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FLOWERS FOODS INC - Quarter Report: 2013 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 5, 2013

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 1, 2013

Common Stock, $.01 par value   208,526,520

 

 

 


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 5, 2013 and December 29, 2012

     3   
    

Condensed Consolidated Statements of Income for the Twelve and Forty Weeks Ended October  5, 2013 and October 6, 2012

     4   
    

Condensed Consolidated Statements of Comprehensive Income for the Twelve and Forty Weeks Ended October  5, 2013 and October 6, 2012

     5   
    

Consolidated Statement of Changes in Stockholders’ Equity for the Forty Weeks Ended October 5,  2013

     6   
    

Condensed Consolidated Statements of Cash Flows for the Forty Weeks Ended October  5, 2013 and October 6, 2012

     7   
    

Notes to Condensed Consolidated Financial Statements

     8   

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 4.

    

Controls and Procedures

     53   

PART II. Other Information

  

Item 1.

    

Legal Proceedings

     54   

Item 1A.

    

Risk Factors

     54   

Item 6.

    

Exhibits

     54   

Signatures

     55   

Exhibit index

     56   


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;

 

    the failure of our information technology systems to perform adequately, including any interruptions, intrusions or security breaches of such systems;

 

    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 our Form 10-K filed on February 20, 2013 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 trademarks, trade names and copyrights.

 

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Table of Contents

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except share data)

(Unaudited)

 

     October 5, 2013     December 29, 2012  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 10,655      $ 13,275   
  

 

 

   

 

 

 

Accounts and notes receivable, net of allowances of $3,445 and $386, respectively

     266,839        256,235   
  

 

 

   

 

 

 

Inventories, net:

    

Raw materials

     35,491        32,731   

Packaging materials

     21,542        18,885   

Finished goods

     46,406        39,394   
  

 

 

   

 

 

 
     103,439        91,010   
  

 

 

   

 

 

 

Spare parts and supplies

     47,511        45,239   
  

 

 

   

 

 

 

Deferred taxes

     29,572        29,198   
  

 

 

   

 

 

 

Other

     29,162        29,494   
  

 

 

   

 

 

 

Total current assets

     487,178        464,451   
  

 

 

   

 

 

 

Property, Plant and Equipment, net of accumulated depreciation of $884,254 and $811,161, respectively

     893,708        725,836   
  

 

 

   

 

 

 

Notes Receivable

     134,176        102,723   
  

 

 

   

 

 

 

Assets Held for Sale — Distributor Routes

     31,392        30,116   
  

 

 

   

 

 

 

Other Assets

     15,339        14,442   
  

 

 

   

 

 

 

Goodwill

     276,230        269,897   
  

 

 

   

 

 

 

Other Intangible Assets, net

     663,393        388,384   
  

 

 

   

 

 

 

Total assets

   $ 2,501,416      $ 1,995,849   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Current maturities of long-term debt and capital lease obligations

   $ 23,171      $ 71,996   

Accounts payable

     157,154        153,956   

Other accrued liabilities

     140,235        129,006   
  

 

 

   

 

 

 

Total current liabilities

     320,560        354,958   
  

 

 

   

 

 

 

Long-term Debt:

    

Total long-term debt

     903,451        535,016   
  

 

 

   

 

 

 

Other Liabilities:

    

Post-retirement/post-employment obligations

     139,895        159,158   

Deferred taxes

     74,413        39,206   

Other

     56,776        48,891   
  

 

 

   

 

 

 

Total other liabilities

     271,084        247,255   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

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

     —         —    

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

     —         —    

Common stock — $.01 stated par value and $.001 current par value, 500,000,000 authorized shares, 228,729,585 shares and 152,488,008 shares issued, respectively

     199        199   

Treasury stock — 20,203,065 shares and 14,214,819 shares, respectively

     (187,952     (196,465

Capital in excess of par value

     589,067        571,924   

Retained earnings

     720,576        597,629   

Accumulated other comprehensive loss

     (115,569     (114,667
  

 

 

   

 

 

 

Total stockholders’ equity

     1,006,321        858,620   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,501,416      $ 1,995,849   
  

 

 

   

 

 

 

(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 5, 2013     October 6, 2012     October 5, 2013     October 6, 2012  

Sales

   $ 878,492      $ 717,282      $ 2,907,455      $ 2,297,049   

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

     467,798        382,508        1,524,710        1,227,144   

Selling, distribution and administrative expenses

     327,529        257,326        1,064,914        833,829   

Depreciation and amortization

     29,837        24,757        89,769        76,751   

Gain on acquisition

     —         —         (50,071     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     53,328        52,691        278,133        159,325   

Interest expense

     (7,077     (6,708     (22,087     (17,014

Interest income

     3,906        3,140        11,661        10,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     50,157        49,123        267,707        152,798   

Income tax expense

     16,269        17,892        75,333        55,244   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 33,888      $ 31,231      $ 192,374      $ 97,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Common Share:

        

Basic:

        

Net income per common share

   $ 0.16      $ 0.15      $ 0.93      $ 0.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     208,428        207,040        207,747        204,522   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Net income per common share

   $ 0.16      $ 0.15      $ 0.91      $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     212,364        209,576        211,727        207,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends paid per common share

   $ 0.1125      $ 0.1067      $ 0.3317      $ 0.3133   
  

 

 

   

 

 

   

 

 

   

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

     For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
     October 5, 2013     October 6, 2012     October 5, 2013     October 6, 2012  

Net income

   $ 33,888      $ 31,231      $ 192,374      $ 97,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Pension and postretirement plans:

        

Amortization of prior service (credit) cost included in net income

     (36     (36     (121     (121

Amortization of actuarial loss included in net income

     763        679        2,543        2,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and postretirement plans, net of tax

     727        643        2,422        2,143   

Derivative instruments:

        

Net change in fair value of derivatives

     (1,585     39        (17,124     2,988   

Loss (Gain) reclassified to net income

     5,906        2,677        13,800        16,737   
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative instruments, net of tax

     4,321        2,716        (3,324     19,725   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     5,048        3,359        (902     21,868   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 38,936      $ 34,590      $ 191,472      $ 119,422   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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 29, 2012

    152,488,008      $ 199      $ 571,924      $ 597,629      $ (114,667     (14,214,819   $ (196,465   $ 858,620   

Net income

          192,374              192,374   

Derivative instruments, net of tax

            (3,324         (3,324

Pension and postretirement plans, net of tax

            2,422            2,422   

Adjustment for 3 for 2 stock split (Note 1)

    76,241,577            (52       (6,860,135       (52

Exercise of stock options

        539            891,160        10,677        11,216   

Deferred stock issuance

        (752         54,120        752        —    

Amortization of share-based payment awards

        11,430                11,430   

Tax benefits related to share-based payment awards

        6,800                6,800   

Performance-contingent restricted stock awards supplemental grant for exceeding TSR (Note 12)

        (874         63,232        874        —    

Stock repurchases

              (136,623     (3,790     (3,790

Dividends paid on vested performance-contingent restricted stock awards

          (386           (386

Dividends paid — $0.3317 per common share

          (68,989           (68,989
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at October 5, 2013

    228,729,585      $ 199      $ 589,067      $ 720,576      $ (115,569     (20,203,065   $ (187,952   $ 1,006,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(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 5, 2013     October 6, 2012  

CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:

    

Net income

   $ 192,374      $ 97,554   

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

    

Gain on acquisition

     (50,071     —    

Stock based compensation

     12,698        7,012   

Loss reclassified from accumulated other comprehensive income to net income

     21,622        24,972   

Depreciation and amortization

     89,769        76,751   

Deferred income taxes

     (4,633     3,155   

Provision for inventory obsolescence

     1,170        804   

Allowances for accounts receivable

     3,992        1,995   

Pension and postretirement plans (benefit) expense

     (1,570     1,208   

Other

     (5,191     (1,452

Pension contributions

     (12,760     (18,143

Changes in operating assets and liabilities:

    

Accounts and notes receivable, net

     (11,833     (30,518

Inventories, net

     (13,257     (10,270

Hedging activities, net

     (26,676     5,627   

Other assets

     (9,450     10,343   

Accounts payable

     4,952        10,761   

Other accrued liabilities

     29,124        2,430   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     220,260        182,229   
  

 

 

   

 

 

 

CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:

    

Purchase of property, plant and equipment

     (71,846     (49,188

Proceeds from sale of property, plant and equipment

     2,328        1,103   

Repurchase of independent distributor territories

     (23,631     (9,640

Principal payments from notes receivable

     16,353        11,056   

Proceeds from sales of distribution territories

     14,604        —    

Acquisition of businesses, net of cash acquired

     (415,472     (318,426
  

 

 

   

 

 

 

NET CASH DISBURSED FOR INVESTING ACTIVITIES

     (477,664     (365,095
  

 

 

   

 

 

 

CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:

    

Dividends paid

     (69,375     (64,426

Exercise of stock options

     11,216        9,112   

Excess windfall tax benefit related to share-based payment awards

     6,755        1,544   

Payments for debt issuance costs

     —         (3,877

Payment of financing fees

     (2,111     —    

Stock repurchases

     (3,790     (13,587

Change in bank overdraft

     (614     3,287   

Proceeds from debt borrowings

     1,887,000        1,179,181   

Debt and capital lease obligation payments

     (1,574,245     (922,014

Other financing activities

     (52     —    
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     254,784        189,220   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (2,620     6,354   

Cash and cash equivalents at beginning of period

     13,275        7,783   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 10,655      $ 14,137   
  

 

 

   

 

 

 

(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”, “Flowers Foods”, “Flowers”, “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 GAAP 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 5, 2013 and October 6, 2012 are not necessarily indicative of the results to be expected for a full fiscal year. The balance sheet at December 29, 2012 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP 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 29, 2012.

ESTIMATES — The preparation of financial statements in conformity with GAAP 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 29, 2012.

REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2013 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 20, 2013 (sixteen weeks), second quarter ended July 13, 2013 (twelve weeks), third quarter ended October 5, 2013 (twelve weeks) and fourth quarter ending December 28, 2013 (twelve weeks).

STOCK SPLIT — On May 22, 2013, the board of directors declared a 3-for-2 stock split of the company’s common stock. The record date for the split was June 5, 2013, and new shares were issued on June 19, 2013. All share and per share information has been restated for all prior periods presented giving retroactive effect to the stock split in the accompanying footnotes.

SEGMENTS — Flowers Foods currently operates two business segments: a direct-store-delivery segment (“DSD segment”) and a warehouse delivery segment (“warehouse segment”). The DSD segment (82% of total sales) operates 36 bakeries that market a wide variety of fresh bakery foods, including fresh breads, buns, rolls, tortillas, and snack cakes. These products are sold through a DSD route delivery system to retail and foodservice customers in the Southeast, Mid-Atlantic, New England, and Southwest as well as in select markets in California and Nevada. The warehouse segment (18% of total sales) operates 9 bakeries that produce snack cakes, breads and rolls for national retail, foodservice, vending, and co-pack customers and deliver through customers’ warehouse channels. The warehouse segment also operates one mix facility.

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 5, 2013 and October 6, 2012. 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 5, 2013     October 6, 2012     October 5, 2013     October 6, 2012  
     (Percent of Sales)     (Percent of Sales)  

DSD segment

     17.2     16.9     17.1     17.6

Warehouse segment

     2.9        2.9        3.1        3.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     20.1     19.8     20.2     21.0
  

 

 

   

 

 

   

 

 

   

 

 

 

SIGNIFICANT ACCOUNTING POLICIES — There were no significant changes to our critical accounting policies for the quarter ended October 5, 2013 from those disclosed in the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

 

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ACQUISITIONS — On February 25, 2013, the company announced the completion of its acquisition from BBU, Inc., a subsidiary of Grupo Bimbo S.A.B. de C.V. (“BBU”), of (1) the perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California for a total cash payment of $50.0 million. Additional disclosure regarding the acquisition is included in Note 4, Acquisitions.

On January 11, 2013, the company announced that it had signed two asset purchase agreements with Hostess Brands, Inc. (“Hostess”), as the “stalking horse bidder” for certain Hostess assets. One of the agreements provided for the purchase by the company of Hostess’ Wonder, Nature’s Pride, Merita, Home Pride and Butternut bread brands, 20 bakeries, and 38 depots (the “Acquired Hostess Assets”) for a purchase price of $360.0 million. The company paid $18.0 million as a deposit for the Acquired Hostess Assets during our quarter ended April 20, 2013. On July 19, 2013, the company completed the Acquired Hostess Assets acquisition for a total cash payment of $355.0 million as a result of a purchase price adjustment related to the Butternut trademark. The total cash payment made by the company for the acquisition in the the quarter ended October 5, 2013 was $337.0 million. The company purchased 36 of the 38 depots included in the original bid. A second Hostess asset purchase agreement provided for the purchase of the Beefsteak brand for $30.0 million that was topped by another bidder, as a result, the agreement terminated and we received a break-up fee of $0.9 million during the first quarter of 2013.

On July 27, 2013, the company completed the acquisition of certain assets related to a bun line in Modesto, California that will serve the California market for a total cash payment of $10.3 million.

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 its financial position. In January 2013 an amendment was issued for this guidance. This amendment clarifies that the scope applies to derivative accounting including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. 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. This guidance will be effective for our fiscal 2014 which begins on December 29, 2013. Our fiscal 2013 began on December 30, 2012 which was before the effective date of this new guidance.

 

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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.

During the forty weeks ended October 5, 2013, reclassifications out of accumulated other comprehensive loss were as follows (amounts in thousands):

 

    Amount reclassified from Accumulated Other Comprehensive Loss      

Details about accumulated other
comprehensive income
components (Note 2)

  For the Twelve Weeks Ended
October 5, 2013
    For the Forty Weeks Ended
October 5, 2013
   

Affected Line Item in the Statement

Where Net Income is Presented

Gains and losses on cash flow hedges:

     

Interest rate contracts

  $ (21   $ (817  

Interest income (expense)

Commodity contracts

    (9,582     (21,622  

Cost of sales, Note 3

 

 

 

   

 

 

   

Total before tax

  $ (9,603   $ (22,439  

Total before tax

Tax (expense) or benefit

    3,697        8,639     

Tax (expense) or benefit

 

 

 

   

 

 

   

Total net of tax

  $ (5,906   $ (13,800  

Net of tax

 

 

 

   

 

 

   

Amortization of defined benefit pension items:

     

Prior-service credits

  $ 60      $ 199     

Note 1, below

Actuarial losses

    (1,241     (4,137  

Note 1, below

 

 

 

   

 

 

   

Total before tax

  $ (1,181   $ (3,938  

Total before tax

Tax (expense) or benefit

    454        1,516     

Tax (expense) or benefit

 

 

 

   

 

 

   

Total net of tax

  $ (727   $ (2,422  

Net of tax benefit

 

 

 

   

 

 

   

Total reclassifications

  $ (6,633   $ (16,222  

Net of tax benefit

 

 

 

   

 

 

   

 

Note 1:      These items are included in the computation of net periodic pension cost. See Note 13, Postretirement Plans, for additional information.
Note 2:      Amounts in parentheses indicate debits to determine net income.
Note 3:      Amounts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

During the forty weeks ended October 5, 2013, changes to accumulated other comprehensive loss, net of income tax, by component were as follows (amounts in thousands):

 

    Gains/Losses on
Cash Flow Hedges
    Defined Benefit
Pension Plan
Items
    Total  

Accumulated other comprehensive loss, December 29, 2012

  $ (4,100   $ (110,567   $ (114,667

Other comprehensive income before reclassifications

    (17,124     —         (17,124

Reclassified to earnings from accumulated other comprehensive income

    13,800        2,422        16,222   
 

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss, October 5, 2013

  $ (7,424   $ (108,145   $ (115,569
 

 

 

   

 

 

   

 

 

 

 

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4. ACQUISITIONS

Modesto acquisition

On July 27, 2013, the company completed the acquisition of certain assets related to a bun line in Modesto, California that will serve the California market for a total cash payment of $10.3 million. This acquisition is included in our DSD segment and the total goodwill for this acquisition was $4.2 million.

