FLOWERS FOODS INC
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended January 1, 2011 | ||
|
OR
|
||
|
o
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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 No.) |
|
|
1919 Flowers Circle
Thomasville, Georgia (Address of principal executive offices) |
31757
(Zip Code) |
Registrant’s telephone number, including area code:
(229) 226-9110
Securities registered pursuant to Section 12(b) of the
Act:
|
Name of Each Exchange
|
||||
| Title of Each Class | on Which Registered | |||
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Common Stock, $0.01 par value, together
with Preferred Share Purchase Rights |
New York Stock Exchange | |||
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act of
1934. Yes
o
No
þ
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
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, 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
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 232.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
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
þ
|
Accelerated filer o |
Non-accelerated
filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
Based on the closing sales price on the New York Stock Exchange
on July 17, 2010 the aggregate market value of the voting
and non-voting common stock held by non-affiliates of the
registrant was $2,107,319,372.
On February 18, 2011, the number of shares outstanding of
the registrant’s Common Stock, $0.01 par value, was
90,876,015.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement for the 2011
Annual Meeting of Shareholders to be held May 25, 2011,
which will be filed with the Securities and Exchange Commission
on or prior to April 15, 2011, have been incorporated by
reference into Part III, Items 10, 11, 12, 13 and 14
of this Annual Report on
Form 10-K.
FORM 10-K
REPORT
TABLE OF
CONTENTS
i
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, 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 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 as required; | |
| • | the credit and business risks associated with our independent distributors and customers which operate in the highly competitive retail food and foodservice industries, including the amount of consolidation in these industries; | |
| • | changes in pricing, customer and consumer reaction to pricing actions, and the pricing environment among competitors within the industry; | |
| • | consolidation within the baking industry; | |
| • | any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events; and | |
| • | regulation and legislation related to climate change that could affect our ability to procure our commodity needs or that necessitate additional unplanned capital expenditures. |
The foregoing list of important factors does not include all
such factors, nor necessarily present them in order of
importance. In addition, you should consult other disclosures
made by the company (such as in our other filings with the
Securities and Exchange Commission (“SEC”) or in
company press releases) for other factors that may cause actual
results to differ materially from those projected by the
company. Please refer to Part I, Item 1A.,
Risk
Factors
, of this
Form 10-K
for additional information regarding factors that could affect
the company’s results of operations, financial condition
and liquidity.
We caution you not to place undue reliance on forward-looking
statements, as they speak only as of the date made and are
inherently uncertain. The company undertakes no obligation to
publicly revise or update such statements, except as required by
law. You are advised, however, to consult any further public
disclosures by the company (such as in our filings with the SEC
or in company press releases) on related subjects.
ii
Table of Contents
PART I
| Item 1. | Business |
Corporate
Information
The company’s predecessor was founded in 1919 when two
brothers, William Howard and Joseph Hampton Flowers, opened
Flowers Baking Company in Thomasville, Ga. In 1968, Flowers
Baking Company went public, became Flowers Industries, and began
trading
over-the-counter
stock. Less than a year later, Flowers listed on the American
Stock Exchange. In 1982, the company listed on the New York
Stock Exchange under the symbol FLO. In the mid-1990s, Flowers
Industries transformed itself from a strong regional baker into
a national baked foods company with the acquisition of Keebler
Foods Company, one of the largest cookie and cracker companies
in the United States, and Mrs. Smith’s, one of the
country’s top-selling frozen pie brands. By 1999, Flowers
Industries had become a $4.2 billion national baked foods
company with three business units — Flowers Bakeries,
a super-regional fresh baked foods company;
Mrs. Smith’s Bakeries, a national frozen baked foods
company; and Keebler. In March 2001, Flowers sold its investment
in Keebler to the Kellogg Company, and the remaining business
units — Flowers Bakeries and
Mrs. Smith’s — were spun off into a new
company called Flowers Foods, which was incorporated in Georgia
in 2000. In April 2003, Flowers sold the Mrs. Smith’s
frozen dessert business to The Schwan Food Company.
As used herein, references to “we,” “our,”
“us,” the “company” or “Flowers
Foods” include the historical operating results and
activities of the business operations that comprised Flowers
Foods as of January 1, 2011.
The
Company
Flowers Foods is one of the largest producers and marketers of
bakery products in the United States. The company consists of
two business segments: direct-store-delivery (“DSD”)
and warehouse delivery. The DSD segment focuses on the
production and marketing of bakery products to
U.S. customers in the Southeast, Mid-Atlantic, and
Southwest as well as select markets in California and Nevada
primarily through its direct-store-delivery system. The
warehouse delivery segment produces snack cakes for sale to
co-pack, retail and vending customers nationwide as well as
frozen bread, rolls, buns, and tortillas for sale to national
retail and foodservice customers primarily through warehouse
distribution.
We have a major presence in each of the product categories in
which we compete. Our brands have a leading share of fresh
packaged branded sales measured in both dollars and units in the
major southern metropolitan markets we serve. Our major branded
products include, among others, the following:
| DSD Brands | Regional Franchised Brands | Warehouse Delivery Brands | ||
|
Flowers Foods
|
Sunbeam | Mrs. Freshley’s | ||
|
Nature’s Own
|
Roman Meal | European Bakers | ||
|
Whitewheat
|
Bunny | Broad Street Bakery | ||
|
Cobblestone Mill
|
Holsum | Mi Casa | ||
|
Blue Bird
|
Aunt Hattie’s | Leo’s Foods | ||
|
ButterKrust
|
Juarez | |||
|
Dandee
|
||||
|
Mary Jane
|
||||
|
Evangeline Maid
|
||||
|
Ideal
|
||||
|
Captain John Derst
|
||||
|
Country Hearth
|
||||
|
Nature’s Grain
|
Our strategy is to be one of the nation’s leading producers
and marketers of bakery products, available to distributors and
customers through multiple channels of distribution, including
traditional supermarkets and their in-store deli/bakeries,
foodservice distributors, convenience stores, mass
merchandisers, club stores, wholesalers, restaurants, fast food
outlets, schools, hospitals and vending machines. Our strategy
focuses on developing products
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that are responsive to ever changing consumer needs and
preferences through product innovation and leveraging our well
established brands. To assist in accomplishing our strategy, we
have invested capital to automate and expand our production and
distribution capabilities as well as increase our efficiency. We
believe these investments allow us to produce and distribute
high quality products at the lowest cost.
In our DSD segment, we focus on producing and marketing bakery
products to U.S. customers in the Southeast, Mid-Atlantic,
and Southwest as well as select markets in California and
Nevada. We market a variety of breads and rolls under the brands
outlined in the table above. Over time, through product
innovation and product diversity, we have been able to
strengthen and establish our brands in the markets we serve. We
have devoted significant resources to automate our production
facilities, improve our distribution capabilities and enhance
our information technology. Historically, we have grown through
acquisitions of bakery operations that are generally within or
contiguous to our existing region and which can be served with
our extensive DSD system. However, we also have grown by
expanding our DSD service into markets that adjoin the current
territories we supply, and we intend to continue this growth
initiative in the near future. Our DSD system utilizes
approximately 3,600 independent distributors who own the rights
to distribute certain brands of our fresh packaged bakery
products in their geographic territories. The company has
approximately 4,000 total distributor territories, including
independent distributorships, distributorships available for
sale, and company owned distributorships. Our strategy is to
continue enabling these independent distributors to better serve
their customers, principally by using technology to enhance the
productivity and efficiency of our production facilities and our
DSD system.
In our warehouse delivery segment, we produce snack cakes for
sale to retail, vending, and co-pack customers as well as frozen
bread, rolls and buns for sale to retail and foodservice
customers. Our warehouse products are distributed nationally
through mass merchandisers and brokers, as well as through
warehouse and vending distributors. Additionally, we distribute
to retail outlets to U.S. customers in the Southeast,
Mid-Atlantic, and Southwest as well as select markets in
California and Nevada through our DSD system.
Industry
Overview
The United States food industry is comprised of a number of
distinct product lines and distribution channels for bakery
products. Although supermarket bakery aisle purchases remain the
largest channel for consumers’ bakery foods purchases,
non-supermarket channels, such as mass merchandisers,
convenience stores, club stores, dollar stores, restaurants,
institutions and other convenience channels also are outlets
where consumers purchase bakery items.
Fresh
Bakery Products
In addition to Flowers Foods, several large baking and
diversified food companies market bakery products in the United
States. Competitors in this category include Grupo Bimbo S.A. de
C.V., Hostess Brands, Inc., Sara Lee Corporation, McKee Foods
Corporation (
Little Debbie
) and Campbell Soup Company
(
Pepperidge Farm
). There are also a number of smaller
regional companies. Historically, the larger companies have
enjoyed several competitive advantages over smaller operations
due principally to greater brand awareness and economies of
scale in areas such as purchasing, distribution, production,
information technology, advertising and marketing. However, size
alone is not sufficient to ensure success in our industry.
Consolidation has been a significant trend in the baking
industry over the last several years. It continues to be driven
by factors such as capital constraints on smaller companies that
limit their ability to avoid technological obsolescence and to
increase productivity or to develop new products, generational
changes at family-owned businesses and the need to serve the
consolidated retail customers and the foodservice channel. We
believe that the consolidation trend in the baking, food
retailing and foodservice industries will continue to present
opportunities for strategic acquisitions that complement our
existing businesses and extend our super-regional presence. In
2010, Sara Lee Corporation announced it signed an agreement to
sell its North American Fresh Bakery business to Grupo Bimbo
S.A. de C.V. The transaction is expected to close during 2011
and further consolidate the baking industry.
Frozen
Bakery Products
Primary competitors in the frozen breads and rolls market
include Alpha Baking Co., Inc., Rotella’s Italian Bakery,
United States Bakery (
Franz
), Turano Baking Company and
All Round Foods, Inc.
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Table of Contents
According to the National Restaurant Association
(“NRA”), restaurant industry sales are expected to
reach $604 billion in 2011. The NRA projects that while
overall restaurant industry sales will increase in current
dollars by 3.6% over 2010 figures, they are expected to be flat
when inflation-adjusted. The quickservice restaurant segment is
expected to fare slightly better than the fullservice restaurant
segment as diners focus on values and specials. Quickservice
restaurants are projected to post sales gains of 3.3% over 2010
while sales at fullservice restaurants are projected to increase
3.1% over 2010.
Strategy
Our mission is to drive sustainable growth that over time
enhances value for our shareholders, team members, associates,
distributors, customers, consumers, and communities. Our
strategies are based on the production, distribution and
marketing requirements of the food channels we serve as a
leading producer and marketer of bakery products. Our operating
strategies are to:
| • | Grow Sales. We grow sales by introducing new products, further penetrating core markets, expanding our DSD service to new geographic markets, serving new customers, and making bolt-on acquisitions. | |
| • | Invest Wisely. We invest to make our bakeries the most efficient in the U.S. We will continue investing in technology, efficiency improvements, and new bakeries to maintain our advantage as one of the country’s low-cost bakers. | |
| • | Bake Smart. We offer a broad line of fresh and frozen bakery products that meet our customers’ and our consumers’ needs. We will continue to develop and introduce innovative new products while maintaining the quality of our core products. | |
| • | Develop Brands. Our brands represent product quality, consistency, and delicious taste to consumers. We will maintain our brand strength and use the power of our brands to grow. | |
| • | Give Extraordinary Service. We offer extraordinary service — going beyond the call of duty to help meet customers’ needs. We will expand and refine our distribution and information systems to help us respond even more quickly and efficiently to changing customer service needs, consumer preferences, and seasonal demands in the channels we serve. | |
| • | Innovate. We constantly improve our business processes throughout the company to increase efficiencies, reduce costs, improve quality, and enhance customer service. | |
| • | Appreciate the Team. We embrace diversity, foster team spirit, and encourage professional growth. We build teams that understand the importance of working together to implement our strategies. Our work environment encourages recognition and respect for team and individual achievements. | |
| • | Manage Resources. We strive to conduct business in a manner that helps conserve natural resources and promotes a clean and healthy environment. |
Products
We produce fresh packaged and frozen bakery products.
DSD
Segment
We market our DSD fresh packaged bakery products to
U.S. customers in the Southeast, Mid-Atlantic, and
Southwest as well as select markets in California and Nevada.
Our soft variety and premium specialty breads are marketed
throughout these regions under our
Nature’s Own,
Whitewheat
and
Cobblestone Mill
brands. We have
developed and introduced many new products over the last several
years that appeal to health-conscious consumers. Examples of new
products under our
Nature’s Own
brand in fiscal 2010
include:
| • | Nature’s Own Sandwich Rounds | |
| • | Nature’s Own Thin Sliced Bagels | |
| • | Nature’s Own Whole Grain White Bread |
We also market regional franchised brands such as
Sunbeam,
Roman Meal, Bunny, Holsum
and
Aunt Hattie’s
and
regional brands we own such as
ButterKrust, Country Hearth,
Dandee, Mary Jane, Evangeline Maid, Ideal
and
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Captain John Derst. Nature’s Own
is the bestselling
brand by volume of soft variety bread in the United States,
although it is only available to approximately 54% of the
population, with 2010 retail sales of approximately
$888 million. Our DSD branded retail products account for
approximately 59% of the DSD segment sales.
In addition to our DSD branded products, we also produce and
distribute fresh packaged bakery products under store brands for
retailers. While store branded products carry lower margins than
our branded products, we use our store branded offerings to
effectively utilize production and distribution capacity and to
help the independent distributors in the DSD system expand total
retail shelf space.
We also utilize our DSD system to supply bakery products to
quickserve restaurants, institutions and other outlets, which
account for approximately 25% of DSD sales.
Warehouse
Delivery Segment
Our warehouse delivery segment produces and sells its branded
pastries, doughnuts and bakery snack products primarily under
the
Mrs. Freshley’s
brand to customers for
re-sale through multiple channels of distribution, including
mass merchandisers, vending and convenience stores.
Mrs. Freshley’s
is a full line of bakery snacks
positioned as a warehouse delivered alternative to our
competitors’ DSD brands such as
Hostess
and
Little Debbie. Mrs. Freshley’s
products are
delivered throughout the United States. We also produce
pastries, doughnuts and bakery snack products for distribution
by our DSD system under the
Blue Bird
brand and for sale
to other food companies for re-sale under their brand names. We
also contract manufacture snack products under various store
brand and branded labels for sale through the retail channel.
Some of our contract manufacture customers are also our
competitors.
We also produce and distribute a variety of frozen bread, rolls
and buns for sale to foodservice customers. In addition, our
frozen bread and roll products under the
European Bakers
brand are distributed for retail sale in supermarket
deli-bakeries. We have the ability to provide our customers with
a variety of products using both conventional and hearth baking
technologies.
Production
and Distribution
We design our production facilities and distribution systems to
meet the marketing and production demands of our major product
lines. Through a significant program of capital improvements and
careful planning of plant locations, which, among other things,
allows us to establish reciprocal baking or product transfer
arrangements among our bakeries, we seek to remain a low cost
producer and marketer of a full line of bakery products on a
national and super-regional basis. In addition to the DSD system
for our fresh baked products, we also use both owned and public
warehouses and distribution centers in central locations for the
distribution of certain of our warehouse delivery products.
DSD
Segment
We operate 30 fresh packaged bakery production facilities in
twelve states and one production facility that produces frozen
bakery products. Throughout our history, we have devoted
significant resources to automate our production facilities and
improve our distribution capabilities. We believe that these
investments have made us the most efficient major producer of
packaged bakery products in the United States. We believe that
our capital investment yields long-term benefits in the form of
more consistent product quality, highly sanitary processes, and
greater production volume at a lower cost per unit. We intend to
continue investing in our production facilities and equipment to
maintain high levels of efficiency.
Expansions during 2010 include a new production line for buns at
our Houston (Leeland) Texas manufacturing facility and a new
production line for sandwich rounds at our Denton, Texas
facility.
In August 2008, a wholly owned subsidiary of the company merged
with Holsum Holdings, LLC (“Holsum”). Holsum operates
two bakeries in the Phoenix, Arizona area and serves customers
in Arizona, New Mexico, southern Nevada and southern California
with fresh breads and rolls under the
Holsum
,
Aunt
Hattie’s
, and
Roman Meal
brands. This merger
allowed us to expand our
Nature’s Own
brand into new
geographic markets.
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Table of Contents
In August 2008, the company acquired 100% of the outstanding
shares of capital stock of the parent company of ButterKrust
Bakery (“ButterKrust”). ButterKrust manufactures fresh
breads and rolls in Lakeland, Florida and its products are
available throughout Florida under the
Country Hearth
,
Rich Harvest
, and
Sunbeam
brands, as well as store
brands. This acquisition increased our production capacity in
the Florida market.
We opened a 200,000-square-foot bakery in Bardstown, Kentucky
with one production line in 2009 that produces products for
markets in Tennessee, Kentucky, Ohio, and Indiana. A second
production line began production in spring 2010.
Distribution of fresh packaged bakery products through the
company’s DSD system involves determining appropriate order
levels, delivering the product from the production facility to
the independent distributor for direct store delivery to the
customer, stocking the product on the shelves, visiting the
customer daily to ensure that inventory levels remain adequate
and removing stale goods. The company also uses scan-based
trading, which allows us to track and monitor sales and
inventories more effectively.
We utilize a network of approximately 3,600 independent
distributors who own the rights to distribute certain brands of
our fresh packaged bakery products in their geographic
territories. The company has sold the majority of its
territories to independent distributors under long-term
financing arrangements, most of which are managed and serviced
by the company. The system is designed to provide retail and
foodservice customers with superior service because independent
distributors, highly motivated by financial incentives from
their route ownership, strive to increase sales by maximizing
service. In turn, independent distributors have the opportunity
to benefit directly from the enhanced value of their routes
resulting from higher branded sales volume.
The company leases hand-held computer hardware, which contains
our proprietary software, and charges independent distributors
an administrative fee for its use. This fee reduces the
company’s selling, distribution and administrative expenses
and amounted to $3.7 million, $2.9 million and
$2.9 million for fiscal years 2010, 2009 and 2008,
respectively. Our proprietary software permits distributors to
track and communicate inventory data to the production
facilities and to calculate recommended order levels based on
historical sales data and recent trends. These orders are
electronically transmitted to the appropriate production
facility on a nightly basis. This system is designed to ensure
that the distributor has an adequate supply of product and the
right mix of products available to meet retail and foodservice
customers’ immediate needs. We believe our system minimizes
returns of unsold goods. In addition to hand-held computers, we
use a software system that allows us to accurately track sales,
product returns and profitability by selling location, plant,
day and other criteria. The system provides real-time, on-line
access to sales and gross margin reports on a daily basis,
allowing us to make prompt operational adjustments when
appropriate. The hand-held computers are highly integrated with
this software system. This system permits us to forecast sales
and more fully leverage our sales data warehouse to improve our
in-store product ordering by customer.
Warehouse
Delivery Segment
We operate eleven production facilities, of which four produce
packaged bakery snack products, two produce frozen bread and
rolls, two produce fresh packaged bread and rolls, two produce
mixes used in the baking process and one produces tortillas. We
distribute a majority of our packaged bakery snack products from
a centralized distribution facility located near our Crossville,
Tennessee production facility, which allows us to achieve both
production and distribution efficiencies. The production
facilities are able to operate longer, more efficient production
runs of a single product, a majority of which are then shipped
to the centralized distribution facility. Products coming from
different production facilities are then cross-docked and
shipped directly to customer warehouses. Our frozen bread and
roll products are shipped to various outside freezer facilities
for distribution to our customers. We added three production
lines during 2010 for packaged bakery snack products.
In October 2009, the company acquired Leo’s Foods, Inc. in
Ft. Worth, Texas (“Leo’s”). Leo’s was
formerly a family-owned business with one tortilla facility in
Ft. Worth. The company makes an extensive line of flour and
corn tortillas and tortilla chips that are sold to foodservice
and institutional customers nationwide under
Leo’s
,
Juarez
, and customer brands. This acquisition adds
production capacity for the foodservice and retail customers of
flour and corn tortilla and tortilla chips.
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In May 2009, the company acquired substantially all the assets
of a bakery mix operation in Cedar Rapids, Iowa from General
Mills, Inc. The mix plant produces bakery mixes for the company
and for retail and foodservice customers. With the acquisition,
the company also gained greater control over the
Country
Hearth
trademark, which it licenses to various bakers in
certain parts of the country and delivers through our DSD system.
Customers
Our top 10 customers in fiscal 2010 accounted for 46.5% of
sales. During fiscal 2010, our largest customer,
Wal-Mart/Sam’s Club, represented 21.8% of the
company’s sales. Retail consolidation has increased the
importance of our significant customers. The loss of
Wal-Mart/Sam’s Club or any other major customer or a
material negative change in our relationship with
Wal-Mart/Sam’s Club or any other major customer could have
a material adverse effect on our business. No other customer
accounted for 10% of our sales.
Our fresh baked foods customer base includes mass merchandisers,
supermarkets and other retailers, restaurants, fast-food chains,
food wholesalers, institutions and vending companies. We also
sell returned and surplus product through a system of thrift
outlets. The company currently operates 238 such outlets, and
reported sales of $55.9 million during fiscal 2010 related
to these thrift outlets. We supply numerous restaurants,
institutions and foodservice companies with bakery products. We
also sell packaged bakery products to wholesale distributors for
ultimate sale to a wide variety of food outlets.
Our packaged bakery snack products under the
Mrs. Freshley’s
brand are sold primarily to
customers who distribute the product nationwide through multiple
channels of distribution, including mass merchandisers,
supermarkets, vending outlets and convenience stores. We also
produce packaged bakery snack products for the DSD system under
our
Blue Bird
brand. In certain circumstances, we enter
into co-packing arrangements with other food companies, some of
which are competitors. Our frozen bakery products are sold to
foodservice distributors, institutions, retail in-store bakeries
and restaurants under our
European Bakers
brand and under
store brands.
Marketing
Our marketing and advertising campaigns are conducted through
targeted television and radio advertising and printed media
coupons. We also incorporate promotional tie-ins with other
sponsors, on-package promotional offers and sweepstakes into our
marketing efforts. Additionally, we focus our marketing and
advertising campaigns on specific products throughout the year,
such as hamburger and hotdog buns for Memorial Day, Independence
Day and Labor Day.
Competition
The United States packaged bakery category is intensely
competitive and is comprised of large food companies, large
independent bakeries with national distribution and smaller
regional and local bakeries. Primary national competitors
include Grupo Bimbo S.A. de C.V., Hostess Brands, Inc.
(“Hostess”), Sara Lee Corporation, McKee Foods
Corporation (
Little Debbie
) and Campbell Soup Company
(
Pepperidge Farm
). During 2010, Sara Lee Corporation
announced it has entered into an agreement to sell its North
American Fresh Bakery business to Grupo Bimbo S.A. de C.V. This
transaction is expected to close during 2011 and further
consolidate the baking industry. We also face competition from
store brands produced by us and our competitors. Competition is
based on product availability, product quality, brand loyalty,
price, effective promotions and the ability to target changing
consumer preferences. Customer service, including frequent
delivery and well-stocked shelves through the efforts of our
independent distributors, is an increasingly important
competitive factor. While we experience price pressure from time
to time, primarily as a result of competitors’ promotional
efforts, we believe that our distributor and customer
relationships, which are enhanced by our information technology
and the consumers’ brand loyalty, as well as our diversity
within our region in terms of geographic markets, products and
sales channels, limit the effects of such competition. We
believe we have significant competitive advantages over smaller
regional bakeries due to greater brand awareness and economies
of scale in areas such as purchasing, distribution, production,
information technology, advertising and marketing.
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Competition for fresh packaged bakery snack products is based
upon the ability to meet production and distribution demands of
retail and vending customers at a competitive price.
Competitors for frozen bakery products include Alpha Baking Co.,
Inc., Rotella’s Italian Bakery, United States Bakery,
Turano Baking Company and All Round Foods, Inc. Competition for
frozen bakery products is based primarily on product quality and
consistency, product variety and the ability to consistently
meet production and distribution demands at a competitive price.
Intellectual
Property
We own a number of trademarks and trade names, as well as
certain licenses. The company also sells its products under a
number of regional franchised and licensed trademarks and trade
names that it does not own. These trademarks and trade names are
considered to be important to our business since they have the
effect of developing brand awareness and maintaining consumer
loyalty. On July 23, 2008, a wholly-owned subsidiary of the
company filed a lawsuit against Hostess Brands, Inc.
(“Hostess”) (formerly Interstate Bakeries Corporation)
in the United States District Court for the Northern
District of Georgia. The complaint alleges that Hostess is
infringing upon Flowers’
Nature’s Own
trademarks by using or intending to use the
Nature’s
Pride
trademark. Flowers asserts that Hostess’ sale or
intended sale of baked goods under the
Nature’s Pride
trademark is likely to cause confusion with, and likely to
dilute the distinctiveness of, the
Nature’s Own
mark
and constitutes unfair competition and deceptive trade
practices. Flowers is seeking actual damages, an accounting of
Hostess’ profits from its sales of
Nature’s Pride
products, and injunctive relief. Flowers sought summary
judgment for its claims, which was denied by the court. Unless
our motion for reconsideration is granted and changes that
ruling, we expect this case to proceed to trial in 2011.
Raw
Materials
Our primary baking ingredients are flour, sweeteners and
shortening. We also use paper products, such as corrugated
cardboard and films and plastics to package our baked foods. In
addition, we are dependent upon natural gas and propane as fuel
for firing ovens. The independent distributors and third party
shipping companies are dependent upon gasoline and diesel as
fuel for distribution vehicles. In general, we maintain
diversified sources for all of our baking ingredients and
packaging products.
Commodities, such as our baking ingredients, periodically
experience price fluctuations, and, for that reason, we
continually monitor the market for these commodities. The
commodities market continues to be volatile. Agricultural
commodity prices reached all time high levels during 2007 and
the first half of 2008 before declining during 2009. Commodity
prices began to rise in the second half of 2010 and are expected
to continue rising during 2011. 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 derivative financial instruments to manage the
impact of such volatility in raw materials prices. Any decrease
in the availability of these agreements and instruments could
increase the price of these raw materials and significantly
affect our earnings.
Research
and Development
We engage in research and development activities that
principally involve developing new products, improving the
quality of existing products and improving and automating
production processes. We also develop and evaluate new
processing techniques for both current and proposed product
lines.
Regulation
As a producer and marketer of food items, our operations are
subject to regulation by various federal governmental agencies,
including the Food and Drug Administration, the Department of
Agriculture, the Federal Trade Commission, the Environmental
Protection Agency and the Department of Commerce, as well as
various state agencies, with respect to production processes,
product quality, packaging, labeling, storage and distribution.
Under various statutes and regulations, these agencies prescribe
requirements and establish standards for quality,
7
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purity and labeling. Failure to comply with one or more
regulatory requirements can result in a variety of sanctions,
including monetary fines or compulsory withdrawal of products
from store shelves.
In addition, advertising of our businesses is subject to
regulation by the Federal Trade Commission, and we are subject
to certain health and safety regulations, including those issued
under the Occupational Safety and Health Act.
Our operations, like those of similar businesses, are subject to
various federal, state and local laws and regulations with
respect to environmental matters, including air and water
quality and underground fuel storage tanks, as well as other
regulations intended to protect public health and the
environment. 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 or the competitive position of the company.
The company is currently in substantial compliance with all
material environmental regulations affecting the company and its
properties.
The cost of compliance with such laws and regulations has not
had a material adverse effect on the company’s business.
Our operations and products also are subject to state and local
regulation through such measures as licensing of plants,
enforcement by state health agencies of various state standards
and inspection of facilities. We believe that we are currently
in material compliance with applicable federal, state and local
laws and regulations.
Employees
We employ approximately 8,800 persons, approximately 770 of
whom are covered by collective bargaining agreements. We believe
that we have good relations with our employees.
Other
Available Information
Throughout this
Form 10-K,
we incorporate by reference information from parts of other
documents filed with the SEC. The SEC allows us to disclose
important information by referring to it in this manner, and you
should review this information in addition to the information
contained in this report.
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and proxy statement for the annual shareholders’ meeting,
as well as any amendments to those reports, are available free
of charge through our web site as soon as reasonably practicable
after we file them with the SEC. You can learn more about us by
reviewing our SEC filings in the investor relations page on our
web site at
http://www.flowersfoods.com
under the heading “Investor Center.”
The SEC also maintains a web site at
www.sec.gov
that
contains reports, proxy statements and other information about
SEC registrants, including the company. You may also obtain
these materials at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549. You
can obtain information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
The following corporate governance documents may be obtained
free of charge through our website in the “Corporate
Governance” section of the “Investor Center” tab
or by sending a written request to Flowers Foods, Inc., 1919
Flowers Circle, Thomasville, GA 31757, Attention: Investor
Relations.
| • | Board Committees | |
| • | Code of Business Conduct and Ethics | |
| • | Flowers Foods Employee Code of Conduct | |
| • | Disclosure Policy | |
| • | Corporate Governance Guidelines | |
| • | Stock Ownership Guidelines | |
| • | Audit Committee Charter | |
| • | Compensation Committee Charter |
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| • | Finance Committee Charter | |
| • | Nominating/Corporate Governance Committee Charter |
| Item 1A. | Risk Factors |
You should carefully consider the risks described below,
together with all of the other information included in this
report, in considering our business and prospects. The risks and
uncertainties described below are not the only ones facing us.
Additional risks and uncertainties not presently known to us, or
that we currently deem insignificant, may also impair our
business operations. The occurrence of any of the following
risks could harm our business, financial condition or results of
operations.
Current
economic conditions may negatively impact demand for our
products, which could adversely impact our sales and operating
profit.
Economic conditions have deteriorated significantly throughout
the United States in recent years and these difficult conditions
may continue to exist for the foreseeable future. This
deterioration could have a negative impact on our business.
