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FLOWERS FOODS INC - Quarter Report: 2012 October (Form 10-Q)

FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 6, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 1-16247

 

 

FLOWERS FOODS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

GEORGIA   58-2582379

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA

(Address of principal executive offices)

31757

(Zip Code)

229/226-9110

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer           ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company           ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

TITLE OF EACH CLASS   OUTSTANDING AT NOVEMBER 2, 2012
Common Stock, $.01 par value   138,181,007

 

 

 


Table of Contents

FLOWERS FOODS, INC.

INDEX

 

     PAGE
      NUMBER      

PART I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheets as of October 6, 2012 and December 31, 2011

   3

Condensed Consolidated Statements of Income for the Twelve and Forty Weeks Ended October  6, 2012 and October 8, 2011

   4

Condensed Consolidated Statements of Comprehensive Income for the Twelve and Forty Weeks Ended October  6, 2012 and October 8, 2011

   5

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Forty Weeks Ended October 6, 2012

   6

Condensed Consolidated Statements of Cash Flows for the Forty Weeks Ended October  6, 2012 and October 8, 2011

   7

Notes to Condensed Consolidated Financial Statements

   8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   40

Item 4. Controls and Procedures

   41

PART II. Other Information

  

Item 1. Legal Proceedings

   41

Item 1A. Risk Factors

   42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   42

Item 6. Exhibits

   42

Signatures

   43

Exhibit index

   44

 

1


Table of Contents

Forward-Looking Statements

Statements contained in this filing and certain other written or oral statements made from time to time by the company and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our future financial condition and results of operations and are often identified by the use of words and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would,” “is likely to,” “is expected to” or “will continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are based upon assumptions we believe are reasonable.

Forward-looking statements are based on current information and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results, performance, liquidity, and achievements to differ materially from those projected are discussed in this report and may include, but are not limited to:

 

   

unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including, advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with or increased costs related to our employees, independent distributors and third party service providers; and (vi) laws and regulations (including environmental and health-related issues), accounting standards or tax rates in the markets in which we operate;

 

   

the loss or financial instability of any significant customer(s);

 

   

our ability to execute our business strategy, which may involve integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values;

 

   

our ability to operate existing, and any new, manufacturing lines according to schedule;

 

   

the level of success we achieve in developing and introducing new products and entering new markets;

 

   

changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward more inexpensive store-branded products;

 

   

our ability to implement new technology and customer requirements as required;

 

   

the credit and business risks associated with independent distributors and our customers which operate in the highly competitive retail food and foodservice industries, including the amount of consolidation in these industries;

 

   

changes in pricing, customer and consumer reaction to pricing actions, and the pricing environment among competitors within the industry;

 

   

consolidation within the baking industry and related industries;

 

   

any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters, technological breakdowns, product contamination or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events; and

 

   

regulation and legislation related to climate change that could affect our ability to procure our commodity needs or that necessitate additional unplanned capital expenditures.

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Please refer to Part I, Item 1A., Risk Factors, of the company’s Form 10-K filed on February 29, 2012 for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the SEC or in company press releases) on related subjects.

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this Form 10-Q are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks and trade names.

 

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Table of Contents

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except share data)

(Unaudited)

      October 6, 2012           December 31, 2011      

ASSETS

   

Current Assets:

   

Cash and cash equivalents

   $ 14,137        $ 7,783    
 

 

 

   

 

 

 

Accounts and notes receivable, net of allowances of $888 and $171, respectively

    221,581         185,603    
 

 

 

   

 

 

 

Inventories, net:

   

Raw materials

    29,466         26,626    

Packaging materials

    18,145         15,820    

Finished goods

    40,447         31,650    
 

 

 

   

 

 

 
    88,058         74,096    
 

 

 

   

 

 

 

Spare parts and supplies

    44,108         39,624    
 

 

 

   

 

 

 

Deferred taxes

    20,956         36,264    
 

 

 

   

 

 

 

Other

    23,201         35,200    
 

 

 

   

 

 

 

Total current assets

    412,041         378,570    
 

 

 

   

 

 

 

Property, Plant and Equipment, net of accumulated depreciation of $799,028 and $735,629, respectively

    728,912         685,487    
 

 

 

   

 

 

 

Notes Receivable

    100,946         102,322    
 

 

 

   

 

 

 

Assets Held for Sale — Distributor Routes

    26,162         12,726    
 

 

 

   

 

 

 

Other Assets

    15,238         13,932    
 

 

 

   

 

 

 

Goodwill

    276,170         219,730    
 

 

 

   

 

 

 

Other Intangible Assets, net

    390,848         141,231    
 

 

 

   

 

 

 

Total assets

   $ 1,950,317        $ 1,553,998    
 

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Current Liabilities:

   

Current maturities of long-term debt and capital lease obligations

   $ 72,016        $ 42,768    

Accounts payable

    132,879         115,138    

Other accrued liabilities

    129,402         110,513    
 

 

 

   

 

 

 

Total current liabilities

    334,297         268,419    
 

 

 

   

 

 

 

Long-term liabilities:

   

Long-term debt and capital leases

    132,818         283,406    

4.375% senior notes due April 1, 2022

    399,089         —     
 

 

 

   

 

 

 

Total long-term debt and capital lease obligations

    531,907         283,406    
 

 

 

   

 

 

 

Other Liabilities:

   

Post-retirement/post-employment obligations

    133,831         155,263    

Deferred taxes

    38,398         35,375    

Other

    48,223         52,567    
 

 

 

   

 

 

 

Total other liabilities

    220,452         243,205    
 

 

 

   

 

 

 

Stockholders’ Equity:

   

Preferred stock — $100 stated par value, 200,000 authorized and none issued

    —          —     

Preferred stock — $.01 stated par value, 800,000 authorized and none issued

    —          —     

Common stock — $.01 stated par value and $.001 current par value, 500,000,000 authorized shares, 152,488,008 shares and 152,488,008 shares issued, respectively

    199         199    

Treasury stock — 14,307,001 shares and 16,506,822 shares, respectively

    (196,259)        (221,246)   

Capital in excess of par value

    568,775         544,065    

Retained earnings

    581,125         547,997    

Accumulated other comprehensive loss

    (90,179)        (112,047)   
 

 

 

   

 

 

 

Total stockholders’ equity

    863,661         758,968    
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,950,317        $ 1,553,998    
 

 

 

   

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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Table of Contents

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands except per share data)

(Unaudited)

 

     For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
       October 6, 2012         October 8, 2011         October 6, 2012         October 8, 2011    

Sales

    $ 717,282        $ 675,369        $ 2,297,049        $ 2,119,790    

Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)

     382,508         365,706         1,227,144         1,119,851    

Selling, distribution and administrative expenses

     257,326         239,084         833,829         775,841    

Depreciation and amortization

     24,757         22,816         76,751         71,706    
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     52,691         47,763         159,325         152,392    

Interest expense

     (6,708)        (2,838)        (17,014)        (7,359)   

Interest income

     3,140         3,103         10,487         9,982    
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     49,123         48,028         152,798         155,015    

Income tax expense

     17,892         17,009         55,244         54,625    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    $ 31,231        $ 31,019        $ 97,554        $ 100,390    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Common Share:

        

Basic:

        

Net income per common share

    $ 0.23        $ 0.23        $ 0.72        $ 0.74    
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     138,027         135,617         136,348         135,384    
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Net income per common share

    $ 0.22        $ 0.23        $ 0.71        $ 0.73    
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     139,717         137,207         138,110         136,851    
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends paid per common share

    $ 0.160        $ 0.150        $ 0.470        $ 0.433    
  

 

 

   

 

 

   

 

 

   

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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Table of Contents

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

    For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
      October 6, 2012         October 8, 2011         October 6, 2012         October 8, 2011    

Net income

   $ 31,231        $ 31,019        $ 97,554        $ 100,390    
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

       

Pension and postretirement plans:

       

Amortization of prior service credit included in net income

    (36)        (37)        (121)        (122)   

Amortization of actuarial loss included in net income

    679         381         2,264         1,267    
 

 

 

   

 

 

   

 

 

   

 

 

 

Pension and postretirement plans, net of tax

    643         344         2,143         1,145    

Derivative instruments:

       

Net change in fair value of derivatives

    39         (8,078)        2,988         (17,078)   

Loss (Gain) reclassified to net income

    2,677         (2,054)        16,737         (22,894)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Derivative instruments, net of tax

    2,716         (10,132)        19,725         (39,972)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    3,359         (9,788)        21,868         (38,827)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 34,590        $ 21,231        $ 119,422        $ 61,563    
 

 

 

   

 

 

   

 

 

   

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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FLOWERS FOODS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)

 

     Common Stock      Capital
in Excess
of Par
Value
            Accumulated
Other
Comprehensive
Loss
     Treasury Stock         
                                          
     Number of
Shares Issued
     Par
Value
        Retained
Earnings
        Number of
Shares
     Cost      Total  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at December 31, 2011

     152,488,008       $ 199       $ 544,065        $ 547,997        $ (112,047)         (16,506,822)       $ (221,246)       $ 758,968    

Net income

              97,554                   97,554    

Derivative transactions, net of tax

                 19,725                19,725    

Pension and postretirement plans, net of tax

                 2,143                2,143    

Shares issued for acquisition

           16,628                2,178,648          29,259          45,887    

Exercise of stock options

           (165)               690,115          9,277          9,112    

Deferred stock issuance

           (610)               45,405          610          —     

Amortization of share-based payment awards

           6,834                      6,834    

Tax benefits related to share based payment awards

           1,451                      1,451    

Performance-contingent restricted stock awards forfeitures and cancellations

           606                (45,252)         (606)         —     

Stock repurchases

                    (670,742)         (13,587)         (13,587)   

Issuance of deferred compensation

           (34)               1,647          34          —     

Dividends paid on vested performance-contingent restricted stock awards and deferred share awards

              (255)                  (255)   

Dividends paid — $0.470 per common share

              (64,171)                  (64,171)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at October 6, 2012

     152,488,008       $ 199       $ 568,775        $ 581,125        $ (90,179)         (14,307,001)       $ (196,259)       $ 863,661    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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Table of Contents

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     For the
Forty Weeks Ended
 
       October 6, 2012          October 8, 2011    

CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:

     

Net income

    $ 97,554         $ 100,390    

Adjustments to reconcile net income to net cash provided by operating activities:

     

Stock based compensation

     7,012          11,203    

(Gain) loss reclassified from accumulated other comprehensive income to net income

     24,972          (40,354)   

Depreciation and amortization

     76,751          71,706    

Deferred income taxes

     3,155          (10,520)   

Provision for inventory obsolescence

     804          934    

Allowances for accounts receivable

     1,995          460    

Pension and postretirement plans expense

     1,208          249    

Other

     (1,452)         (87)   

Pension contributions

     (18,143)         (10,962)   

Changes in operating assets and liabilities:

     

Accounts and notes receivable, net

     (30,518)         (8,376)   

Inventories, net

     (10,270)         (15,845)   

Hedging activities, net

     5,627          (24,278)   

Other assets

     10,343          9,442    

Accounts payable

     10,761          3,565    

Other accrued liabilities

     2,430          7,258    
  

 

 

    

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     182,229          94,785    
  

 

 

    

 

 

 

CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:

     

Purchase of property, plant and equipment

     (49,188)         (65,314)   

Proceeds from sale of property, plant and equipment

     1,103          2,339    

Repurchase of distributor territories

     (9,640)         (10,145)   

Principal payments from notes receivable

     11,056          9,651    

Acquisitions, net of cash acquired

     (318,426)         (164,485)   

Contingent acquisition consideration payments

     —            (5,000)   
  

 

 

    

 

 

 

NET CASH DISBURSED FOR INVESTING ACTIVITIES

     (365,095)         (232,954)   
  

 

 

    

 

 

 

CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:

     

Dividends paid

     (64,426)         (58,770)   

Exercise of stock options

     9,112          12,721    

Excess windfall tax benefit related to share-based payment awards

     1,544          3,061    

Payments for debt issuance costs

     (3,877)         —      

Stock repurchases

     (13,587)         (26,598)   

Change in bank overdraft

     3,287          2,962    

Proceeds from debt borrowings

     1,179,181          790,400    

Debt and capital lease obligation payments

     (922,014)         (581,978)   

Payment of financing fees

     —            (2,108)   

Other

     —            (80)   
  

 

 

    

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     189,220          139,610    
  

 

 

    

 

 

 

Net increase in cash and cash equivalents

     6,354          1,441    

Cash and cash equivalents at beginning of period

     7,783          6,755    
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

    $ 14,137         $ 8,196    
  

 

 

    

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

INTERIM FINANCIAL STATEMENTS — The accompanying unaudited condensed consolidated financial statements of Flowers Foods, Inc. (the “company”, “us”, “we”, or “our”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the company’s financial position, the results of its operations and its cash flows. The results of operations for the twelve and forty week periods ended October 6, 2012 and October 8, 2011 are not necessarily indicative of the results to be expected for a full fiscal year. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting estimates affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, derivative instruments, valuation of long-lived assets, goodwill and other intangibles, self-insurance reserves, income tax expense and accruals and pension obligations. These estimates are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2012 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 21, 2012 (sixteen weeks), second quarter ended July 14, 2012 (twelve weeks), third quarter ended October 6, 2012 (twelve weeks) and fourth quarter ending December 29, 2012 (twelve weeks).

SEGMENTS — The company is one of the largest producers and marketers of bakery products in the United States. The company consists of two business segments: direct-store-delivery segment (“DSD segment”) and warehouse delivery segment (“warehouse segment”). The DSD segment focuses on the production and marketing of bakery products to U.S. customers in the Southeast, Mid-Atlantic, Northeast and Southwest as well as select markets in California and Nevada primarily through its DSD system. The warehouse segment produces snack cakes and breads and rolls that are shipped both fresh and frozen to national retail, foodservice, vending, and co-pack customers through their warehouse channels.

SIGNIFICANT CUSTOMER — Following is the effect our largest customer, Walmart/Sam’s Club, had on the company’s sales for the twelve and forty weeks ended October 6, 2012 and October 8, 2011. Walmart is the only customer to account for 10% or more of the company’s sales.

 

     For the
Twelve Weeks Ended
     For the
Forty Weeks Ended
 
         October 6, 2012              October 8, 2011              October 6, 2012              October 8, 2011      
     (Percent of Sales)      (Percent of Sales)  

DSD

     16.9%         17.5%         17.6%         17.9%   

Warehouse delivery

     2.9            3.8            3.4            3.9      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     19.8%         21.3%         21.0%         21.8%   
  

 

 

    

 

 

    

 

 

    

 

 

 

SIGNIFICANT ACCOUNTING POLICIES — There were no significant changes to our accounting policies from those disclosed in our Form 10-K filed for the year ended December 31, 2011.

ACQUISITION — On July 21, 2012, we completed the acquisition of Lepage Bakeries, Inc. and certain of its affiliated companies (collectively, “Lepage”) for cash, deferred cash payments, and shares of Flowers common stock. This acquisition has been accounted for using the purchase method of accounting, with Flowers as the acquirer and Lepage as the acquiree. As of July 21, 2012, Lepage’s results of operations are included in our DSD segment. Additional disclosure is in Note 4, Acquisitions.

