Flowers Foods, Inc., the second-largest producer and marketer of fresh packaged bakery foods in the United States, today reported results for the fourth quarter and fiscal year ended December 28, 2013.
Fourth Quarter 2013 Results
For the 12-week fourth quarter of 2013, sales increased 12.6% to $843.6 million compared to $749.4 million in last year's fourth quarter. This increase was attributable to increased volume of 6.3%, positive price/mix of 3.6%, and contributions from the Sara Lee/California acquisition of 2.7%. Dollar sales and volume increased across all channels. Increases in the white bread, soft variety, bakery deli, buns and rolls, and single-serve cake categories primarily drove volume increases in the branded retail channel. These increases were partially offset by decreases in the multi-pack cake category. Volume increases in the store brand channel were driven by increases in the white bread, buns and rolls, and variety bread categories. The non-retail channel volume increases were primarily in the vending, foodservice, and restaurant categories. The positive net price/mix was primarily driven by the branded retail channel.
Net income for the quarter was $38.5 million compared to $38.6 million in the fourth quarter of fiscal 2012. For the quarter, EPS was $0.18, even with $0.18 in last year's fourth quarter. Carrying costs for the acquired Hostess facilities and interest expense related to funding of the acquisition negatively affected EPS by $0.02 in the quarter and a non-operational prior period adjustment positively affected EPS by $0.01 during the quarter.
Gross margin (excluding depreciation and amortization) as a percent of sales was 46.9%, down 100 basis points compared to 47.9% in last year's fourth quarter. Increased outside purchases as a percent of sales, decreased manufacturing efficiencies compared to the same quarter last year, and carrying costs related to the acquired Hostess assets were partially offset by higher sales volumes and decreased ingredient and packaging costs as a percent of sales. Although ingredient costs as a percent of sales decreased, prices for ingredients rose.
Selling, distribution, and administrative (SD&A) costs as a percent of sales for the quarter were 36.8%, up 30 basis points from 36.5% of sales in the fourth quarter of fiscal 2012. Costs associated with new market expansion was the primary driver of the increase, partially offset by increased sales volumes.
Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year's fourth quarter. Net interest expense decreased for the quarter compared to last year's fourth quarter primarily because of increased interest income associated with an increase in outstanding distributor notes receivable. The effective tax rate for the quarter was 29.5% compared to 31.1% in last year's fourth quarter. The decrease was due primarily to larger discrete benefits recorded by the company in this year's fourth quarter compared to last year's fourth quarter, positively affecting EPS by approximately $0.01.
Income from operations (EBIT) was $57.1 million, or 6.8% of sales, compared to EBIT of $59.2 million, or 7.9% of sales, in last year's fourth quarter. Carrying costs of $5.3 million related to the acquired Hostess assets negatively affected EBIT margin by 60 basis points in the fourth quarter this year.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) for the fourth quarter was $85.8 million, or 10.2% of sales, compared to EBITDA of $85.1 million, or 11.4% of sales in last year's fourth quarter. Carrying costs of $2.9 million related to the acquired Hostess facilities negatively affected EBITDA margin by 30 basis points in the fourth quarter this year.
Segment Results
DSD (84% of 4Q sales): During the quarter, the company's DSD sales increased 14.7%, reflecting volume gains of 6.9%, positive price/mix of 4.6%, and contributions from the Sara Lee/California acquisition of 3.2%. The exit of Hostess from the marketplace was cycled halfway through the quarter. Dollar sales and volume increased across all channels. Increases in the white bread, soft variety, buns and rolls, bakery deli, and single-serve cake categories primarily drove volume increases in the branded retail channel. These increases were partially offset by decreases in the multi-pack cake category. Volume increases in the store brand channel were driven primarily by increases in the white bread and buns and rolls categories, partially offset by decreases in the cake category. The non-retail channel volume increases were primarily in foodservice and other restaurant categories. The positive net price/mix was primarily driven by the branded retail channel.