Economic uncertainty may result in increased pressure to reduce
the prices for some of our products
and/or
limit
our ability to increase or maintain prices. If any of these
events occur, or if the unfavorable economic conditions
continue, our sales and profitability could be adversely
affected.
Increases
in costs and/or shortages of raw materials, fuels and utilities
could cause costs to increase.
Commodities, such as flour, sweeteners, shortening and eggs,
which are used in our bakery products, are subject to price
fluctuations. Any substantial increase in the prices of raw
materials may have an adverse impact on our profitability.
Agricultural commodity prices reached all time high levels
during 2007 and the first half of 2008 before declining during
2009. Commodity prices began to rise in the second half of 2010
and are expected to continue rising during 2011.
The cost of these inputs may fluctuate widely due to government
policy and regulation, weather conditions, domestic and
international demand or other unforeseen circumstances. In
addition, we are dependent upon natural gas and propane for
firing ovens. The independent distributors and third party
shipping companies we use are dependent upon gasoline and diesel
as fuel for distribution vehicles. Substantial future increases
in prices for, or shortages of, these fuels could have a
material adverse effect on our operations and financial results.
The company cannot guarantee that it can cover these cost
increases through future pricing actions. Additionally, as a
result of these pricing actions consumers could move from the
purchase of high margin branded products to lower margin store
brands.
Competition
could adversely impact revenues and profitability.
The United States bakery industry is highly competitive.
Competition is based on product availability, product quality,
price, effective promotions and the ability to target changing
consumer preferences. We experience price pressure from time to
time as a result of our competitors’ promotional and other
pricing efforts. Increased competition could result in reduced
sales, margins, profits and market share.
We rely
on a few large customers for a significant portion of our sales
and the loss of one of our large customers could adversely
affect our financial condition and results of
operations.
We have several large customers that account for a significant
portion of our sales. Our top ten customers accounted for 46.5%
of our sales during fiscal 2010. Our largest customer,
Wal-Mart/Sam’s Club, accounted for 21.8% of our sales
during this period. The loss of one of our large customers could
adversely affect our results of operations. These customers do
not typically enter into long-term sales contracts, and make
purchase decisions based on a combination of price, product
quality, consumer demand and customer service performance. They
may in the future use more of their shelf space, including space
currently used for our products, for store branded products or
products of other suppliers. If our sales to one or more of
these customers are reduced, this reduction may adversely affect
our business.
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Consolidation
in the retail and foodservice industries could affect our sales
and profitability.
As our customers, including mass merchandisers grow larger they
may demand lower pricing and increased promotional programs.
Meeting these demands could adversely affect our margins.
Our large
customers may impose requirements on us that may adversely
affect our results of operations.
From time to time, our large customers may re-evaluate or refine
their business practices and impose new or revised requirements
upon their suppliers, including us. These business demands may
relate to inventory practices, logistics or other aspects of the
customer-supplier relationship. Compliance with requirements
imposed by significant customers may be costly and may have an
adverse effect on our results of operations. However, if we fail
to meet a significant customer’s demands, we could lose
that customer’s business, which could adversely affect our
results of operations.
Our
ability to execute our business strategy could affect our
business.
We employ various operating strategies to maintain our position
as one of the nation’s leading producers and marketers of
bakery products available to customers through multiple channels
of distribution. If we are unsuccessful in implementing or
executing one or more of these strategies, our business could be
adversely affected.
Increases
in employee and employee-related costs could have adverse
effects on our profitability.
Pension, health care and workers’ compensation costs have
been increasing and will likely continue to increase. Any
substantial increase in pension, health care or workers’
compensation costs may have an adverse impact on our
profitability. The company records pension costs and the
liabilities related to its benefit plans based on actuarial
valuations, which include key assumptions determined by
management. Material changes in pension costs may occur in the
future due to changes in these assumptions. Future annual
amounts could be impacted by various factors, such as changes in
the number of plan participants, changes in the discount rate,
changes in the expected long-term rate of return, changes in the
level of contributions to the plan and other factors.
We have
risks related to our pension plans, which could impact the
company’s liquidity.
The company has trusteed, noncontributory defined pension plans
covering certain employees maintained under the
U.S. Employee Retirement Income Security Act of 1974
(“ERISA”). The funding obligations for our pension
plans are impacted by the performance of the financial markets,
including the performance of our common stock, which comprises
approximately 13.0% of all the pension plan assets as of
January 1, 2011.
If the financial markets do not provide the long-term returns
that are expected, the likelihood of the company being required
to make contributions will increase. The equity markets can be,
and recently have been, very volatile, and therefore our
estimate of future contribution requirements can change
dramatically in relatively short periods of time. Similarly,
changes in interest rates can impact our contribution
requirements. In a low interest rate environment, the likelihood
of required contributions in the future increases.
A
disruption in the operation of our DSD system could negatively
affect our results of operations and financial
condition.
We believe that our DSD distribution system is a significant
competitive advantage. A material negative change in our
relations with the independent distributors, an adverse ruling
by regulatory or governmental bodies regarding our independent
distributorship program or an adverse judgment against the
company for actions taken by the independent distributors could
materially affect our results of operation and financial
condition.
We rely
on the value of our brands, and the costs of maintaining and
enhancing the awareness of our brands are increasing, which
could have an adverse impact on our revenues and
profitability.
We rely on the success of our well-recognized brand names. We
intend to maintain our strong brand recognition by continuing to
devote resources to advertising, marketing and other brand
building efforts. If we are not able to successfully maintain
our brand recognition, our revenues and profitability could be
adversely affected.
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Inability
to anticipate changes in consumer preferences may result in
decreased demand for products, which could have an adverse
impact on our future growth and operating results.
Our success depends in part on our ability to respond to current
market trends and to anticipate the tastes and dietary habits of
consumers. Consumer preferences change, and our failure to
anticipate, identify or react to these changes could result in
reduced demand for our products, which could in turn cause our
operating results to suffer.
Future
product recalls or safety concerns could adversely impact our
results of operations.
We may be required to recall certain of our products should they
be mislabeled, contaminated or damaged. We also may become
involved in lawsuits and legal proceedings if it is alleged that
the consumption of any of our products causes injury, illness or
death. A product recall or an adverse result in any such
litigation could have a material adverse effect on our operating
and financial results. We also could be adversely affected if
consumers in our principal markets lose confidence in the safety
and quality of our products.
Government
regulation could adversely impact our results of operations and
financial condition.
As a producer and marketer of food items, we are subject to
regulation by various federal, state and local government
entities and agencies with respect to production processes,
product quality, packaging, labeling, storage and distribution.
Failure to comply with, or violations of, the regulatory
requirements of one or more of these agencies can result in a
variety of sanctions, including monetary fines or compulsory
withdrawal of products from store shelves.
Any
business disruption due to political instability, armed
hostilities, incidents of terrorism or natural disasters could
adversely impact our financial performance.
If terrorist activity, armed conflict, political instability or
natural disasters occur in the U.S. or other locations,
such events may disrupt manufacturing, labor and other aspects
of our business. In the event of such incidents, our business
and financial performance could be adversely affected.
Changes
in applicable laws or regulations or evolving interpretations
thereof, including increased government regulations to limit
carbon dioxide and other greenhouse gas emissions as a result of
concern over climate change, may result in increased compliance
costs, capital expenditures and other financial obligations for
us, which could affect our profitability or impede the
production or distribution of our products, which could affect
our results of operations and financial condition.
We use natural gas, diesel fuel, and electricity in the
manufacturing and distribution of our products. Legislation or
regulation affecting these inputs could materially affect our
profitability. Legislation designed to control emissions
affecting climate change could affect our ability to procure our
commodity needs at costs we currently experience and may require
additional unplanned capital expenditures.
Our
articles of incorporation, bylaws, and shareholder rights plan
and Georgia law may inhibit a change in control that you may
favor.
Our articles of incorporation and bylaws, shareholder rights
plan and Georgia law contain provisions that may delay, deter or
inhibit a future acquisition of us if not approved by our Board
of Directors. This could occur even if our shareholders are
offered an attractive value for their shares or if a substantial
number or even a majority of our shareholders believe the
takeover is in their best interest. These provisions are
intended to encourage any person interested in acquiring us to
negotiate with and obtain the approval of our Board of Directors
in connection with the transaction. Provisions in our
organizational documents that could delay, deter or inhibit a
future acquisition include the following:
| • | a classified Board of Directors; | |
| • | the requirement that our shareholders may only remove directors for cause; | |
| • | specified requirements for calling special meetings of shareholders; and |
11
Table of Contents
| • | the ability of the Board of Directors to consider the interests of various constituencies, including our employees, clients and creditors and the local community. |
Our articles of incorporation also permit the Board of Directors
to issue shares of preferred stock with such designations,
powers, preferences and rights as it determines, without any
further vote or action by our shareholders. In addition, we have
in place a shareholders’ rights plan that will trigger a
dilutive issuance of common stock upon substantial purchases of
our common stock by a third party that are not approved by the
Board of Directors.
| Item 1B. | Unresolved Staff Comments. |
None
Executive
Offices
The address and telephone number of our principal executive
offices are 1919 Flowers Circle, Thomasville, Georgia 31757,
(229) 226-9110.
Executive
Officers of Flowers Foods
The following table sets forth certain information regarding the
persons who currently serve as the executive officers of Flowers
Foods. Our Board of Directors elects our Chairman of the Board
and Chief Executive Officer for a one-year term. The Board of
Directors has granted the Chairman of the Board and Chief
Executive Officer the authority to appoint the executive
officers to hold office until they resign or are removed.
EXECUTIVE
OFFICERS
| Name, age and Office | Business Experience | |
|
George E. Deese
Age 64 Chairman of the Board and Chief Executive Officer |
Mr. Deese has been Chairman of the Board and Chief Executive Officer of Flowers Foods since January 2010. Mr. Deese previously served as Chairman of the Board, President and Chief Executive Officer of Flowers Foods from January 2006 to January 2010. He previously served as President and Chief Executive Officer of Flowers Foods from January 2004 to January 2006. Prior to that he served as President and Chief Operating Officer of Flowers Foods from May 2002 until January 2004. Mr. Deese also served as President and Chief Operating Officer of Flowers Bakeries from January 1997 until May 2002, President and Chief Operating Officer, Baked Products Group of Flowers Industries from 1983 to January 1997, Regional Vice President, Baked Products Group of Flowers Industries from 1981 to 1983 and President of Atlanta Baking Company from 1980 to 1981. | |
|
Allen L. Shiver
Age 55 President |
Mr. Shiver has been President of Flowers Foods since January 2010. Mr. Shiver previously served as Executive Vice President and Chief Marketing Officer of Flowers Foods from May 2008 to January 2010. He previously served as President and Chief Operating Officer of the warehouse delivery segment from April 2003 until May 2008. Prior to that, he served as President and Chief Operating Officer of Flowers Snack from July 2002 until April 2003. Prior to that Mr. Shiver served as Executive Vice President of Flowers Bakeries from 1998 until 2002, as a Regional Vice President of Flowers Bakeries in 1998 and as President of Flowers Baking Company of Villa Rica from 1995 until 1998. Prior to that time, Mr. Shiver served in various sales and marketing positions at Flowers Bakeries. |
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|
R. Steve Kinsey
Age 50 Executive Vice President and Chief Financial Officer |
Mr. Kinsey has been Executive Vice President and Chief Financial Officer of Flowers Foods since May 2008. Mr. Kinsey previously served as Senior Vice President and Chief Financial Officer of Flowers Foods from September 2007 to May 2008. Prior to that he served as Vice President and Corporate Controller of Flowers Foods from 2002 to 2007. Prior to that he served as Director of Tax of Flowers Foods from 2001 to 2002 and Flowers Industries from 1998 to 2001. Mr. Kinsey served as Tax Manager of Flowers Industries from 1994 to 1998. Mr. Kinsey joined the company in 1989 as a Tax Associate. | |
|
Gene D. Lord
Age 63 Executive Vice President and Chief Operating Officer |
Mr. Lord has been Executive Vice President and Chief Operating Officer of Flowers Foods since May 2008. Mr. Lord previously served as President and Chief Operating Officer of the DSD segment from July 2002 to May 2008. Prior to that, he served as a Regional Vice President of Flowers Bakeries from January 1997 until July 2002. Prior to that, he served as Regional Vice President, Baked Products Group of Flowers Industries from May 1987 until January 1997 and as President of Atlanta Baking Company from February 1981 until May 1987. Prior to that time, Mr. Lord served in various sales positions at Flowers Bakeries. | |
|
Stephen R. Avera
Age 54 Executive Vice President, Secretary and General Counsel |
Mr. Avera has been Executive Vice President, Secretary and General Counsel of Flowers Foods since May 2008. Mr. Avera previously served as Senior Vice President, Secretary and General Counsel of Flowers Foods from September 2004 to May 2008. Prior to that, he served as Secretary and General Counsel from February 2002 until September 2004. He also served as Vice President and General Counsel of Flowers Bakeries from July 1998 to February 2002. Mr. Avera also previously served as an associate and Assistant General Counsel of Flowers Industries from February 1986 to July 1998. | |
|
Michael A. Beaty
Age 60 Executive Vice President of Supply Chain |
Mr. Beaty has been Executive Vice President of Supply Chain of Flowers Foods since May 2008. Mr. Beaty previously served as Senior Vice President-Supply Chain of Flowers Foods from September 2002 to May 2008. Prior to that, he served as Senior Vice President of Bakery Operations of Flowers Bakeries from September 1994 until September 2002. He also served as Vice President of Manufacturing of Flowers Bakeries from February 1987 until September 1994. Prior to that time, Mr. Beaty served in management positions at various Flowers Bakeries operations, including Vice President of Manufacturing, Executive Vice President and President of various Flowers operations from 1974 until 1987. | |
|
Marta Jones Turner
Age 57 Executive Vice President of Corporate Relations |
Ms. Turner has been Executive Vice President of Corporate Relations of Flowers Foods since May 2008. Ms. Turner previously served as Senior Vice President of Corporate Relations of Flowers Foods from July 2004 to May 2008. Prior to that, she served as Vice President of Communications and Investor Relations from November 2000 until July 2004. She also served as Vice President of Public Affairs of Flowers Industries from September 1997 until January 2000 and Director of Public Relations of Flowers Industries from 1985 until 1997. | |
|
Karyl H. Lauder
Age 54 Senior Vice President and Chief Accounting Officer |
Ms. Lauder has been Senior Vice President and Chief Accounting Officer of Flowers Foods since May 2008. Ms. Lauder previously served as Vice President and Chief Accounting Officer of Flowers Foods from September 2007 to May 2008. Ms. Lauder previously served as Vice President and Operations Controller of Flowers Foods from 2003 to 2007. Prior to that she served as Division Controller for Flowers Bakeries Group from 1997 to 2003. Prior to that, Ms. Lauder served as a Regional Controller for Flowers Bakeries after serving as Controller and in other accounting supervisory positions at various plant locations since 1978. |
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Table of Contents
|
Bradley K. Alexander
Age 52 President, Flowers Bakeries |
Mr. Alexander has been President of Flowers Bakeries since May 2008. Mr. Alexander previously served as a Regional Vice President of Flowers Bakeries from 2003 until May 2008. Prior to that, he served in various sales, marketing and operational positions since joining the company in 1981, including bakery president and Senior Vice President of Sales and Marketing. | |
|
Donald A. Thriffiley, Jr.
Age 57 Senior Vice President of Human Resources |
Mr. Thriffiley has been Senior Vice President of Human Resources for Flowers Foods since May 2008. Mr. Thriffiley, previously served as Vice President of Human Resources from 2002 to 2008. Prior to that Mr. Thriffiley served as Director of Human Resources for Flowers Bakeries and in other human resources positions since joining the company in 1977. | |
|
Vyto F. Razminas
Age 53 Senior Vice President and Chief Information Officer |
Mr. Razminas has been Senior Vice President and Chief Information Officer for Flowers Foods since May 2008. Mr. Razminas, previously served as Vice President of Business and Information Systems from 2002 to 2008. Prior to that Mr. Razminas served as Chief Information Officer from 1998 to 2002. | |
|
H. Mark Courtney
Age 50 Senior Vice President of Sales and Marketing |
Mr. Courtney has been Senior Vice President of Sales and Marketing of Flowers Bakeries since January of 2010. He previously served as Senior Vice President of Sales from April 2008 until January 2010. Prior to that, Mr. Courtney served in various sales, marketing, and operations positions, including Executive Vice President of Flowers Snack Group. Mr. Courtney joined the company in 1983. |
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| Item 2. | Properties |
The company currently operates 42 production facilities, of
which 41 are owned and one is leased, as indicated below. We
consider that our properties are in good condition, well
maintained and sufficient for our present operations. During
fiscal 2010, DSD production facilities taken as a whole,
operated moderately above capacity and warehouse delivery
production facilities operated moderately below capacity. Our
production plant locations are:
|
DSD
|
||
|
Birmingham, Alabama
|
Baton Rouge, Louisiana | |
|
Opelika, Alabama
|
Lafayette, Louisiana | |
|
Tuscaloosa, Alabama
|
New Orleans, Louisiana | |
|
Phoenix, Arizona
|
Goldsboro, North Carolina | |
|
Tolleson, Arizona
|
Jamestown, North Carolina | |
|
Batesville, Arkansas
|
Newton, North Carolina | |
|
Bradenton, Florida
|
Morristown, Tennessee | |
|
Jacksonville, Florida
|
Denton, Texas | |
|
Lakeland, Florida
|
El Paso, Texas | |
|
Miami, Florida
|
Houston, Texas(2) | |
|
Atlanta, Georgia
|
San Antonio, Texas | |
|
Savannah, Georgia
|
Tyler, Texas | |
|
Thomasville, Georgia
|
Lynchburg, Virginia | |
|
Villa Rica, Georgia
|
Norfolk, Virginia | |
|
Bardstown, Kentucky
|
Bluefield, West Virginia | |
|
Warehouse Delivery
|
||
|
Montgomery, Alabama
|
Sykesville, Maryland (Leased) | |
|
Texarkana, Arkansas
|
Winston-Salem, North Carolina | |
|
Suwanee, Georgia
|
Cleveland, Tennessee | |
|
Tucker, Georgia
|
Crossville, Tennessee | |
|
Cedar Rapids, Iowa
|
Ft. Worth, Texas | |
|
London, Kentucky
|
||
The company leases properties that house its shared services
center and its information technology group, and owns its
corporate headquarters facility, all of which are located in
Thomasville, Georgia.
| Item 3. | Legal Proceedings |
The company and its subsidiaries from time to time are parties
to, or targets of, lawsuits, claims, investigations and
proceedings, which are being handled and defended in the
ordinary course of business. While the company is unable to
predict the outcome of these matters, it believes, based upon
currently available facts, that it is remote that the ultimate
resolution of any such pending matters will have a material
adverse effect on its overall financial condition, results of
operations or cash flows in the future. However, adverse
developments could negatively impact earnings in a particular
future fiscal period.
On July 23, 2008, a wholly-owned subsidiary of the company
filed a lawsuit against Hostess Brands, Inc.
(“Hostess”) (formerly Interstate Bakeries Corporation)
in the United States District Court for the Northern District of
Georgia. The complaint alleges that Hostess is infringing upon
Flowers’
Nature’s Own
trademarks by using or
intending to use the
Nature’s Pride
trademark.
Flowers asserts that Hostess’ sale or intended sale of
baked goods under the
Nature’s Pride
trademark is
likely to cause confusion with, and likely to dilute the
distinctiveness of, the
Nature’s Own
mark and
constitutes unfair competition and deceptive trade practices.
Flowers is seeking actual damages, an accounting of
Hostess’ profits from its sales of
Nature’s Pride
products, and injunctive relief. Flowers sought summary
judgment for its claims, which was denied by the court. Unless
our motion for reconsideration is granted and changes that
ruling, we expect this case to proceed to trial in 2011.
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The company’s facilities are subject to various federal,
state and local laws and regulations regarding the discharge of
material into the environment and the protection of the
environment in other ways. The company is not a party to any
material proceedings arising under these regulations. The
company believes that compliance with existing environmental
laws and regulations will not materially affect the consolidated
financial condition or the competitive position of the company.
The company is currently in substantial compliance with all
material environmental regulations affecting the company and its
properties.
| Item 4. | [Removed and Reserved] |
PART II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market
Information
Shares of Flowers Foods common stock are quoted on the New York
Stock Exchange under the symbol “FLO.” The following
table sets forth quarterly dividend information and the high and
low sale prices of the company’s common stock on the New
York Stock Exchange as reported in published sources.
| FY 2010 | FY 2009 | |||||||||||||||||||||||
| Market Price | Dividend | Market Price | Dividend | |||||||||||||||||||||
| Quarter | High | Low | High | Low | ||||||||||||||||||||
|
First
|
$ | 26.67 | $ | 23.75 | $ | 0.175 | $ | 24.44 | $ | 20.40 | $ | 0.150 | ||||||||||||
|
Second
|
$ | 27.58 | $ | 23.68 | $ | 0.200 | $ | 24.27 | $ | 20.59 | $ | 0.175 | ||||||||||||
|
Third
|
$ | 26.15 | $ | 22.97 | $ | 0.200 | $ | 26.40 | $ | 22.41 | $ | 0.175 | ||||||||||||
|
Fourth
|
$ | 27.34 | $ | 24.25 | $ | 0.200 | $ | 24.72 | $ | 21.90 | $ | 0.175 | ||||||||||||
Holders
As of February 18, 2011, there were approximately 4,000
holders of record of our common stock.
Dividends
The payment of dividends is subject to the discretion of our
Board of Directors. The Board of Directors bases its decisions
regarding dividends on, among other things, general business
conditions, our financial results, contractual, legal and
regulatory restrictions regarding dividend payments and any
other factors the Board may consider relevant.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following chart sets forth the amounts of securities
authorized for issuance under the company’s compensation
plans.
|
Number of Securities to
|
Number of Securities Remaining
|
|||||||||||
|
be Issued Upon
|
Weighted Average
|
Available for Future Issuance Under
|
||||||||||
|
Exercise of Outstanding
|
Exercise Price of
|
Equity Compensation Plans
|
||||||||||
|
Options, Warrants and
|
Outstanding Options,
|
(Excluding Securities Reflected in
|
||||||||||
| Plan Category | Rights | Warrants and Rights | Column(a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||
|
Equity compensation plans approved by security holders
|
4,365 | $ | 22.00 | 3,923 | ||||||||
|
Equity compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
4,365 | $ | 22.00 | 3,923 | ||||||||
16
Table of Contents
Under the company’s compensation plans, the Board of
Directors is authorized to grant a variety of stock-based
awards, including stock options, restricted stock awards and
deferred stock, to its directors and certain of its employees.
The number of securities set forth in column (c) above
reflects securities available for issuance as stock options,
restricted stock and deferred stock under the company’s
compensation plans. The number of shares available under the
compensation plan approved by security holders increased by
4,000,000 shares to 18,625,000 shares as approved by
shareholder vote in 2009. See Note 17,
Stock-Based
Compensation,
of Notes to Consolidated Financial Statements
of this
Form 10-K
for additional information on equity compensation plans.
Stock
Performance Graph
The chart below is a comparison of the cumulative total return
(assuming the reinvestment of all dividends paid) among Flowers
Foods common stock, Standard & Poor’s 500 Index,
Standard & Poor’s 500 Packaged Foods and Meats
Index, and Standard & Poor’s MidCap 400 Index for
the period December 31, 2005 through December 31,
2010, the last trading day of our 2010 fiscal year.
Comparison
of Cumulative Five Year Total Return
|
December 31,
|
December 30,
|
December 29,
|
January 3,
|
January 2,
|
January 1,
|
|||||||||||||||||||||||||
| 2005 | 2006 | 2007 | 2009 | 2010 | 2011 | |||||||||||||||||||||||||
|
FLOWERS FOODS INC
|
100.00 | 99.64 | 135.04 | 137.62 | 141.22 | 164.83 | ||||||||||||||||||||||||
|
S&P 500 INDEX
|
100.00 | 115.79 | 123.00 | 79.39 | 97.34 | 112.00 | ||||||||||||||||||||||||
|
S&P 500 PACKAGED FOODS & MEAT INDEX
|
100.00 | 116.5 | 119.97 | 106.21 | 122.81 | 142.91 | ||||||||||||||||||||||||
|
S&P MIDCAP 400 INDEX
|
100.00 | 110.32 | 119.81 | 77.81 | 104.36 | 132.17 | ||||||||||||||||||||||||
Companies in the S&P 500 Index, the S&P 500 Packaged
Foods and Meats Index, and the S&P MidCap 400 Index are
weighted by market capitalization and indexed to $100 at
December 31, 2005. Flowers Foods’ share price is also
indexed to $100 at December 31, 2005.
17
Table of Contents
Purchases
of Equity Securities by the Issuer and Affiliated
Purchases
Our Board of Directors has approved a plan that authorized stock
repurchases of up to 30.0 million shares of the
company’s common stock. Under the plan, the company may
repurchase its common stock in open market or privately
negotiated transactions at such times and at such prices as
determined to be in the company’s best interest. These
purchases may be commenced or suspended without prior notice
depending on then-existing business or market conditions and
other factors. The company has purchased 24.2 million
shares under the plan through January 1, 2011. The
following chart sets forth the amounts of our common stock
purchased by the company during the fourth quarter of fiscal
2010 under the stock repurchase plan.
|
Total
|
||||||||||||||||
|
Number of
|
Maximum
|
|||||||||||||||
|
Shares
|
Number of
|
|||||||||||||||
|
Purchased
|
Shares that
|
|||||||||||||||
|
as Part of
|
May Yet Be
|
|||||||||||||||
|
Total
|
Publicly
|
Purchased
|
||||||||||||||
|
Number of
|
Weighted
|
Announced
|
Under the
|
|||||||||||||
|
Shares
|
Average Price
|
Plan or
|
Plan or
|
|||||||||||||
| Period | Purchased | per Share | Programs | Programs | ||||||||||||
| (Amounts in thousands, except price data) | ||||||||||||||||
|
October 10, 2010 — November 6, 2010
|
45 | $ | 25.54 | 45 | 6,395 | |||||||||||
|
November 7, 2010 — December 4, 2010
|
130 | $ | 25.82 | 130 | 6,265 | |||||||||||
|
December 5, 2010 — January 1, 2011
|
464 | $ | 25.67 | 464 | 5,801 | |||||||||||
|
Total
|
639 | $ | 25.69 | 639 | ||||||||||||
| Item 6. | Selected Financial Data |
The selected consolidated historical financial data presented
below as of and for the fiscal years 2010, 2009, 2008, 2007, and
2006 have been derived from the audited consolidated financial
statements of the company. The results of operations presented
below are not necessarily indicative of results that may be
expected for any future period and should be read in conjunction
with
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
, and our Consolidated
Financial Statements and the accompanying Notes to Consolidated
Financial Statements in this
Form 10-K.
|
For the 53
|
||||||||||||||||||||
| For the 52 Weeks Ended | Weeks Ended | For the 52 Weeks Ended | ||||||||||||||||||
| January 1, 2011 | January 2, 2010 | January 3, 2009 | December 29, 2007 | December 30, 2006 | ||||||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||||||
|
Statement of Income Data:
|
||||||||||||||||||||
|
Sales
|
$ | 2,573,769 | $ | 2,600,849 | $ | 2,414,892 | $ | 2,036,674 | $ | 1,888,654 | ||||||||||
|
Income from continuing operations before cumulative effect of a
change in accounting principle
|
137,047 | 133,712 | 122,307 | 98,115 | 78,135 | |||||||||||||||
|
Income from discontinued operations, net of income tax
|
— | — | — | — | 6,731 | |||||||||||||||
|
Cumulative effect of a change in accounting principle, net of
income tax benefit
|
— | — | — | — | (568 | )(1) | ||||||||||||||
|
Net income
|
137,047 | 133,712 | 122,307 | 98,115 | 84,298 | |||||||||||||||
|
Net income attributable to noncontrolling interest
|
— | (3,415 | ) | (3,074 | ) | (3,500 | ) | (3,255 | ) | |||||||||||
|
Net income attributable to Flowers Foods, Inc.
|
$ | 137,047 | $ | 130,297 | $ | 119,233 | $ | 94,615 | $ | 81,043 | ||||||||||
|
Income from continuing operations before cumulative effect of a
change in accounting principle attributable to Flowers Foods,
Inc. common shareholders per diluted share
|
$ | 1.49 | $ | 1.41 | $ | 1.28 | $ | 1.02 | $ | 0.81 | ||||||||||
|
Cash dividends per common share
|
$ | 0.775 | $ | 0.675 | $ | 0.575 | $ | 0.458 | $ | 0.317 | ||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Total assets
|
$ | 1,325,489 | $ | 1,351,442 | $ | 1,353,244 | $ | 987,535 | $ | 906,590 | ||||||||||
|
Long-term debt
|
$ | 98,870 | $ | 225,905 | $ | 263,879 | $ | 22,508 | $ | 79,126 | ||||||||||
| (1) | Relates to the adoption on January 1, 2006 of guidance on accounting for share-based payments. |
18
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with
Selected Financial Data included herein and our Consolidated
Financial Statements and the accompanying Notes to Consolidated
Financial Statements included in this
Form 10-K.
The following information contains forward-looking statements
which involve certain risks and uncertainties. See
Forward-Looking Statements.
Overview
Flowers Foods is one of the nation’s leading producers and
marketers of packaged bakery foods for retail and foodservice
customers. The company produces breads, buns, rolls, tortillas,
snack cakes and pastries that are distributed fresh to
U.S. customers in the Southeast, Mid-Atlantic, and
Southwest as well as select markets in California and Nevada and
frozen to customers nationwide. Our businesses are organized
into two reportable segments: DSD and warehouse delivery. The
DSD segment focuses on the production and marketing of bakery
products to U.S. customers in the Southeast, Mid-Atlantic,
and Southwest as well as select markets in California and Nevada
primarily through its DSD system. The warehouse delivery segment
produces snack cakes for sale to co-pack, retail and vending
customers nationwide as well as frozen bread, rolls and buns and
tortillas for sale to retail and foodservice customers
nationwide primarily through warehouse distribution.
