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FLOWERS FOODS INC - Quarter Report: 2014 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 4, 2014

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 6, 2014

Common Stock, $.01 par value   209,926,990

 

 

 


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 4, 2014 and December 28, 2013

     3   
    

Condensed Consolidated Statements of Income for the Twelve and Forty Weeks Ended October  4, 2014 and October 5, 2013

     4   
    

Condensed Consolidated Statements of Comprehensive Income for the Twelve and Forty Weeks Ended October  4, 2014 and October 5, 2013

     5   
    

Consolidated Statement of Changes in Stockholders’ Equity for the Forty Weeks Ended October 4, 2014

     6   
    

Condensed Consolidated Statements of Cash Flows for the Forty Weeks Ended October  4, 2014 and October 5, 2013

     7   
    

Notes to Condensed Consolidated Financial Statements

     8   
  Item 2.   

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

     31   
  Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     54   
  Item 4.   

Controls and Procedures

     54   

PART II. Other Information

  
  Item 1.   

Legal Proceedings

     55   
  Item 1A.   

Risk Factors

     55   
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     55   
  Item 6.   

Exhibits

     55   

Signatures

     56   

Exhibit index

     57   


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;

 

    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;

 

    increases in employee and employee-related costs, including funding of pension plans; 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 Annual Report on Form 10-K for the year ended December 28, 2013 for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

 

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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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FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except share data)

(Unaudited)

 

     October 4, 2014     December 28, 2013  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 8,075      $ 8,530   
  

 

 

   

 

 

 

Accounts and notes receivable, net of allowances of $1,925 and $1,598, respectively

     251,349        253,967   
  

 

 

   

 

 

 

Inventories, net:

    

Raw materials

     34,213        37,071   

Packaging materials

     20,381        21,188   

Finished goods

     43,260        42,592   
  

 

 

   

 

 

 
     97,854        100,851   
  

 

 

   

 

 

 

Spare parts and supplies

     54,012        47,956   
  

 

 

   

 

 

 

Deferred taxes

     37,020        31,790   
  

 

 

   

 

 

 

Other

     56,752        44,311   
  

 

 

   

 

 

 

Total current assets

     505,062        487,405   
  

 

 

   

 

 

 

Property, Plant and Equipment, net of accumulated depreciation of $973,276 and $901,004, respectively

     821,954        867,004   
  

 

 

   

 

 

 

Notes Receivable

     156,807        142,845   
  

 

 

   

 

 

 

Assets Held for Sale

     50,455        54,752   
  

 

 

   

 

 

 

Other Assets

     12,297        12,894   
  

 

 

   

 

 

 

Goodwill

     282,960        282,404   
  

 

 

   

 

 

 

Other Intangible Assets, net

     647,669        656,710   
  

 

 

   

 

 

 

Total assets

   $ 2,477,204      $ 2,504,014   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Current maturities of long-term debt and capital lease obligations

   $ 35,654      $ 31,272   

Accounts payable

     147,702        151,935   

Other accrued liabilities

     152,728        144,575   
  

 

 

   

 

 

 

Total current liabilities

     336,084        327,782   
  

 

 

   

 

 

 

Long-Term debt:

    

Total long-term debt and capital lease obligations

     780,969        892,478   
  

 

 

   

 

 

 

Other Long-Term Liabilities:

    

Post-retirement/post-employment obligations

     22,048        44,226   

Deferred taxes

     121,069        112,140   

Other long-term liabilities

     55,835        51,199   
  

 

 

   

 

 

 

Total other liabilities

     198,952        207,565   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

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

     —         —    

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

     —         —    

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

     199        199   

Treasury stock — 18,802,595 shares and 20,166,635 shares, respectively

     (187,266     (190,481

Capital in excess of par value

     609,158        593,355   

Retained earnings

     808,867        735,631   

Accumulated other comprehensive loss

     (69,759     (62,515
  

 

 

   

 

 

 

Total stockholders’ equity

     1,161,199        1,076,189   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,477,204      $ 2,504,014   
  

 

 

   

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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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 4, 2014     October 5, 2013     October 4, 2014     October 5, 2013  

Sales

   $ 849,360      $ 878,492      $ 2,886,498      $ 2,907,455   

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

     442,978        467,798        1,496,874        1,524,710   

Selling, distribution and administrative expenses

     306,514        327,529        1,052,486        1,064,914   

Impairment of assets

     —         —         4,489        —    

Depreciation and amortization

     29,487        29,837        98,686        89,769   

Gain on acquisition

     —         —         —         (50,071
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     70,381        53,328        233,963        278,133   

Interest expense

     (6,285     (7,077     (21,902     (22,087

Interest income

     4,875        3,906        15,586        11,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     68,971        50,157        227,647        267,707   

Income tax expense

     24,372        16,269        79,918        75,333   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 44,599      $ 33,888      $ 147,729      $ 192,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Common Share:

        

Basic:

        

Net income per common share

   $ 0.21      $ 0.16      $ 0.70      $ 0.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     210,084        208,428        209,573        207,747   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Net income per common share

   $ 0.21      $ 0.16      $ 0.69      $ 0.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     213,154        212,364        213,005        211,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends paid per common share

   $ 0.1200      $ 0.1125      $ 0.3525      $ 0.3317   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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 4, 2014     October 5, 2013     October 4, 2014     October 5, 2013  

Net income

   $ 44,599      $ 33,888      $ 147,729      $ 192,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Pension and postretirement plans:

        

Amortization of prior service credit included in net income

     (66     (36     (222     (121

Amortization of actuarial loss included in net income

     191        763        637        2,543   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and postretirement plans, net of tax

     125        727        415        2,422   

Derivative instruments:

        

Net change in fair value of derivatives

     (9,092     (1,585     (9,908     (17,124

Loss reclassified to net income

     (1,181     5,906        2,249        13,800   
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative instruments, net of tax

     (10,273     4,321        (7,659     (3,324
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (10,148     5,048        (7,244     (902
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 34,451      $ 38,936      $ 140,485      $ 191,472   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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
          Accumulated                    
     Number of             Excess           Other     Treasury Stock        
     shares
issued
     Par
Value
     of Par
Value
    Retained
Earnings
    Comprehensive
Income (Loss)
    Number of
shares
    Cost     Total  

Balances at December 28, 2013

     228,729,585       $ 199       $ 593,355      $ 735,631      $ (62,515     (20,166,635   $ (190,481   $ 1,076,189   

Net income

             147,729              147,729   

Derivative instruments, net of tax

               (7,659         (7,659

Pension and postretirement plans, net of tax

               415            415   

Exercise of stock options

           1,925            1,564,895        15,171        17,096   

Issuance of deferred stock awards

           (1,460         151,026        1,460        —    

Amortization of share-based compensation awards

           14,574                14,574   

Issuance of deferred compensation

           (207         10,010        207        —    

Income tax benefits related to share-based payment awards

           7,139                7,139   

Performance-contingent restricted stock awards issued (note 12)

           (6,168         652,719        6,168        —    

Stock repurchases

                 (1,014,610     (19,791     (19,791

Dividends paid on vested restricted stock awards

             (609           (609

Dividends paid — $0.3525 per common share

             (73,884           (73,884
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at October 4, 2014

     228,729,585       $ 199       $ 609,158      $ 808,867      $ (69,759     (18,802,595   $ (187,266   $ 1,161,199   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(See Accompanying Notes to Condensed Consolidated Financial Statements)

 

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FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

     For the
Forty Weeks Ended
 
     October 4, 2014     October 5, 2013  

CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:

    

Net income

   $ 147,729      $ 192,374   

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

    

Impairment of assets

     4,489        —    

Gain on acquisition

     —         (50,071

Stock-based compensation

     14,186        12,698   

Loss reclassified from accumulated other comprehensive income to net income

     3,658        21,622   

Depreciation and amortization

     98,686        89,769   

Deferred income taxes

     8,244        (4,633

Provision for inventory obsolescence

     1,026        1,170   

Allowances for accounts receivable

     3,206        3,992   

Pension and postretirement plans income

     (7,730     (1,570

Other

     (4,122     (5,191

Qualified pension plan contributions

     (12,999     (12,760

Changes in operating assets and liabilities, net of acquisitions and disposals:

    

Accounts and notes receivable, net

     (6,873     (11,833

Inventories, net

     1,971        (13,257

Hedging activities, net

     (16,286     (26,676

Other assets

     (12,088     (9,450

Accounts payable

     (3,798     4,952   

Other accrued liabilities

     943        29,124   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     220,242        220,260   
  

 

 

   

 

 

 

CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:

    

Purchase of property, plant and equipment

     (58,564     (71,846

Proceeds from sale of property, plant and equipment

     18,164        2,328   

Repurchase of independent distributor territories

     (14,845     (23,631

Principal payments from notes receivable

     17,436        16,353   

Contingently refundable consideration

     7,500        —    

Proceeds from sales of distribution territories

     —         14,604   

Acquisition of businesses, net of cash acquired

     —         (415,472
  

 

 

   

 

 

 

NET CASH DISBURSED FOR INVESTING ACTIVITIES

     (30,309     (477,664
  

 

 

   

 

 

 

CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:

    

Dividends paid, including dividends on vested restricted stock awards

     (74,493     (69,375

Exercise of stock options

     17,096        11,216   

Excess windfall tax benefit related to share-based payment awards

     7,139        6,755   

Payments for financing fees

     (577     (2,111

Stock repurchases

     (19,791     (3,790

Change in bank overdrafts

     (3,002     (614

Proceeds from debt borrowings

     942,900        1,887,000   

Debt and capital lease obligation payments

     (1,059,660     (1,574,245

Other financing activities

     —         (52
  

 

 

   

 

 

 

NET CASH (DISBURSED FOR) PROVIDED BY FINANCING ACTIVITIES

     (190,388     254,784   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (455     (2,620

Cash and cash equivalents at beginning of period

     8,530        13,275   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 8,075      $ 10,655   
  

 

 

   

 

 

 

(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 adjustments) necessary to state 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 4, 2014 and October 5, 2013 are not necessarily indicative of the results to be expected for a full fiscal year. The balance sheet at December 28, 2013 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 28, 2013.

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 28, 2013.

REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2014 consists of 53 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 19, 2014 (sixteen weeks), second quarter ended July 12, 2014 (twelve weeks), third quarter ended October 4, 2014 (twelve weeks) and fourth quarter ending January 3, 2015 (thirteen weeks).

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 (84% of total year to date sales) operates 38 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 (16% of total year to date sales) operates eight 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. Effective the first day of fiscal 2014, we reclassified our tortilla operation from a warehouse segment bakery to the DSD segment. This reclassification was made to better align their sales with the delivery method primarily used to serve their customers. All prior period information has been recasted to reflect this change. The tortilla operation was sold during our third quarter of fiscal 2014 for $8.4 million. The company relocated its flour tortilla equipment to an existing manufacturing facility and continues to sell these products through its DSD segment. See Note 16, Assets Held for Sale, for a detailed description of the sold tortilla operation.

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 4, 2014 and October 5, 2013. 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 4, 2014     October 5, 2013     October 4, 2014     October 5, 2013  
     (Percent of Sales)     (Percent of Sales)  

DSD segment

     16.9     17.2     16.8     17.1

Warehouse segment

     2.5        2.9        2.6        3.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     19.4     20.1     19.4     20.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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SIGNIFICANT ACCOUNTING POLICIES — There were no significant changes to our critical accounting policies for the quarter ended October 4, 2014 from those disclosed in the company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

2. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In May 2014, the FASB issued guidance for recognizing revenue in contracts with customers. This guidance requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. There are five steps outlined in the guidance to achieve this core principle. 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 2017 which begins on January 1, 2017.

In August 2014, the FASB issued guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The requirements of this guidance are not expected to have a significant impact on the condensed consolidated financial statements.

3. ACCUMULATED OTHER 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 twelve and forty weeks ended October 4, 2014 and October 5, 2013, reclassifications out of accumulated other comprehensive loss were as follows (amounts in thousands):

 

Details about accumulated other

comprehensive income components (Note 2)

  Amount reclassified from
Accumulated Other
Comprehensive Loss
    Affected Line
Item in the Statement
Where Net Income is
Presented
  For the Twelve
Weeks Ended
October 4, 2014
    For the Twelve
Weeks Ended
October 5, 2013
   

Gains and losses on cash flow hedges:

     

Interest rate contracts

  $ —       $ (21   Interest income (expense)

Commodity contracts

    1,920        (9,582   Cost of sales, Note 3
 

 

 

   

 

 

   

Total before tax

  $ 1,920      $ (9,603   Total before tax

Tax (expense) or benefit

    (739     3,697      Tax (expense) or benefit
 

 

 

   

 

 

   

Total net of tax

  $ 1,181      $ (5,906   Net of tax
 

 

 

   

 

 

   

Amortization of defined benefit pension items:

     

Prior-service credits

  $ 108      $ 60      Note 1, below

Actuarial losses

    (311     (1,241   Note 1, below
 

 

 

   

 

 

   

Total before tax

  $ (203   $ (1,181   Total before tax

Tax (expense) or benefit

    78        454      Tax (expense) or benefit
 

 

 

   

 

 

   

Total net of tax

  $ (125   $ (727   Net of tax
 

 

 

   

 

 

   

Total reclassifications

  $ 1,056      $ (6,633   Net of tax
 

 

 

   

 

 

   

 

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Details about accumulated other

comprehensive income components (Note 2)

  Amount reclassified from
Accumulated Other
Comprehensive Loss
    Affected Line
Item in the Statement
Where Net Income is
Presented
  For the Forty
Weeks Ended
October 4, 2014
    For the Forty
Weeks Ended
October 5, 2013
   

Gains and losses on cash flow hedges:

     

Interest rate contracts

  $ —       $ (817   Interest income (expense)

Commodity contracts

    (3,658     (21,622   Cost of sales, Note 3
 

 

 

   

 

 

   

Total before tax

  $ (3,658   $ (22,439   Total before tax

Tax (expense) or benefit

    1,409        8,639      Tax (expense) or benefit
 

 

 

   

 

 

   

Total net of tax

  $ (2,249   $ (13,800   Net of tax
 

 

 

   

 

 

   

Amortization of defined benefit pension items:

     

Prior-service credits

  $ 360      $ 199      Note 1, below

Actuarial losses

    (1,036     (4,137   Note 1, below
 

 

 

   

 

 

   

Total before tax

  $ (676   $ (3,938   Total before tax

Tax (expense) or benefit

    261        1,516      Tax (expense) or benefit
 

 

 

   

 

 

   

Total net of tax

  $ (415   $ (2,422   Net of tax
 

 

 

   

 

 

   

Total reclassifications

  $ (2,664   $ (16,222   Net of tax
 

 

 

   

 

 

   

 

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 4, 2014, 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 28, 2013

   $ (11,416   $ (51,099   $ (62,515

Other comprehensive income before reclassifications

     (9,908     —         (9,908

Reclassified to earnings from accumulated other comprehensive loss

     2,249        415        2,664   
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss, October 4, 2014

   $ (19,075   $ (50,684   $ (69,759
  

 

 

   

 

 

   

 

 

 

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 loss

     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 serves the California market for a total cash payment of $10.3 million. This acquisition is included in our DSD segment and the total goodwill recorded for this acquisition was $4.2 million.

