Flowers Foods, Inc., the nation's second-largest producer and marketer of fresh packaged bakery foods, today reported results for its 13-week fourth quarter and 53-week fiscal year ended January 3, 2015. 

Fourth Quarter Highlights

• For the 13-week fourth quarter of fiscal 2014, sales increased 4.4% compared to the 12-week fourth quarter last year. This increase reflected the impact of the additional week, which increased sales by 7.5%, negative net price/mix of 0.5%, and decreased volume of 2.6%. 
• Adjusted earnings before income taxes, depreciation, and amortization (EBITDA) for the quarter improved to 10.6% of sales as compared to 10.3% of sales during last year's fourth quarter. 
• Sales of the acquired bread brands – Wonder, Home Pride, Merita, and Butternut – continued to grow sequentially, driving sales in our expansion markets, which contributed 1.6% to overall sales growth during the quarter (1.1% excluding week 53). 
• During the quarter, the company: (i) recognized a previously announced pension settlement charge of $15.4 million, or $0.05 per diluted share; (ii) revised net sales due to the classification of certain immaterial discounts; and (iii) recorded an asset impairment charge of $5.8 million or $0.02 per diluted share, related to the sale of certain acquired Hostess bread assets. The pension settlement charge and the asset impairment are excluded from the discussion that follows. Reconciliations of non-GAAP measures are included in the financial schedules at the end of this release. 
• The company generated $93.7 million of cash flow from operations, paid down debt by $51.1 million, and repurchased 1,000,000 shares of common stock for $19.1 million during the fourth quarter. 
• The company's board of directors increased the annual dividend rate by 10.4%, to $0.53 per share. Additionally, the board increased the company's share repurchase authorization by 7.1 million shares to 74.6 million shares. At the end of the fiscal year, there were 14.0 million shares remaining under the increased authorization.

Fiscal 2014 Highlights

• For the 53-week fiscal 2014, sales increased 0.4% compared to the 52-week prior year. This increase reflected positive net price/mix of 1.1%, decreased volume of 2.8%, contribution of 0.4% from the Sara Lee California acquisition, and the impact of the 53rd week, which increased sales by 1.7%. 
• Nature's Own posted estimated retail sales of $1.1 billion during fiscal 2014. 
• Adjusted EBITDA for the year improved to 11.4% of sales as compared to 11.3% of sales in the prior year. 
• For the full year, expansion market growth increased total sales by 2.1% (2.0% excluding week 53). 
• During the year, the company paid down debt by $167.9 million, paid dividends totaling $102.3 million, and repurchased 2,014,610 shares of common stock for $38.9 million.

2015 Guidance

• For the 52-week fiscal 2015, the company issued guidance for sales of $3.786 billion to $3.861 billion and earnings per share of $0.96 to $1.01.

Allen L. Shiver, president and chief executive officer, said, "The gross margin expansion we've achieved is evidence of the effort put forth by the team to improve efficiencies throughout the company, grow sales in our expansion markets, and lower input costs. Going forward, we remain committed to growing sales and earnings as we offer exceptional service to our customers, enhance the quality of our products, and innovate to provide fresh bakery foods with the qualities today's consumer desires.

"In our DSD Segment this quarter, excluding the effect of week 53, we saw strong results from Wonder and our other branded white breads, as well as volume growth and improved pricing in our DSD foodservice business. However, overall sales declined primarily due to declines in store branded business and competitive pressure on our cake brands.

"In our Warehouse Segment this quarter, excluding the effect of week 53, we experienced lower cake volume due to competition in the market. The divestiture of our Fort Worth, Texas foodservice tortilla operation also contributed to the sales decline during the quarter.

"Adjusted earnings for the quarter grew when compared to the year ago quarter, excluding the effect of week 53. The team has worked hard this year to right-size the business and improve manufacturing efficiencies and we are confident these efforts will drive our ability to deliver on our fiscal 2015 commitments," Shiver said.

Outlook for 2015 
R. Steve Kinsey, executive vice president and chief financial officer, said, "For the 52-week fiscal 2015, the company expects sales to be $3.786 to $3.861 billion and earnings per share to be $0.96 to $1.01. Capital expenditures are forecasted to be $85 million to $95 million.

Commenting on the 2015 guidance, Shiver said, "We continue to find opportunities to grow in our core and expansion markets as we leverage our brand strength, efficient bakeries, distribution networks, customer relationships, and, most importantly, our motivated and experienced team. We also continue to monitor the landscape for acquisitions that will complement and enhance our overall business. As ever, we are focused on the consumer and making certain our products continue to meet their expectations by simplifying ingredients, improving packaging, and introducing new items."

Fourth Quarter 2014 Results
For the 13-week fourth quarter of 2014, sales increased 4.4% to $877.3 million. In last year's 12-week fourth quarter, sales were $840.0 million. The additional week during the quarter increased sales by 7.5% but was offset by negative net price/mix of 0.5% and decreased volume of 2.6%. The negative net price/mix was due primarily to a competitive promotional environment. Overall volume declines were driven primarily by decreases in the store-branded cake business, the store-branded bread and rolls business, and foodservice products.