We aim to achieve consistent and sustainable growth in sales and
earnings by focusing on improvement in the operating results of
our existing businesses and, after detailed analysis, acquiring
businesses and properties that add value to the company. We
believe this consistent and sustainable growth will build value
for our shareholders.
Sales are principally affected by pricing, quality, brand
recognition, new product introductions and product line
extensions, marketing and service. The company manages these
factors to achieve a sales mix favoring its higher-margin
branded products, while using store branded products to absorb
overhead costs and maximize use of production capacity. Sales
for fiscal 2010 decreased 1.0% from fiscal 2009. This decrease
was primarily due to decreased volume and the deconsolidation of
a Variable Interest Entity (“VIE”), as discussed in
Note 14,
Variable Interest Entity,
of Notes to
Consolidated Financial Statements of this
Form 10-K,
partially offset by favorable pricing and mix shifts. During
fiscal 2010, our sales were negatively impacted by the weakened
economy, the competitive landscape and higher promotional
activity within the baking industry. While the company expects
sales to grow, it cannot guarantee at what level considering the
current economic environment and competitive landscape in the
baking industry.
Commodities, such as our baking ingredients, periodically
experience price fluctuations, and, for that reason, we
continually monitor the market for these commodities. The cost
of these inputs may fluctuate widely due to government policy
and regulation, weather conditions, domestic and international
demand or other unforeseen circumstances. Agricultural commodity
prices reached all time high levels during 2007 and the first
half of 2008 before declining during 2009. Commodity prices
began to rise in the second half of 2010 and are expected to
continue rising during 2011. We enter into forward purchase
agreements and other derivative financial instruments qualifying
for hedge accounting to reduce the impact of such volatility in
raw material prices. Any decrease in the availability of these
agreements and instruments could increase the price of these raw
materials and significantly affect our earnings.
Critical
Accounting Estimates
Note 2,
Summary of Significant Accounting Policies,
of the Notes to Consolidated Financial Statements of this
Form 10-K
includes a summary of the significant accounting policies and
methods used in the preparation of the company’s
consolidated financial statements.
The company’s discussion and analysis of its results of
operations and financial condition are based upon the
Consolidated Financial Statements of the company, which have
been prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”). The
preparation of these financial statements requires the company
to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of the
revenues and expenses during the reporting period. On an ongoing
basis,
19
Table of Contents
the company evaluates its estimates, including those related to
customer programs and incentives, bad debts, raw materials,
inventories, long-lived assets, intangible assets, income taxes,
restructuring, pensions and other post-retirement benefits and
contingencies and litigation. The company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The selection and disclosure of the company’s critical
accounting estimates have been discussed with the company’s
audit committee. The following is a review of the critical
assumptions and estimates, and the accounting policies and
methods listed below which are 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. |
Revenue Recognition.
The company recognizes
revenue from the sale of its products at the time of delivery
when title and risk of loss pass to the customer. The company
records estimated reductions to revenue for customer programs
and incentive offerings at the time the incentive is offered or
at the time of revenue recognition for the underlying
transaction that results in progress by the customer towards
earning the incentive. If market conditions were to decline, the
company may take actions to increase incentive offerings,
possibly resulting in an incremental reduction of revenue.
Independent distributors receive a discount equal to a
percentage of the wholesale price of product sold to retailers
and other customers. The company records such amounts as
selling, distribution and administrative expenses. If market
conditions were to decline, the company may take actions to
increase distributor discounts, possibly resulting in an
incremental increase in selling, distribution and administrative
expenses at the time the discount is offered.
The consumer packaged goods industry has used scan-based trading
technology 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. Consequently, revenue is not recognized until the
product is purchased by the consumer. This technology is
referred to as
pay-by-scan
(“PBS”). The company began a pilot program in fiscal
1999, working with certain retailers to develop the technology
to execute PBS, and there has been a sharp increase in its use
since that time. The company believes it is a baked foods
industry leader in PBS and utilizes this technology with a
majority of its larger retail customers such as Wal-Mart,
Kroger, Food Lion and Winn-Dixie. In fiscal 2010 the company
recorded $744.7 million in sales through PBS. The company
will continue to implement PBS technology for current PBS
customers as they open new retail stores during 2011. In
addition, new PBS customers will begin implementation during
2011.
Revenue on PBS sales is recognized when the product is purchased
by the end consumer because that is when title and risk of loss
is transferred. Non-PBS sales are recognized when the product is
delivered to the customer (i.e. the independent distributor or
retail customers) since that is when title and risk of loss is
transferred. See Note 2,
Summary of Significant
Accounting Policies
, of Notes to Consolidated Financial
Statements of this
Form 10-K
for additional information on PBS and the significant accounting
policies associated with PBS.
Derivative Instruments.
The company’s
cost of primary raw materials is highly correlated to certain
commodities markets. Commodities, such as our baking
ingredients, experience price fluctuations. If actual market
conditions become significantly different than those
anticipated, raw material prices could increase significantly,
adversely affecting our results of operations. We enter into
forward purchase agreements and other derivative financial
instruments qualifying for hedge accounting to manage the impact
of volatility in raw material prices.
20
Table of Contents
Valuation of Long-Lived Assets, Goodwill and Other
Intangibles.
The company records an impairment
charge to property, plant and equipment, goodwill and intangible
assets in accordance with applicable accounting standards when,
based on certain indicators of impairment, it believes such
assets have experienced a decline in value that is other than
temporary. Future adverse changes in market conditions or poor
operating results of these underlying assets could result in
losses or an inability to recover the carrying value of the
asset that may not be reflected in the asset’s current
carrying value, thereby possibly requiring impairment charges in
the future. Based on management’s evaluation, no impairment
charges relating to long-lived assets were necessary for fiscal
years 2010 or 2009. There was an impairment charge of
$3.1 million recorded in fiscal 2008, as discussed below in
Results of Operations.
The company evaluates the recoverability of the carrying value
of its goodwill on an annual basis or at a time when events
occur that indicate the carrying value of the goodwill may be
impaired using a two step process. The first step of this
evaluation is performed by calculating the fair value of the
business segment, or reporting unit, with which the goodwill is
associated. This fair value is calculated as the average of
projected EBITDA (defined as earnings before interest, taxes,
depreciation and amortization) using a reasonable multiplier and
projected revenue using a reasonable multiplier. This fair value
is compared to the carrying value of the reporting unit, and if
less than the carrying value, the goodwill is measured for
potential impairment under step two. Under step two of this
calculation, goodwill is measured for potential impairment by
comparing the implied fair value of the reporting unit goodwill,
determined in the same manner as a business combination, with
the carrying amount of the goodwill. Based on management’s
evaluation, no impairment charges relating to goodwill were
necessary for the fiscal years 2010, 2009, or 2008.
In connection with acquisitions, the company has acquired
trademarks, customer lists and non-compete agreements, which are
intangible assets subject to amortization. The company evaluates
these assets whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. The undiscounted future cash flows of each
intangible asset is compared to the carrying amount, and if less
than the carrying value, the intangible asset is written down to
the extent the carrying amount exceeds the fair value. Based on
management’s evaluation, no impairment charges relating to
amortizable intangible assets were necessary for the fiscal
years 2010, 2009, or 2008.
The company also owns trademarks acquired in acquisitions that
are intangible assets not subject to amortization. The company
evaluates the recoverability of the carrying value of these
intangible assets on an annual basis or at a time when events
occur that indicate the carrying value may be impaired. In
addition, the useful life is evaluated to determine whether
events and circumstances continue to support an indefinite life.
The fair value is compared to the carrying value of the
intangible asset, and if less than the carrying value, the
intangible asset is written down to fair value. Based on
management’s evaluation, no impairment charges relating to
intangible assets not subject to amortization were necessary for
the fiscal years 2010, 2009, or 2008.
See Note 8,
Goodwill and Other Intangible Assets
, of
Notes to Consolidated Financial Statements of this
Form 10-K
for further information relating to the company’s goodwill
and other intangible assets.
Self-Insurance Reserves.
We are self-insured
for various levels of general liability, auto liability,
workers’ compensation and employee medical and dental
coverage. Insurance reserves are calculated on an undiscounted
basis based on actual claim data and estimates of incurred but
not reported claims developed utilizing historical claim trends.
Projected settlements and incurred but not reported claims are
estimated based on pending claims and historical trends and
data. Though the company does not expect them to do so, actual
settlements and claims could differ materially from those
estimated. Material differences in actual settlements and claims
could have an adverse effect on our financial condition and
results of operations.
Income Tax Expense and Accruals.
The annual
tax rate is based on our income, statutory tax rates and tax
planning opportunities available to us in the various
jurisdictions in which we operate. Changes in statutory rates
and tax laws in jurisdictions in which we operate may have a
material effect on the annual tax rate. The effect of these
changes, if any, would be recognized when the change takes place.
21
Table of Contents
Deferred income taxes arise from temporary differences between
tax and financial statement recognition of revenue and expense.
Our income tax expense, deferred tax assets and liabilities and
reserve for unrecognized tax benefits reflect our best
assessment of future taxes to be paid in the jurisdictions in
which we operate. The company records a valuation allowance to
reduce its deferred tax assets if it is more likely than not
that some or all of the deferred assets will not be realized.
While the company has considered future taxable income and
ongoing prudent and feasible tax strategies in assessing the
need for the valuation allowance, if these estimates and
assumptions change in the future, the company may be required to
adjust its valuation allowance, which could result in a charge
to, or an increase in, income in the period such determination
is made.
Periodically we face audits from federal and state tax
authorities, which can result in challenges regarding the timing
and amount of deductions. We provide reserves for potential
exposures when we consider it more likely than not that a taxing
authority may take a sustainable position on a matter contrary
to our position. We evaluate these reserves on a quarterly basis
to insure that they have been appropriately adjusted for events,
including audit settlements, that may impact the ultimate
payment of such potential exposures. While the ultimate outcome
of audits cannot be predicted with certainty, we do not
currently believe that future audits will have a material
adverse effect on our consolidated financial condition or
results of operations. During fiscal 2010, the IRS completed the
audit of fiscal years 2007 and 2008. The results of the audit
were immaterial, and the company is no longer subject to federal
examination for years prior to 2009. See Note 21,
Income
Taxes
, of Notes to Consolidated Financial Statements of this
Form 10-K
for more information on income taxes.
Pension Obligations.
The company records
pension costs and benefit obligations related to its defined
benefit plans based on actuarial valuations. These valuations
reflect key assumptions determined by management, including the
discount rate and expected long-term rate of return on plan
assets. The expected long-term rate of return assumption
considers the asset mix of the plans portfolios, past
performance of these assets, the anticipated future economic
environment and long-term performance of individual asset
classes, and other factors. Material changes in pension costs
and in benefit obligations may occur in the future due to
experience different than assumed and changes in these
assumptions. Future benefit obligations and annual pension costs
could be impacted by changes in the discount rate, changes in
the expected long-term rate of return, changes in the level of
contributions to the plans and other factors. Effective
January 1, 2006, the company curtailed its largest defined
benefit plan that covered 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
another defined benefit plan that covers a small number of union
employees. Effective August 4, 2008, the company assumed
sponsorship of two defined benefit plans as part of the
ButterKrust acquisition. Benefits under these plans are frozen,
and no future benefits will accrue under these plans. The
company recorded pension cost of $0.6 million for fiscal
2010.
A quarter percentage point change in the discount rate would
impact the company’s fiscal 2010 pension cost by
approximately $0.2 million on a pre-tax basis. A quarter
percentage point change in the long-term expected rate of return
assumption would impact the company’s fiscal 2010 pension
cost by approximately $0.6 million on a pre-tax basis. A
quarter percentage point decrease in the discount rate would
increase the company’s fiscal year-end 2010 pension
obligations by approximately $11.0 million. A quarter
percentage point increase in the discount rate would decrease
the company’s fiscal year-end 2010 pension obligations by
approximately $10.4 million. The company expects pension
income of approximately $0.2 million for fiscal 2011.
The discount rate used by the company reflects rates at which
pension benefits could be effectively settled. The company looks
to rates of return on high-quality fixed income investments to
determine its discount rate. The company uses a cash flow
matching technique to select the discount rate. The expected
cash flows of each pension plan are matched to a yield curve
based on Aa-graded bonds available in the marketplace at the
measurement date. A present value is developed, which is then
used to develop a single equivalent discount rate.
In developing the expected long-term rate of return on plan
assets at each measurement date, the company considers the plan
assets’ historical actual returns, targeted asset
allocations, and the anticipated future economic environment and
long-term performance of individual asset classes, based on the
company’s investment strategy. While appropriate
consideration is given to recent and historical investment
performance, the assumption represents management’s best
estimate of the long-term prospective return. Based on these
factors the long-term rate of return assumption for the plans
was set at 8.0% for fiscal 2010, as compared with the average
annual return on the
22
Table of Contents
plans assets over the past 15 years of approximately 9.1%
(net of expenses). The expected long-term rate of return
assumption is based on a target asset allocation of
40-60%
equity securities,
10-40%
fixed
income securities, 0-25% real estate, 0-40% other diversifying
strategies (including, absolute return funds, hedged equity
funds, and guaranteed insurance contracts), and 0-25% short-term
investments and cash. The company regularly reviews such
allocations and periodically rebalances the plan assets to the
targeted allocation when considered appropriate. Pension costs
do not include an explicit expense assumption and the return on
assets rate reflects the long-term expected return, net of
expenses.
The company determines the fair value of substantially all its
plans assets utilizing market quotes rather than developing
“smoothed” values, “market related” values
or other modeling techniques. Plan asset gains or losses in a
given year are included with other actuarial gains and losses
due to remeasurement of the plans’ projected benefit
obligations (“PBO”). If the total unrecognized gain or
loss exceeds 10% of the larger of (i) the PBO or
(ii) the market value of plan assets, the excess of the
total unrecognized gain or loss is amortized over the expected
average future lifetime of participants in the frozen pension
plans. The total unrecognized loss as of the fiscal 2010
measurement date of December 31, 2009 for the pension plans
the company sponsors was $86.9 million. The total
unrecognized loss as of the fiscal 2011 measurement date of
December 31, 2010 for the pension plans the company
sponsors was $96.6 million. The company uses a calendar
year end for the measurement date since the plans are based on a
calendar year and because it approximates the company’s
fiscal year end. Amortization of this unrecognized loss during
fiscal 2011 is expected to be approximately $2.7 million.
To the extent that this unrecognized loss is subsequently
recognized, then this loss will increase the company’s
pension costs in the future.
Additional information for the Plan assets is in Note 20,
Postretirement Plans
, of the Notes to Consolidated
Financial Statements of this
Form 10-K.
Matters
Affecting Analysis
Reporting Periods.
The company operates on a
52-53 week
fiscal year ending the Saturday nearest December 31. Fiscal
2010 and fiscal 2009 consisted of 52 weeks. Fiscal 2008
consisted of 53 weeks. Fiscal 2011 will consist of
52 weeks.
Acquisitions.
On October 17, 2009, the
company acquired Leo’s. Leo’s operates one tortilla
facility in Ft. Worth, Texas that makes an extensive line
of flour and corn tortillas and tortilla chips that are sold to
foodservice and institutional customers nationwide. As a result
of the acquisition, the company added capacity in the growing
tortilla market segment. This acquisition is reported in the
warehouse delivery segment.
On May 15, 2009, the company acquired substantially all the
assets of a bakery mix operation in Cedar Rapids, Iowa that is
reported in the warehouse delivery segment.
On August 11, 2008, the company merged with Holsum. Holsum
operates two bakeries in the Phoenix, Arizona area and serves
customers in Arizona, New Mexico, southern Nevada and southern
California with fresh breads and rolls under the
Holsum
,
Aunt Hattie’s
, and
Roman Meal
brands. As a
result of the merger, the company has expanded our
Nature’s Own
brand into new geographic markets. The
results of operations for Holsum are included in the DSD segment.
On August 4, 2008, the company acquired ButterKrust.
ButterKrust manufactures fresh breads and rolls in Lakeland,
Florida and its products are available throughout Florida under
Country Hearth
,
Rich Harvest,
and
Sunbeam
brands, as well as store brands. The company added
additional production capacity in the Florida market with the
acquisition. The results of operations for ButterKrust are
included in the DSD segment.
23
Table of Contents
Results
of Operations
The company’s results of operations, expressed as a
percentage of sales, are set forth below for the fifty-two weeks
ended January 1, 2011 and the fifty-two weeks ended
January 2, 2010:
| Percentage of Sales | Increase (Decrease) | |||||||||||||||||||||||
|
For the Fifty-Two
|
For the Fifty-Two
|
For the Fifty-Two
|
For the Fifty-Two
|
|||||||||||||||||||||
| Weeks Ended | Weeks Ended | Weeks Ended | Weeks Ended | |||||||||||||||||||||
| January 1, 2011 | January 2, 2010 | January 1, 2011 | January 2, 2010 | Dollars | % | |||||||||||||||||||
| (Amounts in thousands) | (Amounts in thousands) | |||||||||||||||||||||||
|
Sales
|
||||||||||||||||||||||||
|
DSD
|
$ | 2,071,356 | $ | 2,135,128 | 80.5 | 82.1 | $ | (63,772 | ) | (3.0 | ) | |||||||||||||
|
Warehouse delivery
|
502,413 | 465,721 | 19.5 | 17.9 | 36,692 | 7.9 | ||||||||||||||||||
|
Total
|
$ | 2,573,769 | $ | 2,600,849 | 100.0 | 100.0 | $ | (27,080 | ) | (1.0 | ) | |||||||||||||
|
Materials, supplies, labor and other production costs
(exclusive of depreciation and amortization shown separately
below)
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 986,610 | $ | 1,060,398 | 47.6 | 49.7 | $ | (73,788 | ) | (7.0 | ) | |||||||||||||
|
Warehouse delivery(1)
|
360,180 | 329,785 | 71.7 | 70.8 | 30,395 | 9.2 | ||||||||||||||||||
|
Total
|
$ | 1,346,790 | $ | 1,390,183 | 52.3 | 53.5 | $ | (43,393 | ) | (3.1 | ) | |||||||||||||
|
Selling, distribution and administrative expenses
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 823,797 | $ | 817,613 | 39.8 | 38.3 | $ | 6,184 | 0.8 | |||||||||||||||
|
Warehouse delivery(1)
|
75,323 | 71,561 | 15.0 | 15.4 | 3,762 | 5.3 | ||||||||||||||||||
|
Corporate(2)
|
36,879 | 37,244 | — | — | (365 | ) | (1.0 | ) | ||||||||||||||||
|
Total
|
$ | 935,999 | $ | 926,418 | 36.4 | 35.6 | $ | 9,581 | 1.0 | |||||||||||||||
|
Depreciation and amortization
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 65,977 | $ | 64,578 | 3.2 | 3.0 | $ | 1,399 | 2.2 | |||||||||||||||
|
Warehouse delivery(1)
|
18,985 | 16,062 | 3.8 | 3.4 | 2,923 | 18.2 | ||||||||||||||||||
|
Corporate(2)
|
156 | 288 | — | — | (132 | ) | (45.8 | ) | ||||||||||||||||
|
Total
|
$ | 85,118 | $ | 80,928 | 3.3 | 3.1 | $ | 4,190 | 5.2 | |||||||||||||||
|
Gain on acquisition
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | — | $ | — | — | — | $ | — | — | |||||||||||||||
|
Warehouse delivery(1)
|
— | (3,013 | ) | — | (0.6 | ) | (3,013 | ) | 100.0 | |||||||||||||||
|
Corporate(2)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | — | $ | (3,013 | ) | — | (0.1 | ) | $ | (3,013 | ) | — | ||||||||||||
|
Income from operations
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 194,972 | $ | 192,539 | 9.4 | 9.0 | $ | 2,433 | 1.3 | |||||||||||||||
|
Warehouse delivery(1)
|
47,925 | 51,326 | 9.5 | 11.0 | (3,401 | ) | (6.6 | ) | ||||||||||||||||
|
Corporate(2)
|
(37,035 | ) | (37,532 | ) | — | — | 497 | 1.3 | ||||||||||||||||
|
Total
|
$ | 205,862 | $ | 206,333 | 8.0 | 7.9 | $ | (471 | ) | (0.2 | ) | |||||||||||||
|
Interest income, net
|
$ | 4,518 | $ | 1,426 | 0.2 | 0.1 | $ | 3,092 | 216.8 | |||||||||||||||
|
Income taxes
|
$ | 73,333 | $ | 74,047 | 2.8 | 2.8 | $ | (714 | ) | (1.0 | ) | |||||||||||||
|
Net income
|
$ | 137,047 | $ | 133,712 | 5.3 | 5.1 | $ | 3,335 | 2.5 | |||||||||||||||
|
Net income attributable to noncontrolling interest
|
$ | — | $ | (3,415 | ) | — | (0.1 | ) | $ | 3,415 | 100.0 | |||||||||||||
|
Net income attributable to Flowers Foods, Inc.
|
$ | 137,047 | $ | 130,297 | 5.3 | 5.0 | $ | 6,750 | 5.2 | |||||||||||||||
| 1. | As a percentage of revenue within the reporting segment. | |
| 2. | The corporate segment has no revenues. |
24
Table of Contents
The company’s results of operations, expressed as a
percentage of sales, are set forth below for the fifty two weeks
ended January 2, 2010 and the fifty three weeks ended
January 3, 2009:
| Percentage of Sales | Increase (Decrease) | |||||||||||||||||||||||
|
For the Fifty-Two
|
For the Fifty-Three
|
For the Fifty-Two
|
For the Fifty-Three
|
|||||||||||||||||||||
| Weeks Ended | Weeks Ended | Weeks Ended | Weeks Ended | |||||||||||||||||||||
| January 2, 2010 | January 3, 2009 | January 2, 2010 | January 3, 2009 | Dollars | % | |||||||||||||||||||
| (Amounts in thousands) | (Amounts in thousands) | |||||||||||||||||||||||
|
Sales
|
||||||||||||||||||||||||
|
DSD
|
$ | 2,135,128 | $ | 1,999,293 | 82.1 | 82.8 | $ | 135,835 | 6.8 | |||||||||||||||
|
Warehouse delivery
|
465,721 | 415,599 | 17.9 | 17.2 | 50,122 | 12.1 | ||||||||||||||||||
|
Total
|
$ | 2,600,849 | $ | 2,414,892 | 100.0 | 100.0 | $ | 185,957 | 7.7 | |||||||||||||||
|
Materials, supplies, labor and other production costs
(exclusive of depreciation and amortization shown separately
below)
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 1,060,398 | $ | 961,697 | 49.7 | 48.1 | $ | 98,701 | 10.3 | |||||||||||||||
|
Warehouse delivery(1)
|
329,785 | 302,265 | 70.8 | 72.7 | 27,520 | 9.1 | ||||||||||||||||||
|
Total
|
$ | 1,390,183 | $ | 1,263,962 | 53.5 | 52.3 | $ | 126,221 | 10.0 | |||||||||||||||
|
Selling, distribution and administrative expenses
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 817,613 | $ | 792,435 | 38.3 | 39.6 | $ | 25,178 | 3.2 | |||||||||||||||
|
Warehouse delivery(1)
|
71,561 | 74,425 | 15.4 | 17.9 | (2,864 | ) | (3.8 | ) | ||||||||||||||||
|
Corporate(2)
|
37,244 | 27,940 | — | — | 9,304 | 33.3 | ||||||||||||||||||
|
Total
|
$ | 926,418 | $ | 894,800 | 35.6 | 37.1 | $ | 31,618 | 3.5 | |||||||||||||||
|
Depreciation and amortization
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 64,578 | $ | 57,447 | 3.0 | 2.9 | $ | 7,131 | 12.4 | |||||||||||||||
|
Warehouse delivery(1)
|
16,062 | 15,549 | 3.4 | 3.7 | 513 | 3.3 | ||||||||||||||||||
|
Corporate(2)
|
288 | 316 | — | — | (28 | ) | (8.9 | ) | ||||||||||||||||
|
Total
|
$ | 80,928 | $ | 73,312 | 3.1 | 3.0 | $ | 7,616 | 10.4 | |||||||||||||||
|
Gain on acquisition
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | — | $ | — | — | — | $ | — | — | |||||||||||||||
|
Warehouse delivery(1)
|
(3,013 | ) | — | (0.6 | ) | — | (3,013 | ) | — | |||||||||||||||
|
Corporate(2)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | (3,013 | ) | $ | — | (0.1 | ) | — | $ | (3,013 | ) | — | ||||||||||||
|
Gain on sale of assets
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | — | $ | — | — | — | $ | — | — | |||||||||||||||
|
Warehouse delivery(1)
|
— | (2,306 | ) | — | (0.6 | ) | 2,306 | — | ||||||||||||||||
|
Corporate(2)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | — | $ | (2,306 | ) | — | (0.1 | ) | $ | 2,306 | — | |||||||||||||
|
Asset impairment
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | — | $ | 3,108 | — | 0.2 | $ | (3,108 | ) | — | ||||||||||||||
|
Warehouse delivery(1)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Corporate(2)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | — | $ | 3,108 | — | 0.1 | $ | (3,108 | ) | — | ||||||||||||||
|
Gain on insurance recovery
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | — | $ | (686 | ) | — | — | $ | 686 | — | ||||||||||||||
|
Warehouse delivery(1)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Corporate(2)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | — | $ | (686 | ) | — | — | $ | 686 | — | ||||||||||||||
|
Income from operations
|
||||||||||||||||||||||||
|
DSD(1)
|
$ | 192,539 | $ | 185,292 | 9.0 | 9.3 | $ | 7,247 | 3.9 | |||||||||||||||
|
Warehouse delivery(1)
|
51,326 | 25,666 | 11.0 | 6.2 | 25,660 | 100.0 | ||||||||||||||||||
|
Corporate(2)
|
(37,532 | ) | (28,256 | ) | — | — | (9,276 | ) | (32.8 | ) | ||||||||||||||
|
Total
|
$ | 206,333 | $ | 182,702 | 7.9 | 7.6 | $ | 23,631 | 12.9 | |||||||||||||||
|
Interest income, net
|
$ | 1,426 | $ | 7,349 | 0.1 | 0.3 | $ | (5,923 | ) | (80.6 | ) | |||||||||||||
|
Income taxes
|
$ | 74,047 | $ | 67,744 | 2.8 | 2.8 | $ | 6,303 | 9.3 | |||||||||||||||
|
Net income
|
$ | 133,712 | $ | 122,307 | 5.1 | 5.1 | $ | 11,405 | 9.3 | |||||||||||||||
|
Net income attributable to noncontrolling interest
|
$ | (3,415 | ) | $ | (3,074 | ) | (0.1 | ) | (0.1 | ) | $ | (341 | ) | (11.2 | ) | |||||||||
|
Net income attributable to Flowers Foods, Inc.
|
$ | 130,297 | $ | 119,233 | 5.0 | 4.9 | $ | 11,064 | 9.3 | |||||||||||||||
| 1. | As a percentage of revenue within the reporting segment. | |
| 2. | The corporate segment has no revenues. |
25
Table of Contents
Fifty-Two
Weeks Ended January 1, 2011 Compared to Fifty-Two Weeks
Ended January 2, 2010
Consolidated
Sales.
|
For the 52
|
For the 52
|
|||||||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||||||
| January 1, 2011 | January 2, 2010 |
% Increase
|
||||||||||||||||||
| $ | % | $ | % | (Decrease) | ||||||||||||||||
|
(Amounts in
|
(Amounts in
|
|||||||||||||||||||
| thousands) | thousands) | |||||||||||||||||||
|
Branded Retail
|
$ | 1,329,591 | 51.7 | % | $ | 1,347,578 | 51.8 | % | (1.3 | )% | ||||||||||
|
Store Branded Retail
|
438,062 | 17.0 | 418,026 | 16.1 | 4.8 | % | ||||||||||||||
|
Non-retail and Other
|
806,116 | 31.3 | 835,245 | 32.1 | (3.5 | )% | ||||||||||||||
|
Total
|
$ | 2,573,769 | 100.0 | % | $ | 2,600,849 | 100.0 | % | (1.0 | )% | ||||||||||
The 1.0% decrease in sales was attributable to the following:
|
Favorable
|
||||
| Percentage Point Change in Sales Attributed to: | (Unfavorable) | |||
|
Pricing/Mix
|
(1.7 | )% | ||
|
Volume
|
0.2 | % | ||
|
VIE deconsolidation
|
(0.5 | )% | ||
|
Acquisitions
|
1.0 | % | ||
|
Total Percentage Change in Sales
|
(1.0 | )% | ||
Sales
category discussion
Branded retail sales declined due to volume decreases, partially
offset by pricing/mix increases. Declines in branded white bread
and branded multi-pak cake were partially offset by increases in
branded soft variety and branded sandwich rounds introduced
early in this fiscal year. Competitive pricing and heavy
promotional activity continued to impact the category. The
increase in store branded retail was primarily due to volume
increases in store branded cake as some of the company’s
customers introduced store branded cake programs earlier in this
fiscal year. Decreases in store branded white bread and store
branded variety bread partially offset the increase. The
decrease in non-retail and other sales was due to declines in
food service and the deconsolidation of the VIE, partially
offset by the 2009 acquisitions.