Acquired Hostess Bread 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 bread 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 closed bakeries, and 38 depots (the “Acquired Hostess Bread Assets”) for a purchase price of $360.0 million.

On July 19, 2013, the company completed its acquisition of the Acquired Hostess Bread Assets for a total cash payment of $355.3 million. The final purchase price paid by the company was adjusted downward from $360.0 million to $355.3 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.

The company had filed a complaint in July 2008 alleging that Hostess infringed upon Flowers Foods’ Nature’s Own trademark by using or intending to use the Nature’s Pride trademark. This lawsuit was settled at the closing of the Acquired Hostess Bread Assets acquisition and we recorded a $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 Bread 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 Bread Assets are included in our DSD segment. Late in the third quarter of fiscal 2013, 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. We expect the re-introduction of the brands will continue throughout fiscal 2014.

During fiscal 2013, the company incurred $16.0 million of acquisition-related costs for the Acquired Hostess Bread Assets, of which $5.7 million and $10.3 million were incurred during the twelve and forty weeks ended October 5, 2013, respectively. There were no acquisition-related costs during the forty weeks ended October 4, 2014. 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 for the Acquired Hostess Assets 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 Acquired Hostess Bread Assets and liabilities assumed based on the fair value at the acquisition date (amounts in thousands):

 

Fair value of consideration transferred:

  

Cash consideration transferred

   $ 355,342   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Property, plant, and equipment

   $ 153,990   

Identifiable intangible asset — trademarks

     189,000   

Financial assets

     5,153   
  

 

 

 

Net recognized amounts of identifiable assets acquired

   $ 348,143   
  

 

 

 

Gain on legal settlement

     (1,400
  

 

 

 

Net recognized amounts of identifiable assets acquired and gain on settlement

   $ 346,743   
  

 

 

 

Goodwill

   $ 8,599   
  

 

 

 

 

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The goodwill is expected to be deductible for tax purposes and is included in our DSD segment. Revenues were $26.6 million for the Acquired Hostess Bread Assets during fiscal 2013, when we re-introduced the Acquired Hostess Bread Assets. The identified intangible assets in the table above were assigned indefinite lives and are discussed in Note 5, Goodwill and Other Intangible Assets.

The table below presents the changes to goodwill from December 28, 2013 to October 4, 2014 for the Acquired Hostess Bread Assets (amounts in thousands):

 

Goodwill reported on December 28, 2013 for the Acquired Hostess Bread Assets

   $ 5,419   
  

 

 

 

Changes in goodwill for spare parts and final fair value adjustments

     (3,503

Changes in goodwill for property, plant and equipment final fair value adjustments

     6,683   
  

 

 

 

Net changes to goodwill

   $ 3,180   
  

 

 

 

Final Acquired Hostess Bread Assets goodwill

   $ 8,599   
  

 

 

 

Sara Lee California and Earthgrains acquisition of trademark licenses

On February 23, 2013, the company completed its acquisition from BBU, Inc., a subsidiary of Grupo Bimbo (“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. The results of operations of 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 fair value at the acquisition date (amounts in thousands):

 

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”.

During the third quarter of fiscal 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 our first quarter 2013 Condensed Consolidated Balance Sheet and the Condensed Consolidated Statements of Income.

The asset purchase agreement included a holdback provision (the “holdback”) in the amount of $10.0 million of the cash consideration paid at closing that remained in escrow until disbursed based on the possible occurrence of one of two triggering events. The purpose of the holdback was to encourage the company to increase production capacity serving the California market. The first

 

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triggering event related to the co-pack arrangement and the second triggering event related to the possible opening of the acquired Stockton Bakery. We entered into a co-pack arrangement with BBU at the acquisition date under which BBU was required to supply the company with Sara Lee California and Earthgrains branded product for a period of up to 18 months ending August 17, 2014. If we terminated the co-pack agreement (“co-pack decision”) or reopened the Stockton Bakery (“bakery decision”) potential payments from the holdback would be made to us. The amount of such payments was 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 was capped at $10.0 million. The table below reflects the potential payments to us 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 did not make the co-pack decision by May 19, 2014 or did not make the bakery decision by August 17, 2014, any remaining amount of the holdback would be distributed to BBU. The holdback fair value of $7.6 million represented our assessment, at the time of acquisition for inclusion into the purchase price allocation, of the probability that we would terminate the co-pack arrangement and/or open the Stockton bakery. This probability was assessed at each reporting period and changes in the fair value of the holdback were recorded through earnings in the period of change. There were no changes as a result of the probability assessment in the second or third quarter of fiscal 2013. We initially notified BBU of our intent to terminate the co-pack agreement during the fourth quarter of fiscal 2013 and, upon completion of these notifications, we received $7.5 million during the first quarter of fiscal 2014. This holdback amount was recorded as a current receivable at December 28, 2013 on the Consolidated Balance Sheet. As a result of our initial notification, during the fourth quarter of fiscal 2013, we recorded a $0.1 million reduction to the fair value of the holdback (recorded in selling, distribution and administrative expense). The final delivery date under the supply agreement was February 14, 2014.

Sales from the Sara Lee California and Earthgrains acquisitions during fiscal 2013 were $79.7 million. We incurred $1.5 million in acquisition-related costs during fiscal 2013. These expenses were included in the selling, distribution and administrative line item in the company’s Consolidated Statement of Income for the fifty-two weeks ended December 28, 2013. 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 fiscal 2013. Amounts received upon sale of these new distributor territories are shown in our Condensed Consolidated Statement of Cash Flows as an investing activity.

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of the Acquired Hostess Bread Assets occurred at the beginning of fiscal 2013. The acquisition was cycled early in our third quarter and is not applicable to the twelve weeks results. Unaudited pro forma consolidated results of operations for the Sara Lee and Earthgrains asset acquisitions are not included because the company determined that it is immaterial to our Condensed Consolidated Statements of Income (amounts in thousands, except per share data).

 

     For the Forty Weeks Ended
October 5, 2013
 

Sales:

  

As reported

   $ 2,907,455   

Pro forma

   $ 2,907,455   

Net income:

  

As reported

   $ 192,374   

Pro forma

   $ 187,087   

Basic net income per common share:

  

As reported

   $ 0.93   

Pro forma

   $ 0.90   

Diluted net income per common share:

  

As reported

   $ 0.91   

Pro forma

   $ 0.88   

These amounts have been calculated after applying the company’s accounting policies and adjusting the results to reflect additional depreciation that would have been charged assuming the fair value adjustments to property, plant, and equipment 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.

 

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5. GOODWILL AND OTHER INTANGIBLES

The table below summarizes our goodwill and other intangible assets at October 4, 2014 and December 28, 2013, respectively, each of which is explained in additional detail below (amounts in thousands):

 

     October 4, 2014      December 28, 2013  

Goodwill

   $ 282,960       $ 282,404   

Amortizable intangible assets, net of amortization

     192,669         201,710   

Indefinite-lived intangible assets

     455,000         455,000   
  

 

 

    

 

 

 

Total goodwill and other intangible assets

   $ 930,629       $ 939,114   
  

 

 

    

 

 

 

The changes in the carrying amount of goodwill, by segment, during the forty weeks ended October 4, 2014 are as follows (amounts in thousands):

 

     DSD Segment     Warehouse
Segment
     Total  

Balance as of December 28, 2013

   $ 277,927      $ 4,477       $ 282,404   

Goodwill impairment (Note 16)

     (2,624     —          (2,624

Change in goodwill due to acquisition fair value assessment (Note 4)

     3,180        —          3,180   
  

 

 

   

 

 

    

 

 

 

Balance as of October 4, 2014

   $ 278,483      $ 4,477       $ 282,960   
  

 

 

   

 

 

    

 

 

 

The beginning segment goodwill balances have been recast by $2.6 million for a plant changed from the warehouse segment to the DSD segment during the first quarter of fiscal 2014.

As of October 4, 2014 and December 28, 2013, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

 

     October 4, 2014      December 28, 2013  

Asset

   Cost      Accumulated
Amortization
     Net Value      Cost      Accumulated
Amortization
     Net Value  

Trademarks

   $ 71,727       $ 13,573       $ 58,154       $ 71,727       $ 11,697       $ 60,030   

Customer relationships

     169,921         39,180         130,741         169,921         32,688         137,233   

Non-compete agreements

     4,274         3,213         1,061         4,274         2,751         1,523   

Distributor relationships

     4,123         1,410         2,713         4,123         1,199         2,924   

Supply agreement

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251,095       $ 58,426       $ 192,669       $ 251,095       $ 49,385       $ 201,710   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Aggregate amortization expense for the twelve and forty weeks ending October 4, 2014 and October 5, 2013 were as follows (amounts in thousands):

 

     Amortization
Expense
 

For the twelve weeks ended October 4, 2014

   $ 2,705   

For the twelve weeks ended October 5, 2013

   $ 2,772   

For the forty weeks ended October 4, 2014

   $ 9,041   

For the forty weeks ended October 5, 2013

   $ 9,059   

There are $455.0 million of indefinite life intangible assets at October 4, 2014 and December 28, 2013. These assets are not being amortized and are separately identified from goodwill. These trademarks are classified as indefinite-lived because they are well established brands, many older than forty years old with a long history and well defined markets. In addition, we are continuing to use these brands both in their original markets and throughout our expansion territories. We believe these factors support an indefinite-life assignment. During the fourth quarter each year, we perform an annual impairment analysis to determine if the trademarks are realizing the expected economic benefits. In the event this analysis determines the fair value of the assets to be below carrying value an impairment charge would result.

 

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

 

     Amortization of
Intangibles
 

Remainder of 2014

   $ 2,883   

2015

   $ 11,478   

2016

   $ 11,052   

2017

   $ 10,580   

2018

   $ 10,432   

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 3,700 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.

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

 

     Interest
Income
 

For the twelve weeks ended October 4, 2014

   $ 4,875   

For the twelve weeks ended October 5, 2013

   $ 3,906   

For the forty weeks ended October 4, 2014

   $ 15,586   

For the forty weeks ended October 5, 2013

   $ 11,661   

At October 4, 2014 and December 28, 2013, respectively, the carrying value of the distributor notes was as follows (amounts in thousands):

 

     October 4, 2014      December 28, 2013  

Distributor notes receivable

   $ 176,737       $ 161,560   

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

     19,930         18,715   
  

 

 

    

 

 

 

Long-term portion of distributor notes receivable

   $ 156,807       $ 142,845   
  

 

 

    

 

 

 

At October 4, 2014 and December 28, 2013, 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 conjunction with the distributor settlement process.

The fair value of the company’s variable rate debt at October 4, 2014 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 $423.8 million while the carrying value is $399.3 million on October 4, 2014. 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.

 

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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 commodity prices. 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 4, 2014, the company’s hedge portfolio contained commodity derivatives with a net fair value of $(27.1) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

     Level 1     Level 2     Level 3      Total  

Liabilities:

         

Other current

   $ (21.8   $ (0.6   $ —        $ (22.4

Other long-term

     (4.2     (0.5     —          (4.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

     (26.0     (1.1     —          (27.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Net Fair Value

   $ (26.0   $ (1.1   $ —        $ (27.1
  

 

 

   

 

 

   

 

 

    

 

 

 

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending primarily into fiscal 2016. These instruments are designated as cash-flow hedges. 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, distribution and administrative expenses. All of the company-held commodity derivatives at October 4, 2014 and December 28, 2013 qualified for hedge accounting, except for certain immaterial weather derivatives in fiscal 2013.

INTEREST RATE RISK

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

The company has the following derivative instruments located on the Condensed Consolidated Balance Sheet, which are utilized for the risk management purposes detailed above (amounts in thousands):

 

     Derivative Assets      Derivative Liabilities  

Derivatives designated as hedging
instruments

   October 4, 2014      December 28, 2013      October 4, 2014      December 28, 2013  
   Balance
Sheet
location
   Fair
Value
     Balance
Sheet
location
   Fair
Value
     Balance
Sheet
location
   Fair
Value
     Balance
Sheet
location
   Fair
Value
 

Commodity contracts

   Other current
assets
     —         Other current
assets
     162       Other current
liabilities
     22,380       Other current
liabilities
     10,625   

Commodity contracts

   Other long
term assets
     —         Other long
term assets
     —         Other long
term liabilities
     4,676       Other long
term liabilities
     1,095   
     

 

 

       

 

 

       

 

 

       

 

 

 

Total

      $ —           $ 162          $ 27,056          $ 11,720   
     

 

 

       

 

 

       

 

 

       

 

 

 

 

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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(2)

  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)(2)
  Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)
For the twelve weeks ended
 
  October 4, 2014     October 5, 2013       October 4, 2014     October 5, 2013  

Interest rate contracts

  $ 36      $ 26      Interest (expense) income   $ —       $ (13

Commodity contracts

    (9,128     (1,611   Production costs(1)     1,181        (5,893
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (9,092   $ (1,585     $ 1,181      $ (5,906
 

 

 

   

 

 

     

 

 

   

 

 

 

 

Derivatives in Cash Flow Hedge Relationships(2)

  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)(2)
  Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)
For the forty weeks ended
 
  October 4, 2014     October 5, 2013       October 4, 2014     October 5, 2013  

Interest rate contracts

  $ 119      $ (241   Interest (expense) income   $ —       $ (502

Commodity contracts

    (10,027     (16,883   Production costs(1)     (2,249     (13,298
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (9,908   $ (17,124     $ (2,249   $ (13,800
 

 

 

   

 

 

     

 

 

   

 

 

 

 

1. Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).
2. Amounts in parentheses indicate debits to determine net income.