 

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2. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In December 2011, the FASB issued guidance for offsetting (netting) assets and liabilities. This guidance requires entities to disclose both gross information and net information about both instruments and transactions subject to an agreement similar to a master netting agreement. This includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. These disclosures allow users of the financial statements to understand the effect of those arrangements on a company’s financial position. This guidance is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. These requirements are retrospective for all comparative periods. The company is still analyzing the potential impact of this guidance on the company’s consolidated financial statements.

In July 2012, the FASB issued guidance on testing indefinite-lived intangible assets for impairment. The guidance allows an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The company is analyzing the potential impact of this guidance on the company’s consolidated financial statements.

3. COMPREHENSIVE INCOME (LOSS)

The company’s total comprehensive income presently consists of net income, adjustments for our derivative financial instruments accounted for as cash flow hedges, and various pension and other postretirement benefit related items. Total comprehensive income, determined as net income adjusted by other comprehensive income, was $34.6 million and $119.4 million for the twelve and forty weeks ended October 6, 2012, respectively. Total comprehensive income was $21.2 million and $61.6 million for the twelve and forty weeks ended October 8, 2011, respectively.

During the forty weeks ended October 6, 2012, changes to accumulated other comprehensive loss, net of income tax, were as follows (amounts in thousands):

 

                    

Accumulated other comprehensive loss, December 31, 2011

    $ (112,047)   

Derivative instruments transactions:

  

Loss reclassified to earnings (materials, labor and other production costs), net of income tax of $10,478

     16,737    

Net amount of gain recognized on the effective portion of cash flow hedges, net of income tax of $1,870

     2,988    

Pension and postretirement plans transactions:

  

Amortization of actuarial loss, net of income tax of $1,418

     2,264    

Amortization of prior service credits, net of income tax of $(77)

     (121)   
  

 

 

 

Accumulated other comprehensive loss, October 6, 2012

    $ (90,179)   
  

 

 

 

Amounts reclassified out of accumulated other comprehensive loss to net income that relate to commodity contracts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The gross amount reported on the Condensed Consolidated Statements of Cash Flows is $25.0 million. This is netted against the deferred tax amount of $9.6 million to yield the net amount of $15.4 million that can be found in the disclosures in Note 7, Derivatives, in the Amount of Gain or (Loss) Reclassified from Accumulated OCI Into Income (Effective Portion) table from the production costs disclosure.

The balance in accumulated other comprehensive income (loss) consists of the following:

 

                                                                       
           October 6, 2012                  December 31, 2011        
     (Amounts in thousands)  

Derivatives designated as cash flow hedges

    $ 4,817                 $ (14,908)           

Pension and postretirement plans

     (94,996)                 (97,139)           
  

 

 

    

 

 

 

Total

    $ (90,179)                $ (112,047)           
  

 

 

    

 

 

 

 

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4. ACQUISITIONS

On July 21, 2012, we completed the acquisition of Lepage in two separate but concurrent transactions. Pursuant to the Acquisition Agreement dated May 31, 2012 (the “Acquisition Agreement”), by and among Flowers, Lobsterco I, LLC, a Maine single-member limited liability company and indirect wholly owned subsidiary of Flowers (“Lobsterco I”), Lepage, RAL, Inc., a Maine corporation (“RAL”), Bakeast Company, a Maine general partnership (“Bakeast Partnership”), Bakeast Holdings, Inc., a Delaware corporation (“Bakeast Holdings,” and collectively with Lepage, RAL and Bakeast Partnership, the “Acquired Entities”), and the equityholders of the Acquired Entities named in the Acquisition Agreement (collectively, the “Equityholders”), Lobsterco I purchased from the Equityholders all of the issued and outstanding shares of the Acquired Entities in exchange for approximately $318.4 million in cash and $17.7 million in deferred cash payments.

Pursuant to the Agreement and Plan of Merger dated May 31, 2012 (the “Merger Agreement”), by and among Flowers, Lobsterco II, LLC, a Maine single-member limited liability company and indirect wholly owned subsidiary of Flowers (“Lobsterco II”), Aarow Leasing, Inc., a Maine corporation (“Aarow”), The Everest Company, Incorporated, a Maine corporation (“Everest,” and together with Aarow, the “Acquired Companies”), and the Shareholders, the Acquired Companies merged with and into Lobsterco II (the “Merger”) and all of the issued and outstanding shares of common stock of the Acquired Companies were exchanged for 2,178,648 shares of Flowers common stock.

Lepage operates three bakeries, two in Lewiston, Maine, and one in Brattleboro, Vermont. Lepage serves customers in the New England and New York markets making fresh bakery products under the Country Kitchen and Barowsky’s brands. This acquisition provides a DSD platform to accelerate penetration of Nature’s Own and Tastykake brands in the Northeast. The Lepage acquisition will be accounted for as a business combination.

The preliminary aggregate purchase price was $382.1 million as described in the table below. We incurred $6.7 million in acquisition-related costs during 2012 for Lepage. These expenses were included in the selling, distribution and administrative line item in the company’s consolidated statement of income for the forty weeks ending on October 6, 2012. Acquisition-related costs were $5.1 million for the twelve weeks ending on October 6, 2012.

The following table summarizes the consideration transferred to acquire Lepage and the amounts of identified assets acquired and liabilities assumed based on the estimated fair value at the acquisition date (amounts in thousands):

 

Fair value of consideration transferred:

  

Cash

    $         300,000      

Cash paid for preliminary tax adjustment

     18,426      

Accrued working capital adjustment estimate

     158      

Deferred payment obligations

     17,663      

Flowers Foods, Inc. common stock

     45,887      
  

 

 

 

Total fair value of consideration transferred

    $ 382,134      
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Financial assets

    $ 11,487          

Inventories

     4,537          

Property, plant, and equipment

     60,332          

Assets Held for sale – Distributor routes

     10,000          

Identifiable intangible assets estimate

     256,400          

Deferred income taxes

     (1,318)          

Financial liabilities

     (15,526)          
  

 

 

 

Net recognized amounts of identifiable assets acquired

    $ 325,912          
  

 

 

 

Goodwill

    $ 56,222          
  

 

 

 

The $18.4 million cash payment for the preliminary tax adjustment is the amount paid to the Lepage equityholders at the closing of the acquisition in connection with certain incremental tax liabilities that will be incurred by those equityholders if the parties jointly make an election under Section 338(h)(10) of the Internal Revenue Code. In the event the parties decide not to make such an election, the payment will be returned to the company. There is an additional $2.1 million preliminary tax adjustment (recorded in the financial liabilities figure in the table above) the company will pay for entity level state taxes.

The $17.7 million obligation for the deferred payments represents the fair value of the fixed payments of $1,250,000 beginning on the first business day of each of the sixteen calendar quarters following the fourth anniversary of the closing of the

 

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Acquisition (A total of $20.0 million in gross payments). The first payment will be made by Flowers on October 1, 2016 and the final payment will be made on July 1, 2020. The difference between the fair value and the gross payments of $2.3 million is recorded as a reduction to the liability and will be amortized to expense over eight years.

We issued 2,178,648 shares of Flowers common stock to certain equityholders of Lepage with a fair value of $45.9 million. The number of shares issued was calculated by dividing $50.0 million by the average closing price of Flowers Foods, Inc. common stock for the twenty consecutive trading day period ending five trading days prior to the closing. The shares issued to the equityholders were separated into five categories with each category having a different holding period requirement. As a result, each holding period had a fair value assignment based on an implied fair value which was determined using the Black-Scholes call option formula for an option expiring on each restriction lapse date. The estimated exercise price is equal to the stock price on the last trading day before the closing on July 21, 2012 of $20.48. The table below outlines the determination of fair value and provides the assumptions used in the calculation. The fair value of the stock consideration is computed in the following table:

 

Restriction lapse year       2012      

 

        2013      

 

        2014      

 

        2015      

 

        2016      

 

        Total      

 

 

Value of Flowers shares issued (thousands)

      25,000          10,000          5,000          5,000          5,000          50,000   

Implied Fair Value of Restricted shares (thousands)

      23,626          9,154          4,447          4,363          4,297          45,887   

Exercise price (per share)

      20.48          20.48          20.48          20.48          20.48       

Expected term (yrs)

      0.37          1.00          2.00          3.00          4.00       

Volatility (%)

      25.0%          25.0%          25.0%          25.0%          25.0%       

Risk-free rate (%)

      0.1%          0.2%          0.2%          0.3%          0.4%       

Dividend Yield (%)

      3.0%          3.0%          3.0%          3.0%          3.0%       

The following table presents the allocation of intangible assets subject to amortization (amounts in thousands, except amortization periods):

 

         Amount          Weighted
average
Amortization
years
 

Customer relationships

     69,000             25.0           

Non-compete agreements

     2,400             4.0           
  

 

 

    

 

 

 
    $     71,400             24.3           
  

 

 

    

 

 

 

In addition to the amortizable intangible assets, there is an additional $185.0 million in indefinite-lived trademark intangible assets. Goodwill of $56.2 million is allocated to the DSD segment. Approximately $14.4 million of goodwill is deductible for income tax purposes. The primary reasons for the acquisition are to expand the company’s footprint into the northeastern United States, to distribute Country Kitchen and Borowsky’s products throughout our distribution network and to distribute Nature’s Own and Tastykake products throughout the Lepage markets.

The fair value of trade receivables is $7.4 million. The gross amount receivable is $7.5 million of which $0.1 million is determined to be uncollectible. We did not acquire any other class of receivables as a result of the acquisition.

On May 20, 2011, a wholly owned subsidiary of the company acquired Tasty Baking Company (“Tasty”). Tasty operates two bakeries in Pennsylvania and serves customers primarily in the northeastern United States with an extensive line of Tastykake branded snacks. The results of Tasty’s operations are included in the company’s consolidated financial statements as of May 20, 2011 and are included in the company’s DSD segment. The acquisition facilitated our expansion into new geographic markets and increased our manufacturing capacity. In addition, the Tastykake brand increased our position in the branded snack cake category.

The aggregate purchase price was $172.1 million, including the payoff of certain indebtedness, Tasty transaction expenses and change in control payments. The change in control payments were accrued because they were not paid at closing. During the forty weeks ended October 6, 2012, the company paid a portion of the accrued change in control payments. The acquisition was completed through a short-form merger following the company’s tender offer through a wholly owned subsidiary for all of the outstanding shares

 

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of common stock of Tasty for $4.00 per share in cash, without interest and less any applicable withholding tax. Each share of Tasty not accepted for payment in the tender offer was converted into the right to receive $4.00 per share in cash as consideration, without interest and less any applicable withholding taxes.

The company incurred $6.2 million of acquisition-related costs during 2011 related to Tasty. These expenses were included in the selling, distribution and administrative expense line item in the company’s consolidated statement of income for the 52 weeks ended December 31, 2011.

The following table summarizes the consideration transferred to acquire Tasty and the amounts of identified assets acquired and liabilities assumed based on the estimated fair value at the merger date (amounts in thousands):

 

Fair value of consideration transferred:

  

Total tender, merger consideration, debt cash payments and change in control payments

    $         172,109        
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Financial assets

    $ 44,153        

Inventories

     7,789        

Property, plant, and equipment

     99,796        

Identifiable intangible assets

     51,419        

Deferred income taxes

     15,516        

Financial liabilities

     (66,359)       
  

 

 

 

Net recognized amounts of identifiable assets acquired

    $ 152,314        
  

 

 

 

Goodwill

    $ 19,795        
  

 

 

 

The following table presents the allocation of the intangible assets subject to amortization (amounts in thousands, except for amortization periods):

 

     Amount      Weighted
average
            Amortization             
years

Trademarks

    $         36,409                   40.0

Customer relationships

     13,487                   25.0

Distributor relationships

     1,523                   15.0
  

 

 

    

 

    $ 51,419                   35.3
  

 

 

    

 

Goodwill of $19.8 million is allocated to the DSD segment. The primary reasons for the acquisition are to expand the company’s footprint into the northeastern United States, distribute TastyKake products throughout our distribution network and to distribute Nature’s Own products throughout the legacy Tasty distribution network. None of the intangible assets, including goodwill, are deductible for tax purposes. Goodwill increased by $0.2 million during the twelve weeks ended July 14, 2012.

The fair value of the assets acquired includes trade receivables of $17.3 million. The gross amount receivable is $20.2 million, of which $2.9 million is expected to be uncollectible. The company did not acquire any other class of receivable as a result of the merger with Tasty.

Acquisitions Pro Forma

We recognized revenues for Lepage during the quarter ended October 6, 2012 of $39.2 million. Income from operations for Lepage for the quarter ended October 6, 2012 was $6.7 million. We recorded Lepage’s activity at the beginning of our third quarter. Therefore, there are no pro forma disclosures for the quarter in the table below.

 

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The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions of Lepage and Tasty occurred at the beginning of fiscal 2011 (amounts in thousands, except per share data):

 

    For the
    Twelve Weeks Ended    
October 8, 2011
    For the
    Forty Weeks Ended    
October 8, 2011
    For the
    Forty Weeks Ended    
October 6, 2012
 

Sales:

     

As reported

    $ 675,369       $ 2,119,790        $ 2,297,049   

Pro forma

    $ 718,891       $ 2,341,667        $ 2,396,569   

Net income:

     

As reported

    $
31,019
  
   $ 100,390        $ 97,554   

Pro forma

    $ 35,545       $ 104,984        $ 97,503   

Basic net income per common share:

     

As reported

    $ 0.23       $ 0.74        $ 0.72   

Pro forma

    $ 0.26       $ 0.76        $ 0.71   

Diluted net income per common share:

     

As reported

    $ 0.23       $ 0.73        $ 0.71   

Pro forma

    $ 0.26       $ 0.76        $ 0.70   

These amounts have been calculated after applying the company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and amortizable intangible assets had been applied. In addition, pro forma adjustments have been made for the interest incurred for financing the acquisitions with either the credit facility or the senior notes and to conform Tasty’s revenue recognition policies to ours. Lepage’s revenue recognition policy was consistent with ours and adjustments are not required. Taxes have also been adjusted for the effect of the items discussed. These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future.

5. GOODWILL AND OTHER INTANGIBLES

The changes in the carrying amount of goodwill for the forty weeks ended October 6, 2012, are as follows (amounts in thousands):

 

    DSD     Warehouse
delivery
    Total  

Balance as of December 31, 2011

   $     212,629           $ 7,101           $ 219,730       

Increase in goodwill related to acquisitions (Note 4, Acquisition)

    56,440            —            56,440       
 

 

 

   

 

 

   

 

 

 

Balance as of October 6, 2012

   $ 269,069           $     7,101           $     276,170       
 

 

 

   

 

 

   

 

 

 

As of October 6, 2012 and December 31, 2011, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

 

    October 6, 2012     December 31, 2011  

Asset

  Cost     Accumulated
Amortization
    Net
Value
    Cost     Accumulated
Amortization
    Net
Value
 

Trademarks

   $ 71,677        $ 8,677        $ 63,000        $ 71,677        $ 6,790        $       64,887    

Customer relationships

    157,921         22,539         135,382         88,921         18,162         70,759    

Non-compete agreements

    4,274         1,570         2,704         1,874         1,397         477    

Distributor relationships

    4,123         861         3,262         4,123         649         3,474    

Supply agreement

    1,050         1,050         —          1,050         916         134    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $     239,045        $         34,697        $     204,348        $     167,645        $         27,914        $ 139,731    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There are $186.5 million of indefinite lived intangible assets separately identified from goodwill.