DSD
Sales.
|
For the 52
|
For the 52
|
|||||||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||||||
| January 1, 2011 | January 2, 2010 |
% Increase
|
||||||||||||||||||
| $ | % | $ | % | (Decrease) | ||||||||||||||||
|
(Amounts in
|
(Amounts in
|
|||||||||||||||||||
| thousands) | thousands) | |||||||||||||||||||
|
Branded Retail
|
$ | 1,221,074 | 59.0 | % | $ | 1,213,217 | 56.8 | % | 0.7 | % | ||||||||||
|
Store Branded Retail
|
332,109 | 16.0 | 358,700 | 16.8 | (7.4 | )% | ||||||||||||||
|
Non-retail and Other
|
518,173 | 25.0 | 563,211 | 26.4 | (8.0 | )% | ||||||||||||||
|
Total
|
$ | 2,071,356 | 100.0 | % | $ | 2,135,128 | 100.0 | % | (3.0 | )% | ||||||||||
26
Table of Contents
The 3.0% decrease in sales was attributable to the following:
| Percentage Point Change in Sales Attributed to: | (Unfavorable) | |||
|
Pricing/Mix
|
(2.0 | )% | ||
|
Volume
|
(0.4 | )% | ||
|
VIE deconsolidation
|
(0.6 | )% | ||
|
Total Percentage Change in Sales
|
(3.0 | )% | ||
Sales
category discussion
Branded retail sales increased due to volume increases,
partially offset by price/mix declines. Increases in branded
soft variety and branded sandwich rounds were partially offset
by decreases in branded white bread. Competitive pricing and
heavy promotional activity continued to impact the category.
Store branded retail declined due to decreases in pricing/mix,
and to a lesser extent, volume declines. Non-retail and other
declined primarily due to the deconsolidation of the VIE,
pricing/mix decreases and, to a lesser extent, volume decreases.
Warehouse
Delivery Sales.
|
For the 52
|
For the 52
|
|||||||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||||||
| January 1, 2011 | January 2, 2010 |
% Increase
|
||||||||||||||||||
| $ | % | $ | % | (Decrease) | ||||||||||||||||
|
(Amounts in
|
(Amounts in
|
|||||||||||||||||||
| thousands) | thousands) | |||||||||||||||||||
|
Branded Retail
|
$ | 108,517 | 21.6 | % | $ | 134,361 | 28.9 | % | (19.2 | )% | ||||||||||
|
Store Branded Retail
|
105,953 | 21.1 | 59,326 | 12.7 | 78.6 | % | ||||||||||||||
|
Non-retail and Other
|
287,943 | 57.3 | 272,034 | 58.4 | 5.8 | % | ||||||||||||||
|
Total
|
$ | 502,413 | 100.0 | % | $ | 465,721 | 100.0 | % | 7.9 | % | ||||||||||
The 7.9% increase in sales was attributable to the following:
| Percentage Point Change in Sales Attributed to: | Favorable | |||
|
Pricing/Mix
|
0.9 | % | ||
|
Volume
|
1.2 | % | ||
|
Acquisitions
|
5.8 | % | ||
|
Total Percentage Change in Sales
|
7.9 | % | ||
Sales
category discussion
The decrease in branded retail sales was primarily the result of
lower multi-pak cake volume as a result of store branded cake
programs introduced earlier in the year by some of the
company’s customers, which resulted in the increase in
store branded retail sales. The increase in non-retail and other
sales, which include contract production and vending, was due
primarily to the acquisitions, partially offset by decreases in
vending.
Materials, Supplies, Labor and Other Production Costs
(exclusive of depreciation and amortization shown
separately).
The decrease as a percent of sales
was primarily due to significant decreases in ingredient costs.
These were partially offset by sales declines, higher
workforce-related costs as a percent of sales,
start-up
costs for new production lines and higher costs as a percent of
sales for the companies acquired in 2009.
Commodities, such as our baking ingredients, periodically
experience price fluctuations, and, for that reason, we
continually monitor the market for these commodities. The
commodities market continues to be volatile. Agricultural
commodity prices reached all time high levels during 2007 and
the first half of 2008 before declining during 2009. Commodity
prices increased in the second half of 2010 and are expected to
continue rising in 2011. The cost of these inputs may fluctuate
widely due to government policy and regulation, weather
conditions,
27
Table of Contents
domestic and international demand or other unforeseen
circumstances. We enter into forward purchase agreements and
other derivative financial instruments qualifying for hedge
accounting to reduce the impact of such volatility in raw
materials prices. Any decrease in the availability of these
agreements and instruments could increase the price of these raw
materials and significantly affect our earnings.
The DSD segment decrease as a percent of sales was primarily the
result of significant decreases in ingredient costs and lower
energy costs, partially offset by softer sales and higher
workforce-related costs as a percent of sales. The decreases in
ingredient costs were primarily from lower flour and salad oil
costs.
The warehouse delivery segment increased as a percent of sales
primarily as a result of higher workforce-related costs and
ingredient costs as a percent of sales. Ingredient costs
increased from higher cocoa and sweetener costs and higher costs
related to the acquisition which were partially offset by lower
flour and salad oil costs.
Selling, Distribution and Administrative
Expenses.
The increase as a percent of sales was
due to softer sales and higher workforce-related costs as a
percent of sales, partially offset by lower costs as a percent
of sales for the companies acquired in 2009.
The DSD segment selling, distribution and administrative
expenses include discounts paid to the independent distributors
utilized in our DSD system. The increase as a percent of sales
was primarily due to sales declines and higher workforce-related
and rent expenses as a percent of sales.
The warehouse delivery segment’s selling, distribution and
administrative expenses decreased as a percent of sales
primarily due to higher sales and lower distribution costs as a
percent of sales.
Depreciation and Amortization.
Depreciation
and amortization expense increased primarily due to acquisitions
and the deconsolidation of the VIE. As a result of the
deconsolidation the company recorded $11.9 million in
right-to-use
assets for certain trucks and trailers used for distributing our
products from the manufacturing facilities to the distribution
centers. Prior to fiscal 2010 and deconsolidation, depreciation
expense included only those assets not used in the distribution
of the company’s products. As a result, depreciation of
these assets increased over the prior year.
The DSD segment depreciation and amortization expense increased
primarily as the result of the VIE deconsolidation.
The warehouse delivery segment depreciation and amortization
expense increased primarily as the result of increased
depreciation expense due to the acquisitions that occurred
during fiscal 2009.
Gain on acquisition.
On May 15, 2009, the
company acquired substantially all the assets of a bakery mix
operation in Cedar Rapids, Iowa. Based on the purchase price
allocation, the fair value of the identifiable assets acquired
and liabilities assumed exceeded the fair value of the
consideration paid. As a result, we recognized a gain of
$3.0 million which is included in the line item “Gain
on acquisition” to derive income from operations in the
consolidated statement of income. We believe the gain on
acquisition resulted from the seller’s strategic intent to
exit a non-core business operation.
Income from operations.
The increase in the
DSD segment income from operations was attributable to
significantly lower ingredient costs, partially offset by sales
declines and higher workforce-related expenses. The decrease in
the warehouse delivery segment income from operations was
primarily due to the gain on acquisition in the prior year,
discussed above, partially offset by higher store-branded retail
sales, lower distribution costs as a percent of sales, and the
acquisitions. The decrease in unallocated corporate expenses was
primarily due to lower pension and postretirement plan costs.
Net Interest Income.
The increase resulted
from lower interest expense on the credit facility and term
loans due to repayments made by the company.
Income Taxes.
The effective tax rate for
fiscal 2010 and fiscal 2009 was 34.9% and 35.6%, respectively.
This decrease is primarily due to the increase in
Section 199 qualifying production activities deduction and
favorable discrete items recognized during the year, partially
offset by the absence of non-taxable earnings from the
previously consolidated VIE. The difference in the effective
rate and the statutory rate is primarily due to state income
taxes and the Section 199 qualifying production activities
deduction.
28
Table of Contents
Net Income Attributable to Noncontrolling
Interest.
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 qualified as a VIE for
reporting periods prior to January 3, 2010 under previous
accounting guidance, and all the earnings of the VIE were
eliminated through noncontrolling interest because the company
did not have an equity ownership interest in the VIE. In 2009,
the FASB amended the consolidation principles associated with
VIE accounting by replacing the quantitative-based risks and
rewards calculation for determining which enterprise, if any,
has a controlling financial interest in the VIE with a
qualitative approach. The qualitative approach is focused on
identifying which company has both the power to direct the
activities of a VIE that most significantly impact the
entity’s economic performance and the obligation to absorb
losses of the entity or the right to receive benefits from the
entity. As a result of this qualitative analysis, the company is
no longer required to consolidate the VIE beginning on
January 3, 2010 at adoption. Please see Note 14,
Variable Interest Entity
, of Notes to Consolidated
Financial Statements of this
Form 10-K
for additional disclosure.
Fifty-Two
Weeks Ended January 2, 2010 Compared to Fifty-Three Weeks
Ended January 3, 2009
Consolidated
Sales.
|
For the 52
|
For the 53
|
|||||||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||||||
| January 2, 2010 | January 3, 2009 | |||||||||||||||||||
| $ | % | $ | % | % Increase | ||||||||||||||||
|
(Amounts in
|
(Amounts in
|
|||||||||||||||||||
| thousands) | thousands) | |||||||||||||||||||
|
Branded Retail
|
$ | 1,347,578 | 51.8 | % | $ | 1,274,298 | 52.8 | % | 5.8 | % | ||||||||||
|
Store Branded Retail
|
418,026 | 16.1 | 355,390 | 14.7 | 17.6 | % | ||||||||||||||
|
Non-retail and Other
|
835,245 | 32.1 | 785,204 | 32.5 | 6.4 | % | ||||||||||||||
|
Total
|
$ | 2,600,849 | 100.0 | % | $ | 2,414,892 | 100.0 | % | 7.7 | % | ||||||||||
The 7.7% increase in sales was attributable to the following:
|
Favorable
|
||||
| Percentage Point Change in Sales Attributed to: | (Unfavorable) | |||
|
Pricing/Mix
|
2.6 | % | ||
|
Volume
|
(0.2 | )% | ||
|
Absence of week fifty-three
|
(2.0 | )% | ||
|
Acquisitions
|
7.3 | % | ||
|
Total Percentage Change in Sales
|
7.7 | % | ||
Sales
category discussion
The increase in branded retail sales was due primarily to the
acquisitions and increased sales of branded breakfast bread,
branded soft variety bread and branded multi-pack cake,
partially offset by the impact of the additional week in the
prior year. The company’s
Nature’s Own
products
and its branded white bread labels were the key components of
branded retail sales. The increase in store branded retail sales
was primarily due to the acquisitions and growth in store
branded cake, partially offset by the impact of the additional
week in the prior year. The increase in non-retail and other
sales was due primarily to the acquisitions, price increases and
positive mix shifts, partially offset by softer volume in the
institutional, fast food, vending, and other restaurant
categories and the impact of the additional week in the prior
year. ButterKrust and Holsum sales are not included in sales
growth attributable to acquisition sales after early third
quarter of fiscal 2009 because they were acquired in the third
quarter of fiscal 2008.
29
Table of Contents
DSD
Sales.
|
For the 52
|
For the 53
|
|||||||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||||||
| January 2, 2010 | January 3, 2009 | |||||||||||||||||||
| $ | % | $ | % | % Increase | ||||||||||||||||
|
(Amounts in
|
(Amounts in
|
|||||||||||||||||||
| thousands) | thousands) | |||||||||||||||||||
|
Branded Retail
|
$ | 1,213,217 | 56.8 | % | $ | 1,161,594 | 58.1 | % | 4.4 | % | ||||||||||
|
Store Branded Retail
|
358,700 | 16.8 | 303,193 | 15.2 | 18.3 | % | ||||||||||||||
|
Non-retail and Other
|
563,211 | 26.4 | 534,506 | 26.7 | 5.4 | % | ||||||||||||||
|
Total
|
$ | 2,135,128 | 100.0 | % | $ | 1,999,293 | 100.0 | % | 6.8 | % | ||||||||||
The 6.8% increase in sales was attributable to the following:
|
Favorable
|
||||
| Percentage Point Change in Sales Attributed to: | (Unfavorable) | |||
|
Pricing/Mix
|
1.6 | % | ||
|
Volume
|
(0.5 | )% | ||
|
Absence of week fifty-three
|
(2.0 | )% | ||
|
Acquisitions
|
7.7 | % | ||
|
Total Percentage Change in Sales
|
6.8 | % | ||
Sales
category discussion
The increase in branded retail sales was due primarily to the
acquisitions and growth in branded soft variety bread and
branded breakfast bread, partially offset by the impact of the
additional week in the prior year.
Nature’s Own
products and branded white bread labels were the key
components of branded retail sales. The increase in store
branded retail sales was primarily due to the acquisitions,
partially offset by the impact the additional week in the prior
year. The increase in non-retail and other sales was primarily
due to the acquisitions and price increases, partially offset by
softer volume and the impact of the additional week in the prior
year. ButterKrust and Holsum sales are not included in sales
growth attributable to acquisition sales after early third
quarter of fiscal 2009 because they were acquired early in the
third quarter of fiscal 2008.
Warehouse
Delivery Sales.
|
For the 52
|
For the 53
|
|||||||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||||||
| January 2, 2010 | January 3, 2009 | |||||||||||||||||||
| $ | % | $ | % | % Increase | ||||||||||||||||
|
(Amounts in
|
(Amounts in
|
|||||||||||||||||||
| thousands) | thousands) | |||||||||||||||||||
|
Branded Retail
|
$ | 134,361 | 28.9 | % | $ | 112,704 | 27.1 | % | 19.2 | % | ||||||||||
|
Store Branded Retail
|
59,326 | 12.7 | 52,197 | 12.6 | 13.7 | % | ||||||||||||||
|
Non-retail and Other
|
272,034 | 58.4 | 250,698 | 60.3 | 8.5 | % | ||||||||||||||
|
Total
|
$ | 465,721 | 100.0 | % | $ | 415,599 | 100.0 | % | 12.1 | % | ||||||||||
30
Table of Contents
The 12.1% increase in sales was attributable to the following:
|
Favorable
|
||||
| Percentage Point Change in Sales Attributed to: | (Unfavorable) | |||
|
Pricing/Mix
|
8.2 | % | ||
|
Volume
|
0.8 | % | ||
|
Absence of week fifty-three
|
(2.1 | )% | ||
|
Acquisitions
|
5.2 | % | ||
|
Total Percentage Change in Sales
|
12.1 | % | ||
Sales
category discussion
The increase in branded retail sales was primarily the result of
volume increases. The increase in store branded retail sales was
primarily due to volume increases in store branded cake sales.
The increase in non-retail and other sales, which include
contract production and vending, was due to acquisitions.
Materials, supplies, labor and other production costs
(exclusive of depreciation and amortization shown
separately).
This increase as a percent of sales
was primarily due to higher promotions and significantly higher
ingredient costs as a percent of sales, as well as lower margins
for the acquired companies, partially offset by improved
manufacturing efficiency and lower packaging costs as a percent
of sales. The significantly higher ingredient costs were driven
by increases in flour, soybean and palm oil and sweeteners.
Commodities, such as our baking ingredients, periodically
experience price fluctuations, and, for that reason, we
continually monitor the market for these commodities. The
commodities market continues to be volatile. Agricultural
commodity prices reached all time high levels during 2007 and
the first half of 2008. 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 derivative financial instruments to reduce the
impact of such volatility in raw materials prices. Any decrease
in the availability of these agreements and instruments could
increase the price of these raw materials and significantly
affect our earnings.
The DSD segment increase as a percent of sales was primarily a
result of higher promotions and significant increases in
ingredient costs as a percent of sales and lower margins for the
acquisitions, partially offset by improved manufacturing
efficiency, reduced scrap and lower packaging costs as a percent
of sales.
The warehouse delivery segment decrease as a percent of sales
was primarily a result of lower labor, energy, inbound freight
and packaging costs as a percent of sales, partially offset by
significantly higher ingredients costs as a percent of sales.
The Atlanta plant sale and closure, discussed below, had
additional costs recorded in fiscal 2008 contributing to the
lower costs as a percent of sales this fiscal year.
Selling, Distribution and Administrative
Expenses.
The decrease as a percent of sales was
due to lower labor costs as a percent of sales, including
short-term incentive expenses, and also a decrease in
distribution and advertising costs as a percent of sales,
partially offset by increased pension costs.
The DSD segment selling, distribution and administrative
expenses include discounts paid to the independent distributors
utilized in our DSD system. The decrease as a percent of sales
was primarily due to significantly lower labor and distribution
expense as a percent of sales, partially offset by increased
distributor discounts as a percent of sales.
The warehouse delivery segment’s selling, distribution and
administrative expenses decreased as a percent of sales
primarily attributable to higher sales and lower labor and
distribution costs as a percent of sales.
Depreciation and Amortization.
Depreciation
and amortization expense increased primarily due to acquisitions.
The DSD segment depreciation and amortization expense increased
primarily as the result of the acquisitions that occurred during
fiscal 2008.
31
Table of Contents
The warehouse delivery segment depreciation and amortization
expense increased primarily as the result of increased
depreciation expense due to the acquisitions that occurred
during fiscal 2009.
Gain on acquisition.
On May 15, 2009, the
company acquired substantially all the assets of a bakery mix
operation in Cedar Rapids, Iowa. Based on the purchase price
allocation, the fair value of the identifiable assets acquired
and liabilities assumed exceeded the fair value of the
consideration paid. As a result, we recognized a gain of
$3.0 million which is included in the line item “Gain
on acquisition” to derive income from operations in the
consolidated statement of income. We believe the gain on
acquisition resulted from the seller’s strategic intent to
exit a non-core business operation.
Gain on Sale of Assets.
During the second
quarter of fiscal 2008, the company completed the sale and
closure of a plant facility in Atlanta, Georgia resulting in a
gain of $2.3 million. The company incurred
$1.7 million of cost of goods sold expenses primarily for
employee severance, obsolete inventory, and equipment relocation
costs. Costs of $0.3 million is included in selling,
distribution and administrative expenses relating to the sale
and closure.
Asset Impairment.
During the fourth quarter of
fiscal 2008, the company recorded a $3.1 million asset
impairment charge related to two previously closed facilities
and one bakery that was closed in the fourth quarter to take
advantage of more efficient and better located production
capacity provided by the acquisitions of Holsum and ButterKrust.
Gain on Insurance Recovery.
During fiscal
2007, the company recorded a gain of $0.9 million related
to insurance proceeds in excess of the net book value of certain
equipment destroyed by fire at its Opelika, Alabama production
facility, and a distribution facility destroyed by fire at its
Lynchburg, Virginia location. An additional $0.7 million
related to the Lynchburg location was received during fiscal
2008. The payment closed the claim.
Income from operations.
The increase in the
DSD segment income from operations was attributable to the
acquisitions. The increase in the warehouse delivery segment
income from operations was primarily a result of higher branded
retail sales, lower labor and distribution costs as a percent of
sales, and the acquisitions. The increase in unallocated
corporate expenses was primarily due to significantly higher
pension and postretirement plan costs.
Net Interest Income.
The decrease was caused
by higher interest expense on the credit facility and term loans
used for the Holsum and ButterKrust acquisitions.
Income Taxes.
The effective tax rate for
fiscal 2009 and fiscal 2008 was 35.6%. The difference in the
effective rate and the statutory rate is primarily due to state
income taxes, the non-taxable earnings of the consolidated
variable interest entity and the Section 199 qualifying
production activities deduction.
Net Income Attributable to Noncontrolling
Interest.
In December 2007, the Financial
Accounting Standards Board (“FASB”) issued guidance
that establishes requirements for ownership interests in
subsidiaries held by parties other than the company (sometimes
called “minority interests”) be clearly identified,
presented, and disclosed in the consolidated statement of
financial position within equity but separate from the
parent’s equity. All changes in the parent’s ownership
interests are required to be accounted for consistently as
equity transactions and any noncontrolling equity investments in
unconsolidated subsidiaries must be measured initially at fair
value. The adoption also impacted certain captions previously
used on the consolidated statement of income by separately
identifying net income, net income attributable to
noncontrolling interests and net income attributable to Flowers
Foods, Inc. Prior period information presented in this
Form 10-K
has been reclassified where required. All the earnings of the
VIE were eliminated through noncontrolling interest due to the
company not having any equity ownership in the VIE. The company
was required to consolidate the VIE due to the VIE being
capitalized with a less than substantive amount of legal form
capital investment and the company accounting for a significant
portion of the VIE’s revenues. See Note 14,
Variable Interest Entity
, of Notes to Condensed
Consolidated Financial Statements of this
Form 10-K
for further information regarding the company’s VIE and why
consolidation was discontinued as of January 3, 2010.
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 to convert into cash those
32
Table of Contents
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 and capital expenditures. 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.
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 13,
Debt, Leases and Other Commitments
, of
Notes to Consolidated Financial Statements of this
Form 10-K
for detailed financial information regarding the company’s
lease arrangements.
Flowers Foods’ cash and cash equivalents were
$6.8 million at January 1, 2011 as compared to
$18.9 million at January 2, 2010. The cash and cash
equivalents were derived from the net of $306.1 million
provided by operating activities, $104.3 million disbursed
for investing activities and $213.9 million disbursed for
financing activities.
Included in cash and cash equivalents at January 2, 2010
was $8.8 million related to a VIE the company previously
consolidated, which was not available for use by the company.
Cash Flows Provided by Operating
Activities.
Net cash of $306.1 million
provided by operating activities consisted primarily of
$137.0 million in net income adjusted for the following
non-cash items (amounts in thousands):
|
Depreciation and amortization
|
$ | 85,118 | ||
|
Stock-based compensation
|
13,678 | |||
|
Loss reclassified from accumulated other comprehensive income to
net income
|
8,475 | |||
|
Deferred income taxes
|
3,888 | |||
|
Pension and postretirement expense
|
1,842 | |||
|
Provision for inventory obsolescence
|
1,047 | |||
|
Allowances for accounts receivable
|
547 | |||
|
Other
|
(285 | ) | ||
|
Total
|
$ | 114,310 | ||
Cash provided by working capital and other activities was
$54.7 million. As of January 1, 2011 and
January 2, 2010, the company had $11.5 million and
$0.8 million, respectively, recorded in other accrued
liabilities representing collateral from counterparties for
hedged positions. As of January 2, 2010, the company had
$7.0 million recorded in other current assets representing
collateral on deposit with counterparties for hedged positions.
The cash associated with these positions is included in working
capital and other activities.
In fiscal 2010, there were required pension contributions under
the minimum funding requirements of ERISA and the Pension
Protection Act of 2006 (“PPA”) of $0.5 million
and discretionary contributions of $0.4 million. Despite an
average annual return on plan assets of 9.1% (net of expenses)
over the last fifteen years, contributions in future years are
expected to increase because of the significantly lower than
expected asset returns during 2008 which have not fully
recovered. During 2011, the company expects to contribute
$2.7 million. This amount represents the estimated minimum
pension contribution required under ERISA and the PPA as well as
discretionary contributions to avoid benefit restrictions. The
company believes its strong cash flow and balance sheet will
allow it to fund future pension needs without adversely
affecting the business strategy of the company.
In September of 2007, the company entered into a Master Agency
Agreement and a Master Lease (collectively, the “Master
Lease”) representing a $50.0 million commitment to
lease certain distribution facilities. On August 22, 2008,
the company added an additional $50.0 million to the
commitment. Pursuant to terms of the Master Lease, on behalf of
the lessor, the company may either develop distribution
facilities or sell and lease-back existing owned
33
Table of Contents
distribution facilities of the company. The facilities will be
leased by the lessor to wholly-owned subsidiaries of the company
under one or more operating leases. The leases each have a term
of 22 years following the completion of either the
construction period or completion of the sale and lease-back.
The company has granted certain rights and remedies to the
lessor in the event of certain defaults, including the right to
terminate the Master Lease, to bring suit to collect damages,
and to cause the company to purchase the facilities. The lease
does not include financial covenants.
During the fiscal year ended January 3, 2009, the company
entered into an additional $25.6 million of operating lease
commitments under the lease. During the fiscal years ended
January 1, 2011 and January 2, 2010, the company did
not enter into any additional commitments under the lease.
During the first quarter of fiscal 2011, the company estimates
payments totaling $19.0 million, including our share of
employment taxes and deferred compensation contributions,
relating to its formula driven, performance-based cash bonus
program.
In connection with the acquisition of Holsum in 2008, the
company will make payments of up to $5.0 million in cash to
the former shareholders of Holsum in contingent consideration
because the company’s common stock did not trade over a
target price for ten consecutive trading days during the two
year period beginning February 11, 2009. We expect these
payments to be made during the first quarter of fiscal 2011.
Cash Flows Disbursed for Investing
Activities.
Net cash disbursed for investing
activities for fiscal 2010 of $104.3 million included
capital expenditures of $98.4 million. Capital expenditures
at DSD and warehouse delivery were $69.3 million and
$24.7 million, respectively. The company estimates capital
expenditures of approximately $90.0 million to
$100.0 million during fiscal 2011 part of which is for
additional bun and thin bagel production lines.
Cash Flows Provided by Financing
Activities.
Net cash disbursed for financing
activities of $213.9 million during fiscal 2010 consisted
primarily of dividend payments of $70.9 million, stock
repurchases of $39.2 million, and payments for net debt
borrowings of $111.3 million, partially offset by proceeds
of $7.9 million from the exercise of stock options.
Credit Facility.
The company has a five-year,
$250.0 million unsecured revolving loan facility (the
“credit facility”) that expires October 5, 2012.
Proceeds from the credit facility may be used for working
capital and general corporate purposes, including acquisition
financing, refinancing of indebtedness 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 credit facility and can meet presently foreseeable
financial requirements. As of January 1, 2011 and
January 2, 2010, the company was in compliance with all
restrictive financial covenants under its credit facility.
Interest is due quarterly in arrears on any outstanding
borrowings at a customary Eurodollar rate or the base rate plus
the applicable margin. The underlying rate is defined as the
rate offered in the interbank Eurodollar market or the higher of
the prime lending rate or federal funds rate plus 0.5%. The
applicable margin ranges from 0.00% to 0.30% for base rate loans
and from 0.40% to 1.275% for Eurodollar loans. In addition, a
facility fee ranging from 0.10% to 0.35% is due quarterly on all
commitments under the credit facility. Both the interest margin
and the facility fee are based on the company’s leverage
ratio. There were $0.0 million and $89.0 million in
outstanding borrowings under the credit facility at
January 1, 2011 and January 2, 2010, respectively.
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, tax payments, as
well as derivative transactions which are part of the
company’s overall risk management strategy as discussed in
Note 10,
Derivative Financial Instruments
, of Notes
to Consolidated Financial Statements of this
Form 10-K.
For Fiscal 2010, the company borrowed $418.5 million in
revolving borrowings under the credit facility and repaid
$529.8 million in revolving borrowings. On January 1,
2011, the company had $245.2 million available under the
credit facility for working capital and general corporate
purposes. The amount available under the credit facility is
reduced by $4.8 million for letters of credit.
34
Table of Contents
Term Loan.
On August 1, 2008, the company
entered into a credit agreement (“term loan”) with
various lending parties for the purpose of completing
acquisitions. The term loan provides for $150.0 million of
amortized borrowings through the maturity date of August 4,
2013. Principal payments are due quarterly under the term loan
beginning on December 31, 2008 at an annual amortization of
10% of the principal balance for each of the first two years,
15% during the third year, 20% during the fourth year, and 45%
during the fifth year. The term loan includes certain customary
restrictions, which, among other things, require maintenance of
financial covenants and limit encumbrance of assets and creation
of indebtedness. Restrictive financial covenants include such
ratios as a minimum interest coverage ratio and a maximum
leverage ratio. The company believes that, given its current
cash position, its cash flow from operating activities and its
available credit capacity, it can comply with the current terms
of the term loan and meet financial requirements for the next
twelve months. As of January 1, 2011 and January 2,
2010, the company was in compliance with all restrictive
financial covenants under the term loan. As of January 1,
2011 and January 2, 2010, the amounts outstanding under the
term loan were $114.4 million and $131.3 million,
respectively.
Interest is due quarterly in arrears on outstanding borrowings
at a customary Eurodollar rate or the base rate plus the
applicable margin. The underlying rate is defined as the rate
offered in the interbank Eurodollar market or the higher of the
prime lending rate or federal funds rate plus 0.5%. The
applicable margin ranges from 0.0% to 1.375% for base rate loans
and from 0.875% to 2.375% for Eurodollar loans and is based on
the company’s leverage ratio. The company paid financing
costs of $0.8 million in connection with the term loan,
which is being amortized over the life of the term loan.
Credit Ratings.
Currently, the company’s
credit ratings by Fitch Ratings, Moody’s, and
Standard & Poor’s are BBB, Baa2, and BBB-,
respectively. Changes in the company’s credit ratings do
not trigger a change in the company’s available borrowings
or costs under the credit facility or term loan, but could
affect future credit availability and cost.
Shelf Registration.
On February 8, 2011,
the company filed a universal shelf registration statement on
Form S-3
with the Securities and Exchange Commission (“SEC”),
which will allow the company to sell, from time to time, certain
securities, including common stock, preferred stock, debt
securities
and/or
warrants, either individually or in units, in one or more
offerings. The company has no specific plans to offer the
securities covered by the registration statement, and is not
required to offer the securities in the future pursuant to the
registration statement. The terms of any offering under the
registration statement will be established at the time of the
offering. Proceeds from the sale of any securities will be used
for general corporate purposes, which may include, share
repurchases, refinancing existing indebtedness, capital
expenditures, and possible acquisitions. The company has not
allocated a specific portion of the net proceeds for any
particular use at this time. The universal shelf registration
statement is intended to provide the company with flexibility to
raise funds through one or more offerings of its securities,
subject to market conditions and the company’s capital
needs.
Stock Repurchase Plan.
Our Board of Directors
has approved a plan that authorized stock repurchases of up to
30.0 million shares of the company’s common stock.
Under the plan, the company may repurchase its common stock in
open market or privately negotiated transactions at such times
and at such prices as determined to be in the company’s
best interest. The company repurchases its common stock
primarily for issuance under the company’s stock
compensation plans and to fund possible future acquisitions.