The balance in accumulated other comprehensive loss (income) related to commodity price risk and interest rate risk derivative transactions that are closed or will expire over the next three years are as follows (amounts in millions and net of tax) at October 4, 2014:

 

     Commodity
price risk
derivatives
    Interest
rate risk
derivatives
     Totals  

Closed contracts

   $ 1.3      $ 1.2       $ 2.5   

Expiring in 2014

     (0.3     —          (0.3

Expiring in 2015

     16.1        —          16.1   

Expiring in 2016

     0.8        —          0.8   
  

 

 

   

 

 

    

 

 

 

Total

   $ 17.9      $ 1.2       $ 19.1   
  

 

 

   

 

 

    

 

 

 

As of October 4, 2014, the company had the following outstanding financial contracts that were entered to hedge commodity and interest rate risk (amounts in millions):

 

     Notional
amount
 

Wheat contracts

   $ 127.8   

Soybean oil contracts

     35.4   

Natural gas contracts

     15.8   
  

 

 

 

Total

   $ 179.0   
  

 

 

 

The company’s derivative instruments contain no credit-risk-related contingent features at October 4, 2014. As of October 4, 2014 and December 28, 2013, the company had $32.3 million and $16.9 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 4, 2014 and December 28, 2013 (amounts in thousands):

 

     October 4, 2014      December 28, 2013  

Unsecured credit facility

   $ 26,600       $ 44,200   

Unsecured new term loan

     277,500         296,250   

4.375% senior notes due 2022

     399,280         399,207   

Accounts receivable securitization

     70,000         150,000   

Capital lease obligations

     24,726         15,649   

Other notes payable

     18,517         18,444   
  

 

 

    

 

 

 
     816,623         923,750   

Current maturities of long-term debt and capital lease obligations

     35,654         31,272   
  

 

 

    

 

 

 

Total long-term debt and capital lease obligations

   $ 780,969       $ 892,478   
  

 

 

    

 

 

 

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. The 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 Condensed Consolidated Statements of Cash Flows. Bank overdrafts are included in other current liabilities on our Condensed Consolidated Balance Sheets. As of October 4, 2014 and December 28, 2013, the bank overdraft balance was $13.3 million and $16.3 million, respectively.

The company also had standby letters of credit (“LOCs”) outstanding of $15.4 million and $15.5 million at October 4, 2014 and December 28, 2013, 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 Condensed Consolidated Balance Sheet.

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

Accounts Receivable Securitization Facility. On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). On August 7, 2014, the company amended the facility. The amendment (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million (ii) extended the term one year to August 7, 2016 and (iii) made certain other conforming changes. 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 representations and warranties, affirmative and negative covenants, and events of default. As of October 4, 2014 and December 28, 2013, the company had $70.0 million and $150.0 million, respectively, outstanding under the facility. As of October 4, 2014 and December 28, 2013, the company was in compliance with all restrictive financial covenants under the facility. On October 4, 2014, the company had $130.0 million available under its facility for working capital and general corporate purposes.

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 paid financing costs of $0.8 million in connection with the facility, which are being amortized over the life of the facility.

New Term Loan. We entered into a senior unsecured delayed-draw term facility (the “new term loan”) on April 5, 2013 with a commitment of up to $300.0 million to partially finance the pending acquisition of the Acquired Hostess Bread 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 Bread Assets acquisition as disclosed in Note 4, Acquisitions. On February 14, 2014, we entered into the first amendment to the credit agreement for the new term loan.

 

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The new term loan amortizes in quarterly installments based on the annual percentages in the table below. The first payment was due and payable on June 30, 2013 (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

The February 14, 2014 amendment favorably reduced the interest rates described below from those entered into originally on April 5, 2013. 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 0.00% to 1.25% for base rate loans and from 1.00% to 2.25% 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, 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 Bread 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. The February 14, 2014 amendment cost $0.3 million and will be amortized over the remaining term. As of October 4, 2014 and December 28, 2013, the company was in compliance with all restrictive covenants under the new term loan.

Senior Notes. On April 3, 2012, the company issued $400.0 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. The notes bear interest at 4.375% per annum. 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. As of October 4, 2014 and December 28, 2013, the company was in compliance with all restrictive covenants under the notes.

The face value of the notes is $400.0 million and the current discount on the notes is $0.7 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.

Credit Facility. On February 14, 2014, the company amended its senior unsecured credit facility (the “credit facility”) to provide for a less restrictive leverage ratio and certain more favorable covenant terms, to extend the term to February 14, 2019, to update the existing agreement to address changes in law, and to include applicable conforming changes in light of the new term loan. Our most recent previous amendment to the credit facility was on April 5, 2013. The credit facility is a five-year, $500.0 million senior unsecured revolving loan facility. The credit facility contains a provision that permits Flowers to request up to $200.0 million in additional revolving commitments, for a total of up to $700.0 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 4, 2014 and December 28, 2013, the company was in compliance with all restrictive financial covenants under the credit facility.

 

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Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus applicable margin. The underlying rate is defined as rates offered in the interbank Eurodollar market, or the higher of the prime lending rate or the federal funds rate plus 0.40%, with a floor rate defined by the one-month interbank Eurodollar market rate plus 1.00%. The applicable margin ranges from 0.0% to 0.95% for base rate loans and from 0.95% to 1.95% for Eurodollar loans. In addition, a facility fee ranging from 0.05% to 0.30% 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 $0.3 million in connection with the February 14, 2014 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 $26.6 million and $44.2 million in outstanding borrowings under the credit facility at October 4, 2014 and December 28, 2013, respectively. The highest outstanding daily balance during the forty weeks ended October 4, 2014 was $62.1 million and the lowest outstanding balance was $0.0 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 4, 2014, the company borrowed $892.9 million in revolving borrowings under the credit facility and repaid $910.5 million in revolving borrowings. The amount available under the credit facility is reduced by $15.4 million for letters of credit. On October 4, 2014, the company had $458.0 million available under its credit facility for working capital and general corporate purposes.

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 facility, new term loan, senior notes, and credit facility, but could affect future credit availability and cost.

Assets recorded under capital lease agreements are included in property, plant and equipment and consist of machinery and equipment and transportation equipment.

Aggregate maturities of debt outstanding, including capital leases and the associated interest, as of October 4, 2014, are as follows (excluding unamortized debt discount and issuance costs) (amounts in thousands):

 

2014

   $ 9,700   

2015

     34,496   

2016

     144,437   

2017

     121,935   

2018

     96,290   

2019

     10,476   

2020 and thereafter

     401,493   
  

 

 

 

Total

   $ 818,827   
  

 

 

 

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”), but the company has determined it is not the primary beneficiary.

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 4, 2014 and December 28, 2013, there was $24.7 million and $15.4 million, respectively, in net property, plant and equipment and capital lease obligations associated with the right to use leases.

The incorporated independent distributors (“IDs”) who deliver our products in the DSD segment qualify as VIEs. The company typically finances the ID’s route acquisition and also enters into a contract with the ID to sell product at a fixed discount for distribution in the ID’s territory. The combination of the company’s loans to the IDs and the ongoing supply arrangements with the IDs provide a level of protection and funding to the equity owners of the various IDs that would not otherwise be available.

 

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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 activities controlled by the IDs that are deemed to most significantly impact the ultimate success of the ID entities relate to those decisions inherent in operating the distribution business in the territory, including acquiring trucks and trailers, managing fuel costs, employee matters and other strategic decisions. In addition, we do not provide, nor do we intend to provide, financial or other support to the IDs. The IDs are responsible for the operations of their respective territories.

The company’s maximum exposure to loss for the IDs relates to the distributor route note receivable for the portion of the territory the IDs financed at the time they acquired the route. The IDs remit payment on their route note receivable each week during the settlement process of their weekly activity. If the IDs discontinued making payment on the note receivable we are permitted under the agreement to withhold settlement funds to cover the IDs note balance. In the event the IDs abandon their territory and have a remaining balance outstanding on the route note receivable, we will take the territory back from the IDs (recording the territory as held for sale) and subsequently sell the territory to another ID. The company’s collateral from the route insures that any potential losses are mitigated. The independent distributors who deliver our products that are formed as sole proprietorships are excluded from this analysis.

10. LITIGATION

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

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 4, 2014 and October 5, 2013 (amounts and shares in thousands, except per share data):

 

     For the
Twelve Weeks Ended
     For the
Forty Weeks ended
 
     October 4, 2014      October 5, 2013      October 4, 2014      October 5, 2013  

Net income

   $ 44,599       $ 33,888       $ 147,729       $ 192,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Common Share:

           

Basic weighted average shares outstanding for common stock

     210,084         208,428         209,573         207,747   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.21       $ 0.16       $ 0.70       $ 0.93   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Common Share:

           

Basic weighted average shares outstanding for common stock

     210,084         208,428         209,573         207,747   

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

     3,070         3,936         3,432         3,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding for common stock

     213,154         212,364         213,005         211,727   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.21       $ 0.16       $ 0.69       $ 0.91   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were approximately 59,000 shares excluded from the computation of diluted earnings per share during the forty weeks ended October 5, 2013 because their effect would have been anti-dilutive. There were no anti-dilutive shares for the remaining periods.

 

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12. STOCK BASED COMPENSATION

On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”) that was approved by shareholders on May 21, 2014. The Omnibus Plan authorizes the compensation committee of the Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other awards for the purpose of providing our officers, key employees, and non-employee directors’ incentives and rewards for performance. The Omnibus Plan replaced the Flowers Foods’ 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (“EPIP”), the stock appreciation right plan, and the bonus plan. As a result, no additional awards will be issued under the EPIP as of the approval date of the Omnibus Plan. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares. The first grant under the Omnibus Plan was the Director Deferred Shares, described below, on May 21, 2014.

The EPIP authorized 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) were eligible to receive awards under the EPIP. Over the life of the EPIP, the company issued options, restricted stock and deferred stock.

The following is a summary of stock options, restricted stock, and deferred stock outstanding under the plans described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below.

Stock Options

The company issued non-qualified stock options (“NQSOs”) during fiscal years 2011 and prior that have no additional service period remaining. All outstanding NQSOs have vested and are exercisable on October 4, 2014.

The stock option activity for the forty weeks ended October 4, 2014 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 28, 2013

     8,112      $ 10.89         

Exercised

     (1,565   $ 10.92         
  

 

 

         

Outstanding at October 4, 2014

     6,547      $ 10.89         2.43       $ 48,147   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at October 4, 2014

     6,547      $ 10.89         2.43       $ 48,147   
  

 

 

   

 

 

    

 

 

    

 

 

 

The cash received, the windfall tax benefit, and intrinsic value from stock option exercises for the forty weeks ended October 4, 2014 and October 5, 2013 were as follows (amounts in thousands):

 

     October 4,
2014
     October 5,
2013
 

Cash received from option exercises

   $ 17,096       $ 11,216   

Cash tax windfall, net

   $ 3,871       $ 4,594   

Intrinsic value of stock options exercised

   $ 13,995       $ 14,727   

Performance-Contingent Restricted Stock Awards

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

Since 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 (July as opposed to January) in the grant of the 2012 awards, the 2012 awards vested during the first quarter of 2014. The 2013 and 2014 awards (granted during the first quarters of their respective years) 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

 

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shareholders. The performance payout is calculated at the end of each of the last four quarters (averaged) in the measurement period. 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

For performance between the levels described above, the degree of vesting is interpolated on a linear basis.

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 has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to estimate 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, 2014      January 1, 2013  

Shares granted

     366         414   

Assumed vesting date

     3/1/2016         3/1/2015   

Fair value per share

   $ 23.97       $ 17.22   

As of October 4, 2014, there was $6.2 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 1.1 years.

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

Since 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 (July as opposed to January) in the grant of the 2012 awards, the 2012 awards vested during the first quarter of 2014. The 2013 and 2014 awards (granted during the first quarters of their respective years) vest two years from the date of grant. Return on Invested Capital is calculated by dividing our profit, as defined, by the invested capital (“ROIC”). Generally, the performance condition requires the company’s average ROIC to exceed its average weighted cost of capital (“WACC”) by between 1.75 to 4.75 percentage points (the “ROI Target”) over the two fiscal year performance period. If the lowest 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 percentage points;

 

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

 

    ROIC above WACC by 3.75 percentage points pays 100% of Target; or

 

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

For performance between the levels described above, the degree of vesting is interpolated on a linear basis.

 

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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. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on 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. The 2012 award actual attainment was 125% of 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, 2014      January 1, 2013  

Shares granted

     366         414   

Vesting date

     3/1/2016         3/1/2015   

Fair value per share

   $ 21.47       $ 15.51   

As of October 4, 2014, there was $5.9 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 1.1 years.

Performance-Contingent Restricted Stock Issuance

In connection with the vesting of the performance-contingent restricted stock granted in July 2012, during the forty weeks ended October 4, 2014, an additional 193,756 common shares were issued because the company exceeded the median TSR of its peer group and payout was 195% of the target grant (“TSR modifier”) and an additional 50,939 common shares were issued because the company’s ROIC exceeded its WACC by the maximum amount and payout was 125% of the target grant (“ROIC modifier”). At vesting the company paid accumulated dividends of $0.4 million. The tax windfall at vesting of these awards was $2.7 million.

The company’s performance-contingent restricted stock activity during the quarter ended October 4, 2014, is presented below (amounts in thousands, except price data):

 

     Shares     Weighted
Average
Grant Date
Fair Value
 

Nonvested at December 28, 2013

     1,229      $ 15.88   

Initial 2014 grant at target

     732      $ 22.72   

Incremental shares issued for the 2012 ROIC modifier

     51      $ 14.37   

Incremental shares issued for the 2012 TSR modifier

     194      $ 15.45   

2012 Vested

     (653   $ 15.03   

Forfeited

     (43   $ 19.78   
  

 

 

   

Nonvested at October 4, 2014

     1,510      $ 19.35   
  

 

 

   

 

 

 

As of October 4, 2014, there was a total of $12.1 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 1.1 years. The total intrinsic value of shares vested during the period ended October 4, 2014 was $13.6 million.