 

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Aggregate amortization expense for the twelve and forty weeks ending October 6, 2012 and October 8, 2011 were as follows (amounts in thousands):

 

                                
     Amortization
expense
 

For the twelve weeks ended October 6, 2012

    $ 2,504            

For the twelve weeks ended October 8, 2011

    $ 1,905            

For the forty weeks ended October 6, 2012

    $ 6,749            

For the forty weeks ended October 8, 2011

    $ 5,271            

Estimated net amortization of intangibles for the remainder of fiscal 2012 and the next four years is as follows (amounts in thousands):

 

                                
     Amortization of
intangibles, net
 

Remainder of 2012

    $ 2,504         

2013

    $ 10,831         

2014

    $ 10,691         

2015

    $ 10,498         

2016

    $ 10,124         

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable and short-term debt approximates fair value because of the short-term maturity of the instruments. Notes receivable are entered into in connection with the purchase of distributors’ territories by independent distributors. These notes receivable are recorded in the consolidated balance sheet at carrying value which represents the closest approximation of fair value. In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As a result, the appropriate interest rate that should be used to estimate the fair value of the distributor notes is the prevailing market rate at which similar loans would be made to distributors with similar credit ratings and for the same maturities. However, the company finances approximately 2,800 territory loans all with varied financial histories and credit risks. Considering the diversity of credit risks among the independent distributors, the company has no method to accurately determine a market interest rate to apply to the notes. The territories are generally financed for up to ten years and the distributor notes are collateralized by the independent distributors’ territories. The Tasty sales distribution routes are primarily owned by independent sales distributors that purchased the exclusive right to sell and distribute Tastykake products in defined geographical territories. The company maintains a wholly-owned subsidiary to assist in financing route purchase activities if requested by new independent sales distributors, using the route and certain associated assets as collateral. These notes receivable earn interest based on Treasury or LIBOR yields plus a spread.

Interest income for the distributor notes receivable was as follows (amounts in thousands):

 

                    
     Interest
Income
 

For the twelve weeks ended October 6, 2012

    $ 3,140       

For the twelve weeks ended October 8, 2011

    $ 3,103       

For the forty weeks ended October 6, 2012

    $ 10,487       

For the forty weeks ended October 8, 2011

    $ 9,982       

At October 6, 2012 and December 31, 2011, respectively, the carrying value of the distributor notes was as follows (amounts in thousands):

 

                                             
     October 6, 2012      December 31, 2011  

Distributor notes receivable

    $     115,719            $     117,058   

Current portion of distributor notes receivable recorded in accounts and notes receivable, net

     14,773             14,736   
  

 

 

    

 

 

 

Long-term portion of distributor notes receivable

    $ 100,946            $ 102,322   
  

 

 

    

 

 

 

At October 6, 2012 and December 31, 2011, the company has evaluated the collectability of the distributor notes and determined that a reserve is not necessary. Payments on these distributor notes are collected by the company weekly in the distributor settlement process.

 

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The fair value of the company’s variable rate debt at October 6, 2012 approximates the recorded value. The fair value of the 4.375% senior notes (“notes”) issued on April 3, 2012, as discussed in Note 8, Debt and Other Obligations below, is approximately $413.1 million while the carrying value is $399.1 million on October 6, 2012. The fair value of the notes is estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements and is considered a Level 2 valuation.

For fair value disclosure information about our derivative assets and liabilities see Note 7, Derivative Financial Instruments.

7. DERIVATIVE FINANCIAL INSTRUMENTS

The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1: Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets

Level 2: Modeled fair value with model inputs that are all observable market values

Level 3: Modeled fair value with at least one model input that is not an observable market value

COMMODITY PRICE RISK

The company enters into commodity derivatives designated as cash-flow hedges of existing or future exposure to changes in various raw material prices. The positions held in the portfolio effectively fix the price, or limit increases in price, for various periods of time extending as far as fiscal 2016. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity input to production.

As of October 6, 2012, the company’s hedge portfolio contained commodity derivatives with a net fair value of $5.6 million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

                                                                   
         Level 1              Level 2              Level 3              Total      

Assets:

           

Other current

    $ 5.6         $ 1.0        $ —          $ 6.6    

Other long-term

     —           0.1         —           0.1    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5.6          1.1         —           6.7    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Other current

     (0.4)         (0.6)         —           (1.0)   

Other long-term

     (0.1)         —           —           (0.1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     (0.5)         (0.6)         —           (1.1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Fair Value

    $ 5.1         $ 0.5         $ —          $ 5.6    
  

 

 

    

 

 

    

 

 

    

 

 

 

The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. All of the company-held commodity derivatives at October 6, 2012 and December 31, 2011 qualified for hedge accounting.

INTEREST RATE RISK

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the ten-year 4.375% Senior Notes issued on April 3, 2012. The derivative position was closed when the debt was priced on March 29, 2012 with a cash settlement that offset changes in the benchmark treasury rate between the execution of the treasury rate lock and the debt pricing date. This treasury rate lock was designated as a cash flow hedge and the cash settlement was $3.1 million and will be amortized to interest expense over the term of the notes.

The company entered into interest rate swaps with notional amounts of $85.0 million, and $65.0 million, respectively, to fix the interest rate on the $150.0 million term loan secured on August 1, 2008 to fund the acquisitions of ButterKrust Bakery and Holsum Bakery, Inc. The current notional amount for the swaps of this amortizing loan is $67.5 million.

 

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The interest rate swap agreements result in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amount. The interest rate differential to be paid or received will be recorded as interest expense. These swap transactions are designated as cash-flow hedges. Accordingly, the effective portion of changes in the fair value of the swaps is recorded each period in other comprehensive income. Any ineffective portions of changes in fair value are recorded to current period earnings in selling, distribution and administrative expenses.

As of October 6, 2012, the fair value of the interest rate swaps was $(1.4) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

                                                                   
         Level 1              Level 2              Level 3              Total      

Liabilities:

           

Other current

     —           (1.4)         —           (1.4)   

Other long-term

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           (1.4)         —           (1.4)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Fair Value

    $ —          $ (1.4)        $ —          $ (1.4)   
  

 

 

    

 

 

    

 

 

    

 

 

 

The company has the following derivative instruments located on the condensed consolidated balance sheet, utilized for risk management purposes (amounts in thousands):

 

   

Derivative Assets

   

Derivative Liabilities

 
   

October 6, 2012

   

December 31, 2011

   

October 6, 2012

   

December 31, 2011

 

Derivatives designated as

hedging instruments

 

Balance

Sheet

location

  Fair
Value
   

Balance

Sheet

location

  Fair
Value
   

Balance

Sheet

location

  Fair
Value
   

Balance

Sheet

location

  Fair
Value
 

Interest rate contracts

  —       $      —        —      $    —       

Other current liabilities

     $1,436      

Other current liabilities

     $2,639    

Interest rate contracts

  —       —        —      —       

Other long term liabilities

    —       

Other long term liabilities

    765    

Commodity contracts

 

Other current assets

    6,693      

Other current assets

    —       

Other current liabilities

    970      

Other current liabilities

    5,439    

Commodity contracts

 

Other long term assets

    25      

Other long term assets

    61      

Other long term liabilities

    104      

Other long term liabilities

    278    
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

       $  6,718            $    61            $2,510            $9,121    
   

 

 

     

 

 

     

 

 

     

 

 

 

The company has the following derivative instruments located on the condensed consolidated statements of income, utilized for risk management purposes (amounts in thousands and net of tax):

 

Derivatives in Cash Flow Hedge
Relationships

   Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)
For the twelve weeks ended
    

Location of Gain or (Loss)

Reclassified from AOCI into

Income

(Effective Portion)

   Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)
For the twelve weeks ended
 
    October 6, 2012        October 8, 2011          October 6, 2012        October 8, 2011   

Interest rate contracts

    $ (23)        $ (69)       Interest (expense) income     $ (378)        $ (551)   

Commodity contracts

     62          (8,009)       Production costs(1)      (2,299)         2,605    
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

    $ 39         $ (8,078)           $ (2,677)        $ 2,054    
  

 

 

    

 

 

       

 

 

    

 

 

 

Derivatives in Cash Flow Hedge
Relationships

   Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)
For the forty weeks ended
    

Location of Gain or (Loss)

Reclassified from AOCI into

Income

(Effective Portion)

   Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)
For the forty weeks ended
 
    October 6, 2012        October 8, 2011           October 6, 2012        October 8, 2011   

Interest rate contracts

    $ (1,606)        $ (504)       Interest (expense) income     $ (1,379)        $ (1,923)   

Commodity contracts

     4,594          (16,574)       Production costs(1)      (15,358)         24,817    
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

    $ 2,988         $ (17,078)           $ (16,737)        $ 22,894    
  

 

 

    

 

 

       

 

 

    

 

 

 

 

1. Included in Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).

 

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The balance in accumulated other comprehensive income (loss) related to commodity price risk and interest rate risk derivative transactions that are closed or will expire over the next five years are as follows (amounts in millions and net of tax) at October 6, 2012:

 

                                                                          
     Commodity
price risk
    derivatives    
     Interest
rate risk
    derivatives    
         Totals      

Closed contracts

    $ 3.7             $ (1.4)            $ 2.3        

Expiring in 2012

     (0.3)             (0.4)             (0.7)       

Expiring in 2013

     3.7              (0.5)             3.2        

Expiring in 2014

     —                —                —          

Expiring in 2015

     —                —                —          

Expiring in 2016

     —                —                —          
  

 

 

    

 

 

    

 

 

 

Total

    $ 7.1             $ (2.3)            $ 4.8        
  

 

 

    

 

 

    

 

 

 

As of October 6, 2012, the company had the following outstanding financial contracts that were entered to hedge commodity and interest rate risk (amounts in millions):

 

     Notional
amount
 

Interest rate contracts

    $ 67.5       

Wheat contracts

     106.5       

Soybean oil contracts

     24.6       

Natural gas contracts

     10.2       
  

 

 

 

Total

    $       208.8       
  

 

 

 

The interest rate contracts have multiple settlements to match the amortization of the term loan. The notional amount of $67.5 million represents the current settlement notional amount. Note 8, Debt and Other Obligations, below provides details on the term loan. The company’s derivative instruments contain no credit-risk-related contingent features at October 6, 2012. As of October 6, 2012 and December 31, 2011, the company had $2.1 million and $11.8 million, respectively, in other current assets representing collateral for hedged positions. As of October 6, 2012, the company also had $2.0 million in other current liabilities representing collateral for hedged positions.

8. DEBT AND OTHER OBLIGATIONS

Long-term debt and capital leases consisted of the following at October 6, 2012 and December 31, 2011 (amounts in thousands):

 

                                                             
     October 6, 2012      December 31, 2011  

Unsecured credit facility

    $ 106,600                 $ 225,000           

Unsecured term loan

     67,500                   90,000           

4.375% senior notes due April 1, 2022

     399,089                   —             

Capital lease obligations

     11,431                   9,272           

Other notes payable

     19,303                   1,902           
  

 

 

    

 

 

 
     603,923                   326,174           

Less current maturities

     72,016                   42,768           
  

 

 

    

 

 

 

Total long-term debt and capital leases

    $ 531,907                  $ 283,406           
  

 

 

    

 

 

 

Bank overdrafts occur when checks have been issued but have not been presented to the bank for payment. Certain of our banks allow us to delay funding of issued checks until the checks are presented for payment. A delay in funding results in a temporary source of financing from the bank. The activity related to bank overdrafts is shown as a financing activity in our consolidated statements of cash flows. Bank overdrafts are included in other current liabilities on our consolidated balance sheets. As of October 6, 2012 and December 31, 2011, the bank overdraft balance was $13.5 million and $10.2 million, respectively.

The company also had standby letters of credit (“LOCs”) outstanding of $15.6 million and $14.7 million at October 6, 2012 and December 31, 2011, respectively, which reduce the availability of funds under the credit facility. The outstanding LOCs are for the benefit of certain insurance companies and lessors. None of the LOCs are recorded as a liability on the consolidated balance sheets.

 

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Senior Notes, Credit Facility, and Term Loan

Senior Notes. On April 3, 2012, the company issued $400 million of ten-year 4.375% Senior Notes (the “notes”). The company will pay semiannual interest on the notes on each April 1 and October 1, beginning on October 1, 2012, and the notes will mature on April 1, 2022. On any date prior to January 1, 2022, the company may redeem some or all of the notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal thereof (not including any interest accrued thereon to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the agreement), plus 35 basis points, plus in each case, unpaid interest accrued thereon to, but not including, the date of redemption. At any time on or after January 1, 2022, the company may redeem some or all of the notes at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and related rating of the notes below investment grade), it is required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the notes in whole. The notes are also subject to customary restrictive covenants, including certain limitations on liens and sale and leaseback transactions.

The net proceeds from this offering were partially used to repay $207.2 million of long-term debt then outstanding under the company’s revolving credit facility. The balance of the net proceeds were used in connection with the Lepage acquisition. The face value of the notes is $400.0 million and the current discount on the notes is $0.9 million. The company paid issuance costs (including underwriting fees and legal fees) for issuing the senior notes of $3.9 million. The issuance costs and the debt discount are being amortized to interest expense over the term of the senior notes. As of October 6, 2012 the company was in compliance with the restrictive covenants under the notes.

Credit Facility. On May 20, 2011, the company amended and restated its credit facility (the “new credit facility”), which was previously amended on October 5, 2007 (the “former credit facility”). The new credit facility is a five-year, $500.0 million senior unsecured revolving loan facility with two, one-year extension options. Further, the company may request to increase its borrowings under the new credit facility up to an aggregate of $700.0 million upon the satisfaction of certain conditions. Proceeds from the new credit facility may be used for working capital and general corporate purposes, including capital expenditures, acquisition financing, refinancing of indebtedness, dividends and share repurchases. The new 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 new credit facility and can meet presently foreseeable financial requirements. As of October 6, 2012 and December 31, 2011, the company was in compliance with all restrictive financial covenants under the credit facility.

Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The underlying rate is defined as rates offered in the interbank Eurodollar market, or the higher of the prime lending rate or the federal funds rate plus 0.50%, with a floor rate defined by the one-month interbank Eurodollar market rate plus 1.00%. The applicable margin ranges from 0.30% to 1.25% for base rate loans and from 1.30% to 2.25% for Eurodollar loans. In addition, a facility fee ranging from 0.20% to 0.50% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. The company paid additional financing costs of $2.0 million in connection with the amendment of the new credit facility, which, in addition to the remaining balance of the original $1.0 million in financing costs, is being amortized over the life of the new credit facility. The company recognized financing costs of $0.1 million related to the former credit facility at the time of the amendment for the new credit facility.