These purchases may be commenced or suspended without prior
notice depending on then-existing business or market conditions
and other factors. As of January 1, 2011, 24.2 million
shares at a cost of $404.2 million have been purchased
under this plan. Included in these amounts are 1.5 million
shares at a cost of $39.2 million purchased during fiscal
2010.
Income Taxes.
Federal and state tax payments
totaled $73.2 million, $76.5 million and
$65.5 million during fiscal years 2010, 2009 and 2008,
respectively, and were funded with cash flows from operations.
Distributor Arrangements.
The company offers
long-term financing to independent distributors for the purchase
of their territories, and a vast majority of the independent
distributors elect to use this financing alternative. The
distributor notes have a ten-year term, and the distributors pay
principal and interest weekly. Each independent distributor has
the right to require the company to repurchase the territories
and trucks, if applicable, at the original price paid by the
distributor on the long-term financing arrangement in the six-
month period following the sale of a
35
Table of Contents
territory to the independent distributor. Beginning July 2006,
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 first six-month period. If
the company had been required to repurchase these territories,
the company would have been obligated to pay $0.8 million
and $0.6 million as of January 1, 2011 and
January 2, 2010, respectively. After the six-month period
expires, the company retains a right of first refusal to
repurchase these territories. Additionally, in the event the
company exits 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 for ten times average weekly branded
sales. If the company acquires a territory from an independent
distributor that is to be resold, company employees operate the
territory until it can be resold. If the territory is not to be
resold, the value of the territory is charged to earnings. The
company held an aggregate of $105.4 million and
$107.1 million as of January 1, 2011 and
January 2, 2010, respectively, of distributor notes. The
company does not view this aggregate amount as a concentrated
credit risk, as each note relates to an individual distributor.
The company has approximately $11.9 million and
$6.5 million as of January 1, 2011 and January 2,
2010, respectively, of territories held for sale. The increase
was primarily the result of higher turnover for expansion market
distributor territories and certain routes that were repurchased
for distributor route restructuring.
A majority of the independent distributors lease trucks through
a third-party. It is generally the company’s policy not to
provide third party guarantees. No liability is recorded in the
consolidated financial statements with respect to such
guarantees. When an independent distributor terminates its
relationship with the company, the company, although not legally
obligated, generally purchases and operates that territory
utilizing the truck of the former distributor. To accomplish
this, the company operates the truck for the distributor, who
generally remains solely liable under the original truck lease
to the third party lessor, and continues the payments on behalf
of the former distributor. Once the territory is resold to an
independent distributor, the truck lease is assumed by the new
independent distributor. At January 1, 2011 and
January 2, 2010, the company operated 256 and 155
territories with truck leases, respectively. Assuming the
company does not resell these territories to new independent
distributors, at January 1, 2011 and January 2, 2010,
the maximum obligation associated with these truck leases was
approximately $8.0 million and $4.7 million,
respectively. There is no liability recorded in the consolidated
financial statements with respect to such leases, as the
obligation for each lease generally remains with the former
distributor until the territory is sold to a new distributor.
The company does not anticipate operating these territories over
the life of the lease as it intends to resell these territories
to new independent distributors.
Special Purpose Entities.
At January 1,
2011 and January 2, 2010, the company did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which are established to
facilitate off-balance sheet arrangements or other contractually
narrow or limited purposes.
Deferred Compensation.
During the fourth
quarter of fiscal 2008, participants in the company’s
Executive Deferred Compensation Plan (the “EDCP”) were
offered a one-time option to convert all or a portion of their
cash balance in their EDCP account to company common stock to be
received at a time designated by the participant. Several
employees and non-employee directors of the company converted
the outstanding cash balances in their respective EDCP accounts
to an account that tracks the company’s common stock and
that will be distributed in the future. As part of the
arrangement, the company no longer has any future cash
obligations to the individuals for the amount converted. The
individuals will receive shares of our common stock equal to the
dollar amount of their election divided by the company’s
common stock price on January 2, 2009. A total of
approximately 47,500 deferred shares will be issued throughout
the election dates chosen. As part of the election, the
individuals can choose to receive the shares on either a
specific date, in equal installments over up to 60 quarters, or
separation from service from the company. This non-cash
transaction reduced other long-term liabilities and increased
additional paid in capital by $1.1 million during fiscal
2008 and $0.1 million during fiscal 2009.
36
Table of Contents
Contractual Obligations and Commitments.
The
following table summarizes the company’s contractual
obligations and commitments at January 1, 2011 and the
effect such obligations are expected to have on its liquidity
and cash flow in the indicated future periods:
| Payments Due by Fiscal Year | ||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||
|
2015 and
|
||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||
|
Contractual Obligations:
|
||||||||||||||||||||
|
Long-term debt
|
$ | 24,858 | $ | 39,843 | $ | 51,838 | $ | 221 | $ | — | ||||||||||
|
Interest payments(1)
|
3,895 | 2,340 | 487 | 5 | — | |||||||||||||||
|
Capital leases
|
3,574 | 2,221 | 2,075 | 2,300 | 372 | |||||||||||||||
|
Interest on capital leases
|
374 | 250 | 158 | 73 | 6 | |||||||||||||||
|
Non-cancelable operating lease obligations(2)
|
41,861 | 37,864 | 33,292 | 27,951 | 171,860 | |||||||||||||||
|
Pension and postretirement contributions and payments(3)
|
3,670 | 1,021 | 1,081 | 1,141 | 7,196 | |||||||||||||||
|
Deferred compensation plan obligations(4)
|
192 | 124 | 117 | 101 | 8,060 | |||||||||||||||
|
Purchase obligations(5)
|
170,842 | — | — | — | — | |||||||||||||||
|
Total contractual cash obligations
|
$ | 249,266 | $ | 83,663 | $ | 89,048 | $ | 31,792 | $ | 187,494 | ||||||||||
| Amounts Expiring by Fiscal Year | ||||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||
|
2015 and
|
||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||
|
Commitments:
|
||||||||||||||||||||
|
Standby letters of credit(6)
|
$ | 4,798 | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Truck lease guarantees
|
56 | 276 | 44 | 37 | 193 | |||||||||||||||
|
Total commitments
|
$ | 4,854 | $ | 276 | $ | 44 | $ | 37 | $ | 193 | ||||||||||
| (1) | Interest payments represent expected fixed payments based on our interest rate swaps under our term loan. Interest payments on our credit facility are not included as these balances will fluctuate over time and the interest rates are variable. | |
| (2) | Does not include lease payments expected to be incurred in fiscal year 2011 related to distributor vehicles and other short-term operating leases. | |
| (3) | Includes the estimated company contributions to the pension plans during fiscal 2011 and the expected benefit payments for postretirement plans from fiscal 2011 through fiscal 2020. | |
| (4) | These are unsecured general obligations to pay the deferred compensation of, and our contributions to, participants in the EDCP. | |
| (5) | Represents the company’s various ingredient and packaging purchasing agreements, which meet the normal purchases exception for cash flow hedge accounting. | |
| (6) | These letters of credit are for the benefit of certain insurance companies related to workers’ compensation liabilities recorded by the company as of January 1, 2011. Such amounts are not recorded on the consolidated balance sheets, but reduce availability of funds under the credit facility. |
Because we are uncertain as to if or when settlements may occur,
these tables do not reflect the company’s net liability of
$4.2 million related to uncertain tax positions. Details
regarding this liability are presented in Note 21,
Income Taxes
, of Notes to Consolidated Financial
Statements of this
Form 10-K.
Guarantees and Indemnification
Obligations.
Our company has provided various
representations, warranties and other standard indemnifications
in various agreements with customers, suppliers and other
parties, as well as in agreements to sell business assets or
lease facilities. In general, these provisions indemnify the
counterparty for matters such as breaches of representations and
warranties, certain environmental conditions and tax matters,
and, in the context of sales of business assets, any liabilities
arising prior to the closing of the transactions.
Non-performance under a contract could trigger an obligation of
the company. The ultimate effect on future financial results is
not subject to reasonable estimation because considerable
uncertainty exists as to the final outcome of any potential
claims. We do not believe that any of these commitments will
have a material effect on our results of operations or financial
condition.
37
Table of Contents
New
Accounting Pronouncements
In January 2010, the FASB issued guidance related to fair value
measurements requiring new disclosures regarding transfers in
and out of Level 1 and 2 and requiring the gross
presentation of activity within Level 3. The guidance also
clarifies existing disclosures of inputs and valuation
techniques for Level 2 and 3 fair value measurements.
Additionally, the guidance includes conforming amendments to
employers’ disclosures about postretirement benefit plan
assets. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting
periods beginning after December 15, 2009, except for the
disclosure of activity within Level 3 fair value
measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim periods within
those years. The impact of adopting this guidance resulted in
additional disclosures in Note 20,
Postretirement
Plans
, of Notes to Consolidated Financial Statements of this
Form 10-K.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for the consolidation of variable
interest entities. The guidance affects the overall
consolidation analysis and requires enhanced disclosures on
involvement with variable interest entities (“VIE”).
The guidance is effective for fiscal years beginning after
November 15, 2009. Prior to fiscal 2010, we consolidated a
VIE, as disclosed in Note 14,
Variable Interest
Entity
, of Notes to Consolidated Financial Statements of
this
Form 10-K,
because we determined the company was the primary beneficiary.
Under this guidance, we have determined that the company no
longer qualifies as the primary beneficiary and ceased
consolidating the VIE beginning in the first quarter of fiscal
2010. The company will continue to record certain of the trucks
and trailers the VIE uses for distributing our products as right
to use leases.
In May 2009, the FASB issued new guidance on subsequent events.
The standard provides guidance on management’s assessment
of subsequent events and incorporates this guidance into
accounting literature. The standard was effective prospectively
for interim and annual periods ending after June 15, 2009.
See Note 25,
Subsequent Events
, of Notes to
Consolidated Financial Statements of this
Form 10-K
for the required disclosures. In February 2010, the FASB issued
new guidance that amended certain recognition and disclosure
requirements for subsequent events. The guidance changed the
requirement for public companies to report the date through
which subsequent events were reviewed. This guidance was
effective at issuance. The implementation of the standard and
new guidance did not have an impact on our consolidated
financial position and results of operations.
Information
Regarding Non-GAAP Financial Measures
The company prepares its consolidated financial statements in
accordance with GAAP. However, from time to time, the company
may present in its public statements, press releases and SEC
filings, non-gaap financial measures such as, EBITDA and gross
margin excluding depreciation and amortization to measure the
performance of the company and its operating divisions.
EBITDA is used as the primary performance measure in the
company’s Annual Executive Bonus Plan. The company defines
EBITDA as earnings from continuing operations before interest,
income taxes, depreciation, amortization and income attributable
to non-controlling interest. The company believes that EBITDA is
a useful tool for managing the operations of its business and is
an indicator of the company’s ability to incur and service
indebtedness and generate free cash flow. Furthermore, pursuant
to the terms of our credit facility, EBITDA is used to determine
the company’s compliance with certain financial covenants.
The company also believes that EBITDA measures are commonly
reported and widely used by investors and other interested
parties as measures of a company’s operating performance
and debt servicing ability because EBITDA measures assist in
comparing performance on a consistent basis without regard to
depreciation or amortization, which can vary significantly
depending upon accounting methods and non-operating factors
(such as historical cost). EBITDA is also a widely-accepted
financial indicator of a company’s ability to incur and
service indebtedness.
EBITDA should not be considered an alternative to
(a) income from operations or net income (loss) as a
measure of operating performance; (b) cash flows provided
by operating, investing and financing activities (as determined
in accordance with GAAP) as a measure of the company’s
ability to meet its cash needs; or (c) any other indicator
of performance or liquidity that has been determined in
accordance with GAAP. Our method of calculating EBITDA may
differ from the methods used by other companies, and,
accordingly, our measure of EBITDA may not be comparable to
similarly titled measures used by other companies.
38
Table of Contents
Gross margin excluding depreciation and amortization is used as
a performance measure to provide additional transparent
information regarding our results of operations on a
consolidated and segment basis. Changes in depreciation and
amortization are separately discussed and include depreciation
and amortization for materials, supplies, labor and other
production costs and operating activities.
Presentation of gross margin includes depreciation and
amortization in the materials, supplies, labor and other
production costs according to GAAP. Our method of presenting
gross margin excludes the depreciation and amortization
components, as discussed above. This presentation may differ
from the methods used by other companies and may not be
comparable to similarly titled measures used by other companies.
| Item 7A. | 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 January 1, 2011, the company’s hedge portfolio
contained commodity derivatives with a fair value of
$20.0 million. Of this fair value, $22.4 million is
based on quoted market prices and $(2.4) million is based
on models and other valuation methods. $20.4 million and
$(0.4) million of this fair value relates to instruments
that will be utilized in fiscal 2011 and fiscal 2012,
respectively.
A sensitivity analysis has been prepared to quantify the
company’s potential exposure to commodity price risk with
respect to its derivative portfolio. Based on the company’s
derivative portfolio as of January 1, 2011, a hypothetical
ten percent change in commodity prices would increase or
decrease the fair value of the derivative portfolio by
$18.3 million. The analysis disregards changes in the
exposures inherent in the underlying hedged items; however, the
company expects that any increase or decrease in the fair value
of the portfolio would be substantially offset by increases or
decreases in raw material and packaging prices.
Interest
Rate Risk
The company has interest rate swaps with initial notional
amounts of $85.0 million and $65.0 million,
respectively, to fix the interest rate on the
$150.0 million term loan entered into on August 1,
2008 to fund the acquisitions of ButterKrust and Holsum. The
notional amounts match the quarterly principal payments on the
$150.0 million term loan so that the remaining outstanding
term loan balance at any reporting date is fully covered by the
swap arrangements through the August 2013 maturity of the term
loan. In addition, on October 27, 2008, the company entered
an interest rate swap with a notional amount of
$50.0 million to fix the interest rate through
September 30, 2009 on $50.0 million of borrowings
outstanding under the company’s unsecured credit facility.
As of January 1, 2011, the fair value of these interest
rate swaps was $(6.5) million. All of this fair value is
based on valuation models and $(3.8) million,
$(2.2) million, and $(0.5) million of this fair value
is related to instruments expiring in fiscal 2011 through 2013,
respectively.
A sensitivity analysis has been prepared to quantify the
company’s potential exposure to interest rate risk with
respect to the interest rate swaps. As of January 1, 2011,
a hypothetical ten percent change in interest rates would
increase or decrease the fair value of the interest rate swap by
$0.2 million. The analysis disregards changes in the
exposures inherent in the underlying debt; however, the company
expects that any increase or decrease in payments under the
interest rate swap would be substantially offset by increases or
decreases in interest expense.
The cash effects of the company’s commodity derivatives are
included in the consolidated statement of cash flows as cash
flow from operating activities.
39
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
Refer to the Index to Consolidated Financial Statements and the
Financial Statement Schedule for the required information.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | 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 (“Exchange Act”),
is accumulated and communicated to management in a timely
fashion and is recorded, processed, summarized and reported
within the time periods specified by the SEC’s rules and
forms. An evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e)
under the Exchange Act was performed as of the end of the period
covered by this annual report. This evaluation was performed
under the supervision and with the participation of management,
including our Chief Executive Officer (“CEO”), Chief
Financial Officer (“CFO”) and Chief Accounting Officer
(“CAO”).
Based upon that evaluation, our CEO, CFO and CAO have concluded
that these disclosure controls and procedures were effective as
of the end of the period covered by this annual report.
Management’s
Report on Internal Control Over Financial Reporting:
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” issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in
“Internal Control — Integrated Framework,”
our management concluded that our internal control over
financial reporting was effective as of January 1, 2011.
The effectiveness of our internal control over financial
reporting as of January 1, 2011 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
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 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item with respect to directors
of the company is incorporated herein by reference to the
information set forth under the captions “Election of
Directors”, “Corporate Governance — The
Board of Directors and committees of the Board of
Directors”, “Corporate Governance-Relationships Among
40
Table of Contents
Certain Directors” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in the company’s
definitive proxy statement for the 2011 Annual Meeting of
Shareholders expected to be filed with the SEC on or prior to
April 15, 2011 (the “proxy”). The information
required by this item with respect to executive officers of the
company is set forth in Part I of this
Form 10-K.
We have adopted the Flowers Foods, Inc. Code of Business Conduct
and Ethics for Officers and Members of the Board of Directors,
which applies to all of our directors and executive officers.
The Code of Business Conduct and Ethics is publicly available on
our website at
http://www.flowersfoods.com
in the “Corporate Governance” section of the
“Investor Center” tab. If we make any substantive
amendments to our Code of Business Conduct and Ethics or we
grant any waiver, including any implicit waiver, from a
provision of the Code of Business Conduct and Ethics, that
applies to any of our directors or executive officers, including
our principal executive officer, principal financial officer,
principal accounting officer, we intend to disclose the nature
of the amendment or waiver on our website at the same location.
Alternatively, we may elect to disclose the amendment or waiver
in a report on
Form 8-K
filed with the SEC.
Our Chairman of the Board and Chief Executive Officer certified
to the New York Stock Exchange (“NYSE”) on
July 2, 2010 pursuant to Section 303A.12 of the
NYSE’s listing standards, that he was not aware of any
violation by Flowers Foods of the NYSE’s corporate
governance listing standards as of that date.
| Item 11. | Executive Compensation |
The information required by this item is incorporated herein by
reference to the information set forth under the caption
“Executive Compensation” and “Compensation
Committee Report” in the proxy.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
See Item 5 of this
Form 10-K
for information regarding Securities Authorized for Issuance
under Equity Compensation Plans. The remaining information
required by this item is incorporated herein by reference to the
information set forth under the caption “Security Ownership
of Certain Beneficial Owners and Management” in the proxy.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is incorporated herein by
reference to the information set forth under the caption
“Corporate Governance — Determination of
Independence” and “Transactions with Management and
Others” in the proxy.
| Item 14. | Principal Accounting Fees and Services |
The information required by this item is incorporated herein by
reference to the information set forth under the caption
“Fiscal 2010 and Fiscal 2009 Audit Firm Fee Summary”
in the proxy.
41
Table of Contents
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)
List of documents filed as part of this
report.
1.
Financial Statements of the Registrant
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Income for the fifty-two weeks ended
January 1, 2011 and January 2,
2010 and the fifty-three weeks ended January 3, 2009.
Consolidated Balance Sheets at January 1, 2011 and
January 2, 2010.
Consolidated Statements of Changes in Stockholders’ Equity
and Comprehensive Income for the fifty-two weeks ended
January 1, 2011 and January 2, 2010 and the
fifty-three weeks ended January 3, 2009.
Consolidated Statements of Cash Flows for the fifty-two weeks
ended January 1, 2011 and January 2, 2010 and the
fifty-three weeks ended January 3, 2009.
Notes to Consolidated Financial Statements.
2.
Financial Statement Schedule of the
Registrant
Schedule II Valuation and Qualifying Accounts —
for the fifty-two weeks ended January 1, 2011 and
January 2, 2010 and the fifty-three weeks ended
January 3, 2009.
3.
Exhibits.
The following documents are filed
as exhibits hereto:
|
Exhibit
|
||||||
| No | Name of Exhibit | |||||
| 2 | .1 | — | Distribution Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc., dated as of October 26, 2000 (Incorporated by reference to Flowers Foods’ Registration Statement on Form 10, dated December 1, 2000, File No. 1-16247). | |||
| 2 | .2 | — | Amendment No. 1 to Distribution Agreement, dated as of March 12, 2001, between Flowers Industries, Inc. and Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | |||
| 3 | .1 | — | Restated Articles of Incorporation of Flowers Foods, Inc. as amended on May 30, 2008 (Incorporated by reference to Flowers Foods’ Quarterly Report on Form 10-Q, dated June 4, 2009, File No. 1-16247). | |||
| 3 | .2 | — | Amended and Restated Bylaws of Flowers Foods, Inc., as amended and restated on November 14, 2008 (incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated November 18, 2008, File No. 1-16247). | |||
| 4 | .1 | — | Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | |||
| 4 | .2 | — | Rights Agreement between Flowers Foods, Inc. and First Union National Bank, as Rights Agent, dated March 23, 2001 (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | |||
| 4 | .3 | — | Amendment No. 1, dated November 15, 2002, to Rights Agreement between Flowers Foods, Inc. and Wachovia Bank, N.A. (as successor in interest to First Union National Bank), as rights agent, dated March 23, 2001. (Incorporated by reference to Flowers Foods’ Registration Statement on Form 8-A, dated November 18, 2002, File No. 1-16247). | |||
| 4 | .6 | — | Form of Indenture (Incorporated by reference to Flowers Foods’ Registration Statement on Form S-3, dated February 8, 2011, File No. 1-16247). | |||
| 10 | .1 | — | Flowers Foods, Inc. Retirement Plan No. 1, as amended and restated effective March 26, 2001 (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | |||
42
Table of Contents
|
Exhibit
|
||||||
| No | Name of Exhibit | |||||
| 10 | .2 | — | Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, File No. 1-16247). | |||
| 10 | .3 | — | Flowers Foods, Inc. Stock Appreciation Rights Plan (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 29, 2002, File No. 1-16247). | |||
| 10 | .4 | — | Flowers Foods, Inc. Annual Executive Bonus Plan (Incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, File No. 1-16247). | |||
| 10 | .5 | — | Flowers Foods, Inc. Supplemental Executive Retirement Plan (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 29, 2002, File No. 1-16247). | |||
| 10 | .6 | — | Form of Indemnification Agreement, by and between Flowers Foods, Inc., certain executive officers and the directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 28, 2003, File No. 1-16247). | |||
| 10 | .7 | — | Form of Continuation of Employment Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1016247). | |||
| 10 | .8 | — | Ninth Amendment to the Flowers Foods, Inc. Retirement Plan No. 1, dated November 7, 2005, as amended and restated effective as of March 26, 2001 (Incorporated by reference to Flowers Foods’ Quarterly Report on Form 10-Q dated November 17, 2005, File No. 1-16247). | |||
| 10 | .9 | — | First Amendment and Waiver, dated October 5, 2007, among Flowers Foods, Inc., a Georgia corporation, the lenders party to the Credit Agreement and Deutsche Bank AG New York Branch, as Administrative Agent (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated October 11, 2007, File No. 1-16247). | |||
| 10 | .10 | — | Agreement and Plan of Merger, dated June 23, 2008, by and among, Flowers Foods, Inc., Peachtree Acquisition Co., LLC, Holsum Bakery, Inc., Lloyd Edward Eisele, Jr. and The Lloyd Edward Eisele, Jr. Revocable Trust (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K/A dated June 25, 2008, File No. 1-16247). | |||
| 10 | .11 | — | Credit Agreement, dated as of August 1, 2008, among Flowers Foods, Inc., the Lenders Party thereto from time to time, Bank of America N.A., Cooperative Centrale Raiffeisen-Boerenleen Bank, B.A., “Rabobank International”, New York Branch, and Branch Banking & Trust Company as co-documentation agents, SunTrust Bank, as syndication agent, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated August 6, 2008, File No. 1-16247). | |||
| 10 | .12 | — | Form of 2009 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1-16247). | |||
| 10 | .13 | — | Form of 2010 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 3, 2010, File No. 1-16247). | |||
| 10 | .14 | — | Form of 2010 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 3, 2010, File No. 1-16247). | |||
| *10 | .15 | — | Form of 2010 Deferred Shares Agreement, by and between Flowers Foods, Inc. and certain members of the Board of Directors of Flowers Foods, Inc. | |||
| *10 | .16 | — | Form of 2011 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc.. | |||
| *10 | .17 | — | Form of 2011 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc.. | |||
| 21 | — | Subsidiaries of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 3, 2010, File No. 1-16247). | ||||
| *23 | — | Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP. | ||||
| *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. | |||
43
Table of Contents
|
Exhibit
|
||||||
| No | Name of Exhibit | |||||
| *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 George E. Deese, Chief Executive Officer, R. Steve Kinsey, Chief Financial Officer and Karyl H. Lauder, Chief Accounting Officer for the Fiscal Year Ended January 1, 2011. | ||||
| *101 | .CAL | — | XBRL Taxonomy Extension Calculation Linkbase. | |||
| *101 | .DEF | — | XBRL Taxonomy Extension Definition Linkbase. | |||
| *101 | .INS | — | XBRL Instance Document. | |||
| *101 | .LAB | — | XBRL Taxonomy Extension Label Linkbase. | |||
| *101 | .PRE | — | XBRL Taxonomy Extension Presentation Linkbase. | |||
| *101 | .SCH | — | XBRL Taxonomy Extension Schema Linkbase. | |||
| *101 | .CAL | — | XBRL Taxonomy Extension Calculation Linkbase. | |||
| * | Filed herewith |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Flowers Foods, Inc. has duly
caused this
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized on this 23rd day of February, 2011.
FLOWERS FOODS, INC.
/s/
GEORGE
E. DEESE
George E. Deese
Chairman of the Board
and
Chief Executive
Officer
/s/
R.
STEVE KINSEY
R. Steve Kinsey
Executive Vice President
and
Chief Financial
Officer
/s/
KARYL
H. LAUDER
Karyl H. Lauder
Senior Vice President and Chief
Accounting Officer
44
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of
1934, this
Form 10-K
has been signed below by the following persons on behalf of
Flowers Foods, Inc. and in the capacities and on the dates
indicated.
| Signature | Title | Date | ||||
|
/s/
GEORGE
E. DEESE
|
Chairman of the Board and Chief Executive Officer | February 23, 2011 | ||||
|
/s/
R.
STEVE KINSEY
|
Executive Vice President and Chief Financial Officer | February 23, 2011 | ||||
|
/s/
KARYL
H. LAUDER
|
Senior Vice President and Chief Accounting Officer | February 23, 2011 | ||||
|
/s/
JOE
E. BEVERLY
|
Director | February 23, 2011 | ||||
|
/s/
FRANKLIN
L. BURKE
|
Director | February 23, 2011 | ||||
|
/s/
MANUEL
A. FERNANDEZ
|
Director | February 23, 2011 | ||||
|
/s/
BENJAMIN
H. GRISWOLD, IV
|
Director | February 23, 2011 | ||||
|
/s/
JOSEPH
L. LANIER, Jr.
|
Director | February 23, 2011 | ||||
|
/s/
AMOS
R. MCMULLIAN
|
Director | February 23, 2011 | ||||
|
/s/
J.V.
SHIELDS, JR.
|
Director | February 23, 2011 | ||||
|
/s/
DAVID
V. SINGER
|
Director | February 23, 2011 | ||||
|
/s/
MELVIN
T. STITH, PH.D.
|
Director | February 23, 2011 | ||||
|
/s/
JACKIE
M. WARD
|
Director | February 23, 2011 | ||||
|
/s/
C.