Income from operations for the DSD segment was $59.3 million, or 8.4% of sales for the quarter compared to $59.2 million, or 9.6% of sales in last year's fourth quarter. Carrying costs of $5.3 million related to the acquired Hostess facilities negatively affected income from operations by 80 basis points in the fourth quarter this year. Decreased manufacturing efficiencies compared to the year-ago quarter and costs associated with new market expansion also had a negative effect on income from operations.
Warehouse (16% of 4Q sales): Sales through warehouse delivery increased 2.7%, reflecting volume increases of 6.7%, partially offset by negative net price/mix of 4.0%. The volume increase was driven by the non-retail channel, primarily the vending and foodservice categories. These increases were partially offset by volume declines primarily in the single-serve cake category. The foodservice category was the primary driver of the unfavorable net price/mix.
Income from operations for the warehouse segment was $7.6 million, or 5.5% of sales for the quarter compared to $12.8 million, or 9.5% of sales in last year's fourth quarter. This decrease was due primarily to increased outside purchases and lower manufacturing efficiencies, partially offset by increased sales volumes.
Cash Flow
During the fourth quarter, cash flow from operating activities was $50.2 million. The company invested $27.3 million in capital improvements, paid dividends of $23.5 million to shareholders, and acquired 231,000 shares of its common stock for $5.0 million during the quarter. The company has acquired 58.6 million shares of its common stock under its 67.5 million share repurchase plan since the inception of the plan.
Fiscal 2013 Results
Sales for fiscal 2013 increased 23.1% to $3.751 billion from the $3.046 billion reported for fiscal 2012. This increase was attributable to increased volume of 16.8%, contributions from the Lepage Bakeries and Sara Lee/California acquisitions of 6.2%, and positive price/mix of 0.1%. The company completed its first 12-month period with the Lepage Bakeries acquisition in the first week of the third quarter. Dollar sales and volume increased across all channels. Increases in the soft variety, white bread, buns and rolls, and single-serve cake categories primarily drove volume increases in the branded retail channel. Volume increases in the store brand channel were driven by increases in the white bread, buns and rolls, and variety bread categories. The non-retail channel volume increases were primarily in the foodservice, vending, and restaurant categories.
Net income for the year, adjusted for a bargain purchase accounting gain and acquisition-related costs, was $192.3 million, or $0.91 per diluted share compared to $142.4 million, or $0.69 per diluted share last year adjusted for acquisition-related costs. During the first quarter of 2013, the company recorded a benefit of $50.1 million, net of tax, or $0.24 per diluted share reflecting a bargain purchase accounting gain related to the Sara Lee/California acquisition. Also during the year, Flowers incurred acquisition-related costs of $11.5 million, net of tax, or $0.06 per diluted share. Including these items, net income was $230.9 million, or $1.09 per diluted share. During 2012, the company incurred acquisition-related costs of $6.2 million, net of tax, or $0.03 per diluted share. Including these costs, net income in 2012 was $136.1 million, or $0.66 per diluted share.
Gross margin (excluding depreciation and amortization) for the full year as a percent of sales was 47.4%, up 50 basis points compared to 46.9% last year. Decreases in ingredient, workforce-related, and packaging costs as a percent of sales were the primary drivers of the increase. Although ingredient costs decreased as a percent of sales, ingredient pricing rose 4.0%. Increased outside purchases as a percent of sales, decreased manufacturing efficiencies compared to the prior year, and carrying costs related to the acquired Hostess assets partially offset the decreased costs.
For the year, SD&A costs as a percent of sales were 36.7%, up 30 basis points from 36.4% of sales in 2012. Increased workforce-related costs as a percent of sales were the main driver of the increase. Acquisition-related costs of $17.8 million negatively impacted SD&A by 50 basis points as a percent of sales during 2013. During 2012, acquisition-related costs of $9.6 million negatively impacted SD&A by 30 basis points as a percent of sales.