Acquired Hostess Assets

On July 19, 2013, the company completed its acquisition of the Acquired Hostess Assets for a total cash payment of $355.0 million. The company had previously announced its agreement with Hostess to purchase the Acquired Hostess Assets for $360.0 million, and the bankruptcy court approved the sale in March 2013. The final purchase price paid by the company was adjusted to $355.0 million as a result of a purchase price adjustment related to the Butternut trademark.

The company previously filed a complaint in July 2008 alleging that Hostess infringed upon Flowers Foods’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. This lawsuit was settled at the closing of the Acquired Hostess Assets acquisition and we recorded $1.4 million gain during the twelve weeks ended October 5, 2013 to reflect our estimate of the settlement fair value, determined as the saved future legal expenses as a result of the settlement, at closing. The gain was recorded in selling, distribution and administrative expense in our Condensed Consolidated Statements of Income.

We believe the acquisition of the Acquired Hostess Assets strengthens the company’s position as the second-largest baker in the U.S. by adding brands and bakeries that are expected to enhance our ability to steadily expand the geographic reach of our fresh breads, buns, rolls and snack cakes into new markets. The Acquired Hostess Assets are included in our DSD segment. Late in our third quarter we began to re-introduce the newly acquired brands into markets we currently serve through our DSD segment and new markets as we expand into new regions of the country. The re-introduction of the brands will continue over the next several months and throughout fiscal 2014.

During the forty weeks ended October 5, 2013, the company incurred $15.6 million of acquisition-related costs for the Acquired Hostess Assets. A second proposed Hostess asset purchase agreement provided for the purchase of the Beefsteak brand for $30.0 million. This second agreement was topped by another bidder and the agreement terminated. In connection with this termination we received a break-up fee of $0.9 million during the first quarter of 2013. The acquisition-related costs and the break-up fee related to the second proposed Hostess acquisition are recorded in the selling, distribution and administrative expense line item in our Condensed Consolidated Statements of Income.

The following table summarizes the consideration paid for the Hostess Acquired Assets and liabilities assumed based on the estimated fair value at the acquisition date (amounts in thousands and are preliminary):

 

Fair value of consideration transferred:

  

Cash consideration transferred

   $ 355,000   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Property, plant, and equipment

   $ 162,599   

Identifiable intangible asset — trademarks

     193,000   

Financial assets

     661   
  

 

 

 

Net recognized amounts of identifiable assets acquired

   $ 356,260   
  

 

 

 

Gain on legal settlement

     (1,400
  

 

 

 

Net recognized amounts of identifiable assets acquired and gain on settlement

   $ 354,860   
  

 

 

 

Goodwill

   $ 140   
  

 

 

 

The goodwill is expected to be deductible for tax purposes and is included in our DSD segment. The fair values of the acquired assets are provisional pending receipt of the final valuations for those assets.

Revenues were immaterial for the Acquired Hostess Assets during the twelve weeks ended October 5, 2013.

 

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Sara Lee and Earthgrains acquisition of trademark licenses

On February 23, 2013, the company completed its acquisition from BBU of (1) perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California for a total cash payment of $50.0 million. In addition, we received a perpetual, exclusive, and royalty-free license to the Earthgrains brand for a broad range of fresh bakery products in the Oklahoma City, Oklahoma market area. The acquisition of the Oklahoma license was completed during fiscal 2012 for immaterial consideration. These acquisitions are included in our DSD segment.

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

 

Fair value of consideration transferred:

  

Cash consideration transferred

   $ 49,950   

Contingently refundable consideration (the “holdback”)

     (7,600
  

 

 

 

Total consideration, net

   $ 42,350   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Property, plant, and equipment

   $ 6,476   

Identifiable intangible asset — distribution rights

     25,790   

Identifiable intangible asset — trademarks

     79,500   

Identifiable intangible asset — customer relationships

     12,000   

Deferred income taxes, net

     (31,345
  

 

 

 

Net recognized amounts of identifiable assets acquired

   $ 92,421   
  

 

 

 

Bargain purchase gain

   $ 50,071   
  

 

 

 

The primary reason for this acquisition was to expand the company’s footprint into the California markets. The trademarks are non-amortizable assets and the customer relationships are being amortized over 21 years. We believe the acquisition resulted in a bargain purchase because the U.S. Department of Justice (the “DOJ”) required BBU to divest these assets, which resulted in a more favorable price to us than may have resulted from an arms-length negotiation. The bargain purchase gain is recognized in the line item “Gain on acquisition”. The above purchase price allocation is preliminary.

During the third quarter of 2013 we recorded a measurement period adjustment related to the distribution rights. The fair value of the distribution rights was reduced by $2.0 million as additional information became available. This reduction decreased the amount of the bargain purchase gain by $1.2 million, which is net of deferred taxes of $0.8 million. The measurement period adjustment was recorded as a revision to the first quarter 2013 Condensed Consolidated Balance Sheet and the Condensed Consolidated Statements of Net Income.

The asset purchase agreement includes a holdback provision (the “holdback”) in the amount of $10.0 million of the cash consideration paid at closing that will remain in escrow until disbursed based on the possible occurrence of one of two triggering events. The purpose of the holdback is to encourage the company to increase production capacity serving the California market. The first triggering event relates to the co-pack arrangement and the second triggering event relates to the possible opening of the Stockton Bakery. We entered into a co-pack arrangement with BBU at the acquisition date under which BBU is required to supply the company with Sara Lee and Earthgrains branded product for a period of up to 18 months ending August 17, 2014. If we terminate the co-pack agreement (“co-pack decision”) or reopen the Stockton Bakery (“bakery decision”) potential payments from the holdback will be made to us. The amount of such payments is determined based on the company making the co-pack decision and/or the bakery decision by certain specified dates. The total amount available under the holdback is capped at $10.0 million. The table below reflects the potential payments under each scenario (amounts in thousands):

 

     February 23, 2013 –
November 20, 2013
     November 21, 2013 –
February 18, 2014
     February 19, 2014 –
May 19, 2014
     May 20, 2014 –
August 17, 2014
 

Co-pack decision

   $ 10,000       $ 7,500       $ 5,000       $ —    

Bakery decision

   $ 10,000       $ 10,000       $ 7,500       $ 5,000   

If we do not make the co-pack decision by May 19, 2014 or the bakery decision by August 17, 2014, any remaining amount of the holdback will be distributed to BBU. The holdback fair value of $7.6 million represents our assessment of the probability that we will terminate the co-pack arrangement and/or open the Stockton bakery. This probability will be assessed at each reporting period and changes in the fair value of the holdback will be recorded through earnings in the period of change. The holdback amount is recorded in accounts and notes receivable on the condensed consolidated balance sheet. There were no material changes in this probability assessment in the second or third quarter of fiscal 2013.

 

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Sales from the Sara Lee and Earthgrains acquisition during the twelve and forty weeks ended October 5, 2013 were $25.4 million and $59.8 million, respectively. We incurred $1.5 million in acquisition-related costs during the forty weeks ended October 5, 2013. These expenses are included in the selling, distribution and administrative line item in the company’s condensed consolidated statement of income. Since the acquisition date, we developed distribution territories to sell to independent distributors who serve California. The territory development took place in several phases in the first two quarters of fiscal 2013. Because of our decision to develop and market these territories, the distribution rights intangible asset was recharacterized to territories held for sale immediately after the acquisition.

Lepage Acquisition

On July 21, 2012, we completed the acquisition of Lepage Bakeries, Inc. (“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 direct 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 $318.6 million in cash and $17.7 million in deferred obligations, which is the fair value of gross payments of $20.0 million.

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 direct 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 certain equityholders of Lepage, 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 3,267,972 shares of Flowers common stock.

The Lepage acquisition has been accounted for as a business combination. The results of Lepage’s operations are included in the company’s consolidated financial statements beginning on July 21, 2012 and are included in the company’s DSD operating segment.

The aggregate purchase price was $382.2 million as described in the table below. We incurred $7.1 million in acquisition-related costs during fiscal 2012 for Lepage. These expenses are included in the selling, distribution and administrative line item in the company’s consolidated statement of income for the fifty-two weeks ending on December 29, 2012.

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

 

Fair value of consideration transferred:

  

Cash

   $ 318,605   

Deferred payment obligations

     17,663   

Flowers Foods, Inc. common stock

     45,887   
  

 

 

 

Total fair value of consideration transferred

   $ 382,155   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Financial assets

   $ 11,658   

Inventories

     4,537   

Property, plant, and equipment

     59,970   

Assets held for sale — Distributor routes

     16,098   

Identifiable intangible assets

     256,400   

Deferred income taxes, net

     (1,137

Financial liabilities

     (16,181
  

 

 

 

Net recognized amounts of identifiable assets acquired

   $ 331,345   
  

 

 

 

Goodwill

   $ 50,810   
  

 

 

 

 

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Approximately $18.4 million of the cash consideration was for a tax adjustment paid to the Equityholders at the closing of the acquisition in connection with certain incremental tax liabilities incurred by those Equityholders due to the joint election made by the parties under Section 338(h)(10) of the Internal Revenue Code. Total goodwill increased $0.9 million since the end of fiscal 2012, consisting of an increase of $0.3 million for the final working capital adjustment payment, a decrease of $1.0 million for the final tax adjustment (recorded in financial liabilities in the table above), an increase of $0.1 million for assets held for sale, and an increase of $1.5 million for accrued liabilities (recorded in financial liabilities in the table above). The payment for the working capital adjustment was $0.2 million and was made during our second quarter of fiscal 2013.

The deferred payment obligations represent 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 acquisition (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 is being amortized to interest expense over eight years.

We issued 3,267,972 shares of Flowers common stock with a fair value of $45.9 million to certain equityholders of Lepage. The number of shares issued was calculated by dividing $50.0 million by the average closing price of Flowers 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 $13.65. The table below outlines the determination of fair value and provides the assumptions used in the calculation:

 

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)

   $ 13.65      $ 13.65      $ 13.65      $ 13.65      $ 13.65     

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 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   
  

 

 

    

Lepage operates three bakeries, two in Lewiston, Maine, and one in Brattleboro, Vermont. Lepage serves customers in the New England and New York markets with fresh bakery products sold under the Country Kitchen and Barowsky’s brands. This acquisition provides a DSD platform to more effectively market the Nature’s Own and Tastykake brands in the Northeast.

The primary reasons for the acquisition were to expand the company’s footprint into the northeastern United States to distribute Nature’s Own and Tastykake products throughout the Lepage territories. In addition to the amortizable intangible assets, there is an additional $185.0 million in indefinite-lived trademark intangible assets. Goodwill of $50.8 million is allocated to the DSD segment. Approximately $11.0 million of goodwill is deductible for income tax purposes over fifteen years.

The fair value of trade receivables is $7.4 million. The gross amount of the 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.

 

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Acquisitions Pro Forma

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions of Lepage and the Acquired Hostess Assets occurred at the beginning of fiscal 2012. Unaudited pro forma consolidated results of operations for the Sara Lee and Earthgrains asset acquisitions are not included because the company determined that they are immaterial. Hostess filed for bankruptcy and ceased operations in November 2012. As a result, there were no sales related to the Acquired Hostess Assets for fiscal 2013 and no information to include in the pro forma presentation below. Lepage has been included in our consolidated financial statements since the acquisition in July 2012. The pro forma is as follows (amounts in thousands, except per share data):

 

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

Sales:

   

As reported

  $ 717,282      $ 2,297,049   

Pro forma

  $ 913,524      $ 3,064,400   

Net income:

   

As reported

  $ 31,231      $ 97,554   

Pro forma

  $ 29,193      $ 91,625   

Basic net income per common share:

   

As reported

  $ 0.15      $ 0.48   

Pro forma

  $ 0.14      $ 0.44   

Diluted net income per common share:

   

As reported

  $ 0.15      $ 0.47   

Pro forma

  $ 0.14      $ 0.44   

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 acquisition with our credit facility. 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

Goodwill activity for the forty weeks ended October 5, 2013 and the balances as of October 5, 2013 and December 29, 2012 are as follows (amounts in thousands):

 

     DSD      Warehouse      Total  

Balance as of December 29, 2012

   $ 262,796       $ 7,101       $ 269,897   

Increase in goodwill related to acquisitions

     6,333         —          6,333   
  

 

 

    

 

 

    

 

 

 

Balance as of October 5, 2013

   $ 269,129       $ 7,101       $ 276,230   
  

 

 

    

 

 

    

 

 

 

The table below presents the changes to goodwill by acquisition from December 29, 2012 to October 5, 2013 (amounts in thousands):

 

     Modesto      Acquired Hostess
Assets
     Lepage     Other      Total  

Working capital adjustments

   $ —         $ —         $ 315      $ —         $ 315   

Acquisition-related tax adjustments

     —           —           (1,016     —           (1,016

Adjustment to assets held for sale

     —           —           63        —           63   

Adjustment for accrued liabilities

     —           —           1,500        —           1,500   

Asset reclassification adjustment

     —           —           —         1,122         1,122   

Acquisitions during fiscal 2013

     4,209         140         —         —           4,349   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Change in goodwill during the forty weeks ended October 5, 2013

   $ 4,209       $ 140       $ 862      $ 1,122       $ 6,333   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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As of October 5, 2013 and December 29, 2012, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

 

     October 5, 2013      December 29, 2012  

Asset

   Cost      Accumulated
Amortization
     Net Value      Cost      Accumulated
Amortization
     Net Value  

Trademarks

   $ 71,727       $ 11,131       $ 60,596       $ 71,727       $ 9,243       $ 62,484   

Customer relationships

     169,921         30,774         139,147         157,921         24,275         133,646   

Non-compete agreements

     4,274         2,612         1,662         4,274         1,719         2,555   

Distributor relationships

     4,123         1,135         2,988         4,123         924         3,199   

Supply agreement

     1,050         1,050         —          1,050         1,050         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251,095       $ 46,702       $ 204,393       $ 239,095       $ 37,211       $ 201,884   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There are $459.0 million and $186.5 million of indefinite life intangible assets at October 5, 2013 and December 29, 2012, respectively. These are not being amortized and are separately identified from goodwill. The $25.8 million distribution rights intangible asset acquired in the Sara Lee California transaction were recorded to assets held for sale immediately subsequent to acquisition because we decided to disaggregate the distribution rights in California into the independent distributor model we use to deliver our products.

Aggregate amortization expense for the twelve and forty weeks ending October 5, 2013 and October 6, 2012 were as follows (amounts in thousands):

 

     Amortization
Expense
 

For the twelve weeks ended October 5, 2013

   $ 2,772   

For the twelve weeks ended October 6, 2012

   $ 2,504   

For the forty weeks ended October 5, 2013

   $ 9,059   

For the forty weeks ended October 6, 2012

   $ 6,749   

Estimated amortization of intangibles for each of the next five years is as follows (amounts in thousands):

 

     Amortization of
Intangibles
 

Remainder of 2013

   $ 2,682   

2014

   $ 11,741   

2015

   $ 11,495   

2016

   $ 11,089   

2017

   $ 10,597   

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 3,300 independent distributors 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 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 at a fixed rate.

 

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

 

     Interest
Income
 

For the twelve weeks ended October 5, 2013

   $ 3,906   

For the twelve weeks ended October 6, 2012

   $ 3,140   

For the forty weeks ended October 5, 2013

   $ 11,661   

For the forty weeks ended October 6, 2012

   $ 10,487   

At October 5, 2013 and December 29, 2012, respectively, the carrying value of the distributor notes was as follows (amounts in thousands):

 

    October 5, 2013     December 29, 2012  

Distributor notes receivable

  $ 152,698      $ 118,481   

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

    18,522        15,758   
 

 

 

   

 

 

 

Long-term portion of distributor notes receivable

  $ 134,176      $ 102,723   
 

 

 

   

 

 

 

At October 5, 2013 and December 29, 2012, 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.