Deferred and Restricted Stock

Pursuant to the Omnibus Plan and the preceding EPIP, the company allows non-employee directors to convert their annual board retainers into deferred stock equal in value to 130% of the cash payments these directors would have otherwise received. 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 forty weeks ended October 4, 2014, cash pay was converted into an aggregate of 36,425 shares. 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 ended October 4, 2014, a total of 18,330 previously deferred shares were distributed.

Pursuant to the Omnibus Plan and the preceding 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 2014, non-employee directors were granted

 

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an aggregate of 60,300 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 ended October 4, 2014, a total of 27,075 previously deferred shares were distributed.

A total of 105,621 shares of previously vested and deferred awards were also distributed during the forty weeks ended October 4, 2014. A director retired on May 21, 2014 and the cumulative deferred shares (including retainer conversions and annual grants) were issued at that time.

On May 31, 2013, the company’s Chief Executive Officer (“CEO”) received a time-based 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 and the award value does not exceed 0.5% of our cumulative EBITDA over the vesting period. Vesting will also occur in the event of the CEO’s death or disability, but not his retirement. Dividends will accrue on the award and will be paid to the CEO on the vesting date on all shares that 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 4, 2014 is set forth below (amounts in thousands, except price data):

 

     Shares     Weighted
Average
Grant Date
Fair
Value
 

Nonvested shares at December 28, 2013

     177      $ 18.92   

Deferred stock granted

     97      $ 20.47   

Deferred stock vested

     (78   $ 19.07   

Deferred stock forfeited

     (19   $ 19.03   
  

 

 

   

Nonvested at October 4, 2014

     177      $ 20.01   
  

 

 

   

 

 

 

As of October 4, 2014, there was $2.1 million of total unrecognized compensation cost related to deferred stock awards granted under the EPIP that will be recognized over a weighted-average period of 1.6 years. There was a tax windfall of $0.6 million on the distribution of deferred share awards during the forty weeks ended October 4, 2014.

Stock Appreciation Rights

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

The fair value of the rights at October 4, 2014 ranged from $9.62 to $12.03. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 4, 2014: dividend yield 2.30%; expected volatility 22.0%; risk-free interest rate 0.11% and expected life of 0.10 years to 0.85 years.

There were 21,768 shares exercised during the forty weeks ended October 4, 2014 for a total value of $0.3 million.

The rights activity for the forty weeks ended October 4, 2014 is set forth below (amounts in thousands except price data):

 

     Rights     Weighted
Average
Grant Date
Fair
Value
     Aggregate
Liability
 

Outstanding at December 28, 2013

     141      $ 7.26       $ 1,982   

Rights exercised

     (22   $ 6.25      
  

 

 

      

Outstanding at October 4, 2014

     119      $ 7.44       $ 1,295   
  

 

 

   

 

 

    

 

 

 

 

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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 4, 2014 and October 5, 2013, respectively (amounts in thousands):

 

     For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
     October 4, 2014     October 5, 2013     October 4, 2014     October 5, 2013  

Stock options

   $ —       $ 380      $ 197      $ 1,397   

Performance-contingent restricted stock awards

     3,527        2,463        12,714        8,710   

Deferred and restricted stock

     482        446        1,663        1,323   

Stock appreciation rights

     (297     (281     (388     1,268   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock based compensation

   $ 3,712      $ 3,008      $ 14,186      $ 12,698   
  

 

 

   

 

 

   

 

 

   

 

 

 

13. POST-RETIREMENT PLANS

The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at October 4, 2014 as compared to accounts at December 28, 2013 (amounts in thousands):

 

     October 4, 2014      December 28, 2013  

Current benefit liability

   $ 1,301       $ 1,301   

Noncurrent benefit liability

   $ 22,048       $ 44,226   

Accumulated other comprehensive loss, net of tax

   $ 50,684       $ 51,099   

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 4, 2014, 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 4, 2014 the company contributed $13.0 million to company pension plans. We do not expect to make additional contributions during the remainder of our fiscal 2014.

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 4, 2014     October 5, 2013     October 4, 2014     October 5, 2013  

Service cost

   $ 148      $ 163      $ 493      $ 544   

Interest cost

     4,944        4,636        16,481        15,453   

Expected return on plan assets

     (7,804     (6,618     (26,013     (22,061

Amortization of net loss

     444        1,425        1,480        4,751   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit income

   $ (2,268   $ (394   $ (7,559   $ (1,313
  

 

 

   

 

 

   

 

 

   

 

 

 

The company also has several smaller defined benefit plans associated with recent acquisitions that will be merged into the Flowers Foods defined benefit plans after receipt of final determination letters.

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.

 

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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 4, 2014     October 5, 2013     October 4, 2014     October 5, 2013  

Service cost

   $ 87      $ 79      $ 290      $ 263   

Interest cost

     103        88        343        293   

Amortization of prior service (credit) cost

     (108     (60     (360     (199

Amortization of net (gain) loss

     (133     (184     (444     (614
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit income

   $ (51   $ (77   $ (171   $ (257
  

 

 

   

 

 

   

 

 

   

 

 

 

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 4, 2014 and October 5, 2013, the total cost and employer contributions were $20.1 million and $17.8 million, respectively.

The company acquired Lepage Bakeries, Inc. in fiscal 2012, at which time we assumed sponsorship of the Lepage 401(k) Plan. This plan was merged into the Flowers Foods 401(k) Retirement Savings Plan on December 31, 2013.

14. INCOME TAXES

The company’s effective tax rate for the forty weeks ending October 4, 2014 was 35.1%, significantly higher than the rate of 28.1% for the forty weeks ending October 5, 2013. The prior year’s rate was driven by the gain on acquisition, which was recorded net of deferred taxes as a component of income before income taxes. The prior year gain was treated as a permanent item in the tax provision, and favorably impacted the rate by approximately 6.5%. For the current quarter, the primary differences in the effective rate and the federal statutory rate are additions for state income taxes, offset by reductions for the Section 199 qualifying production activities deduction.

During the forty weeks ended October 4, 2014, the company’s activity with respect to its uncertain tax positions and related interest expense accrual was not material. 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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15. SEGMENT REPORTING

The company’s DSD segment primarily produces fresh packaged bread, rolls, tortillas, and snack products and the warehouse segment produces frozen bread and rolls and snack products. Effective the first day of fiscal 2014, we reclassified our tortilla operation from a warehouse segment bakery to the DSD segment. This reclassification was made to better align their sales with the delivery method primarily used to serve their customers. All prior period information has been recasted to reflect this change. 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 (including recasting the prior year for the reclassified bakery) is as follows (amounts in thousands):

 

     For the
Twelve Weeks Ended
    For the
Forty Weeks Ended
 
     October 4, 2014     October 5, 2013     October 4, 2014     October 5, 2013  

SALES:

        

DSD segment

   $ 732,059      $ 753,813      $ 2,487,162      $ 2,464,881   

Warehouse segment

     159,503        175,919        558,175        608,875   

Eliminations: Sales from warehouse delivery to DSD

     (28,417     (27,292     (99,867     (94,756

Sales from DSD segment to warehouse delivery segment

     (13,785     (23,948     (58,972     (71,545
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 849,360      $ 878,492      $ 2,886,498      $ 2,907,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

DEPRECIATION AND AMORTIZATION:

        

DSD segment

   $ 26,015      $ 26,119      $ 87,286      $ 77,353   

Warehouse segment

     3,469        3,558        11,649        11,945   

Unallocated corporate costs (1)

     3        160        (249     471   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 29,487      $ 29,837      $ 98,686      $ 89,769   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM OPERATIONS:

        

DSD segment

   $ 67,740      $ 62,035      $ 226,935      $ 289,464   

Warehouse segment

     11,833        8,589        39,402        42,659   

Unallocated corporate costs (1)

     (9,192     (17,296     (32,374     (53,990
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 70,381      $ 53,328      $ 233,963      $ 278,133   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

   $ (6,285   $ (7,077   $ (21,902   $ (22,087

INTEREST INCOME

   $ 4,875      $ 3,906      $ 15,586      $ 11,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

   $ 68,971      $ 50,157      $ 227,647      $ 267,707   
  

 

 

   

 

 

   

 

 

   

 

 

 

The assets by segment as of October 4, 2014 and December 28, 2013 were as follows (amounts in thousands):

 

     As of  
     October 4, 2014      December 28, 2013  

Assets:

     

DSD segment

   $ 2,137,821       $ 2,163,606   

Warehouse segment

     205,292         216,194   

Other(2)

     134,091         124,214   
  

 

 

    

 

 

 
   $ 2,477,204       $ 2,504,014   
  

 

 

    

 

 

 

 

(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.

 

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

 

     For the Twelve Weeks Ended
October 4, 2014
     For the Twelve Weeks Ended
October 5, 2013
 
     DSD Segment      Warehouse Segment      Total      DSD Segment      Warehouse Segment      Total  

Branded Retail

   $ 450,263       $ 29,126       $ 479,389       $ 450,280       $ 32,410       $ 482,690   

Store Branded Retail

     108,272         27,541         135,813         118,973         30,207         149,180   

Non-retail and Other

     159,739         74,419         234,158         160,612         86,010         246,622   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 718,274       $ 131,086       $ 849,360       $ 729,865       $ 148,627       $ 878,492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Forty Weeks Ended
October 4, 2014
     For the Forty Weeks Ended
October 5, 2013
 
     DSD Segment      Warehouse Segment      Total      DSD Segment      Warehouse Segment      Total  

Branded Retail

   $ 1,517,674       $ 100,071       $ 1,617,745       $ 1,472,652       $ 112,819       $ 1,585,471   

Store Branded Retail

     376,339         96,425         472,764         390,254         112,566         502,820   

Non-retail and Other

     534,177         261,812         795,989         530,430         288,734         819,164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,428,190       $ 458,308       $ 2,886,498       $ 2,393,336       $ 514,119       $ 2,907,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

16. ASSETS HELD FOR SALE

The company purchases territories from and sells territories to independent distributors from time to time. The company repurchases territories from independent distributors in circumstances when the company decides to exit a territory or when the distributor elects to terminate their relationship with the company. In the event the company decides to exit a territory or ceases to utilize the independent distribution form of doing business, the company is contractually required to purchase the territory from the independent distributor. In the event an independent distributor terminates their relationship with the company, the company, although not legally obligated, normally repurchases and operates that territory as a company-owned territory. The independent distributors may also sell their territories to another person or entity. Territories purchased from independent distributors and operated as company-owned territories are recorded on the company’s Condensed Consolidated Balance Sheet in the line item “Assets Held for Sale “ while the company actively seeks another distributor to purchase the territory.

Territories held for sale and operated by the company are sold to independent distributors at the fair market value of the territory. Subsequent to the purchase of a territory by the distributor, in accordance with the terms of the distributor arrangement, the independent distributor has the right to require the company to repurchase the territory and truck, if applicable, at the original purchase price paid by the distributor within the six-month period following the date of sale. The company is not required to repay interest paid by the distributor during such six-month period. If the truck is leased, the company will assume the lease payment if the territory is repurchased during the six-month period. Should the independent distributor wish to sell the territory after the six-month period has expired, the company has the right of first refusal.

The company is also selling certain plants and depots from the Acquired Hostess Bread Assets purchased in July 2013. These assets were originally recorded as held and used in the purchase price allocation in Note 4, Acquisitions, above. Subsequent to the acquisition, we determined that some of the acquired plants and depots do not meet our long-term strategy. As a result, we are in the process of selling them. There are certain other properties not associated with the Acquired Hostess Bread Assets that are also in the process of being sold. These assets are recorded on the Condensed Consolidated Balance Sheet in the line item “Assets Held for Sale” and are included in the “Other” line item in the summary table below. During the forty weeks ended October 4, 2014, the company received $6.4 million on the sale of thirteen Acquired Hostess Bread Asset depots.

During the second quarter of fiscal 2014, we decided to sell certain assets at our Ft. Worth, Texas, tortilla facility (the “disposal group”). The company relocated our flour tortilla equipment to an existing manufacturing facility and continues to sell these products through our DSD segment. The disposal group sale closed August 13, 2014 for a sale price of $8.4 million in cash. The carrying value of the assets sold was $7.6 million and was presented in “Assets Held for Sale” as of July 12, 2014 because the disposal group met the requirements for held for sale classification on that balance sheet date. Assets not included in the disposal group were either transferred to other plants or were scrapped shortly after closing. We recognized an impairment loss on goodwill of $2.6 million and an additional impairment loss of $1.9 million for the scrapped assets during the forty weeks ended October 4, 2014. These impairments are recorded on the Condensed Consolidated Statements of Income in the line item “Impairment of assets”. The total gain on the divestiture was $1.8

 

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million, of which $0.8 million related to property, plant and equipment recorded as held for sale in our quarter ended July 12, 2014, and is recorded on the Condensed Consolidated Statements of Income in the line item “Selling, distribution and administrative expenses”. We also incurred costs of $0.8 million included in the Condensed Consolidated Statements of Income line item “Materials, supplies, labor, and other production costs, excluding depreciation” relating to severance and inventory. The total costs for fiscal 2014 relating to the divestiture were $3.5 million. Additional assets recorded in assets held for sale are for property, plant and equipment exclusive of the amounts disclosed as part of the Acquired Hostess Bread Assets and the disposal group discussed above. The carrying values of assets held for sale are not amortized and are evaluated for impairment as required. The table below presents the assets held for sale as of October 4, 2014 and December 28, 2013, respectively (amounts in thousands):

 

     October 4, 2014      December 28, 2013  

Distributor territories

   $ 21,187       $ 26,564   

Acquired Hostess Bread Assets plants and depots

     23,872         22,743   

Other

     5,396         5,445   
  

 

 

    

 

 

 

Total assets held for sale

   $ 50,455       $ 54,752   
  

 

 

    

 

 

 

17. SUBSEQUENT EVENTS

The company has evaluated subsequent events since October 4, 2014, the date of these financial statements. We believe there were no material events or transactions discovered during this evaluation that require 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 4, 2014 should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

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 28, 2013.