There were $106.6 million and $225.0 million in outstanding borrowings under the credit facility at October 6, 2012 and at December 31, 2011, respectively. The highest outstanding daily balance during 2012 was $230.0 million and the low amount outstanding balance was zero. Amounts outstanding under the credit facility vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 7, Derivative Financial Instruments, of Notes to Consolidated Financial Statements of this Form 10-Q. For the forty weeks ending October 6, 2012, the company borrowed $780.1 million in revolving borrowings under the credit facility and repaid $898.5 million in revolving borrowings. On October 6, 2012, the company had $377.8 million available under its credit facilities for working capital and general corporate purposes. The amount available under the credit facility is reduced by $15.6 million for letters of credit.

Term Loan. On May 20, 2011, the company amended its credit agreement entered on August 1, 2008 (the “term loan”), to conform the terms to the new credit facility. The term loan provides for an amortizing $150.0 million of borrowings through the maturity date of August 1, 2013. Principal payments are due quarterly under the term loan beginning on December 31, 2008 at an annual amortization of 10% of the principal balance for each of the first two years, 15% during the third year, 20% during the fourth

 

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year, and 45% during the fifth year. The term loan 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 term loan and meet financial requirements for the next twelve months. As of October 6, 2012 and December 31, 2011, the company was in compliance with all restrictive financial covenants under the term loan. As of October 6, 2012 and December 31, 2011, the amounts outstanding under the term loan were $67.5 million and $90.0 million, respectively.

Interest on the term loan is due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for Eurodollar loans and is based on the company’s leverage ratio. The company paid additional financing costs of $0.1 million in connection with the amendment of the term loan, which, in addition to the remaining balance of the original $0.8 million in financing costs, is being amortized over the remaining life of the term loan.

Credit Ratings. Currently, the company’s credit ratings by Fitch Ratings, Moody’s, and Standard & Poor’s are BBB, Baa2, and BBB-, respectively. Changes in the company’s credit ratings do not trigger a change in the company’s available borrowings or costs under the new credit facility or term loan, but could affect future credit availability and cost.

9. VARIABLE INTEREST ENTITY

The company maintains a transportation agreement with an entity that transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualifies as a variable interest entity (“VIE”). Under previous accounting guidance, we consolidated the VIE in our consolidated financial statements from the first quarter of 2004 through the fourth quarter of 2009 because during that time the company was considered to be the primary beneficiary. Under the revised principles, which became effective at the beginning of our fiscal 2010, we determined that the company is no longer the primary beneficiary and we deconsolidated the VIE in our financial statements.

As part of the deconsolidation of the VIE, the company concluded that certain of the trucks and trailers the VIE uses for distributing our products from the manufacturing facilities to the distribution centers qualify as right to use leases. As of October 6, 2012 and December 31, 2011, there was $10.7 million and $7.9 million, respectively, in net property, plant and equipment and capital lease obligations associated with the right to use leases.

As part of the Tasty acquisition the incorporated independent distributors (“IDs”) who deliver Tastykake products also qualify as VIEs. The IDs qualify as VIEs primarily because Tasty (and now the company) financed the routes, which create variability to the company from various economic and pecuniary benefits. However, the company is not considered to be the primary beneficiary of the VIEs because the company does not (i) have the ability to direct the significant activities of the VIEs that would affect their ability to operate their respective distributor territories and (ii) provide any implicit or explicit guarantees or other financial support to the VIEs, other than the financing described above, for specific return or performance benchmarks. The company’s maximum exposure related to the distributor route notes receivable of these VIEs is less than 10% of the total distributor route notes receivable for the consolidated company. The independent distributors who deliver our products that are formed as sole proprietorships are excluded from this analysis.

10. LITIGATION

The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.

On July 23, 2008, a wholly-owned subsidiary of the company filed a lawsuit against Hostess Brands, Inc. (formerly Interstate Bakeries Corporation) in the United States District Court for the Northern District of Georgia. The complaint alleges that Hostess is infringing upon Flowers’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. Flowers asserts that Hostess’ sale or intended sale of baked goods under the Nature’s Pride trademark is likely to cause confusion with, and likely to dilute the distinctiveness of, the Nature’s Own mark and constitutes unfair competition and deceptive trade practices. Flowers is seeking actual damages, an accounting of Hostess’ profits from its sales of Nature’s Pride products, and injunctive relief. Flowers sought summary judgment for its claims, which was denied by the court. On January 11, 2012, Hostess filed a voluntary petition for relief in the United States Bankruptcy Court for the Southern District of New York under Chapter 11, Title 11, United States Code. The bankruptcy filing automatically stayed the trademark lawsuit.

 

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The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition, results of operations, cash flows or the competitive position of the company. The company is currently in substantial compliance with all material environmental regulations affecting the company and its properties.

11. EARNINGS PER SHARE

The following is a reconciliation of net income and weighted average shares for calculating basic and diluted earnings per common share for the twelve and forty weeks ended October 6, 2012 and October 8, 2011 (amounts and shares in thousands, except per share data):

 

    For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
      October 6, 2012         October 8, 2011         October 6, 2012         October 8, 2011    

Net income

   $ 31,231        $ 31,019        $ 97,554        $ 100,390    
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Common Share:

       

Weighted average shares outstanding for common stock

    138,027         135,617         136,348         135,327    

Weighted average shares outstanding for participating securities

    —           —           —           57    
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding for common stock

    138,027         135,617         136,348         135,384    
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.23        $ 0.23        $ 0.72        $ 0.74    
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Earnings Per Common Share:

       

Basic weighted average shares outstanding for common stock

    138,027         135,617         136,348         135,384    

Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock

    1,690         1,590         1,762         1,467    
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding for common stock

    139,717         137,207         138,110         136,851    
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.22        $ 0.23        $ 0.71        $ 0.73    
 

 

 

   

 

 

   

 

 

   

 

 

 

The following shares were not included in the computation of diluted earnings per share for the twelve and forty weeks ended October 6, 2012 and October 8, 2011 because their effect would have been anti-dilutive (shares in thousands):

 

                         Common shares                    

For the twelve weeks ended October 6, 2012

  137,450

For the twelve weeks ended October 8, 2011

 

For the forty weeks ended October 6, 2012

  137,450

For the forty weeks ended October 8, 2011

 

12. STOCK BASED COMPENSATION

Flowers Foods’ 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (“EPIP”), authorizes the compensation committee of the Board of Directors to make awards of options to purchase our common stock, restricted stock, performance stock and units and deferred stock. The company’s officers, key employees and non-employee directors (whose grants are generally approved by the full Board of Directors) are eligible to receive awards under the EPIP. The aggregate number of shares that may be issued or transferred under the EPIP is 27,937,500 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. The following is a summary of stock options, restricted stock, and deferred stock outstanding under the EPIP. Information relating to the company’s stock appreciation rights which are not issued under the EPIP is also disclosed below.

 

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Performance-Contingent Total Shareholder Return Shares (“TSR Shares”)

Certain key employees have been granted performance-contingent restricted stock. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K). The total shareholder return (“TSR”) is the percent change in the company’s stock price over the measurement period plus the dividends paid to shareholders. Once the TSR is determined for the company (“Company TSR”), it is compared to the TSR of our food company peers (“Peer Group TSR”). The Company TSR compared to the Peer Group TSR will determine the payout as set forth below:

 

Percentile           Payout as % of Target         
90th   200%
70th   150%
50th   100%
30th   50%
    Below 30th       0%

The TSR shares vest immediately if the grantee dies or becomes disabled. However, at retirement the grantee will receive a pro-rata number of shares through the grantee’s retirement date at the normal vesting date. In addition, the TSR shares will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to voting rights. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.

The following performance-contingent TSR Shares have been granted under the EPIP and have service period remaining (amounts in thousands, except price data):

 

Grant date

  7/16/2012  

Shares granted

    137.5   

Approximate vesting date

            2/28/2014   

Fair value per share

  $ 23.18   

As of October 6, 2012, there was $2.7 million of total unrecognized compensation cost related to nonvested TSR Shares granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 1.3 years.

Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”)

Certain key employees have been granted performance-contingent restricted stock. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K). Return on Invested Capital is calculated by dividing our profit by the invested capital. Generally, the performance condition requires the company’s “return on invested capital” (“ROIC”) to exceed its weighted average “cost of capital” (“WACC”) between 1.75% to 4.75% (the “ROI Target”) over the two fiscal years immediately preceding the vesting date. If the ROI Target is not met the awards are forfeited. The shares can be earned based on a range from 0% to 125% of target as defined below:

 

   

0% payout if ROIC exceeds WACC by less than 1.75%;

 

   

ROIC above WACC by 1.75% pays 50% of ROI Target; or

 

   

ROIC above WACC by 3.75% pays 100% of target; or

 

   

ROIC above WACC by 4.75% pays 125% of target.

The ROIC shares vest immediately if the grantee dies or becomes disabled. However, at retirement the grantee will receive a pro-rata number of shares through the grantee’s retirement date at the normal vesting date. In addition, the ROIC shares will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to voting rights. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest. The fair value of the award is equal to the stock price on the grant date of $21.56. Since these awards have a performance condition feature the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. For the twelve and forty weeks ended October 6, 2012, we expensed these awards assuming 100% attainment of the ROI Target.

 

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The following performance-contingent ROIC Shares have been granted under the EPIP and have service period remaining (amounts in thousands, except price data):

 

Grant date

  7/16/2012  

Shares granted

    137.5    

Approximate vesting date

            2/28/2014    

Fair value per share

  $         21.56    

As of October 6, 2012, there was $2.5 million of total unrecognized compensation cost related to nonvested ROIC Shares granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 1.3 years.

Performance-Contingent Restricted Stock

Certain key employees have been granted performance-contingent restricted stock. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K) and the performance condition requires the company’s “return on invested capital” to exceed its weighted average “cost of capital” by 3.75% (the “ROI Target”) over the two fiscal years immediately preceding the vesting date. If the ROI Target is not met the awards are forfeited. If the ROI Target is satisfied, then the performance-contingent restricted stock grant may be adjusted based on the company’s total return to shareholders (“Company TSR”) percent rank as compared to the total return to shareholders of the S&P Packaged Food & Meat Index (“S&P TSR”) in the manner set forth below:

 

   

If the Company TSR rank is equal to the 50th percentile of the S&P TSR, then no adjustment;

 

   

If the Company TSR rank is less than the 50th percentile of the S&P TSR, the grant shall be reduced by 1.3% for each percentile below the 50th percentile that the Company TSR is less than the 50th percentile of S&P TSR, but in no event shall such reduction exceed 20%; or

 

   

If the Company TSR rank is greater than the 50th percentile of the S&P TSR, the grant shall be increased by 1.3% for each percentile above the 50th percentile that Company TSR is greater than the 50th percentile of S&P TSR, but in no event shall such increase exceed 20%.

In connection with the vesting of the performance-contingent restricted stock granted in February 2010, during the forty weeks ended October 6, 2012, the Company TSR rank was less than the 37th percentile and the grant was reduced by 16.9% of the award or 43,490 common shares. The total amount of shares that vested to plan participants was 213,271. Because the company achieved the ROI Target, the cost for the portion of the award that did not vest was not reversed.

The performance-contingent restricted stock generally vests immediately if the grantee dies or becomes disabled. However, at normal retirement the grantee will receive a pro-rata number of shares through the grantee’s retirement date at the normal vesting date. In addition, the performance-contingent restricted stock will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to voting rights. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest but will not exceed 100% of the award. The performance-contingent restricted stock granted in February 2010 paid accumulated dividends upon vesting of $0.2 million. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.

The following performance-contingent restricted stock awards have been granted under the EPIP and have service period remaining (amounts in thousands, except price data):

 

Grant date

  2/10/2011  

Shares granted

    324    

Approximate vesting date

            2/10/2013    

Fair value per share

  $         15.93    

 

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A summary of the status of all of the company’s nonvested shares for performance-contingent restricted stock as of October 6, 2012, and changes during the forty weeks ended October 6, 2012, is presented below (amounts in thousands, except price data):

 

    Shares     Weighted
Average
Grant
Date Fair
Value
    Weighted
Average
Remaining
Contractual
Term
    Aggregate
Current
Intrinsic
Value
 

Nonvested at December 31, 2011

    576       $ 16.67        

Vested

    (213)      $ 17.59        

Granted

    275       $ 22.37        

Grant reduction for not achieving the S&P TSR

    (43)      $ 17.59        

Forfeited

    (2)      $ 16.50        
 

 

 

   

 

 

     

Nonvested at October 6, 2012

            593       $         18.92                         0.96       $         11,362    
 

 

 

   

 

 

   

 

 

   

 

 

 

As of October 6, 2012, there was $6.1 million of total unrecognized compensation cost related to nonvested restricted stock granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 1.1 years. The total fair value of shares vested during the forty weeks ended October 8, 2011 was $3.4 million.

Non-Qualified Stock Options

The following non-qualified stock options (“NQSO”) have been granted under the EPIP with service period remaining. The Black-Scholes option-pricing model was used to estimate the grant date fair value (amounts in thousands, except price data and as indicated):

 

Grant date

  2/10/2011     2/9/2010  

Shares granted

    2,142        1,703   

Exercise price

    16.31        16.67   

Vesting date

            2/10/2014                2/9/2013   

Fair value per share ($)

    3.47        3.69   

Dividend yield (%)(1)

    3.00        3.00   

Expected volatility (%)(2)

    29.20        30.60   

Risk-free interest rate (%)(3)

    2.44        2.35   

Expected option life (years)(4)

    5.00        5.00   

Outstanding at October 6, 2012

    2,100        1,629   

 

1. Dividend yield — estimated yield based on the historical dividend payment for the four most recent dividend payments prior to the grant date.
2. Expected volatility — based on historical volatility over the expected term using daily stock prices.
3. Risk-free interest rate — United States Treasury Constant Maturity rates as of the grant date over the expected term.
4. Expected option life — The 2010 and 2011 grant assumptions are based on the simplified formula determined in accordance with Staff Accounting Bulletin No. 110. The company does not have sufficient historical exercise behavior data to reasonably estimate the expected option life.

The summary of the shares granted and outstanding for NQSO activity for the forty weeks ended October 6, 2012 pursuant to the EPIP is set forth below (amounts in thousands, except price data):

 

    NQSO     Weighted
Average
    Exercise Price    
    Weighted Average
Remaining
    Contractual Term    
    Aggregate
    Intrinsic Value    
 

Outstanding at December 31, 2011

    7,423       $ 15.67        

Exercised

    (690)      $ 13.20        

Forfeited

    (15)      $ 16.33        
 

 

 

   

 

 

     

Outstanding at October 6, 2012

    6,718       $ 15.93         3.82       $ 21,707    
 

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at October 6, 2012

            2,982       $ 15.27         2.46       $ 11,642    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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As of October 6, 2012, there was $2.7 million of total unrecognized compensation expense related to outstanding NQSO. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.2 years.

The cash received, the windfall tax benefits, and intrinsic value from NQSO exercises for the forty weeks ended October 6, 2012 and October 8, 2011 were as follows (amounts in thousands):

 

            October 6, 2012                      October 8, 2011           

Cash received from exercises

   $ 9,112                   $ 12,721               

Cash tax windfall, net

   $ 1,491                   $ 3,025               

Intrinsic value of NQSO exercised

   $ 6,472                   $ 11,542               

Generally, if the employee dies, becomes disabled or retires at normal retirement age (age 65 or later), the NQSO immediately vest and must be exercised within two years. In addition, NQSO will vest if the company undergoes a change in control.