The fair value of the company’s variable rate debt at October 5, 2013 approximates the recorded value. The fair value of the ten-year 4.375% senior notes (“notes”) issued on April 3, 2012, as discussed in Note 8, Debt and Other Obligations below, is approximately $397.5 million while the carrying value is $399.2 million on October 5, 2013. 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 5, 2013, the company’s hedge portfolio contained commodity derivatives with a net fair value of $(4.4) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Other long-term

   $ 0.1       $ —        $ —        $ 0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.1       $ —        $ —        $ 0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Level 1     Level 2     Level 3      Total  

Liabilities:

         

Other current

   $ (2.6   $ (0.9   $ —        $ (3.5

Other long-term

     (0.3     (0.7     —          (1.0
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

     (2.9     (1.6     —          (4.5
  

 

 

   

 

 

   

 

 

    

 

 

 

Net Fair Value

   $ (2.8   $ (1.6   $ —        $ (4.4
  

 

 

   

 

 

   

 

 

    

 

 

 

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 5, 2013 and December 29, 2012 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 notes. 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 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.

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

 

   

Derivative Assets

   

Derivative Liabilities

 
   

October 5, 2013

   

December 29, 2012

   

October 5, 2013

   

December 29, 2012

 

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

  $ —      

Other current liabilities

  $ 867   

Interest rate contracts

  —       —       —       —      

Other long term liabilities

    —      

Other long term liabilities

    —    

Commodity contracts

 

Other current assets

    —      

Other current assets

    —      

Other current liabilities

    3,463     

Other current liabilities

    3,047   

Commodity contracts

 

Other long term assets

    58    

Other long term assets

    9     

Other long term liabilities

    917     

Other long term liabilities

    146   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $ 58       $ 9        $ 4,380        $ 4,060   
   

 

 

     

 

 

     

 

 

     

 

 

 

 

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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 5, 2013     October 6, 2012       October 5, 2013     October 6, 2012  

Interest rate contracts

  $ 26      $ (23  

Interest (expense) income

  $ (13   $ (378

Commodity contracts

    (1,611     62     

Production costs(1)

    (5,893     (2,299
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (1,585   $ 39        $ (5,906   $ (2,677
 

 

 

   

 

 

     

 

 

   

 

 

 

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 5, 2013     October 6, 2012       October 5, 2013     October 6, 2012  

Interest rate contracts

  $ (241   $ (1,606  

Interest (expense) income

  $ (502   $ (1,379

Commodity contracts

    (16,883     4,594     

Production costs(1)

    (13,298     (15,358
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (17,124   $ 2,988        $ (13,800   $ (16,737
 

 

 

   

 

 

     

 

 

   

 

 

 

 

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

The balance in accumulated other comprehensive income (loss) related to commodity price 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 5, 2013:

 

     Commodity
price risk
derivatives
 

Closed contracts

   $ (3.3

Expiring in 2013

     (0.1

Expiring in 2014

     (2.2

Expiring in 2015

     (0.3

Expiring in 2016

     (0.1
  

 

 

 

Total

   $ (6.0
  

 

 

 

As of October 5, 2013, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in millions):

 

     Notional
amount
 

Wheat contracts

   $ 110.2   

Soybean oil contracts

     23.9   

Natural gas contracts

     16.2   
  

 

 

 

Total

   $ 150.3   
  

 

 

 

The company’s derivative instruments contain no credit-risk-related contingent features at October 5, 2013. As of October 5, 2013 and December 29, 2012, the company had $8.9 million and $9.0 million, respectively, in other current assets representing collateral for hedged positions.

 

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8. DEBT AND OTHER OBLIGATIONS

Long-term debt and capital leases consisted of the following at October 5, 2013 and December 29, 2012 (amounts in thousands):

 

     October 5, 2013      December 29, 2012  

Unsecured credit facility

   $ 71,000       $ 110,500   

Unsecured new term loan

     296,250         —     

Unsecured term loan

     —           67,500   

4.375% senior notes due 2022

     399,184         399,111   

Accounts receivable securitization

     125,000         —     

Capital lease obligations

     16,788         10,627   

Other notes payable

     18,400         19,274   
  

 

 

    

 

 

 
     926,622         607,012   

Less current maturities of long-term debt

     23,171         71,996   
  

 

 

    

 

 

 

Total long-term debt

   $ 903,451       $ 535,016   
  

 

 

    

 

 

 

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 5, 2013 and December 29, 2012, the bank overdraft balance was $16.2 million and $16.8 million, respectively.

The company also had standby letters of credit (“LOCs”) outstanding of $16.0 million and $15.8 million at October 5, 2013 and December 29, 2012, 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.

Scheduled maturities of long-term debt (including capital lease obligations) are as follows (amounts in thousands):

 

     Principal Payments Due  

Remainder of 2013

   $ 1,093   

2014

   $ 30,772   

2015

   $ 157,257   

2016

   $ 72,159   

2017 and thereafter

   $ 665,341   

Accounts Receivable Securitization Facility, New Term Loan, Senior Notes, Credit Facility, and Term Loan

Accounts Receivable Securitization Facility

On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). The facility provides the company up to $150.0 million in liquidity for a term of two years. Under the facility, a wholly-owned, bankruptcy-remote subsidiary purchases, on an ongoing basis, substantially all trade receivables. As borrowings are made under the facility the subsidiary pledges the receivables as collateral. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions of collections to the company. We include the subsidiary in our consolidated financial statements. The facility contains certain customary events of default, representations and warranties, and affirmative and negative covenants. As of October 5, 2013, the company had $125.0 million outstanding under the facility with $25.0 million available. As of October 5, 2013, the company was in compliance with all restrictive financial covenants under the facility.

Optional principal repayments may be made at anytime without premium or penalty. Interest is due two days after our reporting periods end in arrears on the outstanding borrowings and is computed as the cost of funds rate plus an applicable margin of 70 basis points. An unused fee of 25 basis points is applicable on the unused commitment at each reporting period. The company accrued financing costs of $0.7 million in connection with the facility through October 5, 2013, which are being amortized over the life of the facility.

New Term Loan. On April 5, 2013, the company entered into a senior unsecured delayed-draw term facility (the “new term loan”) with a commitment of up to $300.0 million to partially finance the pending acquisition of the Acquired Hostess Assets and pay acquisition-related costs and expenses. The company drew down the full amount of the new term loan on July 18, 2013 (the borrowing date) to complete the Acquired Hostess Assets acquisition as disclosed in Note 4, Acquisitions.

 

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The new term loan will amortize in quarterly installments based on the annual percentages in the table below. The first payment is due and payable on the last business day of the first calendar quarter ending after the borrowing date, quarterly payments are due on the last business day of each successive calendar quarter and all remaining outstanding principal is due and payable on the fifth anniversary of the borrowing date.

 

Anniversary Year

   Percent of Principal Due  

1

     5

2

     10

3

     10

4

     35

5

     40

Voluntary prepayments on the new term loan may be made without premium or penalty. Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The applicable margin ranges from 0.125% to 1.375% for base rate loans and from 1.125% to 2.375% for Eurodollar loans, and is based on the company’s leverage ratio. Interest on base rate loans is payable quarterly in arrears on the last business day of each calendar quarter. Interest on Eurodollar loans is payable in arrears at the end of the interest period and every three months in the case of interest periods in excess of three months. The company paid financing costs of $1.7 million in connection with the new term loan through October 5, 2013, which are being amortized over the life of the new term loan. A commitment fee of 20 basis points on the daily undrawn portion of the lenders’ commitments commenced on May 1, 2013 and continued until the borrowing date, when the company borrowed the available $300.0 million for the Acquired Hostess Assets acquisition. The new term loan is subject to customary restrictive covenants, including certain limitations on liens and significant acquisitions and financial covenants regarding minimum interest coverage ratio and maximum leverage ratio.

Senior Notes. On April 3, 2012, the company issued $400 million of senior notes. The company pays 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 face value of the notes is $400.0 million and the current discount on the notes is $0.8 million. The company paid issuance costs (including underwriting fees and legal fees) for issuing the notes of $3.9 million. The issuance costs and the debt discount are being amortized to interest expense over the term of the notes. As of October 5, 2013 and December 29, 2012 the company was in compliance with the restrictive covenants under the notes.

Credit Facility. On April 5, 2013, the company amended its senior unsecured credit facility (the “credit facility”) to provide for less restrictive leverage ratios and certain more favorable covenant terms, to update the existing agreement to address changes in law, and to include applicable conforming changes in light of the new term loan. We previously amended the credit facility on November 16, 2012 and on May 20, 2011. The credit facility is a five-year, $500.0 million senior unsecured revolving loan facility. The November 16, 2012 amendment extended the term through November 16, 2017 and included modest improvements in drawn and undrawn pricing. The credit facility contains a provision that permits Flowers to request up to $200 million in additional revolving commitments, for a total of up to $700 million, subject to the satisfaction of certain conditions. Proceeds from the 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 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 amended credit facility and can meet presently foreseeable financial requirements. As of October 5, 2013 and December 29, 2012, 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

 

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the federal funds rate plus 0.40%, with a floor rate defined by the one-month interbank Eurodollar market rate plus 1.00%. The applicable margin ranges from 0.025% to 1.025% for base rate loans and from 1.025% to 2.025% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.35% 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 $0.6 million in connection with the November 16, 2012 amendment of the credit facility, which, in addition to the remaining balance of the original $1.6 million in financing costs, is being amortized over the life of the credit facility.

There were $71.0 million and $110.5 million in outstanding borrowings under the credit facility at October 5, 2013 and December 29, 2012, respectively. The highest outstanding daily balance during 2013 was $209.0 million and the low amount outstanding balance was $23.0 million. 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. For the forty weeks ended October 5, 2013 the company borrowed $1,462.0 million in revolving borrowings under the credit facility and repaid $1,501.5 million in revolving borrowings. The amount available under the credit facility is reduced by $16.0 million for letters of credit. On October 5, 2013, the company had $413.0 million available under its credit facility for working capital and general corporate purposes.

Term Loan. On April 5, 2013, the company amended its credit agreement dated August 1, 2008 (the “amended term loan”), to conform the terms to the new term loan. The amended term loan provided for an amortizing $150.0 million of borrowings through the maturity date of August 1, 2013. Principal payments were due quarterly under the amended 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 amended term loan included certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants included such ratios as a minimum interest coverage ratio and a maximum leverage ratio. As of December 29, 2012, the company was in compliance with all restrictive financial covenants under the amended term loan. As of December 29, 2012, the amounts outstanding under the amended term loan were $67.5 million. The final payment of $16.9 million, which repaid the amended term loan in full, was made on August 5, 2013.

Interest on the amended term loan was due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The underlying rate was 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 ranged from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for Eurodollar loans and was based on the company’s leverage ratio. The company paid additional financing costs of $0.1 million in connection with a prior amendment of the amended term loan on May 20, 2011, which, in addition to the remaining balance of the original $0.8 million in financing costs, was amortized over the remaining life of the term loan.

Credit Ratings. Currently, the company’s credit ratings by Fitch Ratings, Moody’s Investors Service, 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 ENTITIES

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”). However, the company is not considered to be the primary beneficiary of this VIE because the company does not (i) have the ability to direct the significant activities of the VIE that affect its ability to distribute products or (ii) provide any implicit or explicit guarantees or other financial support to the VIE.

The company has 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 5, 2013 and December 29, 2012, there was $16.5 million and $10.0 million, respectively, in net property, plant and equipment and capital lease obligations associated with the right to use leases.

The company uses independent distributors (“IDs”) to distribute our products in the DSD segment. Certain of these IDs are organized as incorporated entities and meet the qualification as VIEs. The IDs qualify as VIEs primarily because the company finances the routes, which creates 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 do not meet the definition of a VIE.

 

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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 in the United States District Court for the Northern District of Georgia. The complaint alleged that Hostess infringed upon Flowers Foods’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. Flowers Foods asserted that Hostess’s 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 Foods sought actual damages, an accounting of Hostess’s profits from its sales of Nature’s Pride products, and injunctive relief. This lawsuit was settled at the closing of the Acquired Hostess Assets acquisition as described in Note 4, Acquisitions.

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 believes it 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 5, 2013 and October 6, 2012 (amounts and shares in thousands, except per share data):

 

     For the
Twelve Weeks Ended
     For the
Forty Weeks ended
 
     October 5, 2013      October 6, 2012      October 5, 2013      October 6, 2012  

Net income

   $ 33,888       $ 31,231       $ 192,374       $ 97,554   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Common Share:

           

Basic weighted average shares outstanding for common stock

     208,428         207,040         207,747         204,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.16       $ 0.15       $ 0.93       $ 0.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Common Share:

           

Basic weighted average shares outstanding for common stock

     208,428         207,040         207,747         204,522   

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

     3,936         2,536         3,980         2,643   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding for common stock

     212,364         209,576         211,727         207,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.16       $ 0.15       $ 0.91       $ 0.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following shares were not included in the computation of diluted earnings per share for the twelve and forty weeks ended October 5, 2013 and October 6, 2012 because their effect would have been anti-dilutive (shares in thousands):

 

     Common shares  

For the twelve weeks ended October 5, 2013

     —     

For the twelve weeks ended October 6, 2012

     206  

For the forty weeks ended October 5, 2013

     59   

For the forty weeks ended October 6, 2012

     206   

 

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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 41,906,250 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.

Stock Options

The following non-qualified stock options (“NQSOs”) 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

   February 10, 2011  

Shares granted

     3,213   

Exercise price($)

     10.87   

Vesting date

     2/10/2014   

Fair value per share($)

     2.31   

Dividend yield(%)(1)

     3.00   

Expected volatility(%)(2)

     29.20   

Risk-free interest rate(%)(3)

     2.44   

Expected option life (years)(4)

     5.00   

Outstanding at October 5, 2013

     3,143   

 

(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 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 stock option activity for the forty weeks ended October 5, 2013 pursuant to the EPIP is set forth below (amounts in thousands, except price data):

 

     Options     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at December 29, 2012

     9,541      $ 10.71         

Exercised

     (1,149   $ 9.77         

Forfeited

     (14   $ 10.99         
  

 

 

         

Outstanding at October 5, 2013

     8,378      $ 10.84         3.14       $ 89,739   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at October 5, 2013

     5,245      $ 10.82         2.42       $ 56,266   
  

 

 

   

 

 

    

 

 

    

 

 

 

As of October 5, 2013, there was $0.6 million of total unrecognized compensation expense related to unvested stock options. This expense is expected to be recognized over a weighted-average period of 0.35 years.

 

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The cash received, the windfall tax benefit, and intrinsic value from stock option exercises for the forty weeks ended October 5, 2013 and October 6, 2012 were as follows (amounts in thousands):

 

     October 5, 2013      October 6, 2012  

Cash received from option exercises

   $ 11,216       $ 9,112   

Cash tax windfall, net

   $ 4,594       $ 1,491   

Intrinsic value of stock options exercised

   $ 14,727       $ 6,472   

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

Performance-Contingent Restricted Stock Awards

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

Beginning in 2012, certain key employees have been granted performance-contingent restricted stock in the form of TSR Shares. 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 shares become non-forfeitable if, and to the extent, that on that date the vesting conditions are satisfied. As a result of the delay in the grant of the 2012 awards, the 2012 awards vest approximately 17 months from the date of grant. The 2013 awards vest two years from the date of grant. 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, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later on the normal vesting date, the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. 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) TSR 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’ TSR. 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

   January 1, 2013      July 16, 2012  

Shares granted

     414         206   

Vesting date

     3/1/2015         2/28/2014   

Fair value per share

   $ 17.22       $ 15.45   

As of October 5, 2013, there was $5.2 million of total unrecognized compensation cost related to nonvested TSR Shares granted under the EPIP. That cost is expected to be recognized over a weighted-average period of 1.3 years. These grants normally vest in two years. The July 16, 2012 grant vests over one and a half years because it was granted in the middle of the year.

 

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

Beginning in 2012, certain key employees have been granted performance-contingent restricted stock in the form of ROIC Shares. 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 shares become non-forfeitable if, and to the extent that on that date, the vesting conditions are satisfied. As a result of the delay in the grant of the 2012 awards the 2012 awards vest approximately 17 months from the date of grant. The 2013 awards vest two years from the date of grant. Return on Invested Capital is calculated by dividing our profit by the invested capital (“ROIC”). Generally, the performance condition requires the company’s ROIC to exceed its weighted average “cost of capital” (“WACC”) between 1.75% to 4.75% (the “ROI Target”) over the two fiscal year performance period. The 2012 award is a 17 month performance period and the 2013 award is a two year performance period. 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 ROI Target; or

 

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

The ROIC Shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC Shares will immediately vest at the target level. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. 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 quarter ended October 5, 2013, we expensed the 2012 awards assuming 125% attainment of the ROI Target and the 2013 awards assuming 100% attainment of the ROI Target.