MARTIN WOOD III
|
Director | February 23, 2011 | ||||
45
FLOWERS
FOODS, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
F-1
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Flowers Foods,
Inc.:
In our opinion, the consolidated financial statements listed in
the index under Item 15(a)(1), present fairly, in all
material respects, the financial position of Flowers Foods, Inc.
and its subsidiaries (the “Company”) at
January 1, 2011 and January 2, 2010, and the results
of their operations and their cash flows for each of the three
years in the period ended January 1, 2011 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
January 1, 2011, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule, and on the Company’s internal control
over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 14 to the consolidated financial
statements, the company changed the manner in which it accounts
for its variable interest entity in 2010.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Atlanta, Georgia
February 23, 2011
F-2
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
|
For the
|
||||||||||||
| For the 52 Weeks Ended | 53 Weeks Ended | |||||||||||
|
January 1,
|
January 2,
|
January 3,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||
|
Sales
|
$ | 2,573,769 | $ | 2,600,849 | $ | 2,414,892 | ||||||
|
Materials, supplies, labor and other production costs (exclusive
of depreciation and amortization shown separately below)
|
1,346,790 | 1,390,183 | 1,263,962 | |||||||||
|
Selling, distribution and administrative expenses
|
935,999 | 926,418 | 894,800 | |||||||||
|
Depreciation and amortization
|
85,118 | 80,928 | 73,312 | |||||||||
|
Gain on acquisition
|
— | (3,013 | ) | — | ||||||||
|
Gain on sale of assets
|
— | — | (2,306 | ) | ||||||||
|
Asset impairment
|
— | — | 3,108 | |||||||||
|
Gain on insurance recovery
|
— | — | (686 | ) | ||||||||
|
Income from operations
|
205,862 | 206,333 | 182,702 | |||||||||
|
Interest expense
|
8,164 | 11,587 | 6,137 | |||||||||
|
Interest income
|
(12,682 | ) | (13,013 | ) | (13,486 | ) | ||||||
|
Income before income taxes
|
210,380 | 207,759 | 190,051 | |||||||||
|
Income tax expense
|
73,333 | 74,047 | 67,744 | |||||||||
|
Net income
|
137,047 | 133,712 | 122,307 | |||||||||
|
Less: net income attributable to noncontrolling interest
|
— | (3,415 | ) | (3,074 | ) | |||||||
|
Net income attributable to Flowers Foods, Inc.
|
$ | 137,047 | $ | 130,297 | $ | 119,233 | ||||||
|
Net Income Per Common Share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Net income attributable to Flowers Foods, Inc. common
shareholders per share
|
$ | 1.50 | $ | 1.41 | $ | 1.29 | ||||||
|
Weighted average shares outstanding
|
91,420 | 92,200 | 92,432 | |||||||||
|
Diluted:
|
||||||||||||
|
Net income attributable to Flowers Foods, Inc. common
shareholders per share
|
$ | 1.49 | $ | 1.41 | $ | 1.28 | ||||||
|
Weighted average shares outstanding
|
92,108 | 92,733 | 93,157 | |||||||||
See Accompanying Notes to Consolidated Financial Statements
F-3
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
| January 1, 2011 | January 2, 2010 | |||||||
|
(Amounts in thousands, except
|
||||||||
| share data) | ||||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 6,755 | $ | 18,948 | ||||
|
Accounts and notes receivable, net (Note 2)
|
166,281 | 178,708 | ||||||
|
Inventories, net:
|
||||||||
|
Raw materials
|
20,879 | 20,952 | ||||||
|
Packaging materials
|
12,125 | 12,065 | ||||||
|
Finished goods
|
27,570 | 27,979 | ||||||
| 60,574 | 60,996 | |||||||
|
Spare parts and supplies
|
37,085 | 35,437 | ||||||
|
Deferred income taxes
|
1,095 | 20,714 | ||||||
|
Other
|
41,924 | 24,152 | ||||||
|
Total current assets
|
313,714 | 338,955 | ||||||
|
Property, Plant and Equipment:
|
||||||||
|
Land
|
67,036 | 64,816 | ||||||
|
Buildings
|
329,646 | 323,860 | ||||||
|
Machinery and equipment
|
795,869 | 737,150 | ||||||
|
Furniture, fixtures and transportation equipment
|
69,223 | 102,331 | ||||||
|
Construction in progress
|
22,480 | 27,006 | ||||||
| 1,284,254 | 1,255,163 | |||||||
|
Less: accumulated depreciation
|
(679,561 | ) | (652,587 | ) | ||||
| 604,693 | 602,576 | |||||||
|
Notes Receivable
|
92,860 | 94,457 | ||||||
|
Assets Held for Sale — Distributor Routes
|
11,924 | 6,535 | ||||||
|
Other Assets
|
5,113 | 4,157 | ||||||
|
Goodwill
|
200,153 | 201,682 | ||||||
|
Other Intangible Assets, net
|
97,032 | 103,080 | ||||||
| $ | 1,325,489 | $ | 1,351,442 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Current Liabilities:
|
||||||||
|
Current maturities of long-term debt and capital leases
|
$ | 28,432 | $ | 25,763 | ||||
|
Accounts payable
|
102,068 | 92,692 | ||||||
|
Other accrued liabilities
|
112,272 | 103,317 | ||||||
|
Total current liabilities
|
242,772 | 221,772 | ||||||
|
Long-Term Debt and Capital Leases
|
98,870 | 225,905 | ||||||
|
Other Liabilities:
|
||||||||
|
Post-retirement/post-employment obligations
|
76,086 | 68,140 | ||||||
|
Deferred income taxes
|
66,680 | 63,748 | ||||||
|
Other
|
45,291 | 43,851 | ||||||
|
Total other liabilities
|
188,057 | 175,739 | ||||||
|
Commitments and Contingencies (Note 22)
|
||||||||
|
Stockholders’ Equity:
|
||||||||
|
Preferred Stock — $100 par value, authorized
100,000 shares and none issued
|
— | — | ||||||
|
Preferred Stock — $.01 par value, authorized
900,000 shares and none issued
|
— | — | ||||||
|
Common Stock — $.01 par value, 500,000,000
authorized shares, 101,659,924 shares and
101,659,924 shares issued, respectively
|
1,017 | 1,017 | ||||||
|
Treasury stock 11,011,494 shares and
10,200,387 shares, respectively
|
(214,683 | ) | (189,250 | ) | ||||
|
Capital in excess of par value
|
539,476 | 531,326 | ||||||
|
Retained earnings
|
503,689 | 437,524 | ||||||
|
Accumulated other comprehensive loss
|
(33,709 | ) | (64,672 | ) | ||||
|
Total Flowers Foods, Inc. stockholders’ equity
|
795,790 | 715,945 | ||||||
|
Noncontrolling interest
|
— | 12,081 | ||||||
|
Total stockholders’ equity
|
795,790 | 728,026 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,325,489 | $ | 1,351,442 | ||||
See Accompanying Notes to Consolidated Financial Statements
F-4
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||
| Common Stock |
Capital
|
Other
|
||||||||||||||||||||||||||||||||||||||
|
Comprehensive
|
Number of
|
in Excess
|
Comprehensive
|
Treasury Stock | ||||||||||||||||||||||||||||||||||||
|
Income
|
Shares
|
Par
|
of Par
|
Retained
|
Income
|
Number of
|
Noncontrolling
|
|||||||||||||||||||||||||||||||||
| (Loss) | Issued | Value | Value | Earnings | (Loss) | Shares | Cost | Interest | Total | |||||||||||||||||||||||||||||||
| (Amounts in thousands, except share data) | ||||||||||||||||||||||||||||||||||||||||
|
Balances at December 29, 2007
|
101,659,924 | $ | 1,017 | $ | 484,472 | $ | 303,386 | $ | 22,141 | (9,755,350 | ) | $ | (154,801 | ) | $ | 7,802 | $ | 664,017 | ||||||||||||||||||||||
|
Net income
|
$ | 122,307 | 119,233 | 3,074 | 122,307 | |||||||||||||||||||||||||||||||||||
|
Derivative instruments
|
(60,320 | ) | (60,320 | ) | (60,320 | ) | ||||||||||||||||||||||||||||||||||
|
Amortization of prior service costs
|
204 | 204 | ||||||||||||||||||||||||||||||||||||||
|
Increase in minimum pension liability
|
(64,304 | ) | (64,304 | ) | (64,304 | ) | ||||||||||||||||||||||||||||||||||
|
Comprehensive (loss)
|
(2,317 | ) | ||||||||||||||||||||||||||||||||||||||
|
Comprehensive income attributable to noncontrolling interest
|
(3,074 | ) | ||||||||||||||||||||||||||||||||||||||
|
Comprehensive (loss) attributable to Flowers Foods, Inc.
|
$ | (5,391 | ) | |||||||||||||||||||||||||||||||||||||
|
Stock repurchases
|
(1,720,148 | ) | (44,072 | ) | (44,072 | ) | ||||||||||||||||||||||||||||||||||
|
Exercise of stock options
|
(1,947 | ) | 289,775 | 4,626 | 2,679 | |||||||||||||||||||||||||||||||||||
|
Issuance of restricted stock awards
|
(3,984 | ) | 249,880 | 3,984 | — | |||||||||||||||||||||||||||||||||||
|
Issuance of deferred stock awards
|
(386 | ) | 24,045 | 386 | — | |||||||||||||||||||||||||||||||||||
|
Amortization of share-based compensation awards
|
10,566 | 10,566 | ||||||||||||||||||||||||||||||||||||||
|
Income tax benefits related to share-based payments
|
2,229 | 2,229 | ||||||||||||||||||||||||||||||||||||||
|
Conversion of deferred compensation (Note 13)
|
1,134 | 1,134 | ||||||||||||||||||||||||||||||||||||||
|
Distributions from noncontrolling interest to owners
|
(1,541 | ) | (1,541 | ) | ||||||||||||||||||||||||||||||||||||
|
Issuance for acquisitions
|
32,299 | 1,998,656 | 32,078 | 64,377 | ||||||||||||||||||||||||||||||||||||
|
Dividends paid — $0.575 per common share
|
(53,222 | ) | (53,222 | ) | ||||||||||||||||||||||||||||||||||||
|
Balances at January 3, 2009
|
101,659,924 | $ | 1,017 | $ | 524,383 | $ | 369,397 | $ | (102,279 | ) | (8,913,142 | ) | $ | (157,799 | ) | $ | 9,335 | $ | 644,054 | |||||||||||||||||||||
|
Net income
|
$ | 133,712 | 130,297 | 3,415 | 133,712 | |||||||||||||||||||||||||||||||||||
|
Derivative instruments
|
28,940 | 28,940 | 28,940 | |||||||||||||||||||||||||||||||||||||
|
Net prior service costs
|
964 | 964 | 964 | |||||||||||||||||||||||||||||||||||||
|
Amortization of actuarial loss
|
1,698 | 1,698 | 1,698 | |||||||||||||||||||||||||||||||||||||
|
Reduction in minimum pension liability
|
6,005 | 6,005 | 6,005 | |||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
171,319 | |||||||||||||||||||||||||||||||||||||||
|
Comprehensive income attributable to noncontrolling interest
|
(3,415 | ) | ||||||||||||||||||||||||||||||||||||||
|
Comprehensive income attributable to Flowers Foods, Inc.
|
$ | 167,904 | ||||||||||||||||||||||||||||||||||||||
|
Stock repurchases
|
(1,793,534 | ) | (40,531 | ) | (40,531 | ) | ||||||||||||||||||||||||||||||||||
|
Exercise of stock options
|
(1,552 | ) | 232,024 | 4,166 | 2,614 | |||||||||||||||||||||||||||||||||||
|
Issuance of restricted stock awards
|
(4,416 | ) | 248,680 | 4,416 | — | |||||||||||||||||||||||||||||||||||
|
Issuance of deferred stock awards
|
(352 | ) | 19,450 | 352 | — | |||||||||||||||||||||||||||||||||||
|
Amortization of share-based compensation awards
|
11,792 | 11,792 | ||||||||||||||||||||||||||||||||||||||
|
Income tax benefits related to share-based payments
|
1,522 | 1,522 | ||||||||||||||||||||||||||||||||||||||
|
Conversion of deferred compensation (Note 13)
|
95 | 95 | ||||||||||||||||||||||||||||||||||||||
|
Issuance of deferred compensation
|
(146 | ) | 6,135 | 146 | — | |||||||||||||||||||||||||||||||||||
|
Distributions from noncontrolling interest to owners
|
(669 | ) | (669 | ) | ||||||||||||||||||||||||||||||||||||
|
Dividends paid — $0.675 per common share
|
(62,170 | ) | (62,170 | ) | ||||||||||||||||||||||||||||||||||||
|
Balances at January 2, 2010
|
101,659,924 | $ | 1,017 | $ | 531,326 | $ | 437,524 | $ | (64,672 | ) | (10,200,387 | ) | $ | (189,250 | ) | $ | 12,081 | $ | 728,026 | |||||||||||||||||||||
|
Deconsolidation of Variable Interest Entity (Note 14)
|
(12,081 | ) | (12,081 | ) | ||||||||||||||||||||||||||||||||||||
|
Net income
|
$ | 137,047 | 137,047 | 137,047 | ||||||||||||||||||||||||||||||||||||
|
Derivative instruments
|
35,769 | 35,769 | 35,769 | |||||||||||||||||||||||||||||||||||||
|
Net prior service credits
|
(107 | ) | (107 | ) | (107 | ) | ||||||||||||||||||||||||||||||||||
|
Amortization of actuarial loss
|
1,303 | 1,303 | 1,303 | |||||||||||||||||||||||||||||||||||||
|
Increase in minimum pension liability
|
(6,002 | ) | (6,002 | ) | (6,002 | ) | ||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
$ | 168,010 | ||||||||||||||||||||||||||||||||||||||
|
Stock repurchases
|
(1,548,771 | ) | (39,184 | ) | (39,184 | ) | ||||||||||||||||||||||||||||||||||
|
Exercise of stock options
|
(1,202 | ) | 486,887 | 9,086 | 7,884 | |||||||||||||||||||||||||||||||||||
|
Issuance of restricted stock awards
|
(4,102 | ) | 220,640 | 4,102 | — | |||||||||||||||||||||||||||||||||||
|
Issuance of deferred stock awards
|
(631 | ) | 33,920 | 631 | — | |||||||||||||||||||||||||||||||||||
|
Amortization of share-based compensation awards
|
12,995 | 12,995 | ||||||||||||||||||||||||||||||||||||||
|
Income tax benefits related to share-based payments
|
1,022 | 1,022 | ||||||||||||||||||||||||||||||||||||||
|
Share-based payment forfeitures
|
83 | (4,425 | ) | (83 | ) | — | ||||||||||||||||||||||||||||||||||
|
Issuance of deferred compensation
|
(15 | ) | 642 | 15 | — | |||||||||||||||||||||||||||||||||||
|
Dividends paid — $0.775 per common share
|
(70,882 | ) | (70,882 | ) | ||||||||||||||||||||||||||||||||||||
|
Balances at January 1, 2011
|
101,659,924 | $ | 1,017 | $ | 539,476 | $ | 503,689 | $ | (33,709 | ) | (11,011,494 | ) | $ | (214,683 | ) | $ | — | $ | 795,790 | |||||||||||||||||||||
See Accompanying Notes to Consolidated Financial Statements
F-5
Table of Contents
|
For the
|
For the
|
|||||||||||
| 52 Weeks Ended | 53 Weeks Ended | |||||||||||
|
January 1,
|
January 2,
|
January 3,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Cash flows provided by (disbursed for) operating activities:
|
||||||||||||
|
Net income
|
$ | 137,047 | $ | 133,712 | $ | 122,307 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
85,118 | 80,928 | 73,312 | |||||||||
|
Stock based compensation
|
13,678 | 11,855 | 10,594 | |||||||||
|
Loss reclassified from accumulated other comprehensive income to
net income
|
8,475 | 63,026 | 49 | |||||||||
|
Gain on sale of assets
|
— | — | (2,306 | ) | ||||||||
|
Gain on acquisition
|
— | (3,013 | ) | — | ||||||||
|
Asset impairment
|
— | — | 3,108 | |||||||||
|
Deferred income taxes
|
3,888 | 3,307 | 2,814 | |||||||||
|
Provision for inventory obsolescence
|
1,047 | 498 | 1,121 | |||||||||
|
Allowances for accounts receivable
|
547 | 2,077 | 640 | |||||||||
|
Pension and postretirement plans expense (benefit)
|
1,842 | 5,112 | (5,772 | ) | ||||||||
|
Other
|
(285 | ) | 39 | (2,472 | ) | |||||||
|
Pension contributions
|
(909 | ) | (450 | ) | — | |||||||
|
Changes in operating assets and liabilities, net of acquisitions
and disposals:
|
||||||||||||
|
Accounts receivable, net
|
11,482 | (476 | ) | (22,340 | ) | |||||||
|
Inventories, net
|
(936 | ) | (3,525 | ) | (4,242 | ) | ||||||
|
Other assets
|
14,595 | 24,623 | (52,058 | ) | ||||||||
|
Accounts payable and other accrued liabilities
|
30,461 | (81,704 | ) | (29,883 | ) | |||||||
|
Net cash provided by operating activities
|
306,050 | 236,009 | 94,872 | |||||||||
|
Cash flows provided by (disbursed for) investing activities:
|
||||||||||||
|
Purchase of property, plant and equipment
|
(98,404 | ) | (72,093 | ) | (86,861 | ) | ||||||
|
Issuance of notes receivable
|
(10,843 | ) | (12,436 | ) | (18,633 | ) | ||||||
|
Proceeds from notes receivable
|
12,514 | 12,126 | 11,354 | |||||||||
|
Acquisition of businesses, net of cash acquired
|
— | (24,565 | ) | (170,077 | ) | |||||||
|
Deconsolidation of variable interest entity (Note 14)
|
(8,804 | ) | — | — | ||||||||
|
Proceeds from sale of property, plant and equipment
|
1,075 | 6,919 | 4,899 | |||||||||
|
Other
|
165 | 440 | 62 | |||||||||
|
Net cash disbursed for investing activities
|
(104,297 | ) | (89,609 | ) | (259,256 | ) | ||||||
|
Cash flows provided by (disbursed for) financing activities:
|
||||||||||||
|
Dividends paid
|
(70,882 | ) | (62,170 | ) | (53,222 | ) | ||||||
|
Exercise of stock options
|
7,884 | 2,614 | 2,679 | |||||||||
|
Excess windfall tax benefit related to stock awards
|
977 | 1,386 | 1,976 | |||||||||
|
Payment of financing fees
|
— | — | (788 | ) | ||||||||
|
Stock repurchases
|
(39,184 | ) | (40,531 | ) | (44,072 | ) | ||||||
|
Change in book overdraft.
|
(1,432 | ) | (7,735 | ) | 6,702 | |||||||
|
Proceeds from debt borrowings
|
418,500 | 848,326 | 645,250 | |||||||||
|
Debt and capital lease obligation payments
|
(529,809 | ) | (888,637 | ) | (392,614 | ) | ||||||
|
Other
|
— | (669 | ) | (1,541 | ) | |||||||
|
Net cash (disbursed for) provided by financing activities
|
(213,946 | ) | (147,416 | ) | 164,370 | |||||||
|
Net decrease in cash and cash equivalents
|
(12,193 | ) | (1,016 | ) | (14 | ) | ||||||
|
Cash and cash equivalents at beginning of period
|
18,948 | 19,964 | 19,978 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 6,755 | $ | 18,948 | $ | 19,964 | ||||||
|
Schedule of non cash investing and financing activities:
|
||||||||||||
|
Stock issued for acquisitions
|
$ | — | $ | — | $ | 64,377 | ||||||
|
(Issuance) conversion of deferred compensation to common stock
equivalent units
|
$ | (15 | ) | $ | 95 | $ | 1,134 | |||||
|
Capital and
right-to-use
lease obligations
|
$ | 13,332 | $ | 4,362 | $ | 1,804 | ||||||
|
Deconsolidation of VIE capital leases
|
$ | (26,389 | ) | $ | — | $ | — | |||||
|
Supplemental disclosures of cash flow information:
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest, net of capitalized interest
|
$ | 7,470 | $ | 11,275 | $ | 6,029 | ||||||
|
Income taxes paid, net of refunds of $623, $1,167 and $252,
respectively
|
$ | 72,554 | $ | 75,310 | $ | 65,255 | ||||||
See Accompanying Notes to Consolidated Financial Statements
F-6
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
| Note 1. | Basis of Presentation |
General.
Flowers Foods, Inc. (the
“company”) is one of the largest producers and
marketers of bakery products in the United States. The company
consists of two business segments: direct-store-delivery
(“DSD”) and warehouse delivery. The DSD segment
focuses on the production and marketing of bakery products to
U.S. customers in the Southeast, Mid-Atlantic, and
Southwest as well as select markets in California and Nevada
primarily through its DSD system. The warehouse delivery segment
produces snack cakes for sale to co-pack, retail and vending
customers nationwide as well as frozen bakery products for sale
to retail and foodservice customers nationwide primarily through
warehouse distribution.
| Note 2. | Summary of Significant Accounting Policies |
Principles of Consolidation.
The Consolidated
Financial Statements include the accounts of the company and its
wholly-owned subsidiaries. Intercompany transactions and
balances are eliminated in consolidation.
Variable Interest Entities.
In 2009, the
Financial Accounting Standards Board (“FASB”) amended
the consolidation principles associated with variable interest
entities (“VIE”). The new accounting guidance caused a
change in our accounting policy effective January 3, 2010.
Generally, the new qualitative approach replaced the
quantitative-based risks and rewards calculation for determining
which enterprise, if any, has a controlling financial interest
in the VIE. The qualitative approach is focused on identifying
which company has both the power to direct the activities of a
VIE that most significantly impact the entity’s economic
performance and the obligation to absorb losses of the entity or
the right to receive benefits from the entity. As a result of
applying this qualitative analysis, effective January 3,
2010, the company is no longer required to consolidate the VIE
that delivers a significant portion of its fresh bakery products
from the company’s production facilities to outlying
distribution centers under a transportation agreement. The
company has elected to prospectively deconsolidate the VIE.
Please see Note 14,
Variable Interest Entity
, for
additional disclosure.
Fiscal Year End.
The company operates on a
52-53 week
fiscal year ending the Saturday nearest December 31. Fiscal
2010 and fiscal 2009 consisted of 52 weeks. Fiscal 2008
consisted of 53 weeks. Fiscal 2011 will consist of
52 weeks.
Revenue Recognition.
The company recognizes
revenue from the sale of product at the time of delivery when
title and risk of loss pass to the customer. The company records
estimated reductions to revenue for customer programs and
incentive offerings at the time the incentive is offered or at
the time of revenue recognition for the underlying transaction
that results in progress by the customer towards earning the
incentive. Independent distributors receive a percentage of the
wholesale price of product sold to retailers and other
customers. The company records such amounts as selling,
distribution and administrative expenses. Independent
distributors do not pay royalty or royalty-related fees to the
company.
The consumer packaged goods industry has used scan-based trading
technology 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. Consequently, revenue on these sales is not recognized
until the product is purchased by the consumer. This technology
is referred to as
pay-by-scan
(“PBS”). In fiscal years 2010, 2009 and 2008 the
company recorded $744.7 million, $674.9 million and
$651.5 million, respectively, in sales through PBS.
Revenue on PBS sales is recognized when the product is purchased
by the end consumer because that is when title and risk of loss
is transferred. Non-PBS sales are recognized when the product is
delivered to the customer (i.e. the independent distributor or
retail customers) since that is when title and risk of loss is
transferred.
The company’s production facilities deliver the products to
independent distributors, who deliver the product to outlets of
retail accounts that are within the distributors’
geographic territory. PBS is utilized primarily in certain
national and regional retail accounts (“PBS Outlet”).
No revenue is recognized by the company upon delivery of the
F-7
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
product by the company to the distributor or upon delivery of
the product by the distributor to a PBS Outlet. It is recognized
when the product is purchased by the end consumer. The product
inventory in the PBS Outlet is reflected as inventory on the
company’s balance sheet. The balance of PBS inventory at
January 1, 2011 and January 2, 2010 was
$4.2 million and $3.8 million, respectively.
A distributor performs a physical inventory of the product at
each PBS Outlet weekly and reports the results to the company.
The inventory data submitted by the distributor for each PBS
Outlet is compared with the product delivery data. Product
delivered to a PBS Outlet that is not recorded in the inventory
data has been purchased by the consumer/customer of the PBS
Outlet and is recorded as sales revenue by the company.
The PBS Outlet submits the scan data that records the purchase
by the consumer/customer to the company either daily or weekly.
The company reconciles the scan data with the physical inventory
data. A difference in the data indicates that “shrink”
has occurred. Shrink is product unaccounted for by scan data or
PBS Outlet inventory counts. A reduction of revenue and a
balance sheet reserve is recorded at each reporting period for
the estimated costs of shrink. The amount of shrink experienced
by the company was immaterial in fiscal years 2010, 2009 and
2008.
The company purchases territories from and sells territories to
independent distributors from time to time. At the time the
company purchases a territory from an independent distributor,
the fair value purchase price of the territory is recorded as
“Assets Held for Sale — Distributor Routes”.
Upon the sale of that territory to a new independent
distributor, generally a note receivable is recorded for the
sales price of the territory (for those situations when the
company provides direct financing to the distributor) with a
corresponding credit to assets held for sale to relieve the
carrying amount of the territory. Any difference between the
amount of the note receivable and the territory’s carrying
value is recorded as a gain or a loss in selling, distribution
and administrative expenses because the company considers its
distributor activity a cost of distribution. No revenue is
recorded when the company sells a territory to an independent
distributor. The deferred gains were $16.9 million and
$19.3 million at January 1, 2011 and January 2,
2010, respectively. In the event the sales price of the
territory exceeds the carrying amount of the territory, the gain
is deferred and recorded over the
10-year
life
of the note receivable from the independent distributor. In
addition, since the distributor has the right to require the
company to repurchase the territory at the original purchase
price within the six-month period following the date of sale, no
gain is recorded on the sale of the territory during this
six-month period. Upon expiration of the six-month period, the
amount deferred during this period is recorded and the remaining
gain on the sale is recorded over the remaining nine and
one-half years of the note. In instances where a territory is
sold for less than its carrying value, a loss is recorded at the
date of sale and any impairment of a territory held for sale is
recorded at such time the impairment occurs. The company
recorded net gains of $4.2 million during fiscal 2010,
$3.9 million during fiscal 2009 and $2.1 million
during fiscal 2008 related to the sale of territories as a
component of selling, distribution and administrative expenses.
Cash and Cash Equivalents.
The company
considers deposits in banks, certificates of deposits and
short-term investments with original maturities of three months
or less as cash and cash equivalents.
Accounts Receivable.
Accounts receivable
consists of trade receivables, current portions of distributor
notes receivable and miscellaneous receivables. The company
maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. Bad debts are charged to this reserve after all
attempts to collect the balance are exhausted. If the financial
condition of the company’s customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required. In determining past due
or delinquent status of a customer, the aged trial balance is
reviewed on a weekly basis by sales
F-8
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
management and generally any accounts older than seven weeks are
considered delinquent. Activity in the allowance for doubtful
accounts is as follows (amounts in thousands):
|
Beginning
|
Charged to
|
Write-Offs
|
Ending
|
|||||||||||||
| Balance | Expense | and Other | Balance | |||||||||||||
|
Fiscal 2010
|
$ | 469 | $ | 547 | $ | 494 | $ | 522 | ||||||||
|
Fiscal 2009
|
$ | 378 | $ | 2,077 | $ | 1,986 | $ | 469 | ||||||||
|
Fiscal 2008
|
$ | 131 | $ | 640 | $ | 393 | $ | 378 | ||||||||
Concentration of Credit Risk.
The company
performs periodic credit evaluations and grants credit to
customers, who are primarily in the grocery and foodservice
markets, and generally does not require collateral. Our top 10
customers in fiscal years 2010, 2009 and 2008 accounted for
46.5%, 46.0% and 45.6% of sales, respectively. Following is the
effect our largest customer, Wal-Mart/Sam’s Club, had on
the company’s sales for fiscal years 2010, 2009 and 2008.
| Percent of Sales | ||||||||||||
|
Warehouse
|
||||||||||||
| DSD | Delivery | Total | ||||||||||
|
Fiscal 2010
|
18.2 | % | 3.6 | % | 21.8 | % | ||||||
|
Fiscal 2009
|
18.1 | % | 2.9 | % | 21.0 | % | ||||||
|
Fiscal 2008
|
18.0 | % | 2.5 | % | 20.5 | % | ||||||
Inventories.
Inventories at January 1,
2011 and January 2, 2010 are valued at the lower of cost or
market using the
first-in-first-out
method. The company writes down its inventory for estimated
unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon
assumptions about future demand and market conditions.
Shipping Costs.
Shipping costs are included in
the selling, distribution and administrative line item of the
consolidated statements of income. For fiscal years 2010, 2009,
and 2008, shipping costs were $577.3 million,
$578.0 million, and $548.4 million, respectively,
including distributor discounts.
Spare Parts and Supplies.
The company
maintains inventories of spare parts and supplies, which are
used for repairs and maintenance of its machinery and equipment.
These spare parts and supplies allow the company to react
quickly in the event of a mechanical breakdown. These parts are
valued using the
first-in-first-out
method and are expensed as the part is used. Periodic physical
inventories of the parts are performed, and the value of the
parts is adjusted for any obsolescence or difference in the
actual inventory count and the value recorded.
Property, Plant and Equipment and
Depreciation.
Property, plant and equipment is
stated at cost. Depreciation expense is computed using the
straight-line method based on the estimated useful lives of the
depreciable assets. Certain equipment held under capital leases
of $13.4 million and $41.3 million at January 1,
2011 and January 2, 2010, respectively, is classified as
property, plant and equipment and the related obligations are
recorded as liabilities. Amortization of assets held under
capital leases is included in depreciation expense. Total
accumulated depreciation for assets held under capital leases
was $3.3 million and $15.3 million at January 1,
2011 and January 2, 2010, respectively. The significant
decrease in gross equipment held under capital leases is due to
the deconsolidation of the variable interest entity as discussed
in Note 14,
Variable Interest Entity
.
Buildings are depreciated over ten to forty years, machinery and
equipment over three to twenty-five years, and furniture,
fixtures and transportation equipment over three to fifteen
years. Property under capital leases is amortized over the
shorter of the lease term or the estimated useful life of the
property. Depreciation expense for fiscal years 2010, 2009 and
2008 was $79.1 million, $75.1 million and
$70.3 million, respectively. The company recorded
capitalized interest of $0.2 million during fiscal 2009 and
$0.2 million during fiscal 2008. The company recorded an
immaterial amount of capitalized interest during fiscal 2010.
F-9
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The cost of maintenance and repairs is charged to expense as
incurred. Upon disposal or retirement, the cost and accumulated
depreciation of assets are eliminated from the respective
accounts. Any gain or loss is reflected in the company’s
income from operations.
Goodwill and Other Intangible Assets.
The
company accounts for goodwill in a purchase business combination
as the excess of the cost over the fair value of net assets
acquired. Business combinations can also result in other
intangible assets being recognized. Amortization of intangible
assets, if applicable, occurs over their estimated useful lives.
The company tests goodwill for impairment on an annual basis (or
an interim basis if an event occurs that might reduce the fair
value of a reporting unit below its carrying value) using a
two-step method. The company conducts this review during the
fourth quarter of each fiscal year absent any triggering event.
No impairment resulted from the annual review performed in
fiscal years 2010, 2009 or 2008. Identifiable intangible assets
that are determined to have an indefinite useful economic life
are not amortized, but separately tested for impairment, at
least annually, using a one-step fair value based approach or
when certain indicators of impairment are present.
Impairment of Long-Lived Assets.
The company
determines whether there has been an impairment of long-lived
assets, excluding goodwill and identifiable intangible assets
that are determined to have indefinite useful economic lives,
when certain indicators of impairment are present. In the event
that facts and circumstances indicate that the cost of any
long-lived assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required,
the estimated future gross, undiscounted cash flows associated
with the asset would be compared to the asset’s carrying
amount to determine if a write-down to market value is required.
Future adverse changes in market conditions or poor operating
results of underlying long-lived assets could result in losses
or an inability to recover the carrying value of the long-lived
assets that may not be reflected in the assets’ current
carrying value, thereby possibly requiring an impairment charge
in the future. During fiscal 2008, the company had an impairment
charge of $3.1 million as discussed in Note 5,
Asset Impairment
. There were no impairment charges during
fiscal 2010 and fiscal 2009.
Derivative Financial Instruments.
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. The company uses natural gas
and propane as fuel for firing ovens. The company also
periodically enters into interest rate derivatives to hedge
exposure to changes in interest rates. See Note 10,
Derivative Financial Instruments
, for further details.
Treasury Stock.
The company records
acquisitions of its common stock for treasury at cost.
