Flowers Foods, Inc., the nation's second-largest producer and marketer of fresh packaged bakery foods, today reported results for its 12-week third quarter ended October 4, 2014.  

Third Quarter Highlights

• Third quarter sales decreased 3.3% compared to the third quarter last year, reflecting positive net price/mix of 1.1% and decreased volume of 4.4%. 
• Sold certain assets of Leo's Foods, our Fort Worth, Texas tortilla operation in the third quarter and transferred the flour tortilla equipment to our San Antonio bakery to serve retail flour tortilla market. 
• Direct-Store-Delivery (DSD) segment sales decreased 1.6% compared to last year primarily due to reduced sales of store branded items and branded cake.  Warehouse segment sales were down 11.8%, impacted by lower cake and frozen foodservice sales. 
• Sales from the acquired bread brands – Wonder, Home Pride, Merita, and Butternut – increased approximately 7.8% from sales of those brands in the second quarter. 
• New markets sales growth remained robust, comprising 6.1% of DSD sales, driven by the reintroduction of acquired brands and continued success of Nature's Own and Tastykake. 
• Adjusted earnings before income taxes, depreciation, and amortization (EBITDA) for the quarter improved to 11.6% of sales. 
• Adjusted income from operations (EBIT) improved to 8.2% of sales. 
• Adjusted net income for the quarter was $44.4 million, or $0.21 per diluted share. 
• Generated $47.3 million in cash flow from operations. 
• Paid down debt by $20.8 million in quarter and $116.8 million since the beginning of 2014. 
• Repurchased 550,000 shares of common stock during the quarter. 
• Offered lump-sum pension payouts to certain former employees which are expected to reduce total pension plan obligations by approximately 10%. 
• Full-year guidance for 2014 revised downward to sales in the range of $3.75 billion to $3.77 billion, and adjusted earnings per share (EPS) in the range of $0.86 to $0.90. In 2013, sales were $3.75 billion and adjusted EPS was $0.91.

Allen L. Shiver, president and chief executive officer, said, "We are pleased that sales from the acquired brands and new markets continue to grow sequentially, but overall the environment remains competitive as participants use price to gain volume. Even though we are not immune from the headwinds facing the food industry, we believe that our category is stable and our long-term growth prospects are encouraging. Flowers Foods possesses well-known brands, efficient bakeries, and a team with the experience to find opportunities to grow while maintaining a secure financial position.

"In our DSD segment, sales of branded breads, buns, and rolls were up 1.4%, illustrating the continued strength of the acquired brands and Nature's Own, and consumer shifts to branded products from store-branded products. Nevertheless, our overall DSD sales declined due to continued pressure from competition in our branded cake business as well as volume losses due to exiting certain low-margin store-branded bread business.

"In our Warehouse segment, we experienced lower cake volume due to competition in the market. In addition, we continue to optimize our foodservice business, and in doing so, have accepted some volume losses to improve profitability.

"Adjusted earnings for the quarter grew when compared to the year ago quarter. Despite lower overall sales, our team has focused its efforts on serving the market and maintaining efficient operations," Shiver said. "Manufacturing efficiencies improved both sequentially and year-over-year. We are seeing improvement at our Lepage operations and I am confident in the team's ability to further enhance profitability there." 

Considering the revised guidance, Shiver said, "We are working to right-size the business to better align with the near-term market realities, without sacrificing our longer-term prospects for growth, and our revised guidance incorporates the effects of the market issues we have discussed. Our team is focused on making sure our cost-structure is aligned with our sales volumes as they stand today. We believe our strategy is sound and we remain committed to those factors that will ultimately determine our long-term success – growing our market share by better serving our core and expanding our geographic reach."

Third Quarter 2014 Results  
For the 12-week third quarter of 2014, sales decreased 3.3% to $849.4 million. In last year's third quarter, sales were $878.5 million. This decrease was attributable to positive net price/mix of 1.1% and decreased volume of 4.4%. The positive net price/mix was due primarily to a favorable mix shift from cake and store branded products to branded bread and rolls, partially offset by a competitive pricing environment.  Overall volume declines were driven primarily by decreases in the cake business, store-branded bread and rolls, and foodservice products.

Adjusted net income for the quarter was $44.4 million, or $0.21 per diluted share, compared to last year's third quarter adjusted net income of $38.4 million, or $0.18 per diluted share. 

Gross margin (excluding depreciation and amortization) as a percent of sales was 47.8%, up 110 basis points compared to 46.7% in last year's third quarter.  Increased manufacturing efficiencies, reduced outside purchases, and lower input prices all contributed to the improved gross margin. 

For the quarter, selling, distribution, and administrative (SD&A) costs as a percent of sales were 36.1%. Excluding acquisition-related costs of $7.0 million in the third quarter last year, prior year SD&A was 36.5% of sales. Workforce-related cost decreases were offset by increased distributor delivery fees and costs associated with new market expansion. Reduced marketing expenditures also contributed to the reduced SD&A expenses as a percent of sales, primarily due to increased marketing spend in the prior year to support the reintroduction of the acquired Hostess brands.