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

   January 1, 2013      July 16, 2012  

Shares granted

     414         206   

Vesting date

     3/1/2015         2/28/2014   

Fair value per share

   $ 15.51       $ 14.37   

As of October 5, 2013, there was $4.8 million of total unrecognized compensation cost related to nonvested ROIC Shares granted under the EPIP. That cost is expected to be recognized over a weighted-average period of 1.2 years. These grants normally vest in two years. The July 16, 2012 grant vests over one and a half years because it was granted in the middle of the year.

Performance-Contingent Restricted Stock

Prior to 2012 certain key employees were 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 2011, during the forty weeks ended October 5, 2013, an additional 94,777 common shares were issued in the aggregate to these certain key employees because the company exceeded the S&P TSR by the maximum amount. At vesting the company paid accumulated dividends of $0.4 million. The tax windfall at vesting of these awards was $2.1 million.

 

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The company’s performance-contingent restricted stock activity during the forty weeks ended October 5, 2013, is presented below (amounts in thousands, except price data):

 

     Shares     Weighted
Average
Grant Date
Fair Value
 

Nonvested at December 29, 2012

     888      $ 12.61   

Initial grant on January 1, 2013

     828      $ 16.37   

Grant increase for exceeding the S&P TSR

     95      $ 10.62   

Vested

     (571   $ 10.62   

Forfeited

     (10   $ 15.85   
  

 

 

   

Nonvested at October 5, 2013

     1,230      $ 15.88   
  

 

 

   

 

 

 

As of October 5, 2013, there was $10.0 million of total unrecognized compensation cost related to nonvested restricted stock granted under the EPIP. That cost is expected to be recognized over a weighted-average period of 1.3 years. The total intrinsic value of shares vested during the period ended October 5, 2013 was $10.6 million.

Deferred and Restricted 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 at the date of conversion. During the first quarter of fiscal 2013, an aggregate of 36,150 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 5, 2013, a total of 36,088 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 2013, non-employee directors were granted an aggregate of 54,150 shares of deferred stock. The deferred stock will be distributed to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one year minimum vesting period. During the forty weeks ending October 5, 2013, there were 45,088 deferred share awards exercised for annual grant awards.

On May 31, 2013, the company’s Chief Executive Officer (“CEO”) received a restricted stock award of approximately $1.3 million of restricted stock pursuant to the EPIP. This award will vest 100% on the fourth anniversary of the date of grant provided the CEO remains employed by the company during this period. Dividends will accrue on the award and will be paid to the CEO on the vesting date on all shares that ultimately vest. There were 58,500 shares issued for this award at a fair value of $22.25 per share.

The deferred and restricted stock activity for the forty weeks ended October 5, 2013 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 29, 2012

     378      $ 11.49         

Deferred stock issued

     89      $ 19.07         

Restricted stock issued

     59      $ 22.25         

Deferred stock exercised

     (81   $ 12.91         
  

 

 

         

Balance at October 5, 2013

     445      $ 14.19         0.68       $ 9,596   
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding vested at October 5, 2013

     269      $ 11.08          $ 5,797   
  

 

 

   

 

 

       

 

 

 

Outstanding unvested at October 5, 2013

     176      $ 18.92         1.71       $ 3,799   
  

 

 

   

 

 

    

 

 

    

 

 

 

Shares vesting during the forty weeks ended October 5, 2013

     110      $ 13.37          $ 2,367   
  

 

 

   

 

 

       

 

 

 

As of October 5, 2013, there was $2.3 million of total unrecognized compensation cost related to deferred and restricted stock awards granted under the EPIP. The tax windfall for deferred shares issued during the forty weeks ended October 5, 2013 was $0.1 million.

 

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Table of Contents

Stock Appreciation Rights

Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chair fees into 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 liability for these rights at October 5, 2013 and December 29, 2012 was $2.7 million and $1.7 million, respectively, and is recorded in other long-term liabilities. The company paid $1.0 million at the exercise of 54,168 shares during the forty weeks ended October 5, 2013.

The fair value of the rights at October 5, 2013 ranged from $12.99 to $16.81. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 5, 2013: dividend yield 2.3%; expected volatility 26.0%; risk-free interest rate 0.33% and expected life of 0.15 years to 1.35 years.

The rights activity for the forty weeks ended October 5, 2013 is set forth below (amounts in thousands except price data):

 

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

Outstanding at December 29, 2012

     195      $ 7.01         

Rights exercised

     (54     6.52         
  

 

 

         

Outstanding at October 5, 2013

     141      $ 7.26         1.78       $ 2,019   
  

 

 

   

 

 

    

 

 

    

 

 

 

Share-Based Payments Compensation Expense Summary

The following table summarizes the company’s stock based compensation expense for the twelve and forty week periods ended October 5, 2013 and October 6, 2012, respectively (amounts in thousands):

 

     For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
     October 5, 2013     October 6, 2012     October 5, 2013      October 6, 2012  

Stock options

   $ 380      $ 694      $ 1,397       $ 2,680   

Performance-contingent restricted stock awards

     2,463        1,509        8,710         3,094   

Deferred and restricted stock

     446        325        1,323         1,060   

Stock appreciation rights

     (281     (410     1,268         178   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total stock based compensation

   $ 3,008      $ 2,118      $ 12,698       $ 7,012   
  

 

 

   

 

 

   

 

 

    

 

 

 

13. POST-RETIREMENT PLANS

The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at October 5, 2013 as compared to accounts at December 29, 2012 (amounts in thousands):

 

     October 5, 2013      December 29, 2012  

Current benefit liability

   $ 1,288       $ 1,288   

Noncurrent benefit liability

   $ 139,895       $ 159,158   

Accumulated other comprehensive loss, net of tax

   $ 108,145       $ 110,567   

Defined Benefit Plans and Nonqualified Plan

The company has noncontributory defined benefit pension plans operated by trustees that cover 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 5, 2013, 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 forty weeks ended October 5, 2013 the company contributed $12.8 million to company pension plans. We contributed an additional $2.1 million early in our fiscal fourth quarter of 2013.

 

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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 5, 2013     October 6, 2012     October 5, 2013     October 6, 2012  

Service cost

   $ 163      $ 142      $ 544      $ 469   

Interest cost

     4,636        5,001        15,453        16,670   

Expected return on plan assets

     (6,618     (6,070     (22,061     (20,232

Amortization of net loss

     1,425        1,174        4,751        3,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit (income) cost

   $ (394   $ 247      $ (1,313   $ 819   
  

 

 

   

 

 

   

 

 

   

 

 

 

The company also had several smaller defined benefit plans associated with recent acquisitions that were merged into the Flowers Foods defined benefit plans.

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 (income) cost for the company includes the following components (amounts in thousands):

 

     For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
     October 5, 2013     October 6, 2012     October 5, 2013     October 6, 2012  

Service cost

   $ 79      $ 106      $ 263      $ 352   

Interest cost

     88        140        293        465   

Amortization of prior service (credit) cost

     (60     (59     (199     (198

Amortization of net (gain) loss

     (184     (70     (614     (230
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit (income) cost

   $ (77   $ 117      $ (257   $ 389   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 5, 2013 and October 6, 2012, the total cost and employer contributions were $17.8 million and $15.6 million, respectively.

The company acquired Lepage in fiscal 2012, at which time we assumed sponsorship of the Lepage 401(k) Plan. This plan will be merged into the Flowers Foods 401(k) Retirement Savings Plan upon completion of a detailed review of prior plan operations and administration. During the forty weeks ended October 5, 2013, the total cost and employer contributions were $0.4 million for the Lepage 401(k) Plan.

14. INCOME TAXES

The company’s effective tax rate for the forty weeks ending October 5, 2013 was 28.1%, significantly lower than the rate of 36.2% for the forty weeks ending October 6, 2012. This decrease was driven by the gain on acquisition, which was recorded net of deferred taxes as a component of income before income taxes. The gain was treated as a permanent item in the tax provision, and favorably impacts the rate by approximately 6.5%. Discrete benefits recognized in the current period also contributed to the lower rate. The other primary differences in the effective rate and the statutory rate are state income taxes and the Section 199 qualifying production activities deduction. On September 13, 2013, the IRS and Treasury released final regulations regarding the deduction and capitalization of expenditures related to tangible property. The company is in the process of evaluating the impact of these regulations and does not expect a material impact to the financial statements. Tax legislation adopted in January of 2013 had an immaterial impact on the rate.

During the twelve weeks ended October 5, 2013, the company’s activity with respect to its reserve for uncertain tax positions resulted in the recognition of a $1.4 million net tax benefit. The benefit reflects the expiration of the statute of limitations on uncertain tax positions recorded through purchase accounting for previous acquisitions. At this time, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.

 

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Table of Contents

15. SEGMENT REPORTING

The company’s DSD segment produces fresh and frozen packaged bread, rolls, and snack products and the warehouse 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 (amounts in thousands):

 

     For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
     October 5, 2013     October 6, 2012     October 5, 2013     October 6, 2012  

SALES:

        

DSD segment

   $ 745,964      $ 601,360      $ 2,448,131      $ 1,918,617   

Warehouse segment

     178,051        149,723        618,516        487,551   

Eliminations: Sales from warehouse delivery to DSD

     (29,390     (24,691     (103,766     (84,459

Sales from DSD to warehouse delivery

     (16,133     (9,110     (55,426     (24,660
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 878,492      $ 717,282      $ 2,907,455      $ 2,297,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

DEPRECIATION AND AMORTIZATION:

        

DSD segment

   $ 25,754      $ 20,716      $ 76,178      $ 62,684   

Warehouse segment

     3,923        4,067        13,120        14,140   

Unallocated corporate costs

     160        (26     471        (73
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 29,837      $ 24,757      $ 89,769      $ 76,751   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM OPERATIONS:

        

DSD segment

   $ 63,550      $ 58,571      $ 291,231      $ 173,962   

Warehouse segment

     7,074        7,566        40,892        23,480   

Unallocated corporate costs (1)

     (17,296     (13,446     (53,990     (38,117
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 53,328      $ 52,691      $ 278,133      $ 159,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST EXPENSE

   $ (3,171   $ (3,568   $ (10,426   $ (6,527
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

   $ 50,157      $ 49,123      $ 267,707      $ 152,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

The assets by segment as of October 5, 2013 and December 29, 2012 were as follows (amounts in thousands):

 

     As of  
     October 5, 2013      December 29, 2012  

Assets:

     

DSD segment(3)

   $ 2,154,660       $ 1,638,826   

Warehouse segment(3)

     242,912         245,195   

Other(2)

     103,844         111,828   
  

 

 

    

 

 

 
   $ 2,501,416       $ 1,995,849   
  

 

 

    

 

 

 

 

(1) Represents the company’s corporate head office amounts and acquisition costs.
(2) Represents the company’s corporate head office assets including primarily cash and cash equivalents, debt, deferred taxes, and deferred financing costs.
(3) The trade accounts receivable associated with the securitization facility are presented in the segment where the sales originated.

 

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

 

     For the Twelve Weeks Ended
October 5, 2013
     For the Twelve Weeks Ended
October 6, 2012
 
     DSD      Warehouse delivery      Total      DSD      Warehouse delivery      Total  

Branded Retail

   $ 450,680       $ 32,609       $ 483,289       $ 351,937       $ 21,749       $ 373,686   

Store Branded Retail

     118,967         30,026         148,993         104,366         26,828         131,194   

Non-retail and Other

     160,184         86,026         246,210         135,947         76,455         212,402   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 729,831       $ 148,661       $ 878,492       $ 592,250       $ 125,032       $ 717,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Forty Weeks Ended
October 5, 2013
     For the Forty Weeks Ended
October 6, 2012
 
     DSD      Warehouse delivery      Total      DSD      Warehouse delivery      Total  

Branded Retail

   $ 1,472,357       $ 113,653       $ 1,586,010       $ 1,122,460       $ 74,994       $ 1,197,454   

Store Branded Retail

     389,672         112,065         501,737         320,228         91,015         411,243   

Non-retail and Other

     530,676         289,032         819,708         451,269         237,083         688,352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,392,705       $ 514,750       $ 2,907,455       $ 1,893,957       $ 403,092       $ 2,297,049   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

16. SUBSEQUENT EVENTS

The company has evaluated subsequent events since October 5, 2013, 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.

 

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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 5, 2013 should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

OVERVIEW:

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is segregated into four sections, including:

 

    Business — discussion of our long-term strategic objectives, acquisitions, and the competitive environment.

 

    Critical Accounting Estimates — describes the accounting areas where management makes critical estimates to report our financial condition and results of operations. There have been no changes to this section from our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

 

    Results of Operations — an analysis of the company’s consolidated results of operations for the two comparative quarters presented in our consolidated financial statements.

 

    Liquidity and Capital Resources — an analysis of cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

There were several significant events during the forty weeks ended October 5, 2013 that will provide additional context while reading this discussion. These events include:

 

    Stock Split — On May 22, 2013, the board of directors declared a 3-for-2 stock split of the company’s common stock. The record date for the split was June 5, 2013, and new shares were issued on June 19, 2013. All share and per share information has been restated for all prior periods presented giving retroactive effect to the stock split.

 

    Sara Lee and Earthgrains acquisition — On February 23, 2013, the company completed its acquisition of certain assets and trademark licenses from BBU, Inc., a subsidiary of Grupo Bimbo (“BBU”). The cash used to acquire these assets was approximately $50.0 million. The company acquired from BBU in the acquisition (1) perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California. In addition, we received a perpetual, exclusive, and royalty-free license to the Earthgrains brand for a broad range of fresh bakery products in the Oklahoma City, Oklahoma, market area. The Oklahoma license purchase was completed during fiscal 2012 for an immaterial cost. We financed this acquisition with cash on hand and debt. We believe the California acquisition resulted in a bargain purchase because the Department of Justice (the “DOJ”) required BBU to divest these assets, which resulted in a more favorable price to us than would have normally resulted from a typical arms-length negotiation. Thus, the fair value of the assets acquired exceeded the consideration paid by approximately $50.1 million after tax. The company agreed to a $10.0 million escrow holdback provision as a part of the Sara Lee California acquisition. The escrow holdback is described in more detail in Note 4, Acquisitions.

 

    Acquired Hostess Assets — On January 11, 2013, the company announced that it had signed two asset purchase agreements with Hostess Brands, Inc. (“Hostess”), as the “stalking horse bidder” for certain Hostess assets. One of the agreements provided for the purchase by the company of Hostess’ Wonder, Nature’s Pride, Merita, Home Pride and Butternut bread brands, 20 bakeries, and 38 depots (the “Acquired Hostess Assets”) for a purchase price of $360.0 million. The company paid $18.0 million as a deposit for the Acquired Hostess Assets during our quarter ended April 20, 2013. On July 19, 2013, the company completed the Acquired Hostess Assets acquisition for a total cash payment of $355.0 million as a result of a purchase price adjustment related to the Butternut trademark. The company purchased 36 of the 38 depots included in the original bid. A second proposed Hostess asset purchase agreement provided for the purchase of the Beefsteak brand for $30.0 million. This second agreement was topped by another bidder and the agreement terminated. In connection with this termination we received a break-up fee of $0.9 million during the first quarter of 2013. For most of the third quarter, we incurred carrying costs of $5.3 million related to these acquired facilities, such as workforce-related costs, property taxes, utilities and depreciation, and these costs were primarily included in the materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately) line item in our Condensed Consolidated Statements of Income, however, we did not begin introducing the brands associated with the Acquired Hostess Assets to the marketplace until near the end of the third quarter on September 23, 2013. The re-introduction of the brands will continue over the next several months and throughout fiscal 2014.