Differences between proceeds for reissuances of treasury stock
and average cost are credited or charged to capital in excess of
par value to the extent of prior credits and thereafter to
retained earnings.
Advertising and Marketing Costs.
Advertising
and marketing costs are expensed the first time the advertising
takes place. Advertising and marketing costs were
$14.4 million, $11.3 million and $12.6 million
for fiscal years 2010, 2009 and 2008, respectively.
Stock-Based Compensation.
Stock-based
compensation expense for all share-based payment awards granted
is determined based on the grant date fair value. The company
recognizes these compensation costs net of an estimated
forfeiture rate, and recognizes compensation cost only for those
shares expected to vest on a straight-line basis over the
requisite service period of the award, which is generally the
vesting term of the share-based payment award.
Software Development Costs.
The company
expenses software development costs incurred in the preliminary
project stage, and, thereafter, capitalizes costs incurred in
developing or obtaining internally used software. Certain costs,
such as maintenance and training, are expensed as incurred.
Capitalized costs are amortized over a period of three to eight
years and are subject to impairment evaluation. The net balance
of capitalized software development costs included in plant,
property and equipment was $6.2 million and
$2.5 million at January 1, 2011
F-10
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and January 2, 2010, respectively. Amortization expense of
capitalized software development costs, which is included in
depreciation expense in the consolidated statements of income,
was $1.7 million, $1.1 million and $2.8 million
in fiscal years 2010, 2009 and 2008, respectively.
Income Taxes.
The company accounts for income
taxes using the asset and liability method that recognizes
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and
liabilities are determined based on the temporary differences
between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect of a
change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment
date.
The company records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be
realized. The company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. In the event the
company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise,
should the company determine that it would not be able to
realize all or part of its net deferred tax asset in the future,
an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.
The company recognizes a tax benefit from an uncertain tax
position when it is more likely than not that the position will
be sustained upon examination, including resolution of any
related appeals or litigation process. Interest related to
unrecognized tax benefits is recorded within the interest
expense line in the accompanying consolidated statement of
operations.
Self-Insurance Reserves.
The company is
self-insured for various levels of general liability, auto
liability, workers’ compensation and employee medical and
dental coverage. Insurance reserves are calculated on an
undiscounted basis based on actual claim data and estimates of
incurred but not reported claims developed utilizing historical
claim trends. Projected settlements and incurred but not
reported claims are estimated based on pending claims,
historical trends and data. Though the company does not expect
them to do so, actual settlements and claims could differ
materially from those estimated. Material differences in actual
settlements and claims could have an adverse effect on our
results of operations and financial condition.
Net Income Per Common Share.
Basic net income
per share is computed by dividing net income by weighted average
common shares outstanding for the period. Diluted net income per
share is computed by dividing net income by weighted average
common and common equivalent shares outstanding for the period.
Common stock equivalents consist of the incremental shares
associated with the company’s stock compensation plans, as
determined under the treasury stock method. Our nonvested
performance contingent restricted stock awards granted prior to
the February 9, 2010 grant are considered participating
securities since the share-based awards contain a
non-forfeitable right to dividend equivalents irrespective of
whether the awards ultimately vest. As a result, we computed
basic earnings per common share under the two-class method for
those awards. The performance contingent restricted stock awards
granted on February 9, 2010 do not contain a
non-forfeitable right to dividend equivalents and are included
in the computation for diluted net income per share. A grant
issued on February 10, 2011 also does not contain a
non-forfeitable right to dividend equivalents and will be
included in the computation for diluted net income per share.
Use of Estimates.
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the
F-11
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
| Note 3. | New Accounting Pronouncements |
In January 2010, the FASB issued guidance related to fair value
measurements requiring new disclosures regarding transfers in
and out of Level 1 and 2 and requiring the gross
presentation of activity within Level 3. The guidance also
clarifies existing disclosures of inputs and valuation
techniques for Level 2 and 3 fair value measurements.
Additionally, the guidance includes conforming amendments to
employers’ disclosures about postretirement benefit plan
assets. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting
periods beginning after December 15, 2009, except for the
disclosure of activity within Level 3 fair value
measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim periods within
those years. The impact of adopting this guidance resulted in
additional disclosures in Note 20,
Postretirement
Plans
.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for the consolidation of variable
interest entities. The guidance affects the overall
consolidation analysis and requires enhanced disclosures on
involvement with variable interest entities. The guidance is
effective for fiscal years beginning after November 15,
2009. Prior to fiscal 2010, we consolidated a VIE, as disclosed
in Note 14,
Variable Interest Entity
, because we
determined the company was the primary beneficiary. Under this
guidance, we have determined that the company no longer
qualifies as the primary beneficiary and prospectively ceased
consolidating the VIE beginning in the first quarter of fiscal
2010. The company will continue to record certain of the trucks
and trailers the VIE uses for distributing our products as right
to use leases.
In May 2009, the FASB issued new guidance on subsequent events.
The standard provides guidance on management’s assessment
of subsequent events and incorporates this guidance into
accounting literature. The standard was effective prospectively
for interim and annual periods ending after June 15, 2009.
See Note 25,
Subsequent Events
, for the required
disclosures. In February 2010, the FASB issued new guidance that
amended certain recognition and disclosure requirements for
subsequent events. The guidance changed the requirement for
public companies to report the date through which subsequent
events were reviewed. This guidance was effective at issuance.
The implementation of the standard and new guidance did not have
an impact on our consolidated financial position and results of
operations.
| Note 4. | Gain on Sale of Assets |
During the second quarter of fiscal 2008, the company completed
the sale and closure of a plant in Atlanta, Georgia resulting in
a gain of $2.3 million. The company incurred
$1.7 million of cost of goods sold expenses related to the
closure primarily for employee severance, obsolete inventory,
and equipment relocation costs. An additional $0.3 million
related to the closure of the facility is included in selling,
distribution and administrative expenses.
| Note 5. | Asset Impairment |
During the fourth quarter of fiscal 2008, the company recorded a
$3.1 million asset impairment charge related to two
previously closed facilities and one bakery that was closed in
the fourth quarter to take advantage of more efficient and
better located production capacity provided by the acquisitions
of Holsum and ButterKrust. These facilities will not be utilized
in the future.
| Note 6. | Notes Receivable |
The company provides direct financing to independent
distributors for the purchase of the distributors’
territories and records the notes receivable on the consolidated
balance sheet. The territories are financed over ten
F-12
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
years bearing an interest rate of 12%. During fiscal years 2010,
2009 and 2008, $12.7 million, $12.9 million and
$13.0 million, respectively, were recorded as interest
income relating to the distributor notes. The distributor notes
are collateralized by the independent distributors’
territories. Additional details are included in Note 15,
Fair Value of Financial Instruments
.
| Note 7. | Assets Held for Sale — Distributor Routes |
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 its 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 for ten
times average weekly branded sales, and this value is charged to
earnings. In the event an independent distributor terminates its
relationship with the company, the company, although not legally
obligated, normally repurchases and operates that territory as a
company-owned territory. Territories purchased from independent
distributors and operated as company-owned territories are
recorded on the company’s consolidated balance sheets as
“Assets Held for Sale — Distributor Routes”
while the company actively seeks another distributor to purchase
the territory. At January 1, 2011 and January 2, 2010,
territories recorded as assets held for sale were
$11.9 million and $6.5 million, respectively. The
company held and operated approximately 300 and 150 such
independent distributor territories held for sale at
January 1, 2011 and January 2, 2010, respectively. The
carrying value of each territory is recorded as an asset held
for sale, is not amortized and is evaluated for impairment as
required. The increase was primarily the result of higher
turnover for expansion market distributor territories and
certain routes that were repurchased for distributor route
restructuring.
Territories held for sale and operated by the company are sold
to independent distributors at a multiple of average weekly
branded sales, which approximate 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 on the long-term financing arrangement 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 first 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.
| Note 8. | Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill from fiscal 2009
to fiscal 2010, are as follows (amounts in thousands):
| DSD | Warehouse delivery | Total | ||||||||||
|
Balance as of January 3, 2009
|
$ | 195,558 | $ | 4,477 | $ | 200,035 | ||||||
|
Goodwill adjustments during fiscal 2009
|
$ | (977 | ) | $ | — | $ | (977 | ) | ||||
|
Goodwill acquired during fiscal 2009
|
$ | — | $ | 2,624 | $ | 2,624 | ||||||
|
Balance as of January 2, 2010
|
$ | 194,581 | $ | 7,101 | $ | 201,682 | ||||||
|
Adjustment for deconsolidation of VIE (Note 14)
|
(1,529 | ) | — | (1,529 | ) | |||||||
|
Balance as of January 1, 2011
|
$ | 193,052 | $ | 7,101 | $ | 200,153 | ||||||
During the 52 weeks ended January 2, 2010, the company
acquired two companies that are included in the warehouse
delivery segment. During the 53 weeks ended January 3,
2009, the company acquired two companies
F-13
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
that are included in the DSD operating segment. See Note 9,
Acquisitions
, for goodwill and amortizable intangible
asset increases related to the Holsum, ButterKrust and
Leo’s acquisitions.
As of January 1, 2011 and January 2, 2010, the company
had the following amounts related to amortizable intangible
assets (amounts in thousands):
| January 1, 2011 | January 2, 2010 | |||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
| Asset | Cost | Amortization | Net Value | Cost | Amortization | Net Value | ||||||||||||||||||
|
Trademarks
|
$ | 35,268 | $ | 4,687 | $ | 30,581 | $ | 35,268 | $ | 3,144 | $ | 32,124 | ||||||||||||
|
Customer relationships
|
75,434 | 13,675 | 61,759 | 75,434 | 9,738 | 65,696 | ||||||||||||||||||
|
Non-compete agreements
|
1,874 | 1,353 | 521 | 1,874 | 1,309 | 565 | ||||||||||||||||||
|
Distributor relationships
|
2,600 | 413 | 2,187 | 2,600 | 240 | 2,360 | ||||||||||||||||||
|
Supplier agreements
|
1,050 | 566 | 484 | 1,050 | 215 | 835 | ||||||||||||||||||
|
Total
|
$ | 116,226 | $ | 20,694 | $ | 95,532 | $ | 116,226 | $ | 14,646 | $ | 101,580 | ||||||||||||
There is an additional $1.5 million of indefinite life
intangible assets from the ButterKrust Bakery
(“ButterKrust”) acquisition separately identified from
goodwill, as discussed in Note 9,
Acquisitions
. In
connection with the sale of Mrs. Smith’s Bakeries
frozen dessert business in April 2003, the company entered into
a
5-year
non-compete agreement (“agreement”) with Schwan valued
at $3.0 million recorded as an intangible liability. The
company recognized income related to this agreement as a
reduction of amortization expense over the life of the
agreement. The carrying amount of this liability at
December 29, 2007 was $0.2 million and was fully
accreted to income during the 53 weeks ended
January 3, 2009.
Aggregate amortization expense for fiscal 2010, 2009, and 2008
were as follows (amounts in thousands):
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
|
Amortizable intangible assets expense
|
$ | 6,048 | $ | 5,923 | $ | 3,258 | ||||||
|
Amortizable intangible liabilities (income)
|
(44 | ) | (44 | ) | (240 | ) | ||||||
|
Total
|
$ | 6,004 | $ | 5,879 | $ | 3,018 | ||||||
Estimated amortization of intangibles for 2011 and the next four
years thereafter is as follows (amounts in thousands):
|
Amortization of
|
||||
| Intangibles | ||||
|
2011
|
$ | 6,003 | ||
|
2012
|
$ | 5,677 | ||
|
2013
|
$ | 5,488 | ||
|
2014
|
$ | 5,389 | ||
|
2015
|
$ | 5,237 | ||
| Note 9. | Acquisitions |
On October 17, 2009, the company acquired 100% of the
outstanding shares of capital stock of Leo’s Foods, Inc.
(“Leo’s”). Leo’s operates one tortilla
facility in Ft. Worth, Texas and makes an extensive line of
flour and corn tortillas and tortilla chips that are sold to
foodservice and institutional customers nationwide. This
acquisition is recorded in the company’s warehouse delivery
segment and resulted in goodwill of $2.6 million, none of
which is deductible for tax purposes.
On May 15, 2009, the company acquired substantially all the
assets of a bakery mix operation in Cedar Rapids, Iowa. Based on
the purchase price allocation, the fair value of the
identifiable assets acquired and liabilities assumed exceeded
the fair value of the consideration paid. As a result, we
recognized a gain of $3.0 million in the
F-14
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
second quarter of fiscal 2009, which is included in the line
item “Gain on acquisition” to derive income from
operations in the consolidated statement of income for the
fifty-two weeks ended January 2, 2010. We believe the gain
on acquisition resulted from the seller’s strategic intent
to exit a non-core business operation. This acquisition is
recorded in the company’s warehouse delivery segment.
On August 4, 2008, the company acquired 100% of the
outstanding shares of capital stock of the parent company of
ButterKrust Bakery (“ButterKrust”). ButterKrust
manufactures fresh breads and rolls in Lakeland, Florida and its
products are available throughout Florida under the
Country
Hearth
,
Rich Harvest
, and
Sunbeam
brands, as
well as store brands. The results of ButterKrust’s
operations have been included in the consolidated financial
statements since August 4, 2008 and are included in the
company’s DSD operating segment. As a result of the
acquisition, the company has added additional production
capacity in the Florida market.
The aggregate purchase price was $91.3 million in cash,
including the payoff of certain indebtedness and other payments
and acquisition costs. The following table presents the
allocation of the acquisition cost, including professional fees
and other related costs, to the assets acquired and liabilities
assumed, based on their fair values (amounts in thousands):
At
August 4, 2008
|
Purchase price:
|
||||||||
|
Cash, including acquisition costs
|
$ | 91,258 | ||||||
|
Total consideration
|
$ | 91,258 | ||||||
|
Allocation of purchase price:
|
||||||||
|
Current assets, including cash of $1.2 million and a
current deferred tax asset of $1.0 million
|
$ | 8,039 | ||||||
|
Property, plant, and equipment
|
36,920 | |||||||
|
Other assets
|
1,323 | |||||||
|
Intangible assets
|
22,600 | |||||||
|
Goodwill
|
57,566 | |||||||
|
Total assets acquired
|
$ | 126,448 | ||||||
|
Current liabilities
|
$ | 10,542 | ||||||
|
Long-term debt and other
|
5,161 | |||||||
|
Long-term pension and postretirement liabilities
|
9,081 | |||||||
|
Deferred tax liabilities
|
10,406 | |||||||
|
Total liabilities assumed
|
$ | 35,190 | ||||||
|
Net assets acquired
|
$ | 91,258 | ||||||
The following table presents the allocation of the intangible
assets subject to amortization (amounts in thousands, except for
amortization periods):
|
Weighted average
|
||||||||
| Amount | Amortization years | |||||||
|
Trademarks
|
$ | 2,200 | 22.0 | |||||
|
Customer relationships
|
18,900 | 25.0 | ||||||
|
Total intangible assets subject to amortization
|
$ | 21,100 | 24.7 | |||||
F-15
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Acquired intangible assets not subject to amortization include
trademarks of $1.5 million. Goodwill of $57.6 million
is allocated to the DSD operating segment. None of the
intangible assets, including goodwill, are deductible for tax
purposes.
On August 11, 2008, a wholly owned subsidiary of the
company merged with Holsum Holdings, LLC (“Holsum”).
Holsum operates two bakeries in the Phoenix, Arizona area and
serves customers in Arizona, New Mexico, southern Nevada
and southern California with fresh breads and rolls under the
Holsum
,
Aunt Hattie’s
, and
Roman Meal
brands. The results of Holsum’s operations are included
in the company’s consolidated financial statements as of
August 11, 2008 and are included in the company’s DSD
operating segment. As a result of the merger, the company has
expanded into new geographic markets.
The aggregate purchase price was $143.9 million, consisting
of $80.0 million in cash, including the payoff of certain
indebtedness, 1,998,656 shares of company common stock,
contingent consideration, a working capital adjustment and
acquisition costs. The contingent consideration payment of up to
$5.0 million is payable to the former shareholders of
Holsum in cash should the company’s common stock not trade
over a target price for ten consecutive trading days during the
two year period beginning February 11, 2009. As a result,
we recorded the shares at the target value of $32.21 per share.
The company’s common stock did not trade over the target
price as required so the company will make payments of up to
$5.0 million. We expect these payments to be made during
the first quarter of fiscal 2011.
The following table presents the allocation of the acquisition
cost, including professional fees and other related costs, to
the assets acquired and liabilities assumed, based on their fair
values (amounts in thousands):
At
August 11, 2008
|
Purchase price:
|
||||||||
|
Cash, including acquisition costs
|
$ | 80,026 | ||||||
|
Common stock
|
64,377 | |||||||
|
Working capital adjustment
|
(476 | ) | ||||||
|
Total consideration
|
$ | 143,927 | ||||||
|
Allocation of purchase price:
|
||||||||
|
Current assets, including a current deferred tax asset of
$0.3 million
|
$ | 18,626 | ||||||
|
Property, plant, and equipment
|
54,019 | |||||||
|
Other assets
|
1,202 | |||||||
|
Intangible assets
|
64,900 | |||||||
|
Goodwill
|
65,154 | |||||||
|
Total assets acquired
|
$ | 203,901 | ||||||
|
Current liabilities
|
$ | 17,972 | ||||||
|
Deferred tax liabilities
|
33,518 | |||||||
|
Long-term liabilities
|
8,484 | |||||||
|
Total liabilities assumed
|
$ | 59,974 | ||||||
|
Net assets acquired
|
$ | 143,927 | ||||||
F-16
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents the allocation of the intangible
assets subject to amortization (amounts in thousands, except for
amortization periods):
|
Weighted average
|
||||||||
| Amount | Amortization years | |||||||
|
Trademarks
|
$ | 19,200 | 20.0 | |||||
|
Customer relationships
|
43,100 | 20.0 | ||||||
|
Distributor relationships
|
2,600 | 15.0 | ||||||
|
Total intangible assets subject to amortization
|
$ | 64,900 | 19.8 | |||||
Goodwill of $65.2 million is allocated to the DSD operating
segment. None of the intangible assets, including goodwill, are
deductible for tax purposes.
| Note 10. | Derivative Financial Instruments |
In the first fiscal quarter of fiscal 2008, the company began
measuring the fair value of its derivative portfolio using the
fair value as 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
This change in measurement technique had no material impact on
the reported value of our derivative portfolio.
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 January 1, 2011, the company’s commodity hedge
portfolio contained derivatives with a fair value of
$20.0 million, which is recorded in the following accounts
with fair values measured as indicated (amounts in millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
Assets:
|
||||||||||||||||
|
Other current
|
$ | 22.4 | $ | — | $ | — | $ | 22.4 | ||||||||
|
Total
|
22.4 | — | — | 22.4 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Other current
|
— | (2.0 | ) | — | (2.0 | ) | ||||||||||
|
Other long-term
|
— | (0.4 | ) | — | (0.4 | ) | ||||||||||
|
Total
|
— | (2.4 | ) | — | (2.4 | ) | ||||||||||
|
Net Fair Value
|
$ | 22.4 | $ | (2.4 | ) | $ | — | $ | 20.0 | |||||||
F-17
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of January 2, 2010, the company’s commodity hedge
portfolio contained derivatives with a fair value of
$(3.7) million, which is recorded in the following accounts
with fair values measured as indicated (amounts in millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
Assets:
|
||||||||||||||||
|
Other current
|
$ | 2.5 | $ | — | $ | — | $ | 2.5 | ||||||||
|
Total
|
2.5 | — | — | 2.5 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Other current
|
(4.2 | ) | (1.9 | ) | — | (6.1 | ) | |||||||||
|
Other long-term
|
— | (0.1 | ) | — | (0.1 | ) | ||||||||||
|
Total
|
(4.2 | ) | (2.0 | ) | — | (6.2 | ) | |||||||||
|
Net Fair Value
|
$ | (1.7 | ) | $ | (2.0 | ) | $ | — | $ | (3.7 | ) | |||||
The positions held in the portfolio are used to hedge economic
exposure to changes in various raw material and production input
prices and effectively fix the price, or limit increases in
prices, for a period of time extending into fiscal 2012. 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. The company held no commodity
derivatives at January 1, 2011 that did not qualify for
hedge accounting. During fiscal years 2010, 2009 and 2008 there
was no material income or expense recorded due to
ineffectiveness in current earnings due to changes in fair value
of these instruments.
As of January 1, 2011, the balance in accumulated other
comprehensive income related to commodity derivative
transactions was $27.9 million. Of this total,
approximately $12.5 million and $(0.2) million were
related to instruments expiring in 2011 and 2012, respectively,
and $15.6 million was related to deferred gains on cash
flow hedge positions.
The company routinely transfers amounts from other comprehensive
income (“OCI”) to earnings as transactions for which
cash flow hedges were held occur. Significant situations which
do not routinely occur that could cause transfers from OCI to
earnings are as follows: (i) an event that causes a hedge
to be suddenly ineffective and significant enough that hedge
accounting must be discontinued and (ii) cancellation of a
forecasted transaction for which a derivative was held as a
hedge or a significant and material reduction in volume used of
a hedged ingredient such that the company is overhedged and must
discontinue hedge accounting. During the 53 weeks ended
January 3, 2009, $0.6 million was recorded to income
for net gains obtained from exiting derivative positions
acquired with ButterKrust and Holsum that did not qualify for
hedge accounting treatment. During fiscal 2009,
$0.4 million was recorded to expense for net losses from
discontinuing hedge accounting and exiting of a position in the
commodity hedge portfolio. During fiscal 2010 there were no
discontinued hedge positions.
Interest
Rate Risk
The company entered interest rate swaps with initial notional
amounts of $85.0 million, and $65.0 million,
respectively, to fix the interest rate on the
$150.0 million term loan entered into on August 1,
2008 to fund the acquisitions of ButterKrust and Holsum. The
notional amounts are adjusted to match the scheduled quarterly
principal payments on the $150.0 million term loan so that
the remaining outstanding term loan balance at any reporting
date is fully covered by the swap arrangements through the
August 2013 maturity of the term loan. In addition, on
October 27, 2008, the company entered an interest rate swap
with a notional amount of $50.0 million to fix the interest
rate through September 30, 2009 on $50.0 million of
borrowings outstanding under the company’s unsecured credit
facility.
F-18
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The interest rate swap agreements result in the company paying
or receiving the difference between the fixed and floating rates
at specified intervals calculated based on the notional amount.
The interest rate differential to be paid or received is
recorded as interest expense. These swap transactions are
designated as cash-flow hedges. Accordingly, the effective
portion of changes in the fair value of the swaps is recorded
each period in other comprehensive income. Any ineffective
portions of changes in fair value are recorded to current period
earnings in selling, distribution and administrative expenses.
As of January 1, 2011, the fair value of the interest rate
swaps was $(6.5) 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
|
$ | — | $ | (3.8 | ) | $ | — | $ | (3.8 | ) | ||||||
|
Other long-term
|
— | (2.7 | ) | — | (2.7 | ) | ||||||||||
|
Total
|
— | (6.5 | ) | — | (6.5 | ) | ||||||||||
|
Net Fair Value
|
$ | — | $ | (6.5 | ) | $ | — | $ | (6.5 | ) | ||||||
As of January 2, 2010, the fair value of the interest rate
swaps was $(6.7) 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
|
$ | — | $ | (4.3 | ) | $ | — | $ | (4.3 | ) | ||||||
|
Other long-term
|
— | (2.4 | ) | — | (2.4 | ) | ||||||||||
|
Total
|
— | (6.7 | ) | — | (6.7 | ) | ||||||||||
|
Net Fair Value
|
$ | — | $ | (6.7 | ) | $ | — | $ | (6.7 | ) | ||||||
During fiscal 2010, fiscal 2009 and fiscal 2008, interest
expense of $4.6 million, $5.2 million and
$0.1 million, respectively, was recognized due to periodic
settlements of the swaps.
As of January 1, 2011, the balance in accumulated other
comprehensive (loss) related to interest rate derivative
transactions was $(4.0) million. Of this total,
approximately $(2.3) million, $(1.4) million, and
$(0.3) million, were related to instruments expiring in
2011 through 2013, respectively and an immaterial amount was
related to deferred losses on cash flow hedge positions.
F-19
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The company had the following derivative instruments recorded on
the consolidated balance sheet, all of which are utilized for
the risk management purposes detailed above (amounts in
thousands):
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||
|
Derivatives
|
January 1, 2011 | January 2, 2010 | January 1, 2011 | January 2, 2010 | ||||||||||||||||||||||||||||
|
Designated as
|
Balance
|
Balance
|
Balance
|
Balance
|
||||||||||||||||||||||||||||
|
Hedging
|
Sheet
|
Fair
|
Sheet
|
Fair
|
Sheet
|
Fair
|
Sheet
|
Fair
|
||||||||||||||||||||||||
| Instruments | Location | Value | Location | Value | Location | Value | Location | Value | ||||||||||||||||||||||||
| Other current | Other current | |||||||||||||||||||||||||||||||
|
Interest rate contracts
|
— | $ | — | — | $ | — | liabilities | $ | 3,789 | liabilities | $ | 4,271 | ||||||||||||||||||||
| Other long term | Other long term | |||||||||||||||||||||||||||||||
|
Interest rate contracts
|
— | — | — | — | liabilities | 2,684 | liabilities | 2,459 | ||||||||||||||||||||||||
| Other current | Other current | |||||||||||||||||||||||||||||||
|
Commodity contracts
|
Other current assets | 22,380 | Other current assets | 2,501 | liabilities | 2,032 | liabilities | 6,143 | ||||||||||||||||||||||||
| Other long term | Other long term | |||||||||||||||||||||||||||||||
|
Commodity contracts
|
Other long term assets | — | Other long term assets | — | liabilities | 371 | liabilities | 78 | ||||||||||||||||||||||||
|
Total
|
$ | 22,380 | $ | 2,501 | $ | 8,876 | $ | 12,951 | ||||||||||||||||||||||||
The company had the following derivative instruments for
deferred gains and (losses) on closed contracts and the
effective portion for changes in fair value recorded on the
consolidated statements of income, all of which are utilized for
the risk management purposes detailed above (amounts in
thousands and net of tax):
|
Amount of Gain or (Loss)
|
||||||||||||
|
Recognized in OCI on
|
||||||||||||
| Derivative (Effective Portion)(Net of tax) | ||||||||||||
|
For the 52
|
For the 52
|
For the 53
|
||||||||||
|
Derivatives in
|
Weeks Ended
|
Weeks Ended
|
Weeks Ended
|
|||||||||
|
Cash Flow Hedging
|
January 1,
|
January 2,
|
January 3,
|
|||||||||
| Relationships | 2011 | 2010 | 2009 | |||||||||
|
Interest rate contracts
|
$ | (2,684 | ) | $ | (1,512 | ) | $ | (5,780 | ) | |||
|
Commodity contracts
|
30,384 | (11,491 | ) | (54,480 | ) | |||||||
|
Total
|
$ | 27,700 | $ | (13,003 | ) | $ | (60,260 | ) | ||||
|
Amount of (Gain) or Loss Reclassified
|
||||||||||||||
|
from Accumulated OCI into Income
|
||||||||||||||
| (Effective Portion)(Net of tax) | ||||||||||||||
|
For the 52
|
For the 52
|
For the 53
|
Location of (Gain) or Loss
|
|||||||||||
|
Derivatives in
|
Weeks Ended
|
Weeks Ended
|
Weeks Ended
|
Reclassified from AOCI
|
||||||||||
|
Cash Flow Hedging
|
January 1,
|
January 2,
|
January 3,
|
into Income
|
||||||||||
| Relationships | 2011 | 2010 | 2009 | (Effective Portion) | ||||||||||
|
Interest rate contracts
|
$ | 2,857 | $ | 3,182 | $ | (30 | ) | Interest expense (income) | ||||||
| Selling, distribution and | ||||||||||||||
|
Commodity contracts
|
— | (1,475 | ) | — | administrative expenses | |||||||||
|
Commodity contracts
|
5,212 | 40,236 | (30 | ) | Production costs(1) | |||||||||
|
Total
|
$ | 8,069 | $ | 41,943 | $ | (60 | ) | |||||||
| 1. | Included in Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately). |
F-20
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Amount of Gain or (Loss) Recognized in
|
||||||||||||||
|
Income on
|
||||||||||||||
|
Derivative (Ineffective Portion and Amount
|
||||||||||||||
|
Excluded from
|
Location of Gain or (Loss)
|
|||||||||||||
| Effectiveness Testing, Net of tax) |
Recognized in Income on
|
|||||||||||||
|
For the
|
Derivative (Ineffective
|
|||||||||||||
|
52 Weeks
|
For the 52
|
For the 53
|
Portion and Amount
|
|||||||||||
|
Ended
|
Weeks Ended
|
Weeks Ended
|
Excluded from
|
|||||||||||
|
Derivatives in Cash
|
January 1,
|
January 2,
|
January 3,
|
Effectiveness Testing,
|
||||||||||
| Flow Hedging Relationships | 2011 | 2010 | 2009 | Net of tax) | ||||||||||
|
Interest rate contracts
|
$ | — | $ | — | $ | — |
Selling, distribution and administrative
expenses |
|||||||
|
Commodity contracts
|
— | (698 | ) | 582 |
Selling, distribution and administrative
expenses |
|||||||||
|
Total
|
$ | — | $ | (698 | ) | $ | 582 | |||||||
As of January 1, 2011, the company had entered into the
following financial contracts to hedge commodity and interest
rate risk:
| Derivatives in Cash Flow Hedging Relationships | Notional amount | |||
| (Millions) | ||||
|
Interest rate contracts
|
$ | 114.4 | ||
|
Wheat contracts
|
133.7 | |||
|
Soybean oil contracts
|
14.8 | |||
|
Natural gas contracts
|
14.2 | |||
|
Total
|
$ | 277.1 | ||
The company’s derivative instruments contained no
credit-risk-related contingent features at January 1, 2011.