 

    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 that will provide additional context while reading this discussion. These events include:

 

    Hostess Asset Purchases — On July 19, 2013, we completed the acquisition of certain assets of Hostess Brands, Inc. (“Hostess”), which included the Wonder, Nature’s Pride, Merita, Home Pride and Butternut bread brands, 20 closed bakeries and 36 depots (the “Acquired Hostess Bread Assets”). We began the re-introduction of certain of the Acquired Hostess Bread brands in our third quarter of fiscal 2013. We have not completed our assessment of the plants and depots, but we have determined that we intend to sell certain plants and depots that do not fit into our long-term operating strategy. During the forty weeks ended October 4, 2014, the company received $6.4 million on the sale of thirteen Acquired Hostess Bread Asset depots with additional plants and depots classified as held for sale in our Condensed Consolidated Balance Sheet included in this Form 10-Q. We sold three plants and two depots subsequent to October 4, 2014 for $12.0 million in cash, which will be included in our fourth quarter financial statements. We expect these sales to continue throughout fiscal 2014 and into fiscal 2015. Also, we recorded carrying costs, including depreciation, associated with all of the Acquired Hostess Bread Asset plants and depots of approximately $3.6 million and $14.8 million during the twelve and forty weeks ended October 4, 2014, respectively, in our Condensed Consolidated Statements of Income. The carrying costs were $5.3 million for the twelve and forty weeks ended October 5, 2013.

 

    Opening of the Henderson, Nevada Plant — During the fourth quarter of fiscal 2013, we opened the bread line at a plant that was acquired as a part of the Acquired Hostess Bread Assets. We also opened the bun line during the second quarter of fiscal 2014. This plant increased our capacity for the California market.

 

    Opening of the Modesto, California Bread Line — During the first quarter of fiscal 2014, we added a bread line at a plant we acquired in fiscal 2013 that originally produced only buns. This new line increases our capacity for the California market.

 

    Opening of the Knoxville, Tennessee Plant — During the second quarter of fiscal 2014, we opened another plant that was acquired as a part of the Acquired Hostess Bread Assets. This plant operates a single bread line and increases our capacity in Tennessee, Kentucky, and Ohio. We anticipate adding a bun line in the future at this plant.

 

    Amendment to the Credit Facility and Term Loan — On February 14, 2014, we announced that we amended our existing senior unsecured revolving loan facility previously amended and restated on May 20, 2011 and the term loan agreement dated April 5, 2013. The amendment to the senior unsecured revolving loan facility reduced the applicable interest rate and extended the maturity date to February 14, 2019. The amendment to the term loan agreement reduced the applicable interest rate.

 

   

Plant Sale — During the second quarter of fiscal 2014, we decided to sell certain assets at our Ft. Worth, Texas, tortilla facility (the “disposal group”). The company relocated our flour tortilla equipment to an existing manufacturing facility and continues to sell these products through our DSD segment. The disposal group sale closed August 13, 2014 for a sale price of $8.4 million in cash. The carrying value of the assets sold was $7.6 million and was presented in “Assets Held for Sale” as of July 12, 2014 because the disposal group met the requirements for held for sale classification on that balance sheet date. Assets not included in the disposal group were either transferred to other plants or were

 

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scrapped shortly after closing. We recognized an impairment loss on goodwill of $2.6 million and an additional impairment loss of $1.9 million for the scrapped assets during the forty weeks ended October 4, 2014. These impairments are recorded on the Condensed Consolidated Statements of Income in the line item “Impairment of assets”. The total gain on the divestiture was $1.8 million, of which $0.8 million related to property, plant and equipment recorded as held for sale in our quarter ended July 12, 2014, and is recorded on the Condensed Consolidated Statements of Income in the line item “Selling, distribution and administrative expenses”. We also incurred costs of $0.8 million included in the Condensed Consolidated Statements of Income line item “Materials, supplies, labor, and other production costs, excluding depreciation” relating to severance and inventory. The total costs for fiscal 2014 relating to the divestiture were $3.5 million.

 

    Amendment to the Accounts Receivable Securitization facility — On August 7, 2014, the company amended the facility. The amendment (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million (ii) extended the term one year to August 7, 2016 and (iii) made certain other conforming changes.

 

    Pension Risk Mitigation Plan — In September, 2014, the Company announced a one-time voluntary lump sum offer to approximately 2,500 former employees who have not yet started receiving monthly payments of their vested pension benefit from its tax-qualified pension plans. Eligible former employees had until October 31, 2014 to voluntarily accept the offer.

The offer supports the Company’s pension risk management strategy and is estimated to reduce total pension plan obligations by approximately 10%, without reducing benefits to those former employees. Distributions to eligible former employees will be made out of existing plan assets in December 2014. The Company will not be required to make additional contributions into these plans as a result of the lump sum payments.

Based on the initial acceptance rate of 60%, the Company expects to recognize a one-time, non-cash settlement charge in the fourth quarter of 2014. At this participation level, the Company is expecting to incur a non-cash charge in the range of $14 - $15 million during the fourth quarter. The Company will not be able to determine the final amount of the non-cash charge until all acceptances are processed; the actual amount will also depend on the return on plan assets and various actuarial assumptions, including discount rate and mortality at the measurement date.

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, institutions, or vending machines. The company has 46 bakeries in 16 states that produce a wide range of breads, buns, rolls, and snack cakes. These products are marketed fresh to approximately 80% of the U.S. population or are sold fresh and frozen nationally.

Segments and Delivery Methods

The company has two business segments that reflect its two distinct methods of delivering products to market. Direct Store Delivery (“DSD”) segment products are delivered fresh to customers through a network of independent distributors who are incentivized to grow sales and to build equity in their distributorships. Our DSD segment reaches approximately 80% of the U.S. population with fresh bakery foods. The warehouse segment ships fresh and frozen products to customers’ warehouses nationwide. Customers then distribute these products to their depots, stores, or restaurants. Flowers’ bakeries fall into either the DSD segment or warehouse segment depending on the primary method of delivery used to sell their products.

The DSD segment operates a highly involved system of reciprocal baking whereby each bakery has an assigned production mission to produce certain items for its own market as well as for other DSD segment bakeries’ markets. 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 DSD segment bakery has a full complement of fresh products for its independent distributors to provide to their retail and foodservice customers.

The company has invested significant capital in its bakeries for several decades to develop efficient production processes, use technology effectively, provide consistently excellent quality, and offer a good working environment for team members. During the forty weeks ended October 4, 2014, we had capital expenditures of $58.6 million.

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 are engaged 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 teams collaborate regularly as new products are considered, developed, tested, and introduced.

 

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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.

On July 19, 2013 the company completed the acquisition of the Acquired Hostess Bread Assets. In September 2013, the Wonder, Merita, Home Pride, and Butternut brands, which had been off the market since Hostess ceased operations in November 2012, were re-introduced into the market by the company. The brands were returned to markets where they were available before the company acquired the brands within our DSD segment market in the Northeast, East, South, Southwest, and Western parts of the United States. The acquired Nature’s Pride brand has not been re-introduced to the market and we are still considering the future of this brand.

Snack cakes have been part of the company’s product offerings since at least the early 1920s. In more recent years, snack cakes have been developed and introduced under several brands, such as Blue Bird and Mrs. Freshley’s. On May 20, 2011, the company acquired Tasty Baking Co. (“Tasty”) and its extensive line of Tastykake branded snack cakes. The Tastykake brand added an iconic snack cake brand to our brand portfolio. Since the acquisition of Tasty, we have expanded the distribution of the Tastykake products into our core markets. We expect to continue to expand the Tastykake brand into any additional markets we enter over the next several years.

In 2014 we re-branded the Cobblestone Mill brand to the Cobblestone Bread Company brand. We have twelve core items and regional favorites at introduction. This brand includes restaurant and sandwich shop inspired breads and rolls. We completed the roll-out to the full market in July 2014.

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 bakeries and, after detailed analysis, acquiring companies and properties that add value to the company. We believe this strategy has resulted in consistent and sustainable growth that will continue to build value for our shareholders.

The company is also committed to maintaining a collaborative, in-house information technology team that meets all of our bakeries’ needs and maximizes efficiencies. 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.

We regularly articulate our core business strategies to the investment community and internally to our team members, including long-term (five-year) goals. Compensation and bonus programs are linked to the company’s short and 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 both a short- and long-term goal for our most senior management team and aligns their interests with those of shareholders.

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

Competition and risks

In January 2012, Hostess filed for bankruptcy. By the end of 2012, Hostess, which had been in bankruptcy for six of the last nine years, ceased production and announced it would liquidate. At that time, Hostess immediately stopped production and sold out their remaining inventory. Hostess discontinued serving their customers by late November 2012. These events impacted the industry as Hostess sales shifted to other providers to meet marketplace needs. These providers included Flowers, Grupo Bimbo (with Sara Lee, Arnolds, Thomas, and Entenmann’s brands), Campbell Soup Company (with the Pepperidge Farm brand), McKee Foods Corporation (Little Debbie) and smaller regional bakeries, retailer-owned bakeries, and store brands. The Hostess cake products were re-introduced into the market in July 2013 by a new and separate company formed by the outside investment group of Apollo Global Management and C. Dean Metropoulous & Co. that purchased the Hostess cake brands.

Sales are principally affected by pricing, quality, brand recognition, new product introductions, product line extensions, marketing, and service. Sales for the third quarter of fiscal 2014 decreased 3.3% from the third quarter of fiscal 2013. This decrease was primarily due to declining cake volumes caused by the re-introduction of the Hostess cake products and lower store brand and foodservice volumes.

 

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The current economic environment and competitive landscape in the baking industry is currently experiencing volatility. The baking industry will continue to see market fluctuations in the near-term as companies compete for market position in the wake of the Hostess liquidation.

Commodities, such as our baking ingredients, periodically experience price fluctuations. 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 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 28, 2013. 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 28, 2013, 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 28, 2013.

 

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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 4, 2014 and October 5, 2013, are set forth below (dollars in thousands):

 

     For the Twelve Weeks Ended  
                 Percentage of Sales      Increase (Decrease)  
     October 4, 2014     October 5, 2013     October 4, 2014      October 5, 2013      Dollars     %  

Sales

              

DSD segment

   $ 718,274      $ 729,865        84.6         83.1       $ (11,591     (1.6

Warehouse segment

     131,086        148,627        15.4         16.9         (17,541     (11.8
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

Total

   $ 849,360      $ 878,492        100.0         100.0       $ (29,132     (3.3
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

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

              

DSD segment(1)

   $ 347,361      $ 353,276        48.4         48.4       $ (5,915     (1.7

Warehouse segment (1)

     95,617        114,522        72.9         77.1         (18,905     (16.5
  

 

 

   

 

 

         

 

 

   

Total

   $ 442,978      $ 467,798        52.2         53.3       $ (24,820     (5.3
  

 

 

   

 

 

         

 

 

   

Selling, distribution and administrative expenses

              

DSD segment (1)

   $ 277,158      $ 288,435        38.6         39.5       $ (11,277     (3.9

Warehouse segment(1)

     20,167        21,958        15.4         14.8         (1,791     (8.2

Corporate(2)

     9,189        17,136        —          —          (7,947     (46.4
  

 

 

   

 

 

         

 

 

   

Total

   $ 306,514      $ 327,529        36.1         37.3       $ (21,015     (6.4
  

 

 

   

 

 

         

 

 

   

Depreciation and amortization

              

DSD segment(1)

   $ 26,015      $ 26,119        3.6         3.6       $ (104     (0.4

Warehouse segment(1)

     3,469        3,558        2.6         2.4         (89     (2.5

Corporate(2)

     3        160        —          —          (157     NM   
  

 

 

   

 

 

         

 

 

   

Total

   $ 29,487      $ 29,837        3.5         3.4       $ (350     (1.2
  

 

 

   

 

 

         

 

 

   

Income from operations

              

DSD segment(1)

   $ 67,740      $ 62,035        9.4         8.5       $ 5,705        9.2   

Warehouse segment(1)

     11,833        8,589        9.0         5.8         3,244        37.8   

Corporate(2)

     (9,192     (17,296     —          —          8,104        46.9   
  

 

 

   

 

 

         

 

 

   

Total

   $ 70,381      $ 53,328        8.3         6.1       $ 17,053        32.0   
  

 

 

   

 

 

         

 

 

   

Interest expense, net

   $ 1,410      $ 3,171        0.2         0.4       $ (1,761     (55.5

Income taxes

   $ 24,372      $ 16,269        2.9         1.9       $ 8,103        49.8   
  

 

 

   

 

 

         

 

 

   

Net income

   $ 44,599      $ 33,888        5.3         3.9       $ 10,711        31.6   
  

 

 

   

 

 

         

 

 

   

 

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

 

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Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the forty week periods ended October 4, 2014 and October 5, 2013, are set forth below (dollars in thousands):

 

     For the Forty Weeks Ended  
                 Percentage of Sales      Increase (Decrease)  
     October 4, 2014     October 5, 2013     October 4, 2014      October 5, 2013      Dollars     %  

Sales

              

DSD segment

   $ 2,428,190      $ 2,393,336        84.1         82.3       $ 34,854        1.5   

Warehouse segment

     458,308        514,119        15.9         17.7         (55,811     (10.9
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

Total

   $ 2,886,498      $ 2,907,455        100.0         100.0       $ (20,957     (0.7
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

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

              

DSD segment(1)

   $ 1,159,714      $ 1,139,709        47.8         47.6       $ 20,005        1.8   

Warehouse segment(1)

     337,160        385,001        73.6         74.9         (47,841     (12.4
  

 

 

   

 

 

         

 

 

   

Total

   $ 1,496,874      $ 1,524,710        51.9         52.4       $ (27,836     (1.8
  

 

 

   

 

 

         

 

 

   

Selling, distribution and administrative expenses

              

DSD segment(1)

   $ 949,766      $ 936,881        39.1         39.1       $ 12,885        1.4   

Warehouse segment(1)

     70,097        74,514        15.3         14.5         (4,417     (5.9

Corporate(2)

     32,623        53,519        —          —          (20,896     (39.0
  

 

 

   

 

 

         

 

 

   

Total

   $ 1,052,486      $ 1,064,914        36.5         36.6       $ (12,428     (1.2
  

 

 

   

 

 

         

 

 

   

Impairment of assets

              

DSD segment(1)

   $ 4,489      $ —         0.2         —        $ 4,489        NM   

Warehouse segment(1)

     —         —         —          —          —         —    

Corporate(2)

     —         —         —          —          —         —    
  

 

 

   

 

 

         

 

 

   

Total

   $ 4,489      $ —         0.2         —        $ 4,489        NM   
  

 

 

   

 

 

         

 

 

   

Depreciation and amortization

              

DSD segment(1)

   $ 87,286      $ 77,353        3.6         3.2       $ 9,933        12.8   

Warehouse segment(1)

     11,649        11,945        2.5         2.3         (296     (2.5

Corporate(2)

     (249     471        —          —          (720     NM   
  

 

 

   

 

 

         

 

 

   

Total

   $ 98,686      $ 89,769        3.4         3.1       $ 8,917        9.9   
  

 

 

   

 

 

         

 

 

   

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)

   $ 226,935      $ 289,464        9.3         12.1       $ (62,529     (21.6

Warehouse segment(1)

     39,402        42,659        8.6         8.3         (3,257     (7.6

Corporate(2)

     (32,374     (53,990     —          —          21,616        40.0   
  

 

 

   

 

 

         

 

 

   

Total

   $ 233,963      $ 278,133        8.1         9.6       $ (44,170     (15.9
  

 

 

   

 

 

         

 

 

   

Interest expense, net

   $ 6,316      $ 10,426        0.2         0.4       $ (4,110     (39.4

Income taxes

   $ 79,918      $ 75,333        2.8         2.6       $ 4,585        6.1   
  

 

 

   

 

 

         

 

 

   

Net income

   $ 147,729      $ 192,374        5.1         6.6       $ (44,645     (23.2
  

 

 

   

 

 

         

 

 

   

 

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 4, 2014 COMPARED TO TWELVE WEEKS ENDED OCTOBER 5, 2013

Consolidated Sales.