 

    New term loan — On April 5, 2013, we announced that we entered into a senior unsecured delayed-drawn term loan facility (“new term loan”) with a commitment of up to $300.0 million to finance a portion of the pending acquisition of the Acquired Hostess Assets, and to pay certain acquisition-related costs and expenses. There were $1.7 million in financing fees associated with this new term loan, which includes a fee of 20 basis points on the daily undrawn portion from May 1, 2013 through the borrowing date of July 18, 2013. The company borrowed $300.0 million under the new term loan on July 18, 2013 to fund a portion of the purchase price for the acquisition of the Acquired Hostess Assets.

 

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    Amendment to the Credit Facility and Term Loan — On April 5, 2013, we announced that we amended our existing $500.0 million senior unsecured revolving credit facility (as amended, the “credit facility”) and existing unsecured term loan (as amended, the “amended term loan”). The amendments provide for less restrictive leverage ratios and certain more favorable covenant terms, update the respective base agreements to address changes in law, and include applicable conforming changes in light of the new term loan. There were no costs associated with these amendments and we made a final payment of $16.9 million, which repaid the amended term loan in full on August 5, 2013.

 

    Accounts Receivable Securitization facility — On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). The facility provides the company up to $150.0 million in liquidity for a term of two years. Under the facility, a wholly-owned, bankruptcy-remote subsidiary purchases, on an ongoing basis, substantially all trade receivables. As borrowings are made under the facility the subsidiary pledges the receivables as collateral. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions of collections to the company. We include the subsidiary in our consolidated financial statements. The facility contains certain customary events of default, representations and warranties, and affirmative and negative covenants. As of October 5, 2013, the company had $125.0 million outstanding under the facility with $25.0 million available. As of October 5, 2013, the company was in compliance with all restrictive financial covenants under the facility. An additional $15.0 million was drawn early in our fourth quarter of fiscal 2013.

BUSINESS:

Flowers is focused on opportunities for growth within the baked foods category and seeks to have its products available wherever baked foods are consumed – whether in homes, restaurants, fast food outlets, or institutions.

Delivery methods and segments

The company has structured a network of bakeries through much of the U.S. to serve retail and foodservice customers with fresh bakery items, such as breads, rolls, buns, and snack cakes. We have two distinct delivery systems for delivering our products. First, the direct-store-delivery segment (the “DSD segment”) products are delivered fresh to customers through a network of independent distributors who are incentivized to grow sales to build equity in their distributorships. The second delivery system is found in the warehouse delivery segment (the “warehouse segment”), which ships fresh or frozen products to customers’ warehouses and customers then distribute these products to their individual depots, stores, or restaurants. Our manufacturing facility locations have been assigned to either the DSD or warehouse segment depending on which method is used to primarily deliver and sell their products.

The DSD segment operates a highly involved system of reciprocal baking whereby individual bakeries have an assigned production mission to produce certain items for their own region as well as for other DSD bakeries’ regions. This system allows for long and efficient production runs that help the company maintain its position as a low cost producer. Bakeries within regional networks exchange products overnight through a third party transportation system so that at the beginning of each sales day, every bakery in the DSD segment has a full complement of fresh products for its independent distributors.

Consumers and our product portfolio

The company recognizes the need to stay in touch with changing consumer trends regarding baked foods. As a result, ongoing research on consumer preferences is conducted and outside resources used to stay current on changing taste, flavor, texture, and shape trends in bakery products and food in general. Our marketing, quality assurance, and research and development staffs collaborate regularly as new products are considered, developed, tested, and introduced.

Brands are important in the bakery category and the company has invested over several decades in its brand portfolio through advertising, promotion and packaging. Nature’s Own, introduced in 1977, was developed to address the developing trend of consumers demanding baked foods with a healthier profile. Nature’s Own, from inception, offered baked foods with no artificial flavors, colors, or preservatives. More recently, Nature’s Own has removed high fructose corn syrup from its recipes and also added specific healthier ingredients such as fiber and omega-3.

Through the years, the company’s product offerings have included some form of cake. In recent years, snack cakes have been developed and introduced under several brands, such as Bluebird and Mrs. Freshley’s. In 2011, the company acquired Tasty Baking Co. (“Tasty”) resulting in the addition of the iconic Tastykake brand to our brand portfolio. Prior to the acquisition, Tasty operated two bakeries in Pennsylvania and served customers primarily in the northeastern U. S. with an extensive line of Tastykake branded snack cakes. Subsequent to the acquisition, we have expanded Tastykake to the majority of our other markets.

 

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Strengths and core competencies

We aim to achieve consistent and sustainable growth in sales and earnings by focusing on improvements 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 strategy will result in consistent and sustainable growth that will build value for our shareholders.

The company is also committed to maintaining a shared Information Technology group that meets all of our bakeries’ needs and maximizes efficiencies where available. The consumer packaged goods industry has used scan-based trading technology (referred to as “pay by scan” or “PBS”) over several years to share information between the supplier and retailer. An extension of this technology allows the retailer to pay the supplier when the consumer purchases the goods rather than at the time they are delivered to the retailer. In addition, PBS permits the manufacturer to more accurately track trends in product sales and manage inventory.

We have developed and publicly announced our long-term goals over five-year time horizons. Compensation and bonus programs are set with benchmarks to the company’s long-term goals. The majority of our employees participate in an annual formula-driven, performance-based cash bonus program. In addition, certain employees participate in a long-term incentive program that provides performance-contingent common stock awards that generally vest over a two year period. We believe these incentive programs provide short and long-term goals for our most senior management team and aligns their interests with those of shareholders.

We believe our highly automated bakeries that focus on quality permit us to bake products that meet consumers’ needs. We also strive to maintain service levels for customers, consumers, and suppliers that exceed what is expected. The design of our delivery systems and segments permits us to allocate management time and resources to meet consumers’ expectations.

Competition and risks

In January 2012, Hostess filed for bankruptcy for the second time since 2004. In November 2012, they filed a liquidation motion seeking permission to wind down the business. The motion was approved on November 21, 2012. At that time, Hostess immediately stopped production and sold out their remaining inventory. Hostess discontinued serving their customers by late November 2012. These events significantly impacted the industry as these Hostess sales shifted to other providers to meet consumers’ needs. These providers included Flowers, Grupo Bimbo (the “Arnolds”, “Thomas”, “Sara Lee”, and “Entenmann’s” brands), Campbell Soup Company (the “Pepperidge Farm” brands), smaller regional bakeries, retailer-owned bakeries, and store brands.

Sales are principally affected by pricing, quality, brand recognition, new product introductions, product line extensions, marketing and service. Sales for the twelve weeks ended October 5, 2013 increased 22.5% over the twelve weeks ended October 6, 2012. Sales for the forty weeks ended October 5, 2013 increased 26.6% over the forty weeks ended October 6, 2012. As disclosed throughout this report, this increase was primarily due to volume increases resulting from the Hostess liquidation and, to a lesser extent, the Lepage acquisition in fiscal 2012 and the Sara Lee and Earthgrains acquisition in 2013. While we expect sales to grow, we cannot provide any assurance regarding the level of growth considering the current economic environment and competitive landscape in the baking industry. The baking industry will continue to see market fluctuations as companies compete for market position in the absence of Hostess.

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 have continued to experience increased commodity costs during 2013. We enter into forward purchase agreements and other derivative financial instruments in an effort to manage the impact of such volatility in raw material prices. Any decrease in the availability of these agreements and instruments could increase the effective price of these raw materials to us and significantly affect our earnings.

CRITICAL ACCOUNTING POLICIES:

Our financial statements are prepared in accordance with U.S. 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 29, 2012. 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 Annual Report on Form 10-K for the fiscal year ended December 29, 2012, 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 Annual Report on Form 10-K filed for the year ended December 29, 2012.

 

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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 5, 2013 and October 6, 2012, are set forth below (dollars in thousands):

 

     For the Twelve Weeks Ended  
                 Percentage of Sales      Increase (Decrease)  
     October 5, 2013     October 6, 2012     October 5, 2013      October 6, 2012      Dollars     %  

Sales

              

DSD segment

   $ 729,831      $ 592,250       83.1         82.6      $ 137,581        23.2   

Warehouse segment

     148,661        125,032       16.9         17.4        23,629        18.9   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

Total

   $ 878,492      $ 717,282       100.0         100.0      $ 161,210        22.5   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

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

              

DSD segment(1)

   $ 352,515      $ 287,939       48.3         48.6      $ 64,576        22.4   

Warehouse segment (1)

     115,283        94,569       77.5         75.6        20,714        21.9   
  

 

 

   

 

 

         

 

 

   

Total

   $ 467,798      $ 382,508       53.3         53.3      $ 85,290        22.3   
  

 

 

   

 

 

         

 

 

   

Selling, distribution and administrative expenses

              

DSD segment (1)

   $ 288,012      $ 225,024       39.5         38.0      $ 62,988        28.0   

Warehouse segment(1)

     22,381        18,830       15.1         15.1        3,551        18.9   

Corporate(2)

     17,136        13,472       —           —          3,664        27.2   
  

 

 

   

 

 

         

 

 

   

Total

   $ 327,529      $ 257,326       37.3         35.9      $ 70,203        27.3   
  

 

 

   

 

 

         

 

 

   

Depreciation and amortization

              

DSD segment(1)

   $ 25,754      $ 20,716       3.5         3.5      $ 5,038        24.3   

Warehouse segment(1)

     3,923        4,067       2.6         3.3        (144     (3.5

Corporate(2)

     160        (26     —           —          186        NM   
  

 

 

   

 

 

         

 

 

   

Total

   $ 29,837      $ 24,757       3.4         3.5      $ 5,080        20.5   
  

 

 

   

 

 

         

 

 

   

Income from operations

              

DSD segment(1)

   $ 63,550      $ 58,571       8.7         9.9      $ 4,979        8.5   

Warehouse segment(1)

     7,074        7,566       4.8         6.1        (492     (6.5

Corporate(2)

     (17,296     (13,446     —           —          (3,850     (28.6
  

 

 

   

 

 

         

 

 

   

Total

   $ 53,328      $ 52,691       6.1         7.3      $ 637        1.2   
  

 

 

   

 

 

         

 

 

   

Interest expense, net

   $ 3,171      $ 3,568        0.4         0.5       $ (397     (11.1

Income taxes

   $ 16,269      $ 17,892       1.9         2.5      $ (1,623     (9.1
  

 

 

   

 

 

         

 

 

   

Net income

   $ 33,888      $ 31,231       3.9         4.4      $ 2,657        8.5   
  

 

 

   

 

 

         

 

 

   

 

1. As a percentage of revenue within the reporting segment.
2. The corporate segment has no revenues.

NM. Not meaningful.

 

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Table of Contents

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 5, 2013 and October 6, 2012, are set forth below (dollars in thousands):

 

     For the Forty Weeks Ended  
                 Percentage of Sales      Increase (Decrease)  
     October 5, 2013     October 6, 2012     October 5, 2013      October 6, 2012      Dollars     %  

Sales

              

DSD segment

   $ 2,392,705      $ 1,893,957       82.3         82.5      $ 498,748        26.3   

Warehouse segment

     514,750        403,092       17.7         17.5        111,658        27.7   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

Total

   $ 2,907,455      $ 2,297,049       100.0         100.0      $ 610,406        26.6   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

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

              

DSD segment(1)

   $ 1,140,100      $ 924,603       47.6         48.8      $ 215,497        23.3   

Warehouse segment(1)

     384,610        302,541       74.7         75.1        82,069        27.1   
  

 

 

   

 

 

         

 

 

   

Total

   $ 1,524,710      $ 1,227,144       52.4         53.4      $ 297,566        24.2   
  

 

 

   

 

 

         

 

 

   

Selling, distribution and administrative expenses

              

DSD segment(1)

   $ 935,267      $ 732,708       39.1         38.7      $ 202,559        27.6   

Warehouse segment(1)

     76,128        62,931       14.8         15.6        13,197        21.0   

Corporate(2)

     53,519        38,190       —          —          15,329        40.1   
  

 

 

   

 

 

         

 

 

   

Total

   $ 1,064,914      $ 833,829       36.6         36.3      $ 231,085        27.7   
  

 

 

   

 

 

         

 

 

   

Depreciation and amortization

              

DSD segment(1)

   $ 76,178      $ 62,684       3.2         3.3      $ 13,494        21.5   

Warehouse segment(1)

     13,120        14,140       2.5         3.5        (1,020     (7.2

Corporate(2)

     471        (73     —          —          544        NM   
  

 

 

   

 

 

         

 

 

   

Total

   $ 89,769      $ 76,751       3.1         3.3      $ 13,018        17.0   
  

 

 

   

 

 

         

 

 

   

Gain on acquisition

              

DSD segment(1)

   $ 50,071      $ —         2.1         —        $ 50,071        NM   

Warehouse segment(1)

     —         —         —          —          —         —    

Corporate(2)

     —         —         —          —          —         —    
  

 

 

   

 

 

         

 

 

   

Total

   $ 50,071      $ —         1.7         —        $ 50,071        NM   
  

 

 

   

 

 

         

 

 

   

Income from operations

              

DSD segment(1)

   $ 291,231      $ 173,962       12.2         9.2      $ 117,269        67.4   

Warehouse segment(1)

     40,892        23,480       7.9         5.8        17,412        74.2   

Corporate(2)

     (53,990     (38,117     —          —          (15,873     (41.6
  

 

 

   

 

 

         

 

 

   

Total

   $ 278,133      $ 159,325       9.6         6.9      $ 118,808        74.6   
  

 

 

   

 

 

         

 

 

   

Interest expense, net

   $ 10,426      $ 6,527        0.4         0.3       $ 3,899        59.7   

Income taxes

   $ 75,333      $ 55,244       2.6         2.4      $ 20,089        36.4   
  

 

 

   

 

 

         

 

 

   

Net income

   $ 192,374      $ 97,554       6.6         4.2      $ 94,820        97.2   
  

 

 

   

 

 

         

 

 

   

 

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 5, 2013 COMPARED TO TWELVE WEEKS ENDED OCTOBER 6, 2012

Consolidated Sales.

 

     For the
Twelve Weeks Ended
October 5, 2013
    For the
Twelve Weeks Ended
October 6, 2012
    % Increase  

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 483,289         55.0   $ 373,686         52.1     29.3

Store Branded Retail

     148,993         17.0        131,194         18.3        13.6

Non-Retail and Other

     246,210         28.0        212,402         29.6        15.9
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 878,492         100.0   $ 717,282         100.0     22.5
  

 

 

    

 

 

   

 

 

    

 

 

   

The 22.5% increase in sales was generally attributable to the following across all sales categories:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     (1.2 )% 

Volume

     20.1

Acquisition

     3.6
  

 

 

 

Total Percentage Change in Sales

     22.5
  

 

 

 

Sales category discussion

Overall, sales increased due to significant volume increases and the Sara Lee California acquisition, partially offset by unfavorable net pricing/mix that was the result of a significant increase in the sale of single serve cake items through the retail and vending channels. The increase in branded retail sales was due to significant volume increases and, to a lesser extent, the Sara Lee California acquisition. Significant increases in branded soft variety, branded white bread and branded cake drove the increase and were primarily attributable to volume growth. The increase in store branded retail sales was due primarily to large volume increases in the white bread, buns and rolls and variety bread categories partially offset by declines in store brand cake. The increase in non-retail and other sales was due to significant volume increases, largely foodservice and vending, partially offset by unfavorable pricing/mix. Sales from the Acquired Hostess Assets were not material in the quarter and are included in volume.

Direct-Store-Delivery Sales.