Depreciation and amortization expenses for the year remained relatively stable as a percent of sales compared to last year. Net interest expense increased in 2013 compared to 2012 primarily due to increased borrowings to fund the acquisition of the Hostess assets and the $400.0 million senior notes issued in April 2012 being outstanding for all of 2013 compared to only three quarters of last year. The effective tax rate for the year was 28.4% compared to 34.8% last year, positively affecting EPS by approximately $0.02. The bargain purchase accounting gain on the Sara Lee/California acquisition positively affected the tax rate by 5.2% during the year.
EBIT, adjusted for the bargain purchase accounting gain and acquisition-related costs, was $302.9 million, or 8.1% of sales, compared to EBIT of $228.1 million, or 7.5% of sales last year, excluding acquisition-related costs. Including the benefit/costs, EBIT was $335.2 million, or 8.9% of sales, compared to $218.5 million, or 7.2% of sales last year. During 2013, carrying costs of $10.6 million related to the acquired Hostess facilities negatively affected EBIT margin by 30 basis points.
EBITDA, adjusted for the bargain purchase accounting gain and acquisition-related costs, was $421.4 million, or 11.2% of sales, compared to EBITDA of $330.8 million, or 10.9% of sales last year, excluding acquisition-related costs. Including the benefit/costs, EBITDA was $453.7 million, or 12.1% of sales, compared to $321.2 million, or 10.5% of sales last year. During 2013, carrying costs of $5.7 million related to the acquired Hostess facilities negatively affected EBITDA margin by 20 basis points.
Segment Results
DSD (83% of fiscal 2013 sales): For the year, the company's DSD sales increased 23.5%, reflecting volume gains of 13.4%, contributions from the Lepage Bakeries and Sara Lee/California acquisitions of 7.5%, and positive net price/mix of 2.6%. The company completed its first 12-month period with the Lepage Bakeries acquisition in the first week of the third quarter. Dollar sales and volume increased across all channels. Increases in the soft variety, white bread, buns and rolls, and single-serve cake categories primarily drove volume increases in the branded retail channel. These volume increases were partially offset by decreases in the multi-pack cake category. Volume increases in the store brand channel were driven primarily by increases in the white bread and buns and rolls categories, partially offset by decreases in the cake category. The non-retail channel volume increases were primarily in the restaurant and institutional categories. The positive net price/mix was primarily driven by the branded retail channel, and to a lesser extent the non-retail channel.
Income from operations for the DSD segment adjusted for the bargain purchase accounting gain was $300.5 million, or 9.7% of sales, compared to $233.2 million, or 9.3% of sales last year. Including the bargain purchase accounting gain, income from operations was $350.5 million, or 11.3% of sales. Carrying costs of $10.6 million related to the acquired Hostess facilities negatively affected income from operations by 30 basis points for the year.
Warehouse (17% of fiscal 2013 sales): Sales through warehouse delivery increased 21.5%, reflecting volume increases of 28.7%, partially offset by negative net price/mix of 7.2%. Dollar sales and volume increased across all channels. The volume increase in the branded retail channel was primarily driven by increases in the single-serve cake category. The cake category drove the volume increase in the store brand retail channel and the foodservice and vending categories drove the volume increase in the non-retail channel. The foodservice category was the primary driver of the unfavorable net price/mix.
Income from operations for the warehouse segment was $48.5 million, or 7.4% of sales for the year compared to $36.2 million, or 6.7% of sales last year.
Outlook for 2014
R. Steve Kinsey, executive vice president and chief financial officer, said the company expects 2014 sales to be $3.976 billion to $4.126 billion, reflecting an increase of 6.0% to 10.0% over the prior year. Earnings per share are targeted to be $0.98 to $1.05, reflecting growth of 7.7% to 15.4% for the company's 53-week fiscal 2014, when compared to adjusted EPS reported for 2013. Capital expenditures for 2014 are forecasted to be $95.0 million to $100.0 million.