Deferred Stock

Pursuant to the EPIP, the company allows non-employee directors to convert their annual board retainers into deferred stock. The deferred stock has a minimum two year vesting period and will be distributed to the individual (along with accumulated dividends) at a time designated by the individual. During the first quarter of fiscal 2012 an aggregate of 18,330 shares were converted. The company records compensation expense for this deferred stock over the two-year minimum vesting period based on the closing price of the company’s common stock on the date of conversion. During the forty weeks ending October 6, 2012, a total of 20,205 deferred shares were exercised for retainer conversions.

Pursuant to the EPIP non-employee directors also receive annual grants of deferred stock. This deferred stock vests over one year from the grant date. During the second quarter of fiscal 2012, non-employee directors were granted an aggregate of 47,800 shares of deferred stock. The deferred stock will be distributed to the grantee at a time designated by the grantee. Compensation expense is recorded on this deferred stock over the one year minimum vesting period. During the forty weeks ending October 6, 2012, there were 25,200 deferred shares awards exercised for annual grant awards.

The deferred stock activity for the forty weeks ended October 6, 2012 is set forth below (amounts in thousands, except price data):

 

        Shares         Weighted
Average
Fair
Value
    Weighted
Average
Remaining
Contractual
Term
(Years)
    Aggregate
Intrinsic
Value
 

Balance at December 31, 2011

    231        $ 16.43        

Deferred stock issued

    66        $ 20.62        

Deferred stock exercised

    (45)       $ 18.00        
 

 

 

       

Balance at October 6, 2012

    252        $ 17.24         0.24        $ 4,827    
 

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding vested at October 6, 2012

    160        $ 15.98          $ 3,071    
 

 

 

   

 

 

     

 

 

 

Outstanding unvested at October 6, 2012

    92        $ 19.45                         0.67        $ 1,755    
 

 

 

   

 

 

   

 

 

   

 

 

 

Shares vesting during the quarter ended October 6, 2012

    77        $         18.62          $         1,483    
 

 

 

   

 

 

     

 

 

 

As of October 6, 2012, there was $0.9 million of total unrecognized compensation cost related to deferred stock awards granted under the EPIP.

Stock Appreciation Rights

Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chairman fees into stock appreciation rights (“rights”). These rights vest after one year and can be exercised over nine years. The company records compensation expense for these rights at a measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model.

The fair value of the rights at October 6, 2012 ranged from $6.99 to $18.88. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 6, 2012: dividend yield 3.0%; expected volatility 29.0%; risk-free interest rate 0.23% and expected life of 0.05 years to 1.85 years.

The rights activity for the forty weeks ended October 6, 2012 is set forth below (amounts in thousands except price data):

 

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        Rights         Weighted
Average
Grant
Date Fair
Value
    Weighted
Average
Remaining
Contractual
Term
    Aggregate
Current
Intrinsic
Value
 

Outstanding at December 31, 2011

    187        $       12.03        

Rights exercised

    (35)       $ 15.61        
 

 

 

   

 

 

     

Outstanding at October 6, 2012

    152        $ 11.19                         2.06        $             1,524    
 

 

 

   

 

 

   

 

 

   

 

 

 

Share-Based Payments Compensation Expense Summary

The following table summarizes the company’s stock based compensation expense (income) for the twelve and forty week periods ended October 6, 2012 and October 8, 2011, respectively (amounts in thousands):

 

     For the
Twelve Weeks Ended
     For the
Forty Weeks Ended
 
         October 6, 2012              October 8, 2011              October 6, 2012              October 8, 2011      

Stock options

    $ 694         $ 1,002         $ 2,680         $ 5,684    

Performance-contingent restricted stock

     1,509          1,048          3,094          3,598    

Stock appreciation rights

     (410)         (568)         178          776    

Deferred stock

     325          333          1,060          1,145    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock based compensation

    $ 2,118         $ 1,815         $ 7,012         $ 11,203    
  

 

 

    

 

 

    

 

 

    

 

 

 

13. POST-RETIREMENT PLANS

The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at October 6, 2012 as compared to accounts at December 31, 2011 (amounts in thousands):

 

 

    As of  
    October 6, 2012     December 31, 2011  

Current benefit liability

   $ 1,335                 $ 1,335             

Noncurrent benefit liability

   $         133,831                 $             155,263             

Accumulated other comprehensive loss

   $ 94,996                 $ 97,139             

Defined Benefit Plans and Nonqualified Plan

The company has trusteed, noncontributory defined benefit pension plans covering certain employees. The benefits are based on years of service and the employees’ career earnings. The plans are funded at amounts deductible for income tax purposes but not less than the minimum funding required by the Employee Retirement Income Security Act of 1974 (“ERISA”). As of October 6, 2012, the assets of the plans included certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities, private and public real estate partnerships, other diversifying strategies and annuity contracts. Effective January 1, 2006, the company curtailed the defined benefit plan that covers the majority of its workforce. Benefits under this plan were frozen, and no future benefits will accrue under this plan. The company continues to maintain a plan that covers a small number of certain union employees. During the second quarter of 2012, Congress passed the Moving Ahead for Progress in 21st Century Act (“MAP-21”), which included pension funding stabilization provisions. The measure, which is designed to stabilize the discount rate used to determine funding requirements from the effects of interest rate volatility, is expected to reduce the company’s minimum required pension contributions in the near-term. The company has contributed $18.1 million to its qualified pension plans during 2012, and is reviewing the potential implications of MAP-21 on its expected contributions for the remainder of the year.

 

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Table of Contents

The net periodic pension cost (income) for the company’s plans include the following components (amounts in thousands):

 

    For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
        October 6, 2012             October 8, 2011             October 6, 2012             October 8, 2011      

Service cost

   $ 142        $ 110        $ 469        $ 368    

Interest cost

    5,001         5,278         16,670         15,500    

Expected return on plan assets

    (6,070)         (6,291)        (20,232)        (18,421)   

Amortization of net loss

    1,174         629         3,912         2,096    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit (income) cost

   $ 247        $ (274)       $ 819        $ (457)    
 

 

 

   

 

 

   

 

 

   

 

 

 

The company also has one smaller defined benefit plans associated with a recent acquisition that will be merged into the Flowers Foods defined benefit plan at year end.

Post-Retirement Benefit Plan

The company provides certain medical and life insurance benefits for eligible retired employees. The medical plan covers eligible retirees under the active medical plans. The plan incorporates an up-front deductible, coinsurance payments and retiree contributions at various premium levels. Eligibility and maximum period of coverage is based on age and length of service.

The net periodic postretirement benefit cost for the company includes the following components (amounts in thousands):

 

    For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
        October 6, 2012             October 8, 2011             October 6, 2012             October 8, 2011      

Service cost

   $ 106        $ 98        $ 352        $ 327    

Interest cost

    140         220         465         614    

Amortization of prior service (credit) cost

    (59)        (59)        (198)        (198)   

Amortization of net (gain) loss

    (70)         (11)        (230)         (37)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit cost

   $ 117        $ 248        $ 389        $ 706    
 

 

 

   

 

 

   

 

 

   

 

 

 

401(k) Retirement Savings Plan

The Flowers Foods 401(k) Retirement Savings Plan covers substantially all of the company’s employees who have completed certain service requirements. During the forty weeks ended October 6, 2012 and October 8, 2011, the total cost and employer contributions were $15.6 million and $14.2 million, respectively.

The company acquired Tasty on May 20, 2011, at which time we assumed sponsorship of a 401(k) savings plan. No employer contributions were made to the Tasty 401(k) savings plan during fiscal 2011, subsequent to the acquisition, or during the forty weeks ended October 6, 2012. The Tasty 401(k) Savings Plan will be merged into the Flowers Foods 401(k) Retirement Savings Plan at year end.

The company also assumed sponsorships of the Lepage 401(k) Plan at the time of the Lepage acquisition on July 21, 2012. Employer contributions to the Lepage 401(k) Plan were $0.1 million for the forty weeks ended October 6, 2012. The Lepage 401(k) Plan will be merged into the Flowers Foods 401(k) Retirement Savings Plan upon a detailed review of prior plan operations and administration.

14. INCOME TAXES

The company’s effective tax rate for the twelve and forty weeks ended October 6, 2012 was 36.4% and 36.2% respectively. The most significant differences in the effective rate and the statutory rate are state income taxes and the Section 199 qualifying production activities deduction.

During the twelve and forty weeks ended October 6, 2012, the company’s activity with respect to its uncertain tax positions and related interest accruals was immaterial.

 

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15. SEGMENT REPORTING

The company’s DSD segment produces fresh and frozen packaged bread, rolls, tortillas, and snack products and the warehouse delivery segment produces frozen bread, rolls, tortillas and snack products. The company evaluates each segment’s performance based on income or loss before interest and income taxes, excluding unallocated expenses and charges which the company’s management deems to be an overall corporate cost or a cost not reflective of the segments’ core operating businesses. Information regarding the operations in these reportable segments is as follows:

 

    For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
        October 6, 2012             October 8, 2011             October 6, 2012             October 8, 2011      

SALES:

       

DSD

   $ 601,360        $ 560,630        $ 1,918,617        $ 1,745,625    

Warehouse delivery

    149,723         145,808         487,551         479,958    

Eliminations: Sales from warehouse delivery to DSD

    (24,691)        (24,207)        (84,459)        (85,366)   

Sales from DSD to warehouse delivery

    (9,110)        (6,862)        (24,660)        (20,427)   
 

 

 

   

 

 

   

 

 

   

 

 

 
   $ 717,282        $ 675,369        $ 2,297,049        $ 2,119,790    
 

 

 

   

 

 

   

 

 

   

 

 

 

DEPRECIATION AND AMORTIZATION:

       

DSD

   $ 20,716        $ 18,069        $ 62,684        $ 56,103    

Warehouse delivery

    4,067         4,600         14,140         15,249    

Unallocated corporate costs

    (26)        147         (73)        354    
 

 

 

   

 

 

   

 

 

   

 

 

 
   $ 24,757        $ 22,816        $ 76,751        $ 71,706    
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM OPERATIONS:

       

DSD

   $ 58,571        $ 46,955        $ 173,962        $ 162,513    

Warehouse delivery

    7,566         7,305         23,480         23,753    

Unallocated corporate costs

    (13,446)        (6,497)        (38,117)        (33,874)   
 

 

 

   

 

 

   

 

 

   

 

 

 
   $ 52,691        $ 47,763        $ 159,325        $ 152,392    
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST (EXPENSE) INCOME

   $ (3,568)       $ 265        $ (6,527)       $ 2,623    
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

   $ 49,123        $ 48,028        $ 152,798        $ 155,015    
 

 

 

   

 

 

   

 

 

   

 

 

 

The assets of our DSD segment were $1,626.0 million at October 6, 2012 and $1,227.9 million at December 31, 2011. This increase is primarily from the Lepage acquisition which was assigned to the DSD segment.

Sales by product category in each reportable segment are as follows (amounts in thousands):

 

    For the Twelve Weeks Ended
October 6, 2012
    For the Twelve Weeks Ended
October 8, 2011
 
    DSD      Warehouse delivery      Total     DSD      Warehouse delivery      Total  

Branded Retail

   $ 350,884        $ 21,830        $ 372,714        $ 327,032        $ 22,037        $ 349,069    

Store Branded Retail

    104,269         26,852         131,121         92,561         30,690         123,251    

Non-retail and Other

    137,097         76,350         213,447         134,175         68,874         203,049    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 592,250        $ 125,032        $ 717,282        $ 553,768        $ 121,601        $ 675,369    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Forty Weeks Ended
October 6, 2012
    For the Forty Weeks Ended
October 8, 2011
 
    DSD     Warehouse delivery     Total     DSD     Warehouse delivery     Total  

Branded Retail

   $ 1,120,434        $ 75,168        $ 1,195,602        $ 1,008,168        $ 73,763        $ 1,081,931    

Store Branded Retail

    321,108         91,039         412,147         283,825         99,308         383,133    

Non-retail and Other

    452,415         236,885         689,300         433,205         221,521         654,726    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,893,957        $ 403,092        $ 2,297,049        $ 1,725,198        $ 394,592        $ 2,119,790    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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16. SUBSEQUENT EVENTS

The company has evaluated subsequent events since October 6, 2012, the date of these financial statements. We believe there were no material events or transactions discovered during this evaluation that requires recognition or disclosure in the financial statements.

On October 26, 2012, we announced an agreement under which we will acquire certain assets and trademark licenses from BBU, Inc., a subsidiary of Grupo Bimbo S.A. B. de C.V. Under the terms of the transactions, we will receive perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California, which together account for annual sales of approximately $134 million. We also will receive perpetual, exclusive, and royalty-free license to the Earthgrains brand for a broad range of fresh bakery products in the Oklahoma City, Okla., market area. The transactions will be completed in phases. The Oklahoma City license will be completed in our fourth quarter of fiscal 2012, and the first phase of the California transaction is expected to close in the first quarter of fiscal 2013.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the company as of and for the twelve and forty week periods ended October 6, 2012 should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

OVERVIEW:

Flowers Foods currently operates two business segments: a direct-store-delivery segment (“DSD segment”) and a warehouse delivery segment (“warehouse segment”). The DSD segment operates 35 bakeries that market a wide variety of fresh bakery foods, including fresh breads, buns, rolls, tortillas, and snack cakes. These products are sold through its DSD route delivery system to retail and foodservice customers in the Southeast, Mid-Atlantic, Northeast and Southwest as well as in select markets in California and Nevada. The warehouse segment operates 9 bakeries and produces snack cakes and breads and rolls that are shipped both fresh and frozen to national retail, foodservice, vending, and co-pack customers through their warehouse channels and one mix plant that produces bakery mixes.

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.

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 store brand products to absorb overhead costs and maximize use of production capacity. During the third quarter of 2012, our results were impacted by the competitive landscape and high promotional activity within the baking industry. Sales for the quarter ended October 6, 2012 increased 6.2% from the quarter ended October 8, 2011. This increase was primarily due to the Lepage acquisition in the third quarter of fiscal 2012 which contributed 5.8% of the growth and to positive pricing and mix shifts of 2.7%, partially offset by a decrease in volume of 2.3%. Sales for the forty weeks ended October 6, 2012 increased 8.4% from the forty weeks ended October 8, 2011. This increase was primarily due to the Lepage and Tasty acquisitions (discussed below) in fiscal 2012 and 2011, respectively, which contributed 6.2% of the growth and to positive pricing and mix shifts of 2.5% partially offset by volume decreases of 0.3%.

For the twelve weeks ended October 6, 2012, diluted net income per share was $0.22 per share as compared to $0.23 per share for the twelve weeks ended October 8, 2011, a 4.3% decrease. For the twelve weeks ended October 6, 2012, net income was $31.2 million, a 0.7% increase compared to $31.0 million reported for the twelve weeks ended October 8, 2011.