 

     For the
Twelve Weeks Ended
October 5, 2013
    For the
Twelve Weeks Ended
October 6, 2012
    % Increase  

Sales Category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 450,680         61.8   $ 351,937         59.4     28.1

Store Branded Retail

     118,967         16.3        104,366         17.6        14.0

Non-Retail and Other

     160,184         21.9        135,947         23.0        17.8
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 729,831         100.0   $ 592,250         100.0     23.2
  

 

 

    

 

 

   

 

 

    

 

 

   

The 23.2% increase in sales was generally attributable to the following across all sales categories:

 

Percentage Point Change in Sales Attributed to:

   Favorable  

Pricing/Mix

     3.0

Volume

     15.9

Acquisition

     4.3
  

 

 

 

Total Percentage Change in Sales

     23.2
  

 

 

 

 

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Table of Contents

Sales category discussion

Overall, sales increased due to significant volume increases and, to a lesser extent, the Sara Lee California acquisition. The increase in branded retail sales was due primarily to significant volume increases and, to a lesser extent, the Sara Lee California acquisition and favorable pricing/mix. The largest increases were in brand soft variety, brand white bread and brand cake. The increase in store branded retail sales was due primarily to volume growth in the white bread, buns and rolls, and variety bread categories. These increases were partially offset by approximately $6.2 million of store branded snack cake that is now sold through our warehouse segment. This operational change negatively affected DSD segment sales approximately 1.0%. The increase in non-retail and other sales was due largely to volume increases. Sales from the Acquired Hostess Asset were not material in the quarter and are included in volume.

Warehouse Segment Sales.

 

     For the
Twelve Weeks Ended
October 5, 2013
    For the
Twelve Weeks Ended
October 6, 2012
    % Increase  

Sales Category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 32,609         21.9   $ 21,749         17.4     49.9

Store Branded Retail

     30,026         20.2        26,828         21.5        11.9

Non-Retail and Other

     86,026         57.9        76,455         61.1        12.5
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 148,661         100.0   $ 125,032         100.0     18.9
  

 

 

    

 

 

   

 

 

    

 

 

   

The 18.9% increase in sales was generally attributable to the following across all sales categories:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     (15.5 )% 

Volume

     34.4
  

 

 

 

Total Percentage Change in Sales

     18.9
  

 

 

 

Sales category discussion

The overall increase in sales was driven by significant volume increases, partially offset by price/mix decreases in foodservice. The increase in branded retail sales was primarily the result of increased branded snack cake volume, partially offset by unfavorable price/mix. The increase in store branded retail sales was due to price/mix increases and, to a lesser extent, volume increases. These increases were mostly due to approximately $6.2 million of store branded snack cake that was previously sold through our DSD segment as discussed above. This operational change positively affected warehouse delivery segment sales approximately 4.9%, increasing volume, but negatively impacting mix overall. The increase in non-retail and other sales, which include contract manufacturing, vending and foodservice was due to significant volume increases, partially offset by price/mix decreases in foodservice.

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately). The table below presents the significant components of materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately) as a percent of sales:

 

     For the Twelve Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     26.9     27.7     (0.8 )% 

Workforce-related costs

     13.2        13.9        (0.7

Packaging

     4.6        4.9        (0.3

Utilities

     1.6        1.8        (0.2

Other

     7.0        5.0        2.0   
  

 

 

   

 

 

   

 

 

 

Total

     53.3     53.3     —  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The ingredient costs decrease as a percent of sales was from higher sales of outside purchased products (sales with no associated ingredient costs). The cost of these outside purchases is included in the other line item component. Although ingredient costs as a percent of sales declined, ingredient pricing increased. Decreases in workforce-related costs as a percent of sales were from increased sales volume and increased sales of outside purchased products (sales with no associated workforce-related costs). Workforce-related costs and utilities did not increase incrementally with sales volume and these costs were spread over a larger sales base. Additionally, we incurred carrying costs for the facilities related to the Acquired Hostess Assets, as discussed in the Overview above, which negatively impacted materials, supplies, labor and other production costs by $2.8 million, and we experienced declines in manufacturing efficiency as compared to the prior year quarter.

Commodities, such as our baking ingredients, periodically experience price fluctuations, and, for that reason, we continually monitor the market for these commodities. The commodities market continues to be volatile. Commodity prices increased in 2011 and 2012 and that trend has continued, and is expected to continue, throughout 2013. 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 enter into forward purchase agreements and other derivative financial instruments to manage 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.

The table below presents the significant components of materials, supplies, labor and other production costs for the DSD segment (exclusive of depreciation and amortization shown separately) as a percent of sales:

 

     For the Twelve Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     23.8     24.1     (0.3 )% 

Workforce-related costs

     11.2        11.8        (0.6

Packaging

     3.4        3.6        (0.2

Utilities

     1.5        1.7        (0.2

Other

     8.4        7.4        1.0   
  

 

 

   

 

 

   

 

 

 

Total

     48.3     48.6     (0.3 )% 
  

 

 

   

 

 

   

 

 

 

Although ingredient pricing increased, ingredient costs decreased as a percent of sales primarily due to increases in outside purchases of product (sales with no associated ingredient costs). Workforce-related costs decreased as a percent of sales due to significant volume increases and increased outside purchases (sales with no associated workforce-related costs) as discussed above, partially offset by carrying costs related to the Acquired Hostess Assets. The overall increase in the other line item component is due to the Sara Lee California products purchased directly from BBU, partially offset by increased sales to the warehouse segment. Additionally, we incurred carrying costs for the facilities related to the Acquired Hostess Assets, as discussed above, which negatively impacted materials, supplies, labor and other production costs by $2.8 million, and we experienced declines in manufacturing efficiency as compared to the prior year quarter.

The table below presents the significant components of materials, supplies, labor and other production costs for the warehouse segment (exclusive of depreciation and amortization shown separately) as a percent of sales:

 

     For the Twelve Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     42.0     44.4     (2.4 )% 

Workforce-related costs

     22.6        23.6        (1.0

Packaging

     10.4        11.0        (0.6

Repairs and maintenance

     3.1        3.0        0.1   

Utilities

     2.1        2.4        (0.3

Other

     (2.7     (8.8     6.1   
  

 

 

   

 

 

   

 

 

 

Total

     77.5     75.6     1.9
  

 

 

   

 

 

   

 

 

 

The warehouse segment’s decrease in ingredient costs and packaging costs as a percent of sales was from the sales transferred from our DSD segment described above (sales with no associated ingredient or packaging costs). The effect of this transfer was a 230 basis point benefit to ingredient and packaging costs as a percent of sales. Excluding the effect of this sales transfer, the decrease in ingredients was primarily attributed to increases in outside purchases of product (sales with no associated ingredient costs) that are

 

39


Table of Contents

included in the other line item component in the above table. Although ingredient costs declined as a percent of sales, ingredient pricing increased. Significant increases in volume and the increase in sales of outside purchased product reduced workforce-related costs as a percent of sales (sales with no associated workforce-related costs). The increase in other costs was due primarily to increased outside purchases and the sales transfer from the DSD segment to the warehouse segment discussed above.

Selling, Distribution and Administrative Expenses. The table below presents the significant components of selling, distribution and administrative expenses as a percent of sales:

 

     For the Twelve Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     17.7     17.1     0.6

Distributor distribution fees

     12.9        12.9        —     

Other

     6.7        5.9        0.8   
  

 

 

   

 

 

   

 

 

 

Total

     37.3     35.9     1.4
  

 

 

   

 

 

   

 

 

 

The increase in workforce-related costs was primarily attributable to higher costs for employee incentive programs in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. Additionally, increased marketing expenses, higher acquisition-related expenses and higher miscellaneous income in the prior year quarter resulted in the increase in the other category above. Acquisition-related costs were $7.0 million in the third quarter of fiscal 2013 compared to $5.1 million in the third quarter of fiscal 2012. The increase in acquisition-related costs was primarily for costs associated with the Acquired Hostess Assets, partially offset by the prior year costs for the Lepage acquisition.

The table below presents the significant components of our DSD segment selling, distribution and administrative expenses as a percent of sales:

 

     For the Twelve Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     18.0     17.4     0.6

Distributor distribution fees

     15.5        15.6        (0.1

Other

     6.0        5.0        1.0   
  

 

 

   

 

 

   

 

 

 

Total

     39.5     38.0     1.5
  

 

 

   

 

 

   

 

 

 

The increase in workforce-related costs was primarily attributable to higher employee incentive program costs in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. Additionally, miscellaneous income was higher in the prior year quarter and marketing expense was higher in the current year quarter, both of which are included in other.

The table below presents the significant components of our warehouse segment selling, distribution and administrative expenses as a percent of sales:

 

     For the Twelve Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     9.1     8.8     0.3

Freezer storage/rent

     1.9        2.0        (0.1

Marketing and broker commissions

     1.5        1.2        0.3   

Distribution costs

     0.8        1.0        (0.2

Other

     1.8        2.1        (0.3
  

 

 

   

 

 

   

 

 

 

Total

     15.1     15.1     —  
  

 

 

   

 

 

   

 

 

 

Selling, distribution and administrative expenses were flat as compared to the third quarter of fiscal 2012. The increase in workforce-related costs was due primarily to higher employee incentive programs. The increase in marketing and broker commissions was due to increased sales volume. These increases were offset by higher sales that spread fixed costs over the larger sales base that drove the decrease in the other line item component. In addition, distribution costs decreased due to fluctuations in customer pickups versus deliveries.

 

40


Table of Contents

Depreciation and Amortization. Depreciation and amortization increased primarily as a result of the Hostess Acquired Assets and other plant, property and equipment being placed in service.

The DSD segment’s depreciation and amortization expense increased primarily due to the Hostess Acquired Assets and other plant, property and equipment being placed in service.

The warehouse segment’s depreciation and amortization expense decreased primarily due to assets becoming fully depreciated subsequent to the third quarter of fiscal 2012.

Income from Operations. The table below summarizes the change in operating income by segment as a percent of sales:

 

Operating income (loss)

   Increase
(Decrease)
Percentage
 

DSD segment

     8.5

Warehouse segment

     (6.5

Unallocated corporate

     (28.6

Consolidated

     1.2

The increase in the DSD segment income was driven by significantly higher sales volumes, partially offset by the Hostess carrying costs incurred during the quarter. The decrease in the warehouse segment income from operations was primarily due to decreased efficiencies and increased outside purchases and the sales transfer from our DSD segment to our warehouse segment. The increase in unallocated corporate expenses (which resulted in a decrease in operating income) was primarily due to higher workforce-related costs. Additionally, we incurred carrying costs for the facilities related to the Acquired Hostess Assets, as discussed above, which negatively impacted consolidated operating income by $5.3 million.

Net Interest Expense. The change was related to higher interest income in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. The increase in interest income was related to the higher amount of distributor notes receivable outstanding.

Income Taxes. The effective tax rate for the third quarter of fiscal 2013 was 32.4% compared to 36.4% in the third quarter of the prior year. A discrete benefit related to the company’s reserve for uncertain tax positions during the quarter is primarily responsible for the current quarter’s lower rate. The discrete benefit reflects the expiration of the statute of limitations on uncertain tax positions recorded through purchase accounting for previous acquisitions. The most significant differences in the effective rate and the statutory rate are state income taxes and the Section 199 qualifying production activities deduction.

 

41


Table of Contents

FORTY WEEKS ENDED OCTOBER 5, 2013 COMPARED TO FORTY WEEKS ENDED OCTOBER 6, 2012

Consolidated Sales.

 

     For the
Forty Weeks Ended
October 5, 2013
    For the
Forty Weeks Ended
October 6, 2012
    % Increase  

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 1,586,010         54.5   $ 1,197,454         52.1     32.4

Store Branded Retail

     501,737         17.3        411,243         17.9        22.0

Non-Retail and Other

     819,708         28.2        688,352         30.0        19.1
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 2,907,455         100.0   $ 2,297,049         100.0     26.6
  

 

 

    

 

 

   

 

 

    

 

 

   

The 26.6% increase in sales was generally attributable to the following across all sales categories:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     (1.0 )% 

Volume

     20.3

Acquisition

     7.3
  

 

 

 

Total Percentage Change in Sales

     26.6
  

 

 

 

Sales category discussion

Overall, sales increased due to significant volume increases and the Lepage and Sara Lee California acquisitions, partially offset by unfavorable net pricing/mix primarily the result of a significant increase in the sale of single serve cake items through the retail and vending channels. The increase in branded retail sales was due primarily to significant volume increases and the Lepage and Sara Lee California acquisitions. Significant increases in branded soft variety, snack cake and white bread drove the increase and were primarily attributable to volume growth. The increase in store branded retail sales was due primarily to large volume increases and the Lepage acquisition contribution. Increases in the white bread, buns and rolls and variety bread categories primarily drove the volume increases. The increase in non-retail and other sales was due to volume increases, largely foodservice and vending, and, to a lesser extent, the Lepage acquisition contribution, partially offset by price/mix declines. Sales from the Acquired Hostess Assets were not material for the year and are included in volume.

Direct-Store-Delivery Sales.

 

     For the
Forty Weeks Ended
October 5, 2013
    For the
Forty Weeks Ended
October 6, 2012
    % Increase  

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 1,472,357         61.5   $ 1,122,460         59.3     31.2

Store Branded Retail

     389,672         16.3        320,228         16.9        21.7

Non-Retail and Other

     530,676         22.2        451,269         23.8        17.6
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 2,392,705         100.0   $ 1,893,957         100.0     26.3
  

 

 

    

 

 

   

 

 

    

 

 

   

The 26.3% increase in sales was generally attributable to the following across all sales categories:

 

Percentage Point Change in Sales Attributed to:

   Favorable  

Pricing/Mix

     2.0

Volume

     15.4

Acquisition

     8.9
  

 

 

 

Total Percentage Change in Sales

     26.3
  

 

 

 

 

42


Table of Contents

Sales category discussion

Overall, sales increased due to significant volume increases and the Lepage and Sara Lee California acquisitions. The increase in branded retail sales was due primarily to significant volume increases and the Lepage and Sara Lee California acquisitions. Increases in brand soft variety, brand white bread and brand cake contributed the most growth and were attributable mainly to volume increases. The increase in store branded retail sales was due to volume increases and the Lepage acquisition. Increases in the white bread and buns and rolls categories primarily drove the volume increase. These increases were partially offset by approximately $20.7 million of store branded snack cake that is now sold through our warehouse segment. This operational change negatively affected DSD segment sales approximately 1.1%. The increase in non-retail and other sales was due to volume increases and, to a lesser extent, the Lepage acquisition. Sales from the Acquired Hostess Assets were not material for the year and are included in volume.

Warehouse Segment Sales.

 

     For the
Forty Weeks Ended
October 5, 2013
    For the
Forty Weeks Ended
October 6, 2012
    % Increase
(Decrease)
 

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 113,653         22.1   $ 74,994         18.6     51.5

Store Branded Retail

     112,065         21.8        91,015         22.6        23.1

Non-Retail and Other

     289,032         56.1        237,083         58.8        21.9
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 514,750         100.0   $ 403,092         100.0     27.7
  

 

 

    

 

 

   

 

 

    

 

 

   

The 27.7% increase in sales was generally attributable to the following across all sales categories:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     (8.5 )% 

Volume

     36.2
  

 

 

 

Total Percentage Change in Sales

     27.7
  

 

 

 

Sales category discussion

The overall increase in sales was driven by significant volume increases, partially offset by price/mix decreases in foodservice. The increase in branded retail sales was primarily the result of significant increases in branded snack cake volume, partially offset by unfavorable price/mix. The increase in store branded retail sales was due to volume increases in store branded cake and, to a lesser extent, by price/mix increases. These increases were partially affected by approximately $20.7 million of store branded snack cake that were previously sold through our DSD segment as discussed above. This operational change positively affected warehouse segment sales approximately 5.1%, increasing volume, but negatively impacting mix overall. The increase in non-retail and other sales, which include contract manufacturing, vending and foodservice was due to volume increases in vending and foodservice, partially offset by price/mix decreases in foodservice.

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately). The table below presents the significant components of materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately) as a percent of sales:

 

     For the Forty Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     27.0     27.6     (0.6 )% 

Workforce-related costs

     12.9        14.0        (1.1

Packaging

     4.5        4.8        (0.3

Utilities

     1.5        1.7        (0.2

Other

     6.5        5.3        1.2   
  

 

 

   

 

 

   

 

 

 

Total

     52.4     53.4     (1.0 )% 
  

 

 

   

 

 

   

 

 

 

Although ingredient pricing increased, ingredient costs decreased as a percent of sales as a result of higher sales of outside purchased products (sales with no associated ingredient costs). The cost of these outside purchases is included in the other line item component. Decreases in workforce-related costs as a percent of sales were from increased sales volume, increased sales of outside

 

43


Table of Contents

purchased products (sales with no associated workforce-related costs) and lower costs at Lepage as a percent of sales. Workforce-related costs and utilities did not increase incrementally with sales volume and these costs were spread over a larger sales base. Additionally, we incurred carrying costs for the facilities related to the Aquired Hostess Assets, which negatively affected materials, supplies, labor and other production costs, and we experienced declines in manufacturing efficiency compared to the prior year period.