 

     For the
Twelve Weeks Ended
October 4, 2014
    For the
Twelve Weeks Ended
October 5, 2013
    % Decrease  

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 479,389         56.4   $ 482,690         54.9     (0.7 )% 

Store Branded Retail

     135,813         16.0        149,180         17.0        (9.0 )% 

Non-Retail and Other

     234,158         27.6        246,622         28.1        (5.1 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 849,360         100.0   $ 878,492         100.0     (3.3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

The 3.3% decrease in sales was generally attributable to the following:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     1.1

Volume

     (4.4 )% 
  

 

 

 

Total Percentage Change in Sales

     (3.3 )% 
  

 

 

 

Sales category discussion

The favorable pricing/mix was due to a shift in mix from lower priced store branded bread and rolls and cake items to higher priced branded bread and rolls, partially offset by a competitive pricing environment. The company also exited certain store brand business. We continue to experience heavy promotional activity in the branded category. Volume declines were primarily driven by decreases in our cake business, store branded bread and rolls and foodservice products. The re-introduction of the Hostess cake products negatively impacted both branded and store branded cake. The slight decrease in branded retail sales was due to volume declines in branded cake and pricing declines, mostly offset by volume gains from the Acquired Hostess Bread Assets and growth in our expansion markets (defined as new markets that we entered into in the last five years). The decrease in store branded retail sales was due to significant volume decreases in almost all categories as consumers have shifted to branded breads and our exit from certain store branded programs. Non-retail and other sales, which include contract manufacturing, vending and foodservice, decreased mainly due to volume decreases in foodservice sales, partially offset by positive price/mix.

Direct-Store-Delivery Sales.

 

     For the
Twelve Weeks Ended
October 4, 2014
    For the
Twelve Weeks Ended
October 5, 2013
    % Increase
(Decrease)
 

Sales Category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 450,263         62.7   $ 450,280         61.7     —  

Store Branded Retail

     108,272         15.1        118,973         16.3        (9.0 )% 

Non-Retail and Other

     159,739         22.2        160,612         22.0        (0.5 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 718,274         100.0   $ 729,865         100.0     (1.6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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The 1.6% decrease in sales was generally attributable to the following:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     0.3

Volume

     (1.9 )% 
  

 

 

 

Total Percentage Change in Sales

     (1.6 )% 
  

 

 

 

Sales category discussion

Overall, volume growth in our branded retail sales was offset by negative pricing/mix as well as volume declines in our store branded and non-retail and other products. The marketplace continues to be highly competitive. Branded retail sales were consistent with the same period in the prior year due to volume gains primarily from the Acquired Hostess Bread Assets and sales growth in our expansion markets being offset by pricing declines and volume declines in branded cake. Branded cake volumes declined due to the re-introduction of the Hostess cake items. The decrease in store branded retail was due to volume declines in almost all categories due to consumers shifting to branded products and the exit by the company of certain store branded business.

Warehouse Segment Sales.

 

     For the
Twelve Weeks Ended
October 4, 2014
    For the
Twelve Weeks Ended
October 5, 2013
    % Decrease  

Sales Category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 29,126         22.2   $ 32,410         21.8     (10.1 )% 

Store Branded Retail

     27,541         21.0        30,207         20.3        (8.8 )% 

Non-Retail and Other

     74,419         56.8        86,010         57.9        (13.5 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 131,086         100.0   $ 148,627         100.0     (11.8 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

The 11.8% decrease in sales was generally attributable to the following:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     0.1

Volume

     (11.9 )% 
  

 

 

 

Total Percentage Change in Sales

     (11.8 )% 
  

 

 

 

Sales category discussion

Overall, significant volume declines in all categories drove the decrease. The re-introduction of the Hostess cake items negatively impacted the warehouse segment. The decrease in branded retail was primarily the result of decreased branded snack cake volume, partially offset by price/mix increases. The decrease in store branded retail was due to volume decreases in store branded cake. The decrease in non-retail and other sales, which include contract manufacturing, vending and foodservice, was due primarily to much lower foodservice and vending volume and negative price/mix.

 

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Table of Contents

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     25.8     26.9     (1.1 )% 

Workforce-related costs

     14.1        13.2        0.9   

Packaging

     4.5        4.6        (0.1

Utilities

     1.8        1.6        0.2   

Other

     6.0        7.0        (1.0
  

 

 

   

 

 

   

 

 

 

Total

     52.2     53.3     (1.1 )% 
  

 

 

   

 

 

   

 

 

 

Overall, the decrease was attributable to lower ingredient costs and lower sales of outside purchased product (sales with no associated ingredient cost) as a percent of sales, partially offset by lower production volumes for the warehouse segment and higher workforce-related costs. The cost of the outside purchases is included in the other line item component and was largely comprised of the Sara Lee California product purchases from BBU in the prior year. Ingredient costs decreased as a percent of sales largely due to lower prices for sweeteners, oils, cocoa and flour, partially offset by higher costs for gluten and decreases in outside purchased product (sales with no associated ingredient costs). Increases in workforce-related costs as a percent of sales primarily resulted from lower sales and less outside purchased product (sales with no associated workforce-related costs). The decrease in the other line item is primarily driven by much lower outside purchased product.

Commodities, such as our baking ingredients, periodically experience price fluctuations. 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 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.

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     23.4     24.3     (0.9 )% 

Workforce-related costs

     12.3        11.6        0.7   

Packaging

     3.4        3.5        (0.1

Utilities

     1.7        1.6        0.1   

Other

     7.6        7.4        0.2   
  

 

 

   

 

 

   

 

 

 

Total

     48.4     48.4     —  
  

 

 

   

 

 

   

 

 

 

The DSD segment’s decrease in ingredient costs as a percent of sales was largely due to lower prices for flour, sweeteners and oils, partially offset by higher gluten prices and decreases in outside purchased product (sales with no associated ingredient costs). The cost of the outside purchased product is included in the other line item component and was largely comprised of the Sara Lee California product purchases from BBU in the prior year. Increases in workforce-related costs as a percent of sales primarily resulted from decreases in outside purchased product (sales with no associated workforce-related costs) and lower sales. The other line item increased due to lower volumes and lower sales to the warehouse segment, partially offset by the decrease in outside purchased product.

 

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Table of Contents

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     39.4     39.6     (0.2 )% 

Workforce-related costs

     23.8        20.7        3.1   

Packaging

     11.1        9.9        1.2   

Repairs and maintenance

     2.7        2.5        0.2   

Utilities

     2.1        1.9        0.2   

Other

     (6.2     2.5        (8.7
  

 

 

   

 

 

   

 

 

 

Total

     72.9     77.1     (4.2 )% 
  

 

 

   

 

 

   

 

 

 

Increases in workforce-related costs as a percent of sales were attributable to significantly lower sales volumes and increased sales to the DSD segment (workforce-related costs with no associated sales). Packaging increased due to price increases and higher sales to the DSD segment (packaging costs with no associated sales). Decreases in product purchases from the DSD segment and increases in sales to the DSD segment, largely due to the tortilla facility sale, as well as improved manufacturing efficiencies resulted in the decrease in the other line item as a percentage of sales.

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     16.6     17.7     (1.1 )% 

Distributor distribution fees

     14.0        12.9        1.1   

Other

     5.5        6.7        (1.2
  

 

 

   

 

 

   

 

 

 

Total

     36.1     37.3     (1.2 )% 
  

 

 

   

 

 

   

 

 

 

The distributor distribution fees increased due to the conversion of the Lepage Bakeries, Inc. (“Lepage”) and California routes to independent distributors, as well as the DSD segment comprising a larger percentage of consolidated sales. The decrease in workforce-related costs was due to lower employee incentive costs and the conversion to independent distributors. Prior year acquisition-related costs of $7.0 million primarily caused the decline in the other line item component as well as lower marketing spending.

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     16.7     18.1     (1.4 )% 

Distributor distribution fees

     16.5        15.5        1.0   

Other

     5.4        5.9        (0.5
  

 

 

   

 

 

   

 

 

 

Total

     38.6     39.5     (0.9 )% 
  

 

 

   

 

 

   

 

 

 

The decrease in workforce-related costs as a percentage of sales was attributable to lower employee incentive costs and the conversion to independent distributors for Lepage and California routes, partially offset by higher costs associated with expansion into new markets. The distributor distribution fees increased due to the conversion to independent distributors discussed above. The decrease in the other line item is largely attributable to higher marketing spending in the prior year for the acquired Hostess bread brands, the Tastykake brand and new market expansions.

 

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Table of Contents

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     8.5     8.8     (0.3 )% 

Freezer storage/rent

     2.0        1.8        0.2   

Distribution costs

     0.8        0.8        —    

Other

     4.1        3.4        0.7   
  

 

 

   

 

 

   

 

 

 

Total

     15.4     14.8     0.6
  

 

 

   

 

 

   

 

 

 

Lower sales that spread fixed costs over a smaller sales base drove the overall increase in selling, distribution and administrative expenses as a percent of sales which was partially offset by lower employee incentive costs as a percent of sales.

Impairment of assets. Refer to the discussion in the “Overview” section above.

Depreciation and Amortization. Depreciation and amortization expense was consistent with the third quarter of fiscal 2013.

The DSD segment’s depreciation and amortization expense was consistent with the same period in the prior year.

Lower sales resulted in the increase in the warehouse segment’s depreciation and amortization expense as a percent of sales as compared to third quarter of fiscal 2013.

Income from Operations. The table below summarizes the percentage change in income from operations by segment:

 

Income from operations

   Favorable
Percentage
 

DSD segment

     9.2

Warehouse segment

     37.8   

Unallocated corporate

     46.9   

Consolidated

     32.0

The favorable increase in the DSD segment income was driven by lower ingredient costs, partially offset by sales declines. The favorable increase in the warehouse segment income from operations was primarily due to exiting lower margin store brand business, partially offset by significant sales decreases as discussed above. The favorable change in unallocated corporate expenses was primarily due to the prior year acquisition costs associated with the Acquired Hostess Bread Assets in 2013 and higher pension income in the third quarter of fiscal 2014 compared to the third quarter of 2013. Decreases in workforce-related costs due to lower employee incentive costs across all segments also contributed to the favorable increases to income from operations.

Net Interest Expense. The decrease was related to higher interest income in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 due to the increase in distributor notes receivables outstanding. In addition, lower outstanding debt obligations resulted in decreased interest expense in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013.

Income Taxes. The effective tax rate for the third quarter of fiscal 2014 was 35.3% compared to 32.4% in the third quarter of the prior year. The increase in the rate is primarily due to discrete tax benefits recorded in the prior year related to the expiration of the statute of limitations on uncertain tax positions. The other most significant differences in the effective rate and the federal statutory rate are additions for state income taxes, offset by reductions for the Section 199 qualifying production activities deduction.

 

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Table of Contents

FORTY WEEKS ENDED OCTOBER 4, 2014 COMPARED TO FORTY WEEKS ENDED OCTOBER 5, 2013

Consolidated Sales.

 

     For the
Forty Weeks Ended
October 4, 2014
    For the
Forty Weeks Ended
October 5, 2013
    % Increase
(Decrease)
 

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 1,617,745         56.0   $ 1,585,471         54.5     2.0

Store Branded Retail

     472,764         16.4        502,820         17.3        (6.0 )% 

Non-Retail and Other

     795,989         27.6        819,164         28.2        (2.8 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 2,886,498         100.0   $ 2,907,455         100.0     (0.7 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

The 0.7% decrease in sales was generally attributable to the following:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     1.6

Volume

     (2.8 )% 

Acquisition

     0.5
  

 

 

 

Total Percentage Change in Sales

     (0.7 )% 
  

 

 

 

Sales category discussion

We experienced favorable pricing/mix largely due to a shift from lower margin cake items and store branded bread and rolls to higher margin branded bread, buns and rolls. The company also exited certain store brand business. Overall, volume declines were driven by decreases in our cake business and our store branded bread and rolls and foodservice business. These decreases were partially offset by increases in our branded bread and rolls largely due to the re-introduction of the Acquired Hostess Bread Assets, growth in our expansion markets and to a lesser extent the Sara Lee California acquisition. The re-introduction of the Hostess cake brands negatively impacted our cake sales. The increase in branded retail sales was due primarily to volume increases resulting from the Acquired Hostess Bread Assets and growth in our expansion markets, partially offset by volume declines in branded cake and heavy promotional activity. The decrease in store branded retail sales was due primarily to volume decreases in store branded cake, and to a lesser extent bread and rolls. The decrease in non-retail and other sales, which include contract manufacturing, vending and foodservice, was largely due to volume decreases in institutional, foodservice and vending sales, partially offset by positive pricing/mix.

Direct-Store-Delivery Sales.