For the forty weeks ended October 6, 2012, diluted net income per share was $0.71 as compared to $0.73 per share for the forty weeks ended October 8, 2011, a 2.7% decrease. For the forty weeks ended October 6, 2012, net income was $97.6 million, a 2.8% decrease compared to $100.4 million reported for the forty weeks ended October 8, 2011.

Commodities, such as our baking ingredients, periodically experience price fluctuations, and, for that reason, we continually monitor the market for these commodities. The cost of these inputs may fluctuate widely due to government policy and regulation, weather conditions, domestic and international demand or other unforeseen circumstances. We expect our commodity costs to be higher during 2012 as opposed to the costs experienced during 2011. We enter into forward purchase agreements and other derivative financial instruments qualifying for hedge accounting to reduce the impact of such volatility in raw material prices. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

On April 3, 2012, the Company entered into the Indenture (the “Indenture”) between the company, as issuer, and Wells Fargo Bank, National Association, as trustee (“Trustee”), in connection with the offer and sale of $400.0 million aggregate principal amount of the senior notes (“notes”). The company will pay interest on the notes on each April 1 and October 1, beginning on October 1, 2012. The notes will mature on April 1, 2022. Before January 1, 2022, the Company may, at any time, redeem the notes at a redemption price equal to 100% of the principal amount of such series, plus a “make whole” premium described in the Indenture. On or after January 1, 2022, the Company may redeem the notes at par, plus accrued and unpaid interest.

On July 21, 2012, two wholly owned subsidiaries of the company acquired Lepage Bakeries, Inc. (“Lepage”) and certain affiliated companies. Lepage operates two bakeries in Maine and one in Vermont and serves customers primarily in the northeastern United States with an extensive line of Country Kitchen and Barowsky’s branded bread. The results of Lepage’s operations are included in the company’s consolidated financial statements in the third quarter ending on October 6, 2012 and are included in the company’s DSD segment. The acquisition facilitated our expansion into new geographic markets and increased our manufacturing capacity.

 

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Table of Contents

The aggregate purchase price was $382.1 million. The acquisition of Lepage and certain of its affiliates was completed by the purchase of all the issued and outstanding shares of Lepage and certain affiliates by a wholly-owned subsidiary of the company for approximately $300.0 million in cash and $20.0 million in deferred payments beginning on the fourth anniversary of the closing date. Certain other Lepage affiliates merged into a wholly-owned subsidiary of the company in exchange for 2,178,648 shares of our common stock valued at $45.9 million at closing. The common shares were calculated by dividing $50.0 million by the average closing price over twenty trading days ending five days prior to close. An additional $18.4 million was paid to the shareholders of Lepage at closing in connection with certain incremental tax liabilities that will be incurred by the shareholders if the parties jointly make an election under Section 338(h)(10) of the Internal Revenue Code. In the event the parties decide not to make such an election, these payments will be returned to the company.

Subsequent to the end of our third quarter, on October 26, 2012, we announced an agreement under which we will acquire for approximately $50.0 million certain assets and trademark licenses from BBU, Inc., a subsidiary of Grupo Bimbo S.A. B. de C.V. Under the terms of the transactions, we will receive perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California, which together account for annual sales of approximately $134.0 million. We also will receive perpetual, exclusive, and royalty-free license to the Earthgrains brand for a broad range of fresh bakery products in the Oklahoma City, Okla., market area. The transactions will be completed in phases. The Oklahoma City license will be completed in our fourth quarter of fiscal 2012, and the first phase of the California transaction is expected to close in the first quarter of fiscal 2013.

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 December 31, 2011. 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. Please see our Form 10-K for the fiscal year ended December 31, 2011, for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in our Form 10-K filed for the year ended December 31, 2011.

 

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RESULTS OF OPERATIONS:

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve week periods ended October 6, 2012 and October 8, 2011, are set forth below (dollars in thousands):

 

    For the Twelve Weeks Ended  
                Percentage of Sales     Increase (Decrease)  
      October 6, 2012         October 8, 2011         October 6, 2012         October 8, 2011             Dollars                   %          

Sales

           

DSD

   $ 592,250        $ 553,768         82.6         82.0        $ 38,482         6.9    

Warehouse delivery

    125,032         121,601         17.4         18.0         3,431         2.8    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ 717,282        $ 675,369         100.0         100.0        $ 41,913         6.2    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)

           

DSD (1)

   $ 287,939        $ 274,091         48.6         49.5        $ 13,848         5.1    

Warehouse delivery(1)

    94,569         91,615         75.6         75.3         2,954         3.2    
 

 

 

   

 

 

       

 

 

   

Total

   $ 382,508        $ 365,706         53.3         54.1        $ 16,802         4.6    
 

 

 

   

 

 

       

 

 

   

Selling, distribution and administrative expenses

           

DSD(1)

   $ 225,024        $ 214,653         38.0         38.8        $ 10,371         4.8    

Warehouse delivery(1)

    18,830         18,081         15.1         14.9         749         4.1    

Corporate(2)

    13,472         6,350         —          —         7,122         NM    
 

 

 

   

 

 

       

 

 

   

Total

   $ 257,326        $ 239,084         35.9         35.4        $     18,242         7.6    
 

 

 

   

 

 

       

 

 

   

Depreciation and amortization

           

DSD(1)

   $ 20,716        $ 18,069         3.5         3.3        $ 2,647         14.6    

Warehouse delivery(1)

    4,067         4,600         3.3         3.8         (533)        (11.6)   

Corporate(2)

    (26)        147         —          —         (173)        NM    
 

 

 

   

 

 

       

 

 

   

Total

   $ 24,757        $ 22,816         3.5         3.4        $ 1,941         8.5    
 

 

 

   

 

 

       

 

 

   

Income from operations

           

DSD(1)

   $ 58,571        $ 46,955         9.9         8.5        $     11,616         24.7    

Warehouse delivery(1)

    7,566         7,305         6.1         6.0         261         3.6    

Corporate(2)

    (13,446)        (6,497)        —          —         (6,949)        NM    
 

 

 

   

 

 

       

 

 

   

Total

   $ 52,691        $ 47,763         7.3         7.1        $ 4,928         10.3    
 

 

 

   

 

 

       

 

 

   

Interest (expense) income, net

   $ (3,568)       $ 265         (0.4)        0.0        $ 3,833         NM    

Income taxes

   $ 17,892        $ 17,009         2.5         2.5        $ 883         5.2    
 

 

 

   

 

 

       

 

 

   

Net income

   $ 31,231        $ 31,019         4.4         4.6        $ 212         0.7    
 

 

 

   

 

 

       

 

 

   

 

 

1. As a percentage of revenue within the reporting segment.
2. The corporate segment has no revenues.
NM — Not meaningful.

 

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Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the forty week periods ended October 6, 2012 and October 8, 2011, are set forth below (dollars in thousands):

 

    For the Forty Weeks Ended  
                Percentage of Sales     Increase (Decrease)  
      October 6, 2012         October 8, 2011         October 6, 2012         October 8, 2011           Dollars               %          

Sales

           

DSD

   $ 1,893,957        $ 1,725,198         82.5         81.4        $ 168,759         9.8   

Warehouse delivery

    403,092         394,592         17.5         18.6         8,500         2.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ 2,297,049        $ 2,119,790         100.0         100.0        $ 177,259         8.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)

           

DSD (1)

   $ 924,603        $ 824,169         48.8         47.8        $ 100,434         12.2   

Warehouse delivery(1)

    302,541         295,682         75.1         74.9         6,859         2.3   
 

 

 

   

 

 

       

 

 

   

Total

   $ 1,227,144        $ 1,119,851         53.4         52.8        $ 107,293         9.6   
 

 

 

   

 

 

       

 

 

   

Selling, distribution and administrative expenses

           

DSD(1)

   $ 732,708        $ 682,413         38.7         39.6        $ 50,295         7.4   

Warehouse delivery(1)

    62,931         59,908         15.6         15.2         3,023         5.0   

Corporate(2)

    38,190         33,520         —           —           4,670         13.9   
 

 

 

   

 

 

       

 

 

   

Total

   $ 833,829        $ 775,841         36.3         36.6        $ 57,988         7.5   
 

 

 

   

 

 

       

 

 

   

Depreciation and amortization

           

DSD(1)

   $ 62,684        $ 56,103         3.3         3.3        $ 6,581         11.7   

Warehouse delivery(1)

    14,140         15,249         3.5         3.9         (1,109)        (7.3)   

Corporate(2)

    (73)        354         —           —           (427)        NM    
 

 

 

   

 

 

       

 

 

   

Total

   $ 76,751        $ 71,706         3.3         3.4        $ 5,045         7.0   
 

 

 

   

 

 

       

 

 

   

Income from operations

           

DSD(1)

   $ 173,962        $ 162,513         9.2         9.4        $ 11,449         7.0   

Warehouse delivery(1)

    23,480         23,753         5.8         6.0         (273)        (1.1)   

Corporate(2)

    (38,117)        (33,874)        —           —           (4,243)        12.5   
 

 

 

   

 

 

       

 

 

   

Total

   $ 159,325        $ 152,392         6.9         7.2        $ 6,933         4.5   
 

 

 

   

 

 

       

 

 

   

Interest (expense) income, net

   $ (6,527)       $ 2,623         (0.3)        0.1        $ (9,150)        NM   

Income taxes

   $ 55,244        $ 54,625         2.4         2.6        $ 619         1.1   
 

 

 

   

 

 

       

 

 

   

Net income

   $ 97,554        $ 100,390         4.2         4.7        $     (2,836)        (2.8)   
 

 

 

   

 

 

       

 

 

   

 

 

1. As a percentage of revenue within the reporting segment.
2. The corporate segment has no revenues.
NM — Not meaningful.

 

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CONSOLIDATED AND SEGMENT RESULTS

TWELVE WEEKS ENDED OCTOBER 6, 2012 COMPARED TO TWELVE WEEKS ENDED OCTOBER 8, 2011

Consolidated Sales.

 

     For the
Twelve Weeks Ended
October 6, 2012
     For the
Twelve Weeks Ended
October 8, 2011
         % Increase      

Sales category

   $      %      $      %     
     (Amounts in
thousands)
            (Amounts in
thousands)
               

Branded Retail

    $         372,714          52.0%        $         349,069          51.7%         6.8%   

Store Branded Retail

     131,121          18.3            123,251          18.2            6.4%   

Non-Retail and Other

     213,447          29.7            203,049          30.1            5.1%   
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

    $ 717,282              100.0%        $ 675,369              100.0%         6.2%   
  

 

 

    

 

 

    

 

 

    

 

 

    

The 6.2% increase in sales was attributable to the following for all sales categories:

 

Percentage Point Change in Sales Attributed to:

  Favorable
        (Unfavorable)         
 

Pricing/Mix

    2.7%    

Volume

    (2.3)%   

Acquisition

    5.8%    
 

 

 

 

Total Percentage Change in Sales

    6.2%    
 

 

 

 

Sales category discussion

The increase in branded retail sales was due primarily to the Lepage acquisition and, to a lesser extent, pricing/mix increases, partially offset by volume declines. Branded soft variety and branded cake drove the increases. The increase in store branded retail sales was due to the acquisition, partially offset by the loss of a customer in our core market. The increase in non-retail and other sales was due primarily to the acquisition and to a lesser extent increases in foodservice sales.

Direct-Store-Delivery Sales.

 

 

     For the
Twelve Weeks Ended
October 6, 2012
     For the
Twelve Weeks Ended
October 8, 2011
         % Increase      

Sales Category

   $      %      $      %     
     (Amounts in
thousands)
            (Amounts in
thousands)
               

Branded Retail

    $         350,884          59.2%        $         327,032          59.1%         7.3%   

Store Branded Retail

     104,269          17.6            92,561          16.7            12.6%   

Non-Retail and Other

     137,097          23.2            134,175          24.2            2.2%   
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

    $ 592,250              100.0%        $ 553,768          100.0%         6.9%   
  

 

 

    

 

 

    

 

 

    

 

 

    

The 6.9% increase in sales was attributable to the following for all sales categories:

 

Percentage Point Change in Sales Attributed to:

          Favorable          

Pricing/Mix

    0.7 %   

Volume

    (0.8)%   

Acquisition

    7.0 %   
 

 

 

 

Total Percentage Change in Sales

    6.9 %   
 

 

 

 

Sales category discussion

The increase in branded retail sales was due to the Lepage acquisition and, to a lesser extent, pricing/mix increases and volume increases in soft variety, partially offset by overall volume declines with the largest decrease in branded cake. The increase in store branded retail sales was due to the Lepage acquisition, partially offset by decreases in store branded white bread. The increase in non-retail and other sales was due to the acquisition, somewhat offset by decreases in foodservice and institutional sales.

 

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Warehouse Delivery Sales.

 

     For the
Twelve Weeks Ended
October 6, 2012
     For the
Twelve Weeks  Ended
October 8, 2011
     % Increase
         (Decrease)        
 

Sales Category

   $      %      $      %     
    

  (Amounts in

thousands)

           

  (Amounts in

thousands)

               

Branded Retail

    $ 21,830          17.5%        $ 22,037          18.1%         (0.9)%    

Store Branded Retail

     26,852          21.5            30,690          25.2            (12.5)%    

Non-Retail and Other

     76,350          61.0            68,874          56.7            10.9%     
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

    $         125,032              100.0%        $         121,601              100.0%          2.8%     
  

 

 

    

 

 

    

 

 

    

 

 

    

The 2.8% increase in sales was attributable to the following for all sales categories:

 

Percentage Point Change in Sales Attributed to:

   Favorable
         (Unfavorable)        
 

Pricing/Mix

     9.4%    

Volume

     (6.6)%   
  

 

 

 

Total Percentage Change in Sales

     2.8%    
  

 

 

 

Sales category discussion

The decrease in branded retail sales was primarily the result of lower multi-pak cake volume, partially offset by pricing/mix increases in all branded retail sales categories. The decrease in store branded retail sales was due to volume decreases in store branded cake, partially offset by price/mix increases. The increase in non-retail and other sales was due to pricing/mix increases, partially offset by volume decreases, primarily in contract manufacturing.

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately). The decrease as a percent of sales was primarily due to lower costs for Lepage, sales increases and efficiency gains.

The DSD segment decrease as a percent of sales was due to lower costs for Lepage, lower ingredient costs, primarily flour, and efficiency gains.

The warehouse delivery segment increase as a percent of sales was primarily a result of higher ingredient costs, partially offset by lower packaging, workforce related and energy costs. The higher ingredient costs were driven by increases in flour and sugar.

Selling, Distribution and Administrative Expenses. The increase as a percent of sales was due to acquisition related expenses incurred in the quarter and higher workforce-related costs as a percent of sales. These increases were partially offset by lower costs as a percent of sales for Lepage and increases in miscellaneous income. The acquisition related costs were $5.1 million for the quarter and are included in unallocated corporate expenses.

The DSD segment’s selling, distribution and administrative expenses decreased as a percent of sales due to lower costs for Lepage and increases in miscellaneous income, partially offset by higher workforce-related costs.

The warehouse delivery segment’s selling, distribution and administrative expenses increased as a percent of sales primarily due to higher distribution and marketing costs.