Commodities, such as our baking ingredients, periodically experience price fluctuations, and, for that reason, we continually monitor the market for these commodities. The commodities market continues to be volatile. Commodity prices increased in 2011 and 2012 and that trend continued, and is expected to continue, throughout 2013. 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 enter into forward purchase agreements and other derivative financial instruments to manage 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.

The table below presents the significant components of materials, supplies, labor and other production costs for the DSD segment (exclusive of depreciation and amortization shown separately) as a percent of sales:

 

     For the Forty Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     23.7     23.9     (0.2 )% 

Workforce-related costs

     11.0        11.8        (0.8

Packaging

     3.3        3.4        (0.1

Utilities

     1.4        1.6        (0.2

Other

     8.2        8.1        0.1   
  

 

 

   

 

 

   

 

 

 

Total

     47.6     48.8     (1.2 )% 
  

 

 

   

 

 

   

 

 

 

Although ingredient pricing increased, ingredient costs decreased as a percent of sales primarily due to increases in outside purchases of product (sales with no associated ingredient costs). Workforce-related costs decreased as a percent of sales due to significant volume increases, higher sales from outside purchased (sales with no associated workforce-related costs) products and lower costs at Lepage.

The table below presents the significant components of materials, supplies, labor and other production costs for the warehouse segment (exclusive of depreciation and amortization shown separately) as a percent of sales:

 

     For the Forty Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     42.3     44.7     (2.4 )% 

Workforce-related costs

     21.8        24.3        (2.5

Packaging

     10.4        11.5        (1.1

Utilities

     1.9        2.3        (0.4

Other

     (1.7     (7.7     6.0   
  

 

 

   

 

 

   

 

 

 

Total

     74.7     75.1     (0.4 )% 
  

 

 

   

 

 

   

 

 

 

The warehouse segment’s decrease in ingredient costs and packaging costs as a percent of sales was from the sales transferred from our DSD segment described above (sales with no associated ingredient or packaging costs). The effect of this transfer was a 220 basis point benefit to ingredient and packaging costs as a percent of sales. Excluding the effect of this sales transfer, the decrease in ingredients was primarily attributed to increases in outside purchases of product (sales with no associated ingredient costs) that are included in the other line item component in the above table. Although ingredient costs declined as a percent of sales, ingredient pricing increased. Significant increases in volume and the increase in sales of outside purchased product reduced workforce-related costs as a percent of sales (sales with no associated workforce-related costs). The increase in other costs was due primarily to increased outside purchases and the sales transfer from the DSD segment to the warehouse segment discussed above.

 

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Selling, Distribution and Administrative Expenses. The table below presents the significant components of selling, distribution and administrative expenses as a percent of sales:

 

     For the Forty Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     17.6     17.1     0.5

Distributor distribution fees

     12.5        13.3        (0.8

Other

     6.5        5.9        0.6   
  

 

 

   

 

 

   

 

 

 

Total

     36.6     36.3     0.3
  

 

 

   

 

 

   

 

 

 

The increase in workforce-related costs was primarily attributable to the Lepage and Sara Lee California acquisitions because they generally did not use independent distributors to deliver product for the majority of 2013. We are transitioning both the Lepage and the Sara Lee California operations to the independent distributor model which will, over time, decrease the workforce-related costs and increase the distributor distribution fees. Workforce-related costs also increased because employee incentive program costs were higher in the current year compared to the prior year. Acquisition-related costs were $17.3 million for the forty weeks ended October 5, 2013 compared to $8.5 million for the forty weeks ended October 6, 2012. These costs are included in the other line item component and were primarily for costs associated with the Sara Lee California acquisition and the acquisition of Acquired Hostess Assets, partially offset by costs incurred for the Lepage acquisition in the prior year.

The table below presents the significant components of our DSD segment selling, distribution and administrative expenses as a percent of sales:

 

     For the Forty Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     18.0     17.2     0.8

Distributor distribution fees

     15.2        16.1        (0.9

Other

     5.9        5.4        0.5   
  

 

 

   

 

 

   

 

 

 

Total

     39.1     38.7     0.4
  

 

 

   

 

 

   

 

 

 

The increase in workforce-related costs was primarily attributable to the Lepage and Sara Lee California acquisitions because they generally did not use independent distributors to deliver product for the majority of 2013. We are transitioning both the Lepage and the Sara Lee California operations to the independent distributor model which will, over time, decrease the workforce-related costs and increase the distributor distribution fees. Workforce-related costs also increased because employee incentive program costs were higher in the current year compared to the prior year. The decrease in distributor distribution fees correlates to the increase in workforce-related costs as discussed above.

The table below presents the significant components of our warehouse segment selling, distribution and administrative expenses as a percent of sales:

 

     For the Forty Weeks Ended        

Line item component

   October 5, 2013
% of sales
    October 6, 2012
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     9.0     9.0     —  

Freezer storage/rent

     1.8        1.9        (0.1

Marketing and broker commissions

     1.4        1.2        0.2   

Distribution costs

     0.8        1.1        (0.3

Other

     1.8        2.4        (0.6
  

 

 

   

 

 

   

 

 

 

Total

     14.8     15.6     (0.8 )% 
  

 

 

   

 

 

   

 

 

 

The overall decrease in selling, distribution and administrative expenses was primarily driven by decreases in distribution costs. These costs were lower because of higher sales volumes which spread the costs over a larger base. These decreases were partially offset by increased broker commissions due to increased sales volume. Higher sales that spread fixed costs over the larger sales base drove the decrease in the other line item component.

 

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Depreciation and Amortization. Depreciation and amortization increased due primarily to the Lepage acquisition, the Acquired Hostess Assets as well as other property, plant and equipment being placed in service.

The DSD segment’s depreciation and amortization expense increased primarily due to the Lepage acquisition, the Acquired Hostess Assets as well as other property, plant and equipment being placed in service.

The warehouse segment’s depreciation and amortization expense decreased primarily due to assets becoming fully depreciated subsequent to the third quarter of fiscal 2012.

Gain on acquisition. On February 23, 2013 the company completed its acquisition of certain assets and trademark licenses from BBU. The cash used to acquire these assets was approximately $50.0 million. The company acquired from BBU in the acquisition (1) perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California. In addition, we received a perpetual, exclusive, and royalty-free license to the Earthgrains brand for a broad range of fresh bakery products in the Oklahoma City, Oklahoma, market area. The Oklahoma license purchase was completed during fiscal 2012 for an immaterial cost. We financed this transaction with cash on hand and available borrowings. We believe the California acquisition resulted in a bargain purchase because the DOJ required BBU to divest these assets, which resulted in a more favorable price to us than may have resulted from a typical arms-length negotiation. Thus, the fair value of the assets acquired exceeded the consideration paid by approximately $50.1 million after tax.

During the third quarter of 2013 we recorded a measurement period adjustment related to the distribution rights. The fair value of the distribution rights were reduced by $2.0 million as final information became available. This reduction decreased the amount of the bargain purchase gain by $1.2 million, which is net of deferred taxes of $0.8 million. The measurement period adjustment was recorded as a revision to the first quarter 2013 Condensed Consolidated Balance Sheet and the Condensed Consolidated Statements of Net Income.

Income From Operations. The table below summarizes the change in operating income by segment as a percent of sales:

 

Operating income (loss)

   Increase
(Decrease)
Percentage
 

DSD segment

     67.4

Warehouse segment

     74.2   

Unallocated corporate

     (41.6

Consolidated

     74.6

The increase in the DSD segment income from operations was largely attributable to the gain on acquisition recorded for the Sara Lee California acquisition as discussed above. The gain on acquisition accounted for 28.8% of the DSD segment increase in operating income. Excluding the gain on acquisition, the increase was 38.6% which was driven by significantly higher sales volumes and the Lepage acquisition. The increase in the warehouse segment income from operations was primarily due to sales increases which were driven by higher volume as discussed above. The increase in unallocated corporate expenses (which resulted in a decrease in operating income) was primarily due to higher acquisition costs associated with the Sara Lee California acquisition, higher acquisition costs for the Acquired Hostess Assets acquisition, and higher workforce-related costs, partially offset by Lepage acquisition costs in the prior year.

Net Interest Expense. The change was related to higher interest expense from higher amounts outstanding under the company’s unsecured credit facility, the securitization facility and the senior notes being outstanding all of this year, as compared to two quarters last year.

Income Taxes. The effective tax rate for the forty weeks ending October 5, 2013 was 28.1%, significantly lower than the rate of 36.2% for the forty weeks ending October 6, 2012. This decrease was driven by the gain on acquisition, which was recorded net of deferred taxes as a component of income before income taxes. The gain was treated as a permanent item in the tax provision, and favorably impacts the rate by approximately 6.5%. Discrete benefits recognized in the current period also contribute to the lower rate. The most significant discrete benefit reflects the expiration of the statute of limitations on uncertain tax positions. The other significant differences in the effective rate and the statutory rate are state income taxes and the Section 199 qualifying production activities deduction.

 

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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. We believe we have access to available funds to meet our short and long-term capital requirements.

Cash Flows

On July 19, 2013 the acquisition of the Acquired Hostess Assets, described in the Overview above, required approximately $355.0 million in cash (excluding acquisition-related costs) of which $18.0 million was paid as a deposit during the first quarter of fiscal 2013. This transaction was financed with cash on hand, funds available under the new term loan, and funds available under the securitization facility. The Sara Lee California and Earthgrains acquisitions in the first quarter of fiscal 2013, described in the Overview above, required approximately $50.0 million in cash.

The company leases certain property and equipment under various operating and capital lease arrangements. Most of the operating leases provide the company with the option, after the initial lease term, either to purchase the property at the then fair value or renew its lease at the then fair value. The capital leases provide the company with the option to purchase the property at a fixed price at the end of the lease term. The company believes the use of leases as a financing alternative places the company in a more favorable position to fulfill its long-term strategy for the use of its cash flow. See Note 11, Debt, Lease and Other Commitments, of Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for fiscal year ended December 29, 2012 for detailed financial information regarding the company’s lease arrangements.

The company’s cash and cash equivalents were $10.7 million at October 5, 2013 as compared to $13.3 million at December 29, 2012. The cash and cash equivalents were derived from the activities presented in the table below (amounts in thousands):

 

     For the Forty Weeks Ended        

Cash flow component

   October 5, 2013     October 6, 2012     Change  

Cash flows provided by operating activities

   $ 220,260      $ 182,229      $ 38,031   

Cash disbursed for investing activities

     (477,664     (365,095     (112,569

Cash provided by financing activities

     254,784        189,220        65,564   
  

 

 

   

 

 

   

 

 

 

Total change in cash

   $ (2,620   $ 6,354      $ (8,974
  

 

 

   

 

 

   

 

 

 

Cash Flows Provided by Operating Activities. Net cash provided by operating activities consisted of the following items for non-cash adjustments to net income (amounts in thousands):

 

     For the Forty Weeks Ended        
     October 5, 2013     October 6, 2012     Change  

Depreciation and amortization

   $ 89,769      $ 76,751      $ 13,018   

Gain on acquisition

     (50,071     —         (50,071

Stock-based compensation

     12,698        7,012        5,686   

Loss reclassified from accumulated other comprehensive income to net income

     21,622        24,972        (3,350

Deferred income taxes

     (4,633     3,155        (7,788

Provision for inventory obsolescence

     1,170        804        366   

Bad debt expense (allowance for accounts receivable)

     3,992        1,995        1,997   

Pension and postretirement plans (income) expense

     (1,570     1,208        (2,778

Other non-cash

     (5,191     (1,452     (3,739
  

 

 

   

 

 

   

 

 

 

Net non-cash adjustment to net income

   $ 67,786      $ 114,445      $ (46,659
  

 

 

   

 

 

   

 

 

 

 

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Net cash used for working capital requirements and pension contributions consisted of the following items (amounts in thousands):

 

     For the Forty Weeks Ended        
     October 5, 2013     October 6, 2012     Change  

Changes in accounts receivable, net

   $ (11,833   $ (30,518   $ 18,685   

Changes in inventories, net

     (13,257     (10,270     (2,987

Changes in hedging activities, net

     (26,676     5,627        (32,303

Changes in other assets, net

     (9,450     10,343        (19,793

Changes in accounts payable, net

     4,952        10,761        (5,809

Changes in other accrued liabilities, net

     29,124        2,430        26,694   

Pension contributions

     (12,760     (18,143     5,383   
  

 

 

   

 

 

   

 

 

 

Net changes in working capital and pension contributions

   $ (39,900   $ (29,770   $ (10,130
  

 

 

   

 

 

   

 

 

 

The change in depreciation and amortization was primarily due to the Lepage, Sara Lee California, and the Acquired Hostess Assets acquisitions. Depreciation and amortization increased $8.6 million for these acquisitions. The change in stock-based compensation was primarily because the 2012 long term incentive grant occurred in July 2012 and the significant increase of our stock price in this year. Also, the award in 2013 was on January 1, 2013 and was, therefore, included in the entire first, second and third quarters. The bad debt expense increased because of write-downs for two specific customers that occurred in the first and second quarters of fiscal 2013. The pension and postretirement plan (income) expense decreased because we recognized income during fiscal 2013 compared to expense during fiscal 2012. Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs and gains or losses on the sale of assets.

The changes in accounts receivable and inventories are described above and are due to sales increases and the timing of receipts. Hedging activities change from market movements that affect the fair value and required collateral of positions and the timing and recognition of deferred gains or losses. The other assets and accrued liabilities changes are from changes in income tax receivable balances, deferred tax liabilities, accrued interest and accrued employee costs (including accrued compensation for our formula driven, performance-based cash bonus program).

The company’s derivative instruments contained no credit-risk-related contingent features at December 29, 2012. As of October 5, 2013 and December 29, 2012, the company had $8.9 million and $9.0 million, respectively, recorded in other current assets representing collateral from or with counterparties for hedged positions.

The company contributed an additional $2.1 million to our qualified pension plans early in our fourth quarter of fiscal 2013 and expect to pay an additional $0.1 million in nonqualified pension benefits from corporate assets. The expected contributions to qualified pension plans represent the estimated minimum pension contributions required under ERISA and the PPA as well as discretionary contributions to avoid benefit restrictions. The company believes its cash flow and balance sheet will allow it to fund future pension needs without adversely affecting the business strategy of the company.

During the first quarter of fiscal 2013, the company paid $23.7 million, including our share of employment taxes and deferred compensation contributions, relating to its formula-driven, performance-based cash bonus program. We paid $13.4 million during the first quarter of 2012 for the performance-based cash bonus program earned during fiscal 2011.

Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the forty weeks ended October 5, 2013 and October 6, 2012 (amounts in thousands):

 

     For the Forty Weeks Ended        
     October 5, 2013     October 6, 2012     Change  

Purchase of property, plant, and equipment

   $ (71,846   $ (49,188   $ (22,658

Repurchase of independent distributor territories

     (23,631     (9,640     (13,991

Principal payments from notes receivable

     16,353        11,056        5,297   

Acquisition of businesses, net of cash acquired

     (415,472     (318,426     (97,046

Proceeds from sales of distribution territories

     14,604        —         14,604   

Proceeds from sale of property, plant and equipment

     2,328        1,103        1,225   
  

 

 

   

 

 

   

 

 

 

Net cash disbursed for investing activities

   $ (477,664   $ (365,095   $ (112,569
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Net cash disbursed for investing activities included the Sara Lee California asset acquisition of $49.5 million in the first quarter of fiscal 2013. There was an additional $0.2 million paid for the final working capital adjustment for the Lepage acquisition during the second quarter of fiscal 2013. The Acquired Hostess Assets acquisition required approximately $337.0 million in cash when the acquisition closed on July 19, 2013. We previously paid $18.0 million as a deposit during the first quarter of fiscal 2013 that was applied to the purchase price of the Acquired Hostess Assets acquisition at closing. The acquisition was funded from cash on hand and drawings under the new term loan and the securitization facility. Capital expenditures for the DSD and warehouse segments were $55.8 million and $6.3 million, respectively. The company currently estimates capital expenditures of approximately $90.0 million to $100.0 million on a consolidated basis during fiscal 2013. The change in the distributor territories repurchased and the principal payments on notes receivable are due to the Sara Lee California acquisition distributor territory roll-out in the first and second quarters of fiscal 2013. Prior to the acquisition, Lepage generally did not use the independent distributor model to deliver their products. During the third quarter we began to implement the independent distributor model at Lepage. We expect the implementation to cause changes to the amount outstanding under the distributor notes in fiscal 2013 and affect the principal payments received by us in the future.