Depreciation and amortization expenses as a percent of sales for the quarter remained relatively stable compared to last year's third quarter. Net interest expense decreased for the quarter compared to last year's third quarter primarily due to increased interest income associated with an increase in outstanding distributor notes receivable and lower outstanding debt obligations as compared to the prior year quarter. The effective tax rate for the quarter was 35.3% compared to 32.4% in last year's third quarter. This increase is due to discrete tax benefits recorded in the prior year quarter. 

Adjusted EBIT was $69.4 million, or 8.2% of sales, compared to last year's third quarter of $60.3 million, or 6.9% of sales. During the third quarter of this year, carrying costs of $3.6 million related to the acquired Hostess facilities negatively affected adjusted EBIT margin by 40 basis points as a percent of sales. In the third quarter of last year, carrying costs of $5.3 million for the Hostess facilities negatively affected adjusted EBIT margin by 60 basis points as a percent of sales.

Adjusted EBITDA was $98.9 million, or 11.6% of sales, compared to last year's third quarter of $90.2 million, or 10.3% of sales. During the third quarter of this year, carrying costs of $1.6 million related to the acquired Hostess facilities negatively affected adjusted EBITDA margin by 20 basis points as a percent of sales. In the third quarter of last year, carrying costs of $2.8 million for the Hostess facilities negatively affected adjusted EBITDA margin by 30 basis points as a percent of sales. 

Segment Results 
The segment results reflect shifting the company's tortilla operation from the Warehouse segment to the DSD segment at the beginning of 2014. For comparison purposes, prior year information has been recast to reflect this change.

DSD (85% of Q3 sales): During the quarter, the company's DSD sales were down 1.6% as compared to the prior year quarter, reflecting volume declines of 1.9% and positive net price/mix of 0.3%. The positive net price/mix was primarily driven by a shift in mix from store brand to branded bread and rolls offset by a competitive pricing environment. The decrease in volume was primarily the result of decreases in branded cake and store branded products, partially offset by volume gains in branded white bread. Sales of branded breads, buns, and rolls increased by 1.4%.

Adjusted income from operations for the DSD segment was $66.7 million, or 9.3% of sales. Lower ingredient costs were partially offset by carrying costs of $3.6 million related to the acquired Hostess facilities, which negatively affected the DSD segment's EBIT margin by 50 basis points. Increased promotional activity also negatively impacted DSD's income from operations.

Warehouse (15% of Q3 sales): Sales through warehouse delivery decreased 11.8%, reflecting volume decreases of 11.9% and positive net price/mix of 0.1%. The volume decreases were the result of decreases in all categories. 

Income from operations for the Warehouse segment was $11.8 million, or 9.0% of sales for the quarter compared to $8.6 million, or 5.8% of sales in last year's third quarter. This increase was due primarily to improved margins achieved by exiting certain low-margin business, partially offset by a decline in sales volumes. 

Cash Flow  
During the third quarter, cash flow from operating activities was $47.3 million.  The company paid down debt by $20.8 million in the quarter and $116.8 million for the year-to-date. The company invested $13.6 million in capital improvements and paid dividends of $25.2 million to shareholders during the quarter. The company acquired 550,000 of its shares of common stock during the quarter through its share repurchase program. There are 7.9 million shares remaining for purchase under the company's current authorization.

The company continues to reduce the carrying costs of the acquired Hostess facilities by selling non-strategic facilities. Year-to-date through November 3, 2014, net proceeds of approximately $18.4 million have been realized from the sale of three bakeries and 16 warehouses. 

Outlook for 2014  
The company has revised full-year guidance for fiscal 2014. Sales for the year are now expected to be in the range of $3.75 billion to $3.77 billion. Adjusted earnings per share for the company's 53-week 2014, are now expected to be in the range of $0.86 to $0.90.  Previously, guidance for 2014 was sales of $3.88 billion to $3.94 billion, and earnings per share of $0.92 to $0.98. In 2013, which was a 52-week year, sales were $3.75 billion and adjusted EPS were $0.91. Capital expenditures for 2014 are forecasted to be from $90.0 million to $95.0 million.

In September 2014, the company offered to certain eligible former employees the option to receive a one-time lump sum of their vested pension benefit from its pension plan. Eligible former employees had until October 31, 2014 to voluntarily accept the offer. Based on initial acceptances, we estimate our total pension plan obligations will be reduced by approximately 10%. However, as a result of this offer, the company will record a one-time, non-cash settlement charge in the fourth quarter. Currently the charge is estimated to be $14 - $15 million, or $0.04 to $0.05 per share, which is not included in the revised guidance. Distributions will be made out of existing plan assets. There are no additional required contributions to the plan as the result of these lump sum payments. 

Dividend 
The board of directors will review the dividend at its next regularly scheduled meeting. Any action taken will be announced following that meeting.