Adjusted net income for the quarter was $41.7 million, or $0.20 per diluted share, compared to last year's fourth quarter adjusted net income of $38.8 million, or $0.18 per diluted share. 

Gross margin (excluding depreciation and amortization) as a percent of sales was 48.3%, up 160 basis points compared to 46.7% during last year's fourth quarter. Increased manufacturing efficiencies, reduced outside purchases of product, and lower input costs all contributed to the improved gross margin, partially offset by lower volumes. 

For the quarter, selling, distribution, and administrative (SD&A) costs as a percent of sales were 37.7%. Including acquisition-related costs of $0.5 million in the fourth quarter last year, SD&A was 36.5% of sales. Increased distributor delivery fees due to the conversion to independent distributors and higher workforce-related costs drove the higher SD&A costs as a percentage of sales, as did decreased volume. 

Depreciation and amortization expenses as a percent of sales for the quarter remained relatively consistent compared to last year's fourth quarter. Net interest expense decreased for the quarter compared to last year's fourth 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 30.7% compared to 29.5% in last year's fourth quarter. This increase is due to a decrease in discrete tax benefits recorded this quarter compared to the prior year's fourth quarter. 

Adjusted earnings before interest and taxes (EBIT) was $62.6 million, or 7.1% of sales, compared to last year's fourth quarter of $57.6 million, or 6.9% of sales. During the fourth quarter of this year, carrying costs of $4.7 million related to the acquired closed Hostess facilities negatively affected adjusted EBIT margin by 50 basis points as a percent of sales. In the fourth quarter of last year, carrying costs of $5.3 million for these facilities negatively affected adjusted EBIT margin by 60 basis points as a percent of sales.

Adjusted EBITDA was $92.9 million, or 10.6% of sales, compared to last year's fourth quarter adjusted EBITDA of $86.3 million, or 10.3% of sales. During the fourth quarter of this year, carrying costs of $2.9 million related to the acquired Hostess facilities negatively affected adjusted EBITDA margin by 30 basis points as a percent of sales. In the fourth quarter of last year, carrying costs for these facilities were $2.9 million and negatively affected adjusted EBITDA margin by 30 basis points as a percent of sales. 

Segment Results for the Quarter
The segment results reflect a shift of 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 Q4 sales): During the quarter, the company's DSD sales were $742.3 million, up 5.8% as compared to the prior year quarter, reflecting volume declines of 1.2%, negative net price/mix of 0.6%, and a positive 7.6% impact from the extra week. The negative net price/mix was primarily driven by a competitive promotional environment. The decrease in volume was primarily the result of decreases in store branded products, partially offset by volume gains in branded white and variety bread. 

Adjusted income from operations for the DSD Segment was $63.1 million, or 8.5% of sales, for the quarter compared to $57.7 million, or 8.2% of sales in last year's fourth quarter. Lower ingredient costs and improved efficiencies contributed to the increase in margins when compared to the prior year. Carrying costs related to the acquired Hostess facilities were $4.7 million, which negatively affected the DSD Segment's EBIT margin by 60 basis points. In the fourth quarter of 2013, carrying costs of the acquired facilities were $5.3 million and negatively affected the DSD Segment's prior year EBIT margin by 80 basis points.

Warehouse (15% of Q4 sales): Sales through warehouse delivery decreased 2.3%, to $135.1 million, reflecting volume decreases of 7.0%, negative net price/mix of 2.4%, and an increase of 7.1% due to the extra week. 

Income from operations for the Warehouse Segment was $12.0 million, or 8.9% of sales for the quarter compared to $9.3 million, or 6.7% of sales in last year's fourth quarter. This increase was due primarily to improved margins achieved by exiting certain low-margin business and improved efficiencies, partially offset by a decline in sales volumes. 

Fiscal 2014 Results
For the 53-week fiscal 2014, sales increased 0.4% to $3.749 billion. The 53rd week increased sales by 1.7%, and the Sara Lee California acquisition added 0.4% to the sales increase. Favorable price/mix of 1.1% was more than offset by volume declines of 2.8%. Growth in expansion markets contributed 2.1% (2.0% excluding week 53) to overall sales growth, offset by promotional activity and decreased branded cake, store brand cake and bread, and foodservice sales.

Adjusted net income for the year was $192.1 million, or $0.90 per diluted share, compared to last year's adjusted net income of $192.3 million, or $0.91 per diluted share. The extra week during fiscal 2014 added $0.01 per diluted share. As a result of owning the acquired Hostess facilities for the entirety of fiscal 2014, carrying costs negatively affected adjusted EPS $0.06 in fiscal 2014 versus $0.03 in fiscal 2013.

Gross margin (excluding depreciation and amortization) as a percent of sales in fiscal 2014 was 48.0%, up 80 basis points compared to 47.2% in fiscal 2013. Increased manufacturing efficiencies, reduced outside purchases, and lower input costs all contributed to the improved gross margin, partially offset by volume declines. 