 

     For the
Forty Weeks Ended
October 4, 2014
    For the
Forty Weeks Ended
October 5, 2013
    % Increase
(Decrease)
 

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 1,517,674         62.5   $ 1,472,652         61.5     3.1

Store Branded Retail

     376,339         15.5        390,254         16.3        (3.6 )% 

Non-Retail and Other

     534,177         22.0        530,430         22.2        0.7
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 2,428,190         100.0   $ 2,393,336         100.0     1.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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Table of Contents

The 1.5% increase in sales was generally attributable to the following:

 

Percentage Point Change in Sales Attributed to:

   Favorable  

Pricing/Mix

     0.5

Volume

     0.4

Acquisition

     0.6
  

 

 

 

Total Percentage Change in Sales

     1.5
  

 

 

 

Sales category discussion

Overall, sales increased due to volume increases resulting from the re-introduction of the Acquired Hostess Bread Assets, growth in our expansion markets and to a lesser extent, the Sara Lee California acquisition, partially offset by declines in cake volumes. The re-introduction of the Hostess cake brands negatively impacted our sales. The increase in branded retail sales was due primarily to significant volume increases, the Sara Lee California acquisition and a shift in mix from store branded to branded products, partially offset by declines in pricing/mix. Branded white bread contributed the most growth. We continue to experience heavy promotional activity within the category. The decrease in store branded retail was due to volume declines as consumers shift to branded products, partially offset by positive pricing/mix. The company also exited certain store brand business. The slight increase in non-retail and other sales was due to positive pricing/mix, partially offset by volume decreases in institutional sales.

Warehouse Segment Sales.

 

     For the
Forty Weeks Ended
October 4, 2014
    For the
Forty Weeks Ended
October 5, 2013
    % Decrease  

Sales category

   $      %     $      %    
    

(Amounts in

thousands)

          

(Amounts in

thousands)

              

Branded Retail

   $ 100,071         21.8   $ 112,819         21.9     (11.3 )% 

Store Branded Retail

     96,425         21.0        112,566         21.9        (14.3 )% 

Non-Retail and Other

     261,812         57.2        288,734         56.2        (9.3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 458,308         100.0   $ 514,119         100.0     (10.9 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

The 10.9% decrease in sales was generally attributable to the following:

 

Percentage Point Change in Sales Attributed to:

   Favorable
(Unfavorable)
 

Pricing/Mix

     0.4

Volume

     (11.3 )% 
  

 

 

 

Total Percentage Change in Sales

     (10.9 )% 
  

 

 

 

Sales category discussion

Volume declined in all categories due to decreases in our cake business associated with the re-introduction of the Hostess cake brands in the second half of fiscal 2013 as well as declines in our foodservice business. Branded and store branded retail decreased due to significant volume declines in cake, partially offset by positive pricing/mix. The decrease in non-retail and other sales, which include contract manufacturing, vending and foodservice, was due primarily to lower vending volume and decreases in foodservice price/mix and volume.

 

43


Table of Contents

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     25.9     27.0     (1.1 )% 

Workforce-related costs

     13.7        12.8        0.9   

Packaging

     4.6        4.5        0.1   

Utilities

     1.7        1.5        0.2   

Other

     6.0        6.6        (0.6
  

 

 

   

 

 

   

 

 

 

Total

     51.9     52.4     (0.5 )% 
  

 

 

   

 

 

   

 

 

 

Overall, the decrease was attributable to lower ingredient costs as a percent of sales, partially offset by the carrying costs, excluding depreciation, associated with the acquired Hostess facilities increasing $5.4 million, sales declines and higher workforce-related costs. Ingredient costs decreased as a percent of sales largely due to lower prices for sweeteners, oils and flour, partially offset by higher gluten costs and decreases in outside purchases of product (sales with no associated ingredient costs). This outside purchased product is included in the other line item above and largely relates to purchases from BBU in the prior year for the Sara Lee product. Increases in workforce-related costs as a percent of sales primarily resulted from lower sales for the warehouse segment, the acquired Hostess facilities carrying costs and decreases in outside purchases of product (sales with no associated workforce-related costs).

Commodities, such as our baking ingredients, periodically experience price fluctuations. 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 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.

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     23.5     24.3     (0.8 )% 

Workforce-related costs

     12.0        11.4        0.6   

Packaging

     3.4        3.4        —     

Utilities

     1.6        1.5        0.1   

Other

     7.3        7.0        0.3   
  

 

 

   

 

 

   

 

 

 

Total

     47.8     47.6     0.2
  

 

 

   

 

 

   

 

 

 

The DSD segment’s decrease in ingredient costs as a percent of sales was attributable to lower pricing on sweeteners, soybean oil and flour, partially offset by decreases in sales of outside purchased products (sales with no associated ingredient costs) and higher prices in other ingredients. Workforce-related costs increased as a percent of sales primarily due to the acquired Hostess facilities carrying costs and decreased outside purchased product (sales with no associated workforce-related costs). The increase in the other line item is due to decreases in sales of product to the warehouse segment and increases in purchases of product from the warehouse segment, partially offset by decreases in outside purchases of product.

 

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Table of Contents

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Ingredients

     38.8     39.7     (0.9 )% 

Workforce-related costs

     22.6        20.1        2.5   

Packaging

     10.9        9.8        1.1   

Utilities

     1.9        1.7        0.2   

Other

     (0.6     3.6        (4.2
  

 

 

   

 

 

   

 

 

 

Total

     73.6     74.9     (1.3 )% 
  

 

 

   

 

 

   

 

 

 

The warehouse segment’s decrease in ingredients as a percent of sales was primarily attributed to lower ingredient pricing, partially offset by increased sales to the DSD segment (ingredient costs with no associated sales). The decreases in sales volume and increased sales to the DSD segment increased workforce-related costs as a percent of sales (workforce-related costs with no associated sales). The increase in packaging was due primarily to price increases and increased sales to the DSD segment (packaging costs with no associated sales). The decrease in the other line item is due to the factors discussed above, as well as decreases in purchases of product from the DSD segment.

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     17.2     17.6     (0.4 )% 

Distributor distribution fees

     13.7        12.5        1.2   

Other

     5.6        6.5        (0.9
  

 

 

   

 

 

   

 

 

 

Total

     36.5     36.6     (0.1 )% 
  

 

 

   

 

 

   

 

 

 

The distributor distribution fees increased due to converting the Lepage and California routes to independent distributors, as well as the DSD segment comprising a larger percentage of consolidated sales. Workforce-related costs decreased due to lower employee related incentive costs and the conversion to independent distributors, partially offset by costs associated with the Lepage integration and new market expansions and lower sales for the warehouse segment. Prior year acquisition-related costs of $17.3 million caused the majority of the decline in the other line item component.

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase
(Decrease) as a
% of sales
 

Workforce-related costs

     17.4     18.1     (0.7 )% 

Distributor distribution fees

     16.3        15.2        1.1   

Other

     5.4        5.8        (0.4
  

 

 

   

 

 

   

 

 

 

Total

     39.1     39.1     —  
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The decrease in workforce-related costs was attributable to the conversion to independent distributors for Lepage products and the California market and lower employee related incentive costs. These decreases were partially offset by higher costs associated with expansion into new markets and the Lepage integration. The distributor distribution fees increased due to the conversion to independent distributors. The decrease in the other line item is mainly attributable to lower marketing spending in the current year as compared to the same period in the prior year.

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 4, 2014
% of sales
    October 5, 2013
% of sales
    Increase as a
% of sales
 

Workforce-related costs

     8.7     8.7     —  

Freezer storage/rent

     2.0        1.7        0.3   

Distribution costs

     0.8        0.8        —    

Other

     3.8        3.3        0.5   
  

 

 

   

 

 

   

 

 

 

Total

     15.3     14.5     0.8
  

 

 

   

 

 

   

 

 

 

The overall increase in selling, distribution and administrative expenses was primarily driven by significantly lower sales which spread the costs over a smaller sales base.

Impairment of assets. Refer to the discussion in the “Overview” section above.

Depreciation and Amortization. Depreciation and amortization expense increased primarily as a result of the Acquired Hostess Bread Assets and the acquisition of certain assets related to a bun line in Modesto, California and their bread line added earlier this year.

The DSD segment’s depreciation and amortization expense increased primarily due to the Acquired Hostess Bread Assets and the acquisition of certain assets related to a bun line in Modesto, California and their bread line added earlier this year.

The warehouse segment’s depreciation and amortization expense increased as a percent of sales due to significantly lower sales in the current year as compared to the same period in the prior year.

Gain on acquisition. On October 26, 2012 the company announced that the DOJ approved an agreement under which the company will acquire certain assets and trademark licenses from BBU. The cash used to acquire these assets was approximately $50.0 million. The company received (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. The California acquisition closed on February 23, 2013. We financed this transaction with cash on hand and available holdings. 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 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.

 

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Income From Operations. The table below summarizes the percentage change in income from operations by segment:

 

Income from operations

   Favorable
(Unfavorable)
Percentage
 

DSD segment

     (21.6 )% 

Warehouse segment

     (7.6

Unallocated corporate

     40.0   

Consolidated

     (15.9 )% 

The unfavorable decrease in the DSD segment income from operations was largely attributable to the gain on acquisition recorded for the Sara Lee California acquisition in fiscal 2013 as discussed above. The gain on acquisition accounted for 17.2% of the DSD segment decrease in operating income. Excluding the gain on acquisition, the decrease was 5.2% which was driven by higher costs for the acquired Hostess facilities, the impairment charge discussed in the “Overview” above, and the Lepage integration costs, partially offset by lower ingredient costs. The unfavorable decrease in the warehouse segment income from operations was primarily due to sales decreases which were driven by volume declines as discussed above, partially offset by lower ingredient costs. The favorable decrease in unallocated corporate expenses was primarily due to the prior year acquisition costs associated with the Acquired Hostess Assets and the Sara Lee California acquisition in fiscal 2013 and higher pension income in fiscal 2014 as compared to the prior year.

Net Interest Expense. The change was related to higher interest income related to the increase in distributor notes receivables outstanding.

Income Taxes. The effective tax rate for the forty weeks ended October 4, 2014 and October 5, 2013 was 35.1% and 28.1%, respectively. The prior year’s rate was driven by the gain on acquisition, which was recorded net of deferred taxes as a component of income before income taxes. The prior year gain was treated as a permanent item in the tax provision, and favorably impacted the rate by approximately 6.5%. The other significant differences in the effective rate and the federal statutory rate are additions for state income taxes, offset by reductions for the Section 199 qualifying production activities deduction.

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 obligated debt payments. 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

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 28, 2013 for detailed financial information regarding the company’s lease arrangements.

 

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Flowers’ cash and cash equivalents were $8.1 million at October 4, 2014 and at December 28, 2013. 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 4, 2014     October 5, 2013     Change  

Cash flows provided by operating activities

   $ 220,242      $ 220,260      $ (18

Cash disbursed for investing activities

     (30,309     (477,664     447,355   

Cash (disbursed for) provided by financing activities

     (190,388     254,784        (445,172
  

 

 

   

 

 

   

 

 

 

Total change in cash

   $ (455   $ (2,620   $ 2,165   
  

 

 

   

 

 

   

 

 

 

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 4, 2014     October 5, 2013     Change  

Depreciation and amortization

   $ 98,686      $ 89,769      $ 8,917   

Impairment of assets

     4,489        —         4,489   

Gain on acquisition

     —         (50,071     50,071   

Stock-based compensation

     14,186        12,698        1,488   

Loss reclassified from accumulated other comprehensive income to net income

     3,658        21,622        (17,964

Deferred income taxes

     8,244        (4,633     12,877   

Provision for inventory obsolescence

     1,026        1,170        (144

Bad debt expense (allowance for accounts receivable)

     3,206        3,992        (786

Pension and postretirement plans income

     (7,730     (1,570     (6,160

Other non-cash items

     (4,122     (5,191     1,069   
  

 

 

   

 

 

   

 

 

 

Net non-cash adjustment to net income

   $ 121,643      $ 67,786      $ 53,857   
  

 

 

   

 

 

   

 

 

 

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

 

     For the Forty Weeks Ended        
     October 4, 2014     October 5, 2013     Change  

Changes in accounts receivable, net

   $ (6,873   $ (11,833   $ 4,960   

Changes in inventories, net

     1,971        (13,257     15,228   

Changes in hedging activities, net

     (16,286     (26,676     10,390   

Changes in other assets, net

     (12,088     (9,450     (2,638

Changes in accounts payable, net

     (3,798     4,952        (8,750

Changes in other accrued liabilities, net

     943        29,124        (28,181

Qualified pension plan contributions

     (12,999     (12,760     (239
  

 

 

   

 

 

   

 

 

 

Net changes in working capital and pension contributions

   $ (49,130   $ (39,900   $ (9,230
  

 

 

   

 

 

   

 

 

 

The change in depreciation and amortization was primarily due to the Acquired Hostess Bread Assets. Depreciation and amortization increased $4.1 million for these assets. The change in stock-based compensation was primarily because the stock appreciation rights generated expense of $1.3 million in the forty weeks ended October 5, 2013 and income of $0.4 million during the forty weeks ended October 4, 2014. This change was offset by increased expense to our Performance-Contingent Return on Invested Capital Shares issued to employees as a result of a change to our expectation of the amount of shares that will vest for these performance condition awards. The bad debt expense decreased because of write-downs for a specific customer that occurred in the first quarter of fiscal 2013. The pension and postretirement plan income increased from fiscal 2013 to fiscal 2014 due to the performance of the plan’s assets during fiscal 2013. 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.

 

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The changes in accounts receivable and inventories are described above and are due to 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 28, 2013. As of October 4, 2014 and December 28, 2013, the company had $32.3 million and $16.9 million, respectively, recorded in other current assets representing collateral from or with counterparties for hedged positions.

The $13.0 million contribution to the qualified pension plans during the forty weeks ended October 4, 2014 is all that we intend to make during fiscal 2014 at this time, the company expects to contribute an additional $0.1 million in nonqualified pension benefits from corporate assets during our fourth quarter of fiscal 2014. The expected contributions to qualified pension plans represent the estimated minimum pension contributions required under ERISA and the Patient Protection Act 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 2014, the company paid $24.7 million, including our share of employment taxes and deferred compensation contributions, relating to its formula-driven, performance-based cash bonus program. We paid $23.7 million during the first quarter of 2013 for the performance-based cash bonus program earned during fiscal 2012.

Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the forty weeks ended October 4, 2014 and October 5, 2013 (amounts in thousands):

 

     For the Forty Weeks Ended        
     October 4, 2014     October 5, 2013     Change  

Purchase of property, plant, and equipment

   $ (58,564   $ (71,846   $ 13,282   

Repurchase of independent distributor territories

     (14,845     (23,631     8,786   

Principal payments from notes receivable

     17,436        16,353        1,083   

Acquisition of businesses, net of cash acquired

     —         (415,472     415,472   

Proceeds from sales of distribution territories

     —         14,604        (14,604

Contingently refundable consideration

     7,500        —         7,500   

Proceeds from sale of property, plant and equipment

     18,164        2,328        15,836   
  

 

 

   

 

 

   

 

 

 

Net cash disbursed for investing activities

   $ (30,309   $ (477,664   $ 447,355   
  

 

 

   

 

 

   

 

 

 

Net cash disbursed for investing activities included the Sara Lee California acquisition of $50.0 million in the first quarter of fiscal 2013 and the Acquired Hostess Bread Assets acquisition of $355.3 million in the third quarter of our fiscal 2013. In contrast, there were no acquisitions or acquisition-related costs during the forty weeks ended October 4, 2014. The decrease in the proceeds from sales of distribution territories is because in fiscal 2013 territory sales to independent distributors in California were generally externally financed (the company received cash at the time of the sale) while the territory sales in fiscal 2014 were financed by the company (the company did not receive cash at the time of sale). The change in the contingently refundable consideration includes the $7.5 million receipt in 2014 on the Sara Lee California holdback. Capital expenditures for the DSD and warehouse segments were $53.1 million and $2.4 million, respectively. The company currently estimates capital expenditures of approximately $90.0 million to $95.0 million on a consolidated basis during fiscal 2014. 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 quarter of fiscal 2013.

 

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Cash Flows Disbursed for/Provided by Financing Activities. The table below presents net cash provided by financing activities for the forty weeks ended October 5, 2013 and July 14, 2012, respectively (amounts in thousands):

 

     For the Forty Weeks Ended        
     October 4, 2014     October 5, 2013     Change  

Dividends paid

   $ (74,493   $ (69,375   $ (5,118

Exercise of stock options, including windfall tax benefit

     24,235        17,971        6,264   

Payments for financing fees

     (577     (2,111     1,534   

Stock repurchases

     (19,791     (3,790     (16,001

Change in bank overdrafts

     (3,002     (614     (2,388

Net debt and capital lease obligations payments

     (116,760     312,755        (429,515

Other financing activities

     —         (52     52   
  

 

 

   

 

 

   

 

 

 

Net cash (disbursed for) provided by financing activities

   $ (190,388   $ 254,784      $ (445,172
  

 

 

   

 

 

   

 

 

 

Our dividend payout increased 6.7% when compared to the dividend paid on September 13, 2013. The compound annual growth rate for our dividend payout rate from fiscal 2009 to fiscal 2013 was 11.0%. While there are no requirements to increase the dividend payout, we have shown a recent historical trend to do so. Should this trend 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 4, 2014 there were nonqualified stock option grants of 6,546,963 shares that were exercisable. These have a remaining contractual life of approximately 2.43 years and a weighted average exercise price of $10.89 per share. At this time, we expect 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 increased because we incurred fees of $0.6 million for amending the unsecured credit facility and new term loan on February 14, 2014 and for the amendment to the accounts receivable securitization facility on August 7, 2014. The change in bank overdraft was a function of our cash receipts at the end of our fiscal 2013. Our cash objective is to minimize cash on hand by using the credit facility described below. The net debt obligations decreased primarily because we made payments on our new term loan and unsecured credit facility. At this time we do not anticipate an issue with meeting this obligation.

The credit facility is 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. 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.

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

Accounts Receivable Securitization Facility. On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). On August 7, 2014, the company amended the facility. The amendment (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million (ii) extended the term one year to August 7, 2016 and (iii) made certain other conforming changes. 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 representations and warranties, affirmative and negative covenants, and events of default. As of October 4, 2014 and December 28, 2013, the company had $70.0 million and $150.0 million, respectively, outstanding under the facility. As of October 4, 2014 and December 28, 2013, the company was in compliance with all restrictive financial covenants under the facility. On October 4, 2014, the company had $130.0 million available under its facility for working capital and general corporate purposes.

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 paid financing costs of $0.8 million in connection with the facility, which are being amortized over the life of the facility.

 

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New Term Loan. We entered into a senior unsecured delayed-draw term facility (the “new term loan”) on April 5, 2013 with a commitment of up to $300.0 million to partially finance the pending acquisition of the Acquired Hostess Bread 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 Bread Assets acquisition as disclosed in Note 4, Acquisitions. On February 14, 2014, we entered into the first amendment to the credit agreement for the new term loan.

The new term loan amortizes in quarterly installments based on the annual percentages in the table below. The first payment was due and payable on June 30, 2013 (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

The February 14, 2014 amendment favorably reduced the interest rates described below from those entered into originally on April 5, 2013. 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 0.00% to 1.25% for base rate loans and from 1.00% to 2.25% 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, 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 Bread 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. The February 14, 2014 amendment cost $0.3 million and will be amortized over the remaining term. As of October 4, 2014 and December 28, 2013, the company was in compliance with all restrictive covenants under the new term loan.

Senior Notes. On April 3, 2012, the company issued $400.0 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. The notes bear interest at 4.375% per annum. 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. As of October 4, 2014 and December 28, 2013, the company was in compliance with all restrictive covenants under the notes.

The face value of the notes is $400.0 million and the current discount on the notes is $0.7 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.

Credit Facility. On February 14, 2014, the company amended its senior unsecured credit facility (the “credit facility”) to provide for a less restrictive leverage ratio and certain more favorable covenant terms, to extend the term to February 14, 2019, to update the existing agreement to address changes in law, and to include applicable conforming changes in light of the new term loan. Our most

 

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recent previous amendment to the credit facility was on April 5, 2013. The credit facility is a five-year, $500.0 million senior unsecured revolving loan facility. The credit facility contains a provision that permits Flowers to request up to $200.0 million in additional revolving commitments, for a total of up to $700.0 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 4, 2014 and December 28, 2013, 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 0.0% to 0.95% for base rate loans and from 0.95% to 1.95% for Eurodollar loans. In addition, a facility fee ranging from 0.05% to 0.30% 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 $0.3 million in connection with the February 14, 2014 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 $26.6 million and $44.2 million in outstanding borrowings under the credit facility at October 4, 2014 and December 28, 2013, respectively. The highest outstanding daily balance during the forty weeks ended October 4, 2014 was $62.1 million and the lowest outstanding balance was $0.0 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 4, 2014, the company borrowed $892.9 million in revolving borrowings under the credit facility and repaid $910.5 million in revolving borrowings. The amount available under the credit facility is reduced by $15.4 million for letters of credit. On October 4, 2014, the company had $458.0 million available under its credit facility for working capital and general corporate purposes.

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 facility, new term loan, senior notes, and credit facility, but could affect future credit availability and cost.

 

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Uses of Cash

On August 15, 2014, the Board of Directors declared a dividend of $0.12 per share on the company’s common stock that was paid on September 14, 2014 to shareholders of record on August 29, 2014. This dividend payment was $25.2 million on May 21, 2014, the Board of Directors declared a dividend of $0.12 per share on the company’s common stock that was paid on June 18, 2014 to shareholders of record on June 4, 2014. This dividend payment was $25.1 million. On February 14, 2014, the Board of Directors declared a dividend of $0.1125 per share on the company’s common stock that was paid on March 14, 2014 to shareholders of record on February 28, 2014. 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 2014, 464,610 shares, at a cost of $9.5 million of the company’s common stock were purchased under the plan. No shares were repurchased during our second quarter of fiscal 2014. During the third quarter of fiscal 2014, 550,000 shares, at a cost of $10.3 million of the company’s common stock were purchased under the plan. From the inception of the plan through October 4, 2014, 59.6 million shares, at a cost of $478.1 million, have been purchased.

During the forty weeks ended October 4, 2014, the company paid $24.7 million, including our share of employment taxes, in performance-based cash awards under the company’s bonus plan.

During the forty weeks ended October 4, 2014, the company contributed $13.0 million to our qualified pension plans. We do not anticipate making additional contributions for the remainder of fiscal 2014 at this time.

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued guidance for recognizing revenue in contracts with customers. This guidance requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. There are five steps outlined in the guidance to achieve this core principle. 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 2017 which begins on January 1, 2017.

In August 2014, the FASB issued guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The requirements of this guidance are not expected to have a significant impact on the condensed consolidated financial statements.

 

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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 4, 2014, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $(27.6) million. Of this fair value, $(26.0) million is based on quoted market prices and $(1.1) million is based on models and other valuation methods. An additional $(0.5) million in our portfolio is from a closed contract that contains no variability. Approximately $0.4 million of this fair value relates to instruments that will be utilized in fiscal 2014, $(26.1) million will be utilized in fiscal 2015, and $(1.4) million will be utilized in 2016.

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 4, 2014, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $15.1 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.

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. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO, CFO, and CAO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in “Internal Control — Integrated Framework (1992),” our management concluded that our internal control over financial reporting was effective as of October 4, 2014.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter ended October 4, 2014 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.

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.

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 28, 2013 for information regarding factors that could affect the company’s results of operations, financial condition and liquidity. There have been no changes to our risk factors during the forty weeks ended October 4, 2014.

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

Our Board of Directors has approved a plan that authorizes share repurchases of up to 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. The following chart sets forth the amounts of our common stock purchased by the company during the third quarter of fiscal 2014 under the stock repurchase plan.

 

Period

   Total Number
of Shares Purchased
     Weighted
Average Price
Per Share
     Total Number of
Shares Purchased
as Part of
Publicly Announced
Plan or Programs
     Maximum Number
of Shares that
May Yet Be
Purchased Under the
Plan or Programs
 
    

(Amounts in thousands,

except price data)

 

July 13, 2014 — August 9, 2014

     —          —          —          8,494   

August 10, 2014 — September 6, 2014

     —          —          —          8,494   

September 7, 2014 — October 4, 2014

     550       $ 18.78         550         7,944   
  

 

 

       

 

 

    

Total

     550       $ 18.78         550      
  

 

 

       

 

 

    

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 12, 2014      

 

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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 Exhibit 2.1 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 Exhibit 2.2 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 Exhibit 2.1 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 Exhibit 2.2 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 Exhibit 2.1 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 through May 21, 2014 (Incorporated by reference to Exhibit 3.1 to Flowers Foods’ Current Report on Form 8-K, dated May 27, 2014, 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 Exhibit 3.2 to Flowers Foods’ Current Report on Form 8-K dated May 27, 2014, File No. 1-16247).
      4.1       Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Exhibit 4.1 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 Exhibit 4.6 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 Exhibit 4.1 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 Exhibit 4.1 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 Exhibit 4.2 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 Exhibit 4.3 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 Exhibit 4.1 to Flowers Foods’ Current Report on Form 8-K dated July 23, 2012, File No. 1-16247).
    10.1       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 Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K dated May 26, 2011, File No. 1-16247).

 

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Table of Contents

Exhibit

No

       

Name of Exhibit

    10.2       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 Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K dated November 21, 2012, File No. 1-16247).
    10.3       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 Exhibit 10.3 to Flowers Foods’ Current Report on Form 8-K dated April 10, 2013, File No. 1-16247).
    10.4       Third Amendment to Amended and Restated Credit Agreement, dated as of February 14, 2014, 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 Exhibit 10.2 to Flowers Foods’ Current Report on Form 8-K dated February 18, 2014, File No. 1-16247).
    10.5       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 Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K dated April 10, 2013, File No. 1-16247).
    10.6       First Amendment to Credit Agreement, dated as of February 14, 2014, among Flowers Foods, Inc., the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K dated February 18, 2014, File No. 1-16247).
    10.7       Receivables Loan, Security and Servicing Agreement, dated as of July 17, 2013, among Flowers Finance II, LLC, Flowers Foods, Inc., as servicer, 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 Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K dated July 22, 2013, File No. 1-16247).
    10.8       Amendment to Receivables Loan, Security and Servicing Agreement, dated as of August 7, 2014, among Flowers Finance II, LLC, Flowers Foods, Inc., as services, 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 Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K, dated August 12, 2014, 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 Exhibit 10.3 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 Annex A 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 Exhibit 10.8 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 Annex B to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, File No. 1-16247).
    10.13+       Flowers Foods, Inc. 2014 Omnibus Equity and Incentive Compensation Plan (Incorporated by reference to Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K, dated May 27, 2014, File No. 1-16247).
    10.14+       Flowers Foods, Inc. Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.10 to Flowers Foods’ Annual Report on Form 10-K, dated March 29, 2002, File No. 1-16247).
    10.15+       Form of Indemnification Agreement, by and between Flowers Foods, Inc., certain executive officers and the directors of Flowers Foods, Inc. (Incorporated by reference to Exhibit 10.14 to Flowers Foods’ Annual Report on Form 10-K, dated March 28, 2003, File No. 1-16247).

 

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Table of Contents

Exhibit

No

      

Name of Exhibit

    10.16+      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 Exhibit 10.15 to Flowers Foods’ Quarterly Report on Form 10-Q dated November 17, 2005, File No. 1-16247).
    10.17+      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 Exhibit 10.17 to Flowers Foods’ Annual Report on Form 10-K dated February 23, 2011, File No. 1-16247).
    10.18+      Flowers Foods, Inc. Change of Control Plan (Incorporated by reference to Exhibit 10.1 to Flowers Foods’ Current Report on Form 8-K dated February 29, 2012, File No. 1-16247).
    10.19+      Form of 2012 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Exhibit 10.16 to Flowers Foods’ Annual Report on Form 10-K dated February 20, 2013).
    10.20+      Form of 2013 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Exhibit 10.17 to Flowers Foods’ Annual Report on Form 10-K dated February 20, 2013).
    10.21+      Form of 2014 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Exhibit 10.19 to Flowers Foods’ Annual Report on Form 10-K dated February 19, 2014).
    10.22+      Form of 2014 Restricted Stock Agreement, by and between Flowers Foods, Inc. and a certain executive officer of Flowers Foods, Inc. (Incorporated by reference to Exhibit 10.20 to Flowers Foods’ Annual Report on Form 10-K dated February 19, 2014).
    21      Subsidiaries of Flowers Foods, Inc.
  *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 4, 2014.
*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

 

59