 35.9 percent in last year's first quarter. The bargain purchase accounting gain on the Sara Lee/California acquisition positively affected the tax rate 12.2 percent during the first quarter. The full-year tax rate is expected to be approximately 35.5 percent to 36.0 percent, excluding the effect of the bargain purchase.
Income from operations defined as earnings before interest and taxes (EBIT) adjusted for the bargain purchase accounting gain and the acquisition-related costs, was $104.4 million, or 9.2 percent of sales compared to $59.2 million, or 6.6 percent of sales in last year's first quarter. Including the benefit/costs, EBIT was $151.2 million, or 13.4 percent of sales. Adjusted for the benefit/costs, earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first quarter was $138.6 million, or 12.3 percent of sales, compared to $89.0 million, or 9.9 percent of sales, in last year's first quarter. Including the benefit/costs, EBITDA was $185.4 million, or 16.4 percent of sales.