Depreciation and Amortization. Depreciation and amortization increased due to the Lepage acquisition.

The DSD segment’s depreciation and amortization expense increase was mainly due to the Lepage acquisition. The warehouse delivery’s depreciation and amortization expense decreased primarily due to assets fully depreciated subsequent to the third quarter of fiscal 2012.

Income from Operations. The increase in the DSD segment income from operations was attributable to the Lepage acquisition as well as overall margin improvement and lower SD&A costs as a percent of sales. During the quarter, the Lepage acquisition contributed $6.7 million to operating income. The increase in the warehouse delivery segment income from operations was primarily a result of higher sales partially offset by higher ingredient costs. The increase in unallocated corporate expenses was primarily due to the acquisition related costs discussed above.

 

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Net Interest Expense. The increase was related to higher interest expense due to higher debt outstanding from the senior notes issued in the first quarter of fiscal 2012 and additional withdrawals from the new credit facility.

Income Taxes. The effective tax rate for the third quarter of fiscal 2012 was 36.4% compared to 35.4% in the third quarter of the prior year. The most significant differences in the effective rate and the statutory rate are state income taxes and the Section 199 qualifying production activities deduction. Non-deductible transaction costs in the current quarter and favorable discrete items booked in the prior year quarter account for a significant portion of the difference in the quarters’ effective rates.

FORTY WEEKS ENDED OCTOBER 6, 2012 COMPARED TO FORTY WEEKS ENDED OCTOBER 8, 2011

Consolidated Sales.

 

     For the
Forty Weeks  Ended
October 6, 2012
     For the
Forty Weeks  Ended
October 8, 2011
         % Increase      

Sales category

   $      %      $      %     
    

(Amounts in

thousands)

           

(Amounts in

thousands)

               

Branded Retail

    $     1,195,602          52.0%        $     1,081,931          51.0%         10.5%   

Store Branded Retail

     412,147          17.9            383,133          18.1            7.6%   

Non-Retail and Other

     689,300          30.1            654,726          30.9            5.3%   
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

    $     2,297,049              100.0%        $     2,119,790              100.0%         8.4%   
  

 

 

    

 

 

    

 

 

    

 

 

    

The 8.4% increase in sales was attributable to the following for all sales categories:

 

Percentage Point Change in Sales Attributed to:

          Favorable          

Pricing/Mix

    2.5 %   

Volume

    (0.3)%   

Acquisition

    6.2 %   
 

 

 

 

Total Percentage Change in Sales

    8.4%   
 

 

 

 

Sales category discussion

The increase in branded retail sales was due primarily to the Tasty and Lepage acquisitions and, to a lesser extent, positive net pricing/mix, partially offset by overall volume declines, particularly white bread, buns and sandwich rounds. The increase in store branded retail sales was primarily due to the acquisitions and, to a lesser extent, increases in all sales categories with the exception of decreases in store brand cake. The increase in non-retail and other sales was due primarily to volume increases in foodservice sales as well as acquisition contribution.

Direct-Store-Delivery Sales.

 

     For the
Forty Weeks  Ended
October 6, 2012
     For the
Forty Weeks  Ended
October 8, 2011
         % Increase      

Sales category

   $      %      $      %     
    

(Amounts in

thousands)

           

(Amounts in

thousands)

               

Branded Retail

    $     1,120,434          59.2%        $     1,008,168          58.4%         11.1%   

Store Branded Retail

     321,108          17.0            283,825          16.5            13.1%   

Non-Retail and Other

     452,415          23.8            433,205          25.1            4.4%   
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

    $ 1,893,957              100.0%        $ 1,725,198              100.0%         9.8%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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The 9.8% increase in sales was attributable to the following for all sales categories:

 

Percentage Point Change in Sales Attributed to:

          Favorable          

Pricing/Mix

    2.0%   

Volume

    0.2%   

Acquisition

    7.6%   
 

 

 

 

Total Percentage Change in Sales

    9.8%   
 

 

 

 

Sales category discussion

The increase in branded retail sales was due to the Tasty and Lepage acquisitions and, to a lesser extent, positive net pricing/mix, partially offset by volume declines with the largest decreases in white bread, buns and sandwich rounds. The increase in store branded retail was due to acquisition contribution and growth in store brand buns/rolls/tortillas and store brand white bread. The increase in non-retail and other sales was primarily due to the acquisitions and overall volume increases.

Warehouse Delivery Sales.

 

     For the
Forty Weeks  Ended
October 6, 2012
     For the
Forty Weeks Ended
October 8, 2011
     % Increase
       (Decrease)      
 

Sales category

   $      %      $      %     
    

(Amounts in

thousands)

           

(Amounts in

thousands)

               

Branded Retail

    $         75,168          18.6%        $         73,763          18.7%         1.9%    

Store Branded Retail

     91,039          22.6            99,308          25.2            (8.3)%   

Non-Retail and Other

     236,885          58.8            221,521          56.1            6.9%    
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

    $ 403,092              100.0%        $ 394,592              100.0%         2.2%    
  

 

 

    

 

 

    

 

 

    

 

 

    

The 2.2% increase in sales was attributable to the following for all sales categories:

 

Percentage Point Change in Sales Attributed to:

           Favorable          

Pricing/Mix

     3.8%    

Volume

     (1.6)%   
  

 

 

 

Total Percentage Change in Sales

     2.2%    
  

 

 

 

Sales category discussion

The increase in branded retail sales was primarily due to increases in bakery deli volume and brand snack growth from both volume and pricing/mix increases, partially offset by multi-pak decreases in both volume and pricing/mix. The decrease in store branded retail sales was due to volume decreases in store branded cake, partially offset by pricing/mix increases. The increase in non-retail and other sales was due to volume and pricing/mix increases.

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately). The increase as a percent of sales was primarily due to significantly higher ingredient costs, primarily flour and to a lesser extent, sweeteners and oils, partially offset by sales increases, lower energy and workforce-related costs and improved efficiency. Costs of $2.8 million were incurred during the first quarter of fiscal 2011 associated with the closure of a manufacturing facility.

The DSD segment increase as a percent of sales was primarily a result of significant increases in ingredient costs, primarily flour, and higher costs for Tasty, partially offset by sales increases, efficiency gains and lower energy costs as a percent of sales. Costs of $2.8 million were incurred during the first quarter of fiscal 2011 associated with the closure of a manufacturing facility.

The warehouse delivery segment increased slightly as a percent of sales. Increases in ingredient costs were offset by lower workforce-related, packaging, repairs and maintenance and energy costs as a percent of sales. The higher ingredient costs were driven by increases in flour, sugar, and other shortening.

Selling, Distribution and Administrative Expenses. The decrease as a percent of sales was due to sales increases and lower workforce-related costs as a percent of sales. In the prior year, we incurred $6.0 million of acquisition related costs as compared to $8.5 million in the current year. Costs of $2.4 million were incurred during the first quarter of fiscal 2011 associated with the closure of a manufacturing facility.

 

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The DSD segment’s selling, distribution and administrative expenses decreased as a percent of sales primarily due to sales increases, lower workforce-related costs and lower costs for the acquisitions as a percent of sales. Costs of $2.4 million were incurred during the first quarter of fiscal 2011 associated with the closure of a manufacturing facility.

The warehouse delivery segment’s selling, distribution and administrative expenses increased as a percent of sales primarily due to higher distribution costs.

Depreciation and Amortization. Depreciation and amortization increased due to the Lepage and Tasty acquisitions.

The DSD segment’s depreciation and amortization expense increased due to the acquisitions. The warehouse delivery’s depreciation and amortization expense decreased primarily due to assets fully depreciated subsequent to the third quarter of fiscal 2011.

Income from Operations. The increase in the DSD segment income from operations was attributable to the acquisitions and sales increases, partially offset by higher input costs as a percent of sales. The decrease in the warehouse delivery segment income from operations was primarily a result of higher ingredient costs and higher distribution costs. The increase in unallocated corporate expenses was primarily due to higher acquisition related costs.

Net Interest Expense. The increase was due to higher interest expense due to higher debt outstanding from the senior notes issued in the first quarter of this year and additional withdrawals from the new credit facility in the third quarter.

Income Taxes. The effective tax rate for the forty weeks ended October 6, 2012 and October 8, 2011 was 36.2% and 35.2%, respectively. The most significant differences in the effective rate and the statutory rate are state income taxes and the Section 199 qualifying production activities deduction. Non-deductible transaction costs in the forty weeks ended October 6, 2012 and favorable discrete items booked in the prior year account for a significant portion of the difference in the year over year effective rate.

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, pension contributions 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

Our cash and cash equivalents increased to $14.1 million at October 6, 2012 from $7.8 million at December 31, 2011. The increase resulted from $182.2 million provided by operating activities and $189.2 million provided by financing activities, offset by $365.1 million disbursed for investing activities.

Cash Flows Provided by Operating Activities. Net cash of $182.2 million provided by operating activities during the forty weeks ended October 6, 2012 consisted primarily of $97.6 million in net income, adjusted for the following non-cash items (amounts in thousands):

 

                    

Depreciation and amortization

    $ 76,751    

Loss reclassified from accumulated other comprehensive income to net income

     24,972    

Stock-based compensation

     7,012    

Deferred income taxes

     3,155    

Provision for inventory obsolescence

     804    

Allowances for accounts receivable

     1,995    

Pension and postretirement plans expense

     1,208    

Other

     (1,452)   
  

 

 

 

Total

    $     114,445    
  

 

 

 

Cash disbursed for working capital and other activities is as follows (amounts in thousands):

 

                    

Pension contributions

    $     (18,143)   

Accounts and notes receivable, net

     (30,518)   

Inventories, net

     (10,270)   

Hedging activities, net

     5,627    

Other assets

     10,343    

Accounts payable

     10,761    

Other accrued liabilities

     2,430    
  

 

 

 

Total

    $     (29,770)   
  

 

 

 

 

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As of October 6, 2012, the company had $2.1 million recorded in other current assets representing collateral for hedged positions. As of December 31, 2011, the company had $11.8 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 forty weeks ended October 6, 2012 of $365.1 million consisted primarily of the Lepage acquisition of $318.4 million. In addition, capital expenditures of $49.2 million were paid during the forty weeks ended October 6, 2012. Capital expenditures in the DSD segment and the warehouse delivery segment were $39.2 million and $7.2 million, respectively. The company estimates capital expenditures of approximately $75.0 million to $85.0 million during fiscal 2012. The company also leases certain production machinery and equipment through various operating leases.

Cash Flows Provided by Financing Activities. Net cash provided by financing activities of $189.2 million during the forty weeks ended October 6, 2012 consisted primarily of net proceeds from debt issuance of $257.2 million and $9.1 million from the exercise of stock options. These net proceeds were offset by dividends paid of $64.4 million, stock repurchases of $13.6 million, and $3.9 million paid for debt issuance costs for the senior notes issued in the first quarter of fiscal 2012

Senior Notes, Credit Facility, and Term Loan

Senior Notes. On April 3, 2012, the company issued $400 million of ten-year 4.375% Senior Notes (the “notes”). The company will pay semiannual interest on the notes on each April 1 and October 1, beginning on October 1, 2012, and the notes will mature on April 1, 2022. On any date prior to January 1, 2022, the company may redeem some or all of the notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal thereof (not including any interest accrued thereon to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the agreement), plus 35 basis points, plus in each case, unpaid interest accrued thereon to, but not including, the date of redemption. At any time on or after January 1, 2022, the company may redeem some or all of the notes at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and related rating of the notes below investment grade), it is required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the notes in whole. The notes are also subject to customary restrictive covenants, including certain limitations on liens and sale and leaseback transactions.

The net proceeds from this offering were partially used to repay $207.2 million of long-term debt then outstanding under the Company’s revolving credit facility. The balance of the net proceeds were used for the Lepage acquisition. The face value of the notes is $400.0 million and the current discount on the notes is $0.9 million. The company paid costs (including underwriting fees and legal fees) for issuing the senior notes of $3.9 million. The issuance costs and the debt discount are being amortized to interest expense over the term of the senior notes. The company was in compliance with the terms of the notes on October 6, 2012.

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the ten-year 4.375% Senior Notes issued on April 3, 2012. The derivative position was closed when the debt was priced on March 29, 2012 with a cash settlement that offset changes in the benchmark treasury rate between the execution of the treasury rate lock and the debt pricing date. This treasury rate lock was designated as a cash flow hedge and the cash settlement was $3.1 million and will be amortized to interest expense over the term of the notes.

Credit Facility. On May 20, 2011, the company amended and restated its credit facility (the “new credit facility”), which was previously amended on October 5, 2007 (the “former credit facility”). The new credit facility is a five-year, $500.0 million senior unsecured revolving loan facility with two, one-year extension options. Further, the company may request to increase its borrowings under the new credit facility up to an aggregate of $700.0 million upon the satisfaction of certain conditions. Proceeds from the new credit facility may be used for working capital and general corporate purposes, including capital expenditures, acquisition financing, refinancing of indebtedness, dividends and share repurchases. The new 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 new credit facility and can meet presently foreseeable financial requirements. As of October 6, 2012 and December 31, 2011, the company was in compliance with all restrictive financial covenants under the credit facility.

 

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Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The underlying rate is defined as rates offered in the interbank Eurodollar market, or the higher of the prime lending rate or the federal funds rate plus 0.50%, with a floor rate defined by the one-month interbank Eurodollar market rate plus 1.00%. The applicable margin ranges from 0.30% to 1.25% for base rate loans and from 1.30% to 2.25% for Eurodollar loans. In addition, a facility fee ranging from 0.20% to 0.50% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. The company paid additional financing costs of $2.0 million in connection with the amendment of the new credit facility, which, in addition to the remaining balance of the original $1.0 million in financing costs, is being amortized over the life of the new credit facility. The company recognized financing costs of $0.1 million related to the former credit facility at the time of the amendment for the new credit facility.

There were $106.6 million and $225.0 million in outstanding borrowings under the credit facility at October 6, 2012 and at December 31, 2011, respectively. The highest outstanding daily balance during 2012 was $230.0 million and the low amount outstanding balance was zero. Amounts outstanding under the credit facility vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 7, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. For fiscal 2012, the company borrowed $780.1 million in revolving borrowings under the credit facility and repaid $898.5 million in revolving borrowings. On October 6, 2012, the company had $377.8 million available under its credit facilities for working capital and general corporate purposes. The amount available under the credit facility is reduced by $15.6 million for letters of credit.

Term Loan. On May 20, 2011, the company amended its credit agreement entered on August 1, 2008 (the “term loan”), to conform the terms to the new credit facility. The term loan provides for an amortizing $150.0 million of borrowings through the maturity date of August 1, 2013. Principal payments are due quarterly under the term loan beginning on December 31, 2008 at an annual amortization of 10% of the principal balance for each of the first two years, 15% during the third year, 20% during the fourth year, and 45% during the fifth year. The term loan 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 term loan and meet financial requirements for the next twelve months. As of October 6, 2012 and December 31, 2011, the company was in compliance with all restrictive financial covenants under the term loan. As of October 6, 2012 and December 31, 2011, the amounts outstanding under the term loan were $67.5 million and $90.0 million, respectively.