For the year, adjusted SD&A costs as a percent of sales were 36.5%, excluding income of $1.8 million relating to the tortilla operation divestiture in fiscal 2014. Excluding acquisition-related costs of $17.8 million in fiscal 2013, prior year adjusted SD&A was 35.9% of sales. Increased distributor delivery fees due to the conversion to independent distributors and Lepage integration costs primarily drove the higher SD&A costs as a percentage of sales.

Depreciation and amortization expenses as a percent of sales increased slightly when compared to the prior year due to increased depreciation associated with the acquired facilities and capital improvements. Net interest expense decreased in 2014 compared to 2013 primarily due to higher interest income associated with an increase in outstanding distributor notes receivable.

The effective tax rate for the year was 34.4% compared to 28.4% in fiscal 2013. This increase is due primarily to the effect of the bargain purchase accounting gain in 2013, which positively affected the tax rate by 5.2%. 

Adjusted EBIT in fiscal 2014 was $300.1 million, or 8.0% of sales, compared to adjusted EBIT of $302.9 million, or 8.1% of sales in fiscal 2013. In fiscal 2014, carrying costs of $19.5 million related to the acquired Hostess facilities negatively affected adjusted EBIT margin by 50 basis points as a percent of sales. In fiscal 2013, carrying costs for these facilities were $10.6 million and negatively affected adjusted EBIT margin by 30 basis points as a percent of sales. Carrying costs were incurred for only a portion of fiscal 2013.

Adjusted EBITDA in fiscal 2014 was $429.0 million, or 11.4% of sales, compared to adjusted EBITDA of $421.4 million, or 11.3% of sales in fiscal 2013. In fiscal 2014, carrying costs of $11.1 million related to the acquired Hostess facilities negatively affected adjusted EBITDA margin by 30 basis points as a percent of sales. In fiscal 2013, carrying costs of $5.7 million for these facilities negatively affected adjusted EBITDA margin by 20 basis points as a percent of sales. Carrying costs were incurred for only a portion of fiscal 2013.

Segment Results for the Full Year
The segment results reflect a shift of 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 (84% of fiscal 2014 sales): During the year, the company's DSD sales were $3.156 billion, up 2.4% as compared to the prior year, reflecting flat volume, positive net price/mix of 0.2%, positive 0.5% due to the Sara Lee California acquisition, and a positive 1.7% impact from the extra week. Volume growth in branded white and soft variety bread was offset by negative pricing/mix in the branded retail category. Lower volume of store-brand products was partially offset by higher price/mix in that category.

Adjusted income from operations for the DSD Segment was $293.5 million, or 9.3% of sales, for the year compared to $297.0 million, or 9.6% of sales in the prior year. Lower ingredient costs and reduced outside purchases were offset by higher workforce-related costs and by increases in the carrying costs of $8.9 million related to the acquired Hostess facilities, which negatively affected the DSD Segment's EBIT margin by 20 basis points. 

Warehouse (16% of fiscal 2014 sales): Sales through warehouse delivery decreased 9.0%, to $593.4 million, reflecting volume decreases of 10.4%, negative net price/mix of 0.1%, and an increase of 1.5% due to the 53rd week. 

Income from operations for the Warehouse Segment was $51.5 million, or 8.7% of sales for the year compared to $51.9 million, or 8.0% of sales in the prior year. This increase in margin percent was due primarily to improved margins achieved by exiting certain low-margin business, lower input costs and improved efficiency, partially offset by a decline in sales volumes. 

Cash Flow  
Cash flow from operating activities was $93.7 million during the fourth quarter and $314.0 million for the full year. The company paid down debt by $51.1 million in the quarter and $167.9 million during the year. Capital expenditures were $25.2 million during the quarter and $83.8 million for the year. Dividends paid totaled $27.8 million for the quarter and $102.3 million for the full year. The company acquired 1,000,000 of its shares of common stock for $19.1 million during the quarter through its share repurchase program, bringing the total number of shares repurchased during the year to 2,014,610 for $38.9 million. There are 14.0 million shares remaining for purchase under the company's current authorization.

The company expects to reduce the carrying costs of the acquired Hostess facilities by selling non-strategic facilities. During fiscal 2014, net proceeds of approximately $24.2 million were realized from the sale of five bakeries and 17 warehouses. 

Sales Revision, Pension Settlement Charge, Asset Impairment

• During the fourth quarter of fiscal 2014, the company revised net sales for each preceding quarter and the full year. Historically, certain immaterial discounts had been recorded as an expense to SD&A. Those discounts are now recorded as contra revenue. For the effect of this revision on fiscal 2014 and 2013, see the final page of the financial schedules attached to this release. 
• During the fourth quarter of fiscal 2014, the company consummated the previously announced one-time lump sum settlement offer made to certain eligible former employees, relating to its two defined benefit pension plans, by distributing $50.4 million in lump sums from existing plan assets in December 2014. In connection with this distribution, the company recognized a settlement charge of $15.4 million, or $0.05 per diluted share during the fourth quarter of fiscal 2014. 
• During the fourth quarter of fiscal 2014, the company recognized an impairment loss of $5.8 million, or $0.02 per diluted share, to the amount expected to be realized from the sale of certain acquired Hostess bread assets.