Cash Flows Provided by Financing Activities. The table below presents net cash provided by financing activities for the forty weeks ended October 5, 2013 and October 6, 2012, respectively (amounts in thousands):

 

     For the Forty Weeks Ended        
     October 5, 2013     October 6, 2012     Change  

Dividends paid

   $ (69,375   $ (64,426   $ (4,949

Exercise of stock options, including windfall tax benefit

     17,971        10,656        7,315   

Payment of debt issuance costs and financing fees

     (2,111     (3,877     1,766   

Stock repurchases

     (3,790     (13,587     9,797   

Change in bank overdraft

     (614     3,287        (3,901

Net debt and capital lease obligations borrowings

     312,755        257,167        55,588   

Other financing activities

     (52     —         (52
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

   $ 254,784      $ 189,220      $ 65,564   
  

 

 

   

 

 

   

 

 

 

Our dividend payout increased 5.5% beginning with the dividend paid on June 19, 2013 when compared to the dividend paid on June 29, 2012. The compound annual growth rate for our dividend payout rate from fiscal 2008 to fiscal 2012 was 15.6%. While there are no requirements to increase the dividend payout we have shown a recent historical trend to do so. Should this continue in the future we will have additional working capital needs to meet these expected payouts. Stock option exercises and the associated tax windfall benefit increased slightly. As of October 5, 2013 there were nonqualified stock option grants of 5,245,134 shares that were exercisable. These have a remaining contractual life of approximately 2.42 years and a weighted average exercise price of $10.82 per share. At this time, it is expected that these shares will be exercised before the contractual term expires and they may provide an increase to the cash provided by financing activities.

Stock repurchase decisions are made based on our stock price, our belief of relative value, and our cash projections at any given time. Payments for debt issuance costs and financing fees decreased because we incurred fees for the senior notes issued in April 2012 and the amendment to the credit facility in November 2012. The change in bank overdraft was a function of our cash receipts since the end of our fiscal 2012. Our cash objective is to minimize cash on hand by using the credit facility described below. The net debt obligations increased primarily from the new term loan and the securitization facility issued for the Acquired Hostess Assets.

At December 29, 2012, there was $67.5 million due under our term loan by August 2013 in four equal payments. The first of these payments was made on December 31, 2012 with additional payments made on March 28, 2013 and on June 28, 2013. The final payment was made on August 5, 2013.

The credit facility and the securitization facility are variable rate debt, as described below. In periods of rising interest rates the cost of using the credit facility will become more expensive and increase our interest expense. The stated interest rate of the senior notes will not change and the term loan was paid off during the third quarter of fiscal 2013. Therefore, draw downs on the credit facility provide us the greatest direct exposure to rising rates. In addition, if interest rates do increase it will make the cost of raising funds more expensive. Considering our current debt obligations, an environment of rising rates could materially affect our Condensed Consolidated Statements of Income.

Additional liquidity items are discussed below for context.

 

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Table of Contents

Accounts Receivable Securitization Facility, New Term Loan, Senior Notes, Credit Facility, and Term Loan

Accounts Receivable Securitization Facility

On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). The facility provides the company up to $150.0 million in liquidity for a term of two years. Under the facility, a wholly-owned, bankruptcy-remote subsidiary purchases, on an ongoing basis, substantially all trade receivables. As borrowings are made under the facility the subsidiary pledges the receivables as collateral. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions of collections to the company. We include the subsidiary in our consolidated financial statements. The facility contains certain customary events of default, representations and warranties, and affirmative and negative covenants. As of October 5, 2013, the company had $125.0 million outstanding under the facility with $25.0 million available. As of October 5, 2013, the company was in compliance with all restrictive financial covenants under the facility.

Optional principal repayments may be made at anytime without premium or penalty. Interest is due two days after our reporting periods end in arrears on the outstanding borrowings and is computed as the cost of funds rate plus an applicable margin of 70 basis points. An unused fee of 25 basis points is applicable on the unused commitment at each reporting period. The company accrued financing costs of $0.7 million in connection with the facility through October 5, 2013, which are being amortized over the life of the facility.

New Term Loan. On April 5, 2013, the company entered into a senior unsecured delayed-draw term facility (the “new term loan”) with a commitment of up to $300.0 million to partially finance the Acquired Hostess Assets acquisition and pay acquisition-related costs and expenses. The company drew down the full amount of the new term loan on July 18, 2013 (the borrowing date) to complete the Acquired Hostess Assets acquisition as disclosed in Note 8, Debt and Other Obligations.

The new term loan will amortize in quarterly installments based on the annual percentages in the table below. The first payment is due and payable on the last business day of the first calendar quarter ending after the borrowing date, quarterly payments are due on the last business day of each successive calendar quarter and all remaining outstanding principal is due and payable on the fifth anniversary of the borrowing date.

 

Anniversary Year

   Percent of Principal Due  

1

     5

2

     10

3

     10

4

     35

5

     40

Voluntary prepayments on the new term loan may be made without premium or penalty. Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The applicable margin ranges from 0.125% to 1.375% for base rate loans and from 1.125% to 2.375% for Eurodollar loans, and is based on the company’s leverage ratio. Interest on base rate loans is payable quarterly in arrears on the last business day of each calendar quarter. Interest on Eurodollar loans is payable in arrears at the end of the interest period and every three months in the case of interest periods in excess of three months. The company paid financing costs of $1.7 million in connection with the new term loan through October 5, 2013, which are being amortized over the life of the new term loan. A commitment fee of 20 basis points on the daily undrawn portion of the lenders’ commitments commenced on May 1, 2013 and continued until the borrowing date, when the company borrowed the available $300.0 million for the Acquired Hostess Assets acquisition. The new term loan is subject to customary restrictive covenants, including certain limitations on liens and significant acquisitions and financial covenants regarding minimum interest coverage ratio and maximum leverage ratio.

Senior Notes. On April 3, 2012, the company issued $400 million of senior notes. The company pays 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.

 

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Table of Contents

The face value of the notes is $400.0 million and the current discount on the notes is $0.8 million. The company paid issuance costs (including underwriting fees and legal fees) for issuing the notes of $3.9 million. The issuance costs and the debt discount are being amortized to interest expense over the term of the notes. As of October 5, 2013 and December 29, 2012 the company was in compliance with the restrictive covenants under the notes.

Credit Facility. On April 5, 2013, the company amended its senior unsecured credit facility (the “credit facility”) to provide for less restrictive leverage ratios and certain more favorable covenant terms, to update the existing agreement to address changes in law, and to include applicable conforming changes in light of the new term loan. We previously amended the credit facility on November 16, 2012 and on May 20, 2011. The credit facility is a five-year, $500.0 million senior unsecured revolving loan facility. The November 16, 2012 amendment extended the term through November 16, 2017 and included modest improvements in drawn and undrawn pricing. The credit facility contains a provision that permits Flowers to request up to $200 million in additional revolving commitments, for a total of up to $700 million, subject to the satisfaction of certain conditions. Proceeds from the 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 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 amended credit facility and can meet presently foreseeable financial requirements. As of October 5, 2013 and December 29, 2012, 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 0.40%, with a floor rate defined by the one-month interbank Eurodollar market rate plus 1.00%. The applicable margin ranges from 0.025% to 1.025% for base rate loans and from 1.025% to 2.025% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.35% 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 $0.6 million in connection with the November 16, 2012 amendment of the credit facility, which, in addition to the remaining balance of the original $1.6 million in financing costs, is being amortized over the life of the credit facility.

There were $71.0 million and $110.5 million in outstanding borrowings under the credit facility at October 5, 2013 and December 29, 2012, respectively. The highest outstanding daily balance during 2013 was $209.0 million and the low amount outstanding balance was $23.0 million. 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. For the forty weeks ended October 5, 2013 the company borrowed $1,462.0 million in revolving borrowings under the credit facility and repaid $1,501.5 million in revolving borrowings. The amount available under the credit facility is reduced by $16.0 million for letters of credit. On October 5, 2013, the company had $413.0 million available under its credit facility for working capital and general corporate purposes.

Term Loan. On April 5, 2013, the company amended its credit agreement dated August 1, 2008 (the “amended term loan”), to conform the terms to the new term loan. The amended term loan provided for an amortizing $150.0 million of borrowings through the maturity date of August 1, 2013. Principal payments were due quarterly under the amended 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 amended term loan included 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. As of December 29, 2012, the company was in compliance with all restrictive financial covenants under the amended term loan. As of December 29, 2012, the amount outstanding under the amended term loan was $67.5 million. The final payment of $16.9 million, which repaid the term loan in full, was made on August 5, 2013.

Interest on the amended term loan was due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The underlying rate was 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 ranged from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for Eurodollar loans and was based on the company’s leverage ratio. The company paid additional financing costs of $0.1 million in connection with a prior amendment of the amended term loan on May 20, 2011, which, in addition to the remaining balance of the original $0.8 million in financing costs, was amortized over the remaining life of the term loan.

Credit Ratings. Currently, the company’s credit ratings by Fitch Ratings, Moody’s Investors Service, 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.

 

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Uses of Cash

On February 15, 2013, the Board of Directors declared a dividend of $0.1067 per share on the company’s common stock that was paid on March 15, 2013 to shareholders of record on March 1, 2013. This dividend payment was $22.1 million. On May 22, 2013, the Board of Directors declared a dividend of $0.1125 per share on the company’s common stock that was paid on June 19, 2013 to shareholders of record on June 5, 2013. This dividend payment was $23.4 million. On August 16, 2013, the Board of Directors declared a dividend of $.1125 per share on the company’s common stock that was paid on September 13, 2013, to shareholders of record on August 30, 2013. This dividend payment was $23.5 million.

Our Board of Directors has approved a plan that authorizes share repurchases of up to 67.5 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 2013, 204,934 shares, at a cost of $3.8 million of the company’s common stock were purchased under the plan. No shares were purchased under the plan during the second or third quarter of fiscal 2013. From the inception of the plan through October 5, 2013, 58.3 million shares, at a cost of $453.3 million, have been purchased.

During the first quarter of fiscal 2013, the company paid $23.7 million, including our share of employment taxes, in performance-based cash awards under the company’s bonus plan.

During the forty weeks ended October 5, 2013, the company contributed a total of $12.8 million to company pension plans. We contributed an additional $2.1 million during the beginning of our fourth quarter of fiscal 2013.

During the first quarter of fiscal 2013, and as discussed in the Overview section above, the company paid $50.0 million in connection with the Sara Lee California acquisition for the (1) perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California.

On July 19, 2013, the company used approximately $337.0 million in cash to acquire the Acquired Hostess Assets as discussed in the Overview. We previously paid $18.0 million as a deposit during the first quarter of fiscal 2013 that was applied to the purchase price at closing. The funding for the Acquired Hostess Assets came from cash on hand and drawings under the new term loan and the securitization facility.

On July 27, 2013, the company completed the acquisition of certain assets related to a bun line in Modesto, California that will serve the California market for a total cash payment of $10.3 million.

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 its financial position. In January 2013 an amendment was issued for this guidance. This amendment clarifies that the scope applies to derivative accounting including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. 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. This guidance will be effective for our fiscal 2014 which begins on December 29, 2013. Our fiscal 2013 began on December 30, 2012 which was before the effective date of this new guidance for fiscal 2013.

 

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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 5, 2013, the company’s hedge portfolio contained commodity derivatives with a fair value of $(4.4) million. Of this fair value, $(2.8) million is based on quoted market prices and $(1.6) million is based on models and other valuation methods. Approximately $(0.2) million, $(3.6) million, $(0.4) million and $(0.1) million of this fair value relates to instruments that will be utilized in fiscal 2013 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 5, 2013, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $14.1 million and (14.2) million, respectively. 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.

INTEREST RATE RISK

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the 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 5, 2013.

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 5, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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 in the United States District Court for the Northern District of Georgia. The complaint alleged that Hostess infringed upon Flowers Foods’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. Flowers Foods asserted that Hostess’s 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 Foods sought actual damages, an accounting of Hostess’s profits from its sales of Nature’s Pride products, and injunctive relief. This lawsuit was settled at the closing of the Acquired Hostess Assets acquisition.

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 Annual Report on Form 10-K for the year ended December 29, 2012 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 first, second, and third quarters of fiscal 2013.

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/ ALLEN L. SHIVER

Name:   Allen L. Shiver
Title:   President 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 7, 2013

 

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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).

      2.3

     

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).

      2.4

      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).

      2.5

      Asset Purchase Agreement among Hostess Brands, Inc., Interstate Brands Corporation, IBC Sales Corporation, Flowers Foods, Inc. and FBC Georgia, LLC, dated as of January 11, 2013 (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated January 14, 2013, 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 February 29, 2012, File No. 1-16247).

      4.2

      Form of Indenture (Incorporated by reference to Flowers Foods’ Registration Statement on Form S-3, dated February 8, 2011, File No. 1-16247).

      4.3

     

Form of Indenture (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated

March 29, 2012, File No. 1-16247).

      4.4

     

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).

      4.5

      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).

      4.6

     

Form of 4.375% Senior Note due 2022 (Incorporated by reference to Flowers Foods’ Current Report on

Form 8-K dated April 3, 2012, File No. 1-16247).

      4.7

     

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

      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).

    10.2

      First Amendment 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).

 

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Exhibit No

       

Name of Exhibit

    10.3

      Second Amendment to Credit Agreement, dated as of April 5, 2013, among Flowers Foods, Inc., the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated April 10, 2013, File No. 1-16247).

    10.4

      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).

    10.5

      First Amendment to Amended and Restated Credit Agreement, dated as of November 16, 2012, among Flowers Foods, Inc., a Georgia corporation, the Lenders party thereto and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated November 21, 2012, File No. 1-16247).

    10.6

      Second Amendment to Amended and Restated Credit Agreement, dated as of April 5, 2013, among Flowers Foods, Inc., the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, swingline lender and issuing lender (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated April 10, 2013, File No. 1-16247).

    10.7

      Credit Agreement, dated as of April 5, 2013, among Flowers Foods, Inc., the lenders party thereto, Branch Banking and Trust Company, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland,” New York Branch, and Regions Bank, as co-documentation agents, Bank of America, N.A., 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 April 10, 2013, File No. 1-16247).

    10.8

      Receivables Loan and Security Agreement, dated as of July 17, 2013, among Flowers Finance II, LLC, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland,” New York Branch, as administrative agent and facility agent, and certain financial institutions party thereto (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated July 22, 2013, File No. 1-16247).

    10.9+

      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).

    10.10+

     

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).

    10.11+

      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).

    10.12+

      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).

    10.13+

      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).

    10.14+

      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).

    10.15+

     

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).

    10.16+

      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).

    10.17+

      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).

 

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Exhibit No

       

Name of Exhibit

    10.18+

      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).

    10.19+

      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).

    10.20+

      Flowers Foods, Inc. Change of Control Plan (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated February 29, 2012, File No. 1-16247).

    10.21+

      Form of 2012 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 20, 2013).

    10.22+

      Form of 2013 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 20, 2013).

  *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.

  *32

      Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Allen L. Shiver, Chief Executive Officer, R. Steve Kinsey, Chief Financial Officer and Karyl H. Lauder, Chief Accounting Officer for the Quarter Ended October 5, 2013.

*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
+ Management contract or compensatory plan or arrangement

 

58