Interest on the term loan is due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for Eurodollar loans and is based on the company’s leverage ratio. The company paid additional financing costs of $0.1 million in connection with the amendment of the term loan, which, in addition to the remaining balance of the original $0.8 million in financing costs, is being amortized over the remaining life of the term loan.

Credit Ratings. Currently, the company’s credit ratings by Fitch Ratings, Moody’s, and Standard & Poor’s are BBB, Baa2, and BBB-, respectively. Changes in the company’s credit ratings do not trigger a change in the company’s available borrowings or costs under the new credit facility or term loan, but could affect future credit availability and cost.

Uses of Cash

On February 23, 2012, the Board of Directors declared a dividend of $0.15 per share on the company’s common stock that was paid on March 23, 2012 to shareholders of record on March 9, 2012. This dividend payment was $20.3 million. On June 1, 2012, the Board of Directors declared a dividend of $0.16 per share on the company’s common stock that was paid on June 29, 2012 to shareholders of record on June 15, 2012. This dividend payment was $21.7 million. On August 17, 2012, the Board of Directors declared a dividend of $0.16 per share on the company’s common stock that was paid on September 14, 2012 to shareholders of record on August 31, 2012. This dividend payment was $22.1 million.

Our Board of Directors has approved a plan that authorizes share repurchases of up to 45.0 million shares of the company’s common stock. Under the plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the first quarter of fiscal 2012, 70,742 shares, at a cost of $1.4 million of the company’s common stock were purchased under the plan. There were no shares repurchased under the plan during the second quarter of fiscal 2012. We purchased 600,000 shares during the third quarter of fiscal 2012, at a cost of $12.2 million. From the inception of the plan through October 6, 2012, 38.5 million shares, at a cost of $444.4 million, have been purchased.

 

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During the first quarter of fiscal 2012, the company paid $13.4 million, including our share of employment taxes, in performance-based cash awards under the company’s bonus plan.

During the second quarter of 2012, Congress passed the Moving Ahead for Progress in 21st Century Act (“MAP-21”), which included pension funding stabilization provisions. The measure, which is designed to stabilize the discount rate used to determine funding requirements from the effects of interest rate volatility, is expected to reduce the company’s minimum required pension contributions in the near-term. The company has contributed $18.1 million to its qualified pension plans during 2012, and is reviewing the potential implications of MAP-21 on its expected contributions for the remainder of the year.

We paid approximately $318.4 million of cash consideration and tax related payments in connection with the Lepage acquisition discussed above with cash available and by drawing down on our new credit facility. In addition to the cash consideration at closing we paid $4.5 million in transaction costs. The total acquisition costs recognized during the twelve and forty weeks ended October 6, 2012 were $5.1 million and $8.5 million, respectively.

Accounting Pronouncements Not Yet Adopted

In December 2011, the FASB issued guidance for offsetting (netting) assets and liabilities. This guidance requires entities to disclose both gross information and net information about both instruments and transactions subject to an agreement similar to a master netting agreement. This includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. These disclosures allow users of the financial statements to understand the effect of those arrangements on a company’s financial position. This guidance is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. These requirements are retrospective for all comparative periods. The company is still analyzing the potential impact of this guidance on the company’s consolidated financial statements.

In July 2012, the FASB issued guidance on testing indefinite-lived intangible assets for impairment. The guidance an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that is not more likely than note that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The company is analyzing the potential impact of this guidance on the company’s consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forward, futures, swap and option contracts to hedge existing or future exposure to changes in interest rates and commodity prices. The company does not enter into these derivative financial instruments for trading or speculative purposes. If actual market conditions are less favorable than those anticipated, raw material prices could increase significantly, adversely affecting the margins from the sale of our products.

COMMODITY PRICE RISK

The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of October 6, 2012, the company’s hedge portfolio contained commodity derivatives with a fair value of $5.6 million. Of this fair value, $5.1 million is based on quoted market prices and $0.5 million is based on models and other valuation methods. Approximately $(0.5) million, $6.1 million, $0.04 million, $(0.01) million and $(0.05) million of this fair value relates to instruments that will be utilized in fiscal 2012 through 2016, respectively.

A sensitivity analysis has been prepared to quantify the company’s potential exposure to commodity price risk with respect to the derivative portfolio. Based on the company’s derivative portfolio as of October 6, 2012, a hypothetical ten percent increase in commodity prices would increase the fair value of the derivative portfolio by $12.4 million. Based on the company’s derivative portfolio as of October 6, 2012, a hypothetical ten percent decrease in commodity prices would decrease the fair value of the derivative portfolio by $12.1 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.

 

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INTEREST RATE RISK

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the ten-year 4.375% Senior Notes issued on April 3, 2012. The derivative position was closed when the debt was priced on March 29, 2012, with a cash settlement that offset changes in the benchmark treasury rate between the execution of the treasury rate lock and the debt pricing date. This treasury rate lock was designated as a cash flow hedge. Because the treasury rate lock was exited on March 29, 2012, there was no fair value as of October 6, 2012.

The company entered into interest rate swaps with notional amounts of $85.0 million, and $65.0 million, respectively, to fix the interest rate on the $150.0 million term loan secured on August 1, 2008 to fund the acquisitions of ButterKrust Bakery and Holsum Bakery, Inc. As of October 6, 2012, the fair value of these interest rate swaps was $(1.4) million. The current notional amount of the swaps for the amortizing loan is $67.5 million. All of this fair value is based on valuation models and $(0.6) million and $(0.9) million of this fair value is related to instruments expiring in 2012 and 2013, respectively.

A sensitivity analysis has been prepared to quantify the company’s potential exposure to interest rate risk with respect to the interest rate swaps. As of October 6, 2012, a hypothetical ten percent increase (decrease) in interest rates would increase (decrease) the fair value of the interest rate swap by an immaterial amount. The analysis disregards changes in the exposures inherent in the underlying debt; however, the company expects that any increase (decrease) in payments under the interest rate swap would be substantially offset by increases (decreases) in interest expense.

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to ensure that material information relating to the company, which is required to be timely disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to management in a timely fashion and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed as of the end of the period covered by this quarterly report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”). Based upon that evaluation, our CEO, CFO and CAO have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended October 6, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In making its assessment of changes in internal control over financial reporting as of October 6, 2012, management has excluded the Lepage acquisition as we are currently assessing their control environment. Lepage’s revenues for the twelve and forty weeks ended October 6, 2012 of $39.2 million represents approximately 5.5% and 1.8% of our consolidated revenue for the twelve and forty weeks ended October 6, 2012, respectively. Lepage’s assets, including intangible assets, represent approximately 20.8% of our consolidated assets at October 6, 2012.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.

On July 23, 2008, a wholly-owned subsidiary of the company filed a lawsuit against Hostess Brands, Inc. (formerly Interstate Bakeries Corporation) in the United States District Court for the Northern District of Georgia. The complaint alleges that Hostess is infringing upon Flowers’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. Flowers asserts that Hostess’ sale or intended sale of baked goods under the Nature’s Pride trademark is likely to cause confusion with, and likely to dilute the distinctiveness of, the Nature’s Own mark and constitutes unfair competition and deceptive trade practices. Flowers is seeking actual damages, an accounting of Hostess’ profits from its sales of Nature’s Pride products, and injunctive relief. Flowers sought summary judgment for its claims, which was denied by the court. On January 11, 2012, Hostess filed a voluntary petition for relief in the United States Bankruptcy Court for the Southern District of New York under Chapter 11, Title 11, United States Code. The bankruptcy filing automatically stayed the trademark lawsuit.

 

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The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition, results of operations, cash flows or the competitive position of the company. The company is currently in substantial compliance with all material environmental regulations affecting the company and its properties.

ITEM 1A. RISK FACTORS

Please refer to Part I, Item 1A., Risk Factors, in the company’s Form 10-K for the year ended December 31, 2011 for information regarding factors that could affect the company’s results of operations, financial condition and liquidity. There have been no changes to our risk factors during the forty weeks of fiscal 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our Board of Directors has approved a plan that authorizes share repurchases of up to 45.0 million shares of the company’s common stock. Under the plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. The following chart sets forth the amounts of our common stock purchased by the company during the third quarter of fiscal 2012 under the stock repurchase plan.

 

Period

   Total Number
    of Shares Purchased    
     Weighted
    Average Price    

Per Share
     Total Number of
Shares Purchased
as Part of
Publicly Announced
        Plan or Programs        
     Maximum Number
of Shares that
May Yet Be
Purchased Under the
        Plan or Programs        
 
     (Amounts in thousands, except price data)  

July 17, 2012 — August 11, 2012

     —         $ —           —           7,128   

August 12, 2012 — September 8, 2012

     400       $ 20.34         400         6,728   

September 9, 2012 — October 6, 2012

     200       $ 20.48         200         6,528   
  

 

 

       

 

 

    

Total

     600       $             20.39         600      

ITEM 6. EXHIBITS

Exhibits filed as part of this report are listed in the Exhibit Index attached hereto.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FLOWERS FOODS, INC.

By:

 

/S/    GEORGE E. DEESE

Name:

  George E. Deese

Title:

 

Chairman of the Board and

Chief Executive Officer

By:

 

/S/    R. STEVE KINSEY

Name:

  R. Steve Kinsey

Title:

 

Executive Vice President and

Chief Financial Officer

By:

 

/S/    KARYL H. LAUDER

Name:

  Karyl H. Lauder

Title:

 

Senior Vice President and

Chief Accounting Officer

Date: November 8, 2012

 

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EXHIBIT INDEX

 

        Exhibit No        

     

Name of Exhibit

  2.1     Distribution Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc., dated as of October 26, 2000 (Incorporated by reference to Flowers Foods’ Registration Statement on Form 10, dated December 1, 2000, File No. 1-16247).
  2.2     Amendment No. 1 to Distribution Agreement, dated as of March 12, 2001, between Flowers Industries, Inc. and Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247).
  3.1     Restated Articles of Incorporation of Flowers Foods, Inc. as amended on May 30, 2008 (Incorporated by reference to Flowers Foods’ Quarterly Report on Form 10-Q, dated June 4, 2009, File No. 1-16247).
  3.2     Amended and Restated Bylaws of Flowers Foods, Inc., as amended and restated on November 14, 2008 (incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated November 18, 2008, File No. 1-16247).
  4.1     Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247).
  4.2     Indenture dated as of April 3, 2012 by and between Flowers Foods, Inc. and Wells Fargo, National Association (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K, dated April 3, 2012, File No. 1-16247).
  4.3     Officers Certificate pursuant to Section 2.02 of the Indenture (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated April 3, 2012, File No. 1-16247).
  4.4     Form of 4.375% Senior Note due April 1, 2022 (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated April 3, 2012, File No. 1-16247).
  4.5     Registration Rights Agreement, dated July 21, 2012, by and among Flowers Foods, Inc. and the holders named therein. (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated July 23, 2012, File No. 1-16247).
10.1     Flowers Foods, Inc. Retirement Plan No. 1, as amended and restated effective March 26, 2001 (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247).
10.2     Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, File No. 1-16247).
10.3     Flowers Foods, Inc. Stock Appreciation Rights Plan (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 29, 2002, File No. 1-16247).
10.4     Flowers Foods, Inc. Annual Executive Bonus Plan (Incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, File No. 1-16247).
10.5     Flowers Foods, Inc. Supplemental Executive Retirement Plan (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 29, 2002, File No. 1-16247).
10.6     Form of Indemnification Agreement, by and between Flowers Foods, Inc., certain executive officers and the directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 28, 2003, File No. 1-16247).
10.7     Form of Continuation of Employment Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1016247).
10.8     Ninth Amendment to the Flowers Foods, Inc. Retirement Plan No. 1, dated November 7, 2005, as amended and restated effective as of March 26, 2001 (Incorporated by reference to Flowers Foods’ Quarterly Report on Form 10-Q dated November 17, 2005, File No. 1-16247).

 

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        Exhibit No        

     

Name of Exhibit

10.9     Amended and Restated Credit Agreement, dated as of May 20, 2011, by and among, Flowers Foods, Inc., the Lenders party thereto from time to time, Deutsche Bank AG, New York Branch, as administrative agent, Bank of America, N.A., as syndication agent, and Cooperative Centrale Raiffeisen-Boerenleen Bank, B.A., “Rabobank International,” New York Branch, Branch Banking & Trust Company and Regions Bank, as co-documentation agents (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated May 26, 2011, File No. 1-16247).
10.10     Agreement and Plan of Merger, dated June 23, 2008, by and among, Flowers Foods, Inc., Peachtree Acquisition Co., LLC, Holsum Bakery, Inc., Lloyd Edward Eisele, Jr. and The Lloyd Edward Eisele, Jr. Revocable Trust (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K/A dated June 25, 2008, File No. 1-16247).
10.11     Credit Agreement, dated as of August 1, 2008, among Flowers Foods, Inc., the Lenders Party thereto from time to time, Bank of America N.A., Cooperative Centrale Raiffeisen-Boerenleen Bank, B.A., “Rabobank International”, New York Branch, and Branch Banking & Trust Company as co-documentation agents, SunTrust Bank, as syndication agent, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated August 6, 2008, File No. 1-16247).
10.12     First Amendement to the Credit Agreement, dated May 20, 2011, among Flowers Foods, Inc., the lenders party to the Credit Agreement and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated May 26, 2011, File No. 1-16247).
10.13     Form of 2009 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1-16247).
10.14     Form of 2010 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form
10-K dated March 3, 2010, File No. 1-16247).
10.15     Form of 2010 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 3, 2010, File No. 1-16247).
10.16     Form of 2010 Deferred Shares Agreement, by and between Flowers Foods, Inc. and certain members of the Board of Directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated February 23, 2011, File No. 1-16247).
10.17     Form of 2011 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form
10-K dated February 23, 2011, File No. 1-16247).
10.18     Form of 2011 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated February 23, 2011, File No. 1-16247).
10.19     Acquisition Agreement by and among Flowers Foods, Inc., Lobsterco I, LLC, Lepage Bakeries, Inc., RAL, Inc., Bakeast Company, Bakeast Holdings, Inc., and the equity holders named therein dated May 31, 2012. (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated June 1, 2012, File No. 1-16247).
10.20     Agreement and Plan of Merger by and among Flowers Foods, Inc., Lobsterco II, LLC, Aarow Leasing, Inc., The Everest Company, Incorporated and the shareholders named therein dated May 31, 2012. (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated June 1, 2012, File No.
1-16247).
*31.1          Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2          Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.3          Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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        Exhibit No        

     

Name of Exhibit

*32             Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by George E. Deese, Chief Executive Officer, R. Steve Kinsey, Chief Financial Officer and Karyl H. Lauder, Chief Accounting Officer for the Quarter Ended October 8, 2011.
*101.INS      XBRL Instance Document.
*101.SCH     XBRL Taxonomy Extension Schema Linkbase.
*101.CAL     XBRL Taxonomy Extension Calculation Linkbase.
*101.DEF     XBRL Taxonomy Extension Definition Linkbase.
*101.LAB     XBRL Taxonomy Extension Label Linkbase.
*101.PRE     XBRL Taxonomy Extension Presentation Linkbase.

 

 

* Filed herewith

 

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