As of January 1, 2011 and January 2, 2010, the company
had $0.0 million and $7.0 million, respectively,
recorded in other current assets, and $11.5 million and
$0.8 million, respectively, recorded in other accrued
liabilities representing collateral from counterparties for
hedged positions.
| Note 11. | Other Current Assets |
Other current assets consist of:
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
| (Amounts in thousands) | ||||||||
|
Prepaid assets
|
$ | 11,139 | $ | 9,022 | ||||
|
Collateral to counterparties for derivative positions
|
— | 7,023 | ||||||
|
Fair value of derivative instruments
|
22,380 | 2,501 | ||||||
|
Income taxes receivable
|
7,622 | 3,616 | ||||||
|
Other
|
783 | 1,990 | ||||||
|
Total
|
$ | 41,924 | $ | 24,152 | ||||
F-21
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 12. | Other Accrued Liabilities |
Other accrued liabilities consist of:
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
| (Amounts in thousands) | ||||||||
|
Employee compensation
|
$ | 50,015 | $ | 47,780 | ||||
|
Fair value of derivative instruments
|
5,822 | 10,414 | ||||||
|
Insurance
|
20,036 | 17,521 | ||||||
|
Income taxes payable
|
— | 459 | ||||||
|
Collateral from counterparties for derivative positions
|
11,524 | 797 | ||||||
|
Other
|
24,875 | 26,346 | ||||||
|
Total
|
$ | 112,272 | $ | 103,317 | ||||
| Note 13. | Debt, Lease and Other Commitments |
Long-term debt consisted of the following at January 1,
2011 and January 2, 2010:
|
Interest Rate at
|
||||||||||||||||
|
January 1,
|
Final
|
January 1,
|
January 2,
|
|||||||||||||
| 2011 | Maturity | 2011 | 2010 | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
|
Unsecured credit facility
|
— | 2012 | $ | — | $ | 89,000 | ||||||||||
|
Unsecured term loan
|
5.00 | % | 2013 | 114,375 | 131,250 | |||||||||||
|
Capital lease obligations
|
4.82 | % | 2015 | 10,541 | 26,555 | |||||||||||
|
Other notes payable
|
5.60 | % | 2013 | 2,386 | 4,863 | |||||||||||
| 127,302 | 251,668 | |||||||||||||||
|
Due within one year
|
28,432 | 25,763 | ||||||||||||||
|
Due after one year
|
$ | 98,870 | $ | 225,905 | ||||||||||||
On August 1, 2008, the company entered into a Credit
Agreement (“term loan”) with various lending parties
for $150.0 million. The term loan provides for borrowings
through the maturity date of August 4, 2013 for the purpose
of completing acquisitions. The term loan includes certain
customary restrictions, which, among other things, require
maintenance of financial covenants and limit encumbrance of
assets and creation of indebtedness. Restrictive financial
covenants include such ratios as a minimum interest coverage
ratio and a maximum leverage ratio. As of January 1, 2011,
the amount outstanding under the term loan was
$114.4 million.
Interest is due quarterly in arrears on outstanding borrowings
at a customary Eurodollar rate or the base rate plus the
applicable margin. The underlying rate is defined as the rate
offered in the interbank Eurodollar market or the higher of the
prime lending rate or federal funds rate plus 0.5%. The
applicable margin ranges from 0.0% to 1.375% for base rate loans
and from 0.875% to 2.375% for Eurodollar loans and is based on
the company’s leverage ratio. Principal payments are due
quarterly under the term loan beginning on December 31,
2008 at an annual amortization of 10% of the principal balance
for the first two years, 15% during the third year, 20% during
the fourth year, and 45% during the fifth year. The company paid
financing costs of $0.8 million in connection with the term
loan during fiscal 2008, which is being amortized over the life
of the term loan.
The company has a five-year, $250.0 million unsecured
revolving loan facility (the “credit facility”)
expiring October 5, 2012. Proceeds from the credit facility
may be used for working capital and general corporate purposes,
including acquisition financing, refinancing of indebtedness and
share repurchases. The credit facility includes certain
customary restrictions, which, among other things, require
maintenance of financial covenants and limit
F-22
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 credit facility and
meet presently foreseeable financial requirements. As of
January 1, 2011 and January 2, 2010, the company was
in compliance with all restrictive financial covenants under its
credit facility.
Interest is due quarterly in arrears on any outstanding
borrowings at a customary Eurodollar rate or the base rate plus
the applicable margin. The underlying rate is defined either as
the rate offered in the interbank Eurodollar market or the
higher of the prime lending rate or federal funds rate plus
0.5%. The applicable margin ranges from 0.0% to 0.30% for base
rate loans and from 0.40% to 1.275% for Eurodollar loans. In
addition, a facility fee ranging from 0.10% to 0.35% is due
quarterly on all commitments under the new credit facility. Both
the interest margin and the facility fee are based on the
company’s leverage ratio.
The company paid financing costs of $0.3 million in
connection with its credit facility during fiscal 2007. These
costs were deferred and, along with unamortized costs of
$0.6 million relating to the company’s former credit
facility are being amortized over the term of the credit
facility.
Book overdrafts occur when checks have been issued but have not
been presented to the bank for payment. These bank accounts
allow us to delay funding of issued checks until the checks are
presented for payment. A delay in funding results in a temporary
source of financing from the bank. The activity related to book
overdrafts is shown as a financing activity in our consolidated
statements of cash flows. Book overdrafts are included in other
accrued current liabilities on our consolidated balance sheets.
As of January 1, 2011 and January 2, 2010, the book
overdraft balance was $9.7 million and $11.1 million,
respectively.
Though it is generally the company’s policy not to provide
third party guarantees, the company has guaranteed, through
their respective terms, approximately $0.6 million and
$0.8 million in leases at January 1, 2011 and
January 2, 2010, respectively that certain independent
distributors have entered into with third party financial
institutions related to distribution vehicle financing. In the
ordinary course of business, when an independent distributor
terminates his or her relationship with the company, the
company, although not legally obligated, generally operates the
territory until it is resold. The company uses the former
independent distributor’s vehicle to operate these
territories and makes the lease payments to the third party
financial institution in place of the former distributor. These
payments are recorded as selling, distribution and
administrative expenses and amounted to $3.7 million,
$2.6 million and $3.0 million for fiscal years 2010,
2009 and 2008, respectively. Assuming the company does not
resell the territories to new independent distributors, the
maximum obligation for the vehicles being used by the company at
January 1, 2011 and January 2, 2010, was approximately
$8.0 million and $4.7 million, respectively. The
company does not anticipate operating these territories over the
life of the lease as it intends to resell these territories to
new independent distributors. Therefore, no liability is
recorded on the consolidated balance sheets at January 1,
2011 and January 2, 2010 related to this obligation.
The company also had standby letters of credit
(“LOCs”) outstanding of $4.8 million and
$4.8 million at January 1, 2011 and January 2,
2010, respectively, which reduce the availability of funds under
the credit facility. The outstanding LOCs are for the benefit of
certain insurance companies. None of the LOCs are recorded as a
liability on the consolidated balance sheets.
Assets recorded under capital lease agreements included in
property, plant and equipment consist of buildings, machinery
and equipment and transportation equipment.
F-23
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Aggregate maturities of debt outstanding, including capital
leases, as of January 1, 2011, are as follows (amounts in
thousands):
|
2011
|
$ | 28,432 | ||
|
2012
|
42,064 | |||
|
2013
|
53,913 | |||
|
2014
|
2,521 | |||
|
2015
|
372 | |||
|
2016 and thereafter
|
— | |||
|
Total
|
$ | 127,302 | ||
Leases
The company leases certain property and equipment under various
operating and capital lease arrangements that expire over the
next 22 years. The property and equipment includes
distribution facilities and thrift store locations and equipment
including production, sales and distribution and office
equipment. Initial lease terms range from two to twenty-three
years. Many 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 fair value
rents for periods from one month to ten years. Rent escalations
vary in these leases, from no escalation over the initial lease
term, to escalations linked to changes in economic variables
such as the Consumer Price Index. Rental expense is recognized
on a straight-line basis unless another basis is more
representative of the time pattern for the leased equipment, in
which case that basis is used. The capital leases are primarily
used for distribution vehicle financing and provide the company
with the option to purchase the vehicles at a fixed residual or
fair value at the end of the lease term. Future minimum lease
payments under scheduled leases that have initial or remaining
non-cancelable terms in excess of one year are as follows:
| Capital Leases | Operating Leases | |||||||
| (Amounts in thousands) | ||||||||
|
2011
|
$ | 3,948 | $ | 41,861 | ||||
|
2012
|
2,471 | 37,864 | ||||||
|
2013
|
2,233 | 33,292 | ||||||
|
2014
|
2,373 | 27,951 | ||||||
|
2015
|
378 | 22,567 | ||||||
|
2016 and thereafter
|
— | 149,293 | ||||||
|
Total minimum payments
|
11,403 | $ | 312,828 | |||||
|
Amount representing interest
|
862 | |||||||
|
Obligations under capital leases
|
10,541 | |||||||
|
Obligations due within one year
|
3,574 | |||||||
|
Long-term obligations under capital leases
|
$ | 6,967 | ||||||
Rent expense for all operating leases amounted to
$62.9 million for fiscal 2010, $59.3 million for
fiscal 2009 and $56.0 million for fiscal 2008.
In September of 2007, the company entered into a Master Agency
Agreement and a Master Lease (collectively, the “Master
Lease”) representing a $50.0 million commitment to
lease certain distribution facilities. On August 22, 2008,
the company added an additional $50.0 million to the
commitment. Pursuant to terms of the Master Lease, on behalf of
the lessor, the company may either develop distribution
facilities or sell and lease-back
F-24
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
existing owned distribution facilities of the company. The
facilities will be leased by the lessor to wholly-owned
subsidiaries of the company under one or more operating leases.
The leases each have a term of 23 years following the
completion of either the construction period or completion of
the sale and lease-back. The company has granted certain rights
and remedies to the lessor in the event of certain defaults,
including the right to terminate the lease, to bring suit to
collect damages, and to cause the company to purchase the
facilities. The Master Lease does not include financial
covenants.
During the fiscal year ended January 3, 2009, the company
entered into an additional $25.6 million of operating lease
commitments under the Master Lease. During the fiscal years
ended January 1, 2011 and January 2, 2010, the company
did not enter into any additional operating lease commitments
under the Master Lease.
Deferred
Compensation
The Executive Deferred Compensation Plan (“EDCP”)
consists of unsecured general obligations of the company to pay
the deferred compensation of, and our contributions to,
participants in the EDCP. The obligations will rank equally with
our other unsecured and unsubordinated indebtedness payable from
the company’s general assets.
Our directors and certain key members of management are eligible
to participate in the EDCP. Directors may elect to defer all or
any portion of their annual retainer fee and meeting fees.
Deferral elections by directors must be made prior to the
beginning of each year and are thereafter irrevocable. Eligible
employees may elect to defer up to 75% of their base salaries,
and up to 100% of any cash bonuses and other compensation.
Deferral elections by eligible executives must be made prior to
the beginning of each year and are thereafter irrevocable during
that year. The portion of the participant’s compensation
that is deferred depends on the participant’s election in
effect with respect to his or her elective contributions under
the EDCP. The amount outstanding at January 1, 2011 and
January 2, 2010 was $8.6 million and
$7.2 million, respectively.
During the fourth quarter of fiscal 2008, participants in the
company’s EDCP were offered a one-time option to convert
all or a portion of their cash balance in their EDCP account to
company common stock to be received at a time designated by the
participant. Several employees and non-employee directors of the
company converted the outstanding cash balances in their
respective EDCP accounts to an account that tracks the
company’s common stock and that will be distributed in the
future. As part of the arrangement, the company no longer has
any future cash obligations to the individuals for the amount
converted. The individuals will receive shares equal to the
dollar amount of their election divided by the company’s
common stock price on January 2, 2009. A total of
approximately 47,500 deferred shares will be issued throughout
the election dates chosen. As part of the election, the
individuals can choose to receive the shares on either a
specific date, equally up to 60 quarters, or at separation from
service from the company. This non-cash transaction reduced
other long-term liabilities and increased additional paid in
capital by $1.1 million during fiscal 2008 and
$0.1 million during fiscal 2009.
Guarantees
and Indemnification Obligations
The company has provided various representations, warranties and
other standard indemnifications in various agreements with
customers, suppliers and other parties as well as in agreements
to sell business assets or lease facilities. In general, these
provisions indemnify the counterparty for matters such as
breaches of representations and warranties, certain
environmental conditions and tax matters, and, in the context of
sales of business assets, any liabilities arising prior to the
closing of the transactions. Non-performance under a contract
could trigger an obligation of the company. The ultimate effect
on future financial results is not subject to reasonable
estimation because considerable uncertainty exists as to the
final outcome of any potential claims.
No material guarantees or indemnifications have been entered
into by the company through January 1, 2011.
F-25
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 14. | Variable Interest Entity |
The company maintains a transportation agreement with an entity
that transports a significant portion of the company’s
fresh bakery products from the company’s production
facilities to outlying distribution centers. The company
represents a significant portion of the entity’s revenue.
This entity qualifies as a VIE. Under previous accounting
guidance, we consolidated the VIE in our condensed consolidated
financial statements from the first quarter of 2004 through the
fourth quarter of 2009 because during that time the company was
considered to be the primary beneficiary. Under the revised
principles, which became effective January 3, 2010, we have
determined that the company is no longer the primary beneficiary
and we deconsolidated the VIE in our financial statements. The
VIE does not affect the line item
Net income
attributable to Flowers Foods, Inc.
since the company has no
interest in any net earnings or losses of the VIE through equity
participation. The VIE has collateral that is sufficient to meet
its capital lease and other debt obligations and the owner of
the VIE personally guarantees the obligations of the VIE. The
VIE’s creditors have no recourse against the general credit
of the company.
The company has no exposure to gains or losses of the VIE in
reporting its net income. In addition, the company does not have
explicit or implied power over any of the significant activities
to operate the VIE. The primary beneficiary of the VIE realizes
the economic benefits and losses incurred and has the power to
direct most of the significant activities. The VIE is permitted
to pass along increases in their costs, with company approval,
at a capped increase of 2% per year. The company and the VIE
also agree on a rebate paid or credited to the company depending
on the profitability of the VIE in the preceding year. We do not
guarantee the VIE’s specific returns or performance
benchmarks. In addition, if a manufacturing facility closes or
there is a loss of market share causing the VIE to have to move
their equipment the company will make an effort to move the
equipment to another manufacturing facility. If the company is
unable to do so, we will reimburse the VIE for any losses
incurred in the disposal of the equipment and will pay the cost
to transfer the equipment. The company’s maximum loss
exposure for the truck disposals is the difference in the
estimated fair value of the trucks from the book value.
As part of the deconsolidation of the VIE, the company concluded
that certain of the trucks and trailers the VIE uses for
distributing our products from the manufacturing facilities to
the distribution centers qualify as right to use leases. The
amount for property, plant and equipment and capital lease
obligations was $11.9 million at January 3, 2010. As
of January 1, 2011, there was $9.7 million in net
property, plant and equipment and capital lease obligations
associated with the right to use leases.
Following is the effect of the VIE during fiscal years 2009 and
2008:
| Fiscal 2009 | Fiscal 2008 | |||||||||||||||
| VIE | % of Total | VIE | % of Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Assets as of respective fiscal year ends
|
$ | 39,606 | 2.9 | % | $ | 33,452 | 2.5 | % | ||||||||
|
Sales
|
$ | 12,370 | 0.5 | % | $ | 10,369 | 0.4 | % | ||||||||
|
Income before income taxes
|
$ | 3,415 | 1.6 | % | $ | 3,074 | 1.6 | % | ||||||||
As of January 2, 2010 and January 3, 2009, the assets
consist primarily of $27.5 million and $23.2 million,
respectively, of transportation equipment recorded as capital
lease obligations.
| Note 15. | 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
F-26
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
loans would be made to distributors with similar credit ratings
and for the same maturities. However, the company utilizes 3,582
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 over ten years
bearing an interest rate of 12% and the distributor notes are
collateralized by the independent distributors’
territories. The fair value of the company’s long-term debt
at January 1, 2011 approximates the recorded value. For
fair value disclosure information about our derivative assets
and liabilities see Note 10,
Derivative Financial
Instruments
. For fair value disclosure information about our
pension plan net assets see Note 20,
Postretirement
Plans
.
At January 1, 2011 and January 2, 2010, respectively,
the carrying value of the distributor notes was as follows
(amounts in thousands):
| January 1, 2011 | January 2, 2010 | |||||||
|
Distributor notes receivable
|
$ | 105,396 | $ | 107,067 | ||||
|
Current portion of distributor notes receivable recorded in
accounts and notes receivable, net
|
12,536 | 12,610 | ||||||
|
Long-term portion of distributor notes receivable
|
$ | 92,860 | $ | 94,457 | ||||
At January 1, 2011 and January 2, 2010, the company
has evaluated the collectability of the distributor notes and
determined that a reserve is not necessary. Payments on these
distributor notes are collected by the company weekly in the
distributor settlement process.
| Note 16. | Stockholders’ Equity |
Flowers Foods’ articles of incorporation provide that its
authorized capital consist of 500,000,000 shares of common
stock having a par value of $0.01 per share and
1,000,000 shares of preferred stock of which
(a) 100,000 shares have been designated by the Board
of Directors as Series A Junior Participating Preferred
Stock, having a par value per share of $100 and
(b) 900,000 shares of preferred stock, having a par
value per share of $0.01, have not been designated by the Board
of Directors. No shares of preferred stock have been issued by
Flowers Foods.
Common
Stock
The holders of Flowers Foods common stock are entitled to one
vote for each share held of record on all matters submitted to a
vote of shareholders. Subject to preferential rights of any
issued and outstanding preferred stock, including the
Series A Preferred Stock, holders of common stock are
entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors of the company out of funds
legally available. In the event of a liquidation, dissolution or
winding-up
of the company, holders of common stock are entitled to share
ratably in all assets of the company, if any, remaining after
payment of liabilities and the liquidation preferences of any
issued and outstanding preferred stock, including the
Series A Preferred Stock. Holders of common stock have no
preemptive rights, no cumulative voting rights and no rights to
convert their shares of common stock into any other securities
of the company or any other person.
Preferred
Stock
The Board of Directors has the authority to issue up to
1,000,000 shares of preferred stock in one or more series
and to fix the designations, relative powers, preferences,
rights, qualifications, limitations and restrictions of all
shares of each such series, including without limitation,
dividend rates, conversion rights, voting rights, redemption and
sinking fund provisions, liquidation preferences and the number
of shares constituting each such series, without any further
vote or action by the holders of Flowers Foods common stock.
Pursuant to such authority, the Board of Directors has
designated 100,000 shares of preferred stock as
Series A Junior Participating Preferred Stock in
F-27
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
connection with the adoption of the rights plan described below.
Although the Board of Directors does not presently intend to do
so, it could issue from the 900,000 undesignated preferred
shares, additional series of preferred stock, with rights that
could adversely affect the voting power and other rights of
holders of Flowers Foods common stock without obtaining the
approval of Flowers Foods shareholders. In addition, the
issuance of preferred shares could delay or prevent a change in
control of Flowers Foods without further action by its
shareholders.
Shareholder
Rights Plan
In 2001, the Flowers Foods Board of Directors approved and
adopted a shareholder rights plan that provided for the issuance
of one right for each share of Flowers Foods common stock held
by shareholders of record on March 26, 2001. Under the
plan, the rights trade together with the common stock and are
not exercisable. In the absence of further board action, the
rights generally will become exercisable, and allow the holder
to acquire additional common stock, if a person or group
acquires 15% or more of the outstanding shares of Flowers Foods
common stock. Rights held by persons who exceed the applicable
threshold will be void. Flowers Foods’ Board of Directors
may, at its option, redeem all rights for $0.01 per right
generally at any time prior to the rights becoming exercisable.
The rights will expire on March 26, 2011, unless earlier
redeemed, exchanged or amended by the Board of Directors.
On November 15, 2002, the Board of Directors of Flowers
Foods approved an amendment to the company’s shareholder
rights plan allowing certain investors, including existing
investors and qualified institutional investors, to beneficially
own up to 20% of the company’s outstanding common stock
without triggering the exercise provisions.
Stock
Repurchase Plan
Our Board of Directors has approved a plan that authorized stock
repurchases of up to 30.0 million shares of the
company’s common stock. Under the plan, the company may
repurchase its common stock in open market or privately
negotiated transactions at such times and at such prices as
determined to be in the company’s best interest. The
company repurchases its common stock primarily for issuance
under the company’s stock compensation plans and to fund
possible future acquisitions. These purchases may be commenced
or suspended without prior notice depending on then-existing
business or market conditions and other factors. As of
January 1, 2011, 24.2 million shares at a cost of
$404.2 million have been purchased under this plan.
Included in these amounts are 1.5 million shares at a cost
of $39.2 million purchased during fiscal 2010.
Dividends
During fiscal years 2010, 2009 and 2008, the company paid
dividends of $70.9 million, or $0.775 per share,
$62.2 million, or $0.675 per share and $53.2 million,
or $0.575 per share, respectively.
| Note 17. | Stock-Based Compensation |
Flowers Foods’ 2001 Equity and Performance Incentive Plan,
as amended and restated as of April 1, 2009,
(“EPIP”) authorizes the compensation committee of the
Board of Directors to make awards of options to purchase our
common stock, restricted stock, performance stock and units and
deferred stock. Our officers, key employees and non-employee
directors (whose grants are generally approved by the full Board
of Directors) are eligible to receive awards under the EPIP. The
aggregate number of shares that may be issued or transferred
under the EPIP is 18,625,000 shares. Over the life of the
EPIP, the company has only issued options, restricted stock and
deferred stock. The following is a summary of stock options,
restricted stock, and deferred stock outstanding under the EPIP.
Information relating to the company’s stock appreciation
rights which are not issued under the EPIP is also disclosed
below.
F-28
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
Options
The following non-qualified stock options (“NQSOs”)
have been granted under the EPIP since fiscal 2008. The
Black-Scholes option-pricing model was used to estimate the
grant date fair value (amounts in thousands, except price data
and as indicated):
| Grant date | 2/9/2010 | 2/9/2009 | 2/4/2008 | |||||||||
|
Shares granted
|
1,136 | 993 | 850 | |||||||||
|
Exercise price($)
|
25.01 | 23.84 | 24.75 | |||||||||
|
Vesting date
|
2/9/2013 | 2/9/2012 | 2/4/2011 | |||||||||
|
Fair value per share($)
|
5.54 | 5.87 | 5.80 | |||||||||
|
Dividend yield(%)(1)
|
3.00 | 2.20 | 1.90 | |||||||||
|
Expected volatility(%)(2)
|
30.60 | 31.80 | 27.30 | |||||||||
|
Risk-free interest rate(%)(3)
|
2.35 | 2.00 | 2.79 | |||||||||
|
Expected option life (years)(4)
|
5.00 | 5.00 | 5.00 | |||||||||
|
Outstanding at January 1, 2011
|
1,128 | 988 | 843 | |||||||||
| 1. | Dividend yield — estimated yield based on the historical dividend payment for the four most recent dividend payments prior to the grant date. | |
| 2. | Expected volatility — based on historical volatility over the expected term using daily stock prices. | |
| 3. | Risk-free interest rate — United States Treasury Constant Maturity rates as of the grant date over the expected term. | |
| 4. | Expected option life — The 2010, 2009 and 2008 grant assumptions are based on the simplified formula determined in accordance with Staff Accounting Bulletin No. 110, as the company does not have sufficient historical exercise behavior data to reasonably estimate the expected option life. |
The stock option activity for fiscal years 2010, 2009 and 2008
pursuant to the EPIP is set forth below:
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
| Options | Price | Options | Price | Options | Price | |||||||||||||||||||
| (Amounts in thousands, except price data) | ||||||||||||||||||||||||
|
Outstanding at beginning of year
|
3,734 | $ | 20.34 | 2,975 | $ | 18.46 | 2,417 | $ | 15.15 | |||||||||||||||
|
Granted
|
1,136 | $ | 25.01 | 993 | $ | 23.84 | 850 | $ | 24.75 | |||||||||||||||
|
Exercised
|
(487 | ) | $ | 16.19 | (232 | ) | $ | 11.04 | (288 | ) | $ | 9.25 | ||||||||||||
|
Forfeitures
|
(18 | ) | $ | 24.57 | (2 | ) | $ | 18.68 | (4 | ) | $ | 22.30 | ||||||||||||
|
Outstanding at end of year
|
4,365 | $ | 22.00 | 3,734 | $ | 20.34 | 2,975 | $ | 18.46 | |||||||||||||||
|
Exercisable at end of year
|
1,406 | 1,069 | 1,303 | |||||||||||||||||||||
|
Weighted average fair value of options granted during the year
|
$ | 5.54 | $ | 5.87 | $ | 5.80 | ||||||||||||||||||
As of January 1, 2011, all options outstanding under the
EPIP had an average exercise price of $22.00 and a weighted
average remaining contractual life of 4.34 years.
As of January 1, 2011, there was $5.2 million of total
unrecognized compensation expense related to nonvested stock
options. This cost is expected to be recognized on a
straight-line basis over a weighted-average period of
1.61 years.
F-29
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The cash received, the windfall tax benefits, and intrinsic
value from stock option exercises for fiscal years 2010, 2009
and 2008 are set forth below (amounts in thousands):
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Cash received from option exercises
|
$ | 7,884 | $ | 2,614 | $ | 2,679 | ||||||
|
Cash tax windfall benefit, net
|
$ | 683 | $ | 909 | $ | 1,543 | ||||||
|
Intrinsic value of stock options exercised
|
$ | 4,409 | $ | 2,948 | $ | 4,470 | ||||||
Performance-Contingent
Restricted Stock
Certain key employees have been granted performance-contingent
restricted stock. The 2009 and 2010 awards generally vest two
years from the date of grant and the 2009 award requires the
“return on invested capital” to exceed the weighted
average “cost of capital” by 2.5% (the “ROI
Target”) over the two fiscal years immediately preceding
the vesting date. The 2010 award requires the ROI target to be
3.75% over the two fiscal years immediately preceding the
vesting date. If the ROI Target is not met the awards are
forfeited. Furthermore, each grant of performance-contingent
restricted stock will be adjusted as set forth below:
| • | If the ROI Target is satisfied, then the performance-contingent restricted stock grant may be adjusted based on the company’s total return to shareholders (“Company TSR”) percent rank as compared to the total return to shareholders of the S&P Packaged Food & Meat Index (“S&P TSR”) in the manner set forth below: |
| • | If the Company TSR rank is equal to the 50th percentile of the S&P TSR, then no adjustment; | |
| • | If the Company TSR rank is less than the 50th percentile of the S&P TSR, the grant shall be reduced by 1.3% for each percentile below the 50th percentile that the Company TSR is less than the 50th percentile of S&P TSR, but in no event shall such reduction exceed 20%; or | |
| • | If the Company TSR rank is greater than the 50th percentile of the S&P TSR, the grant shall be increased by 1.3% for each percentile above the 50th percentile that Company TSR is greater than the 50th percentile of S&P TSR, but in no event shall such increase exceed 20%. |
In connection with the vesting of 209,950 shares of
restricted stock granted in February 2008, during fiscal 2010,
an additional 41,990 common shares were issued in the aggregate
to these certain key employees because the company exceeded the
S&P TSR by the maximum amount.
The performance-contingent restricted stock generally vests
immediately if the grantee dies or becomes disabled. However, at
retirement the grantee will receive a pro-rata number of shares
through the grantee’s retirement date at the normal vesting
date. In addition, the performance-contingent restricted stock
will immediately vest at the grant date award level without
adjustment if the company undergoes a change in control. During
the vesting period, the grantee is treated as a normal
shareholder with respect to dividend and voting rights on the
restricted shares for the 2009 and 2008 grants. The 2010 grant
does not include the right to receive dividends until vesting.
Dividends declared and paid during the vesting period will
accrue and will be paid at vesting and will not exceed 100% of
the award. The fair value estimate was determined using a
Monte Carlo
simulation model, which utilizes multiple
input variables to determine the probability of the company
achieving the market condition discussed above. Inputs into the
model included the following for the company and comparator
companies: (i) total stockholder return from the beginning
of the performance cycle through the measurement date;
(ii) volatility;
F-30
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(iii) risk-free interest rates; and (iv) the
correlation of the comparator companies’ total stockholder
return. The inputs are based on historical capital market data.
| Grant date | 2/9/2010 | 2/9/2009 | 2/4/2008 | |||||||||
|
Shares granted
|
179 | 204 | 210 | |||||||||
|
Vesting date
|
2/9/2012 | 2/9/2011 | 2/4/2010 | |||||||||
|
Fair value per share
|
$ | 26.38 | $ | 24.96 | $ | 27.03 | ||||||
The performance-contingent restricted stock activity for fiscal
years 2010, 2009 and 2008 is set forth below:
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Number of
|
Average Fair
|
Number of
|
Average Fair
|
Number of
|
Average Fair
|
|||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||
| (Amounts in thousands, except price data) | ||||||||||||||||||||||||
|
Balance at beginning of year
|
414 | $ | 26.01 | 432 | $ | 23.92 | 536 | $ | 18.41 | |||||||||||||||
|
Granted*
|
221 | $ | 21.36 | 204 | $ | 24.96 | 210 | $ | 27.03 | |||||||||||||||
|
Vested*
|
(252 | ) | $ | 22.53 | (222 | ) | $ | 20.98 | (314 | ) | $ | 16.59 | ||||||||||||
|
Forfeitures
|
(4 | ) | $ | 25.87 | — | $ | — | — | $ | — | ||||||||||||||
|
Balance at end of year
|
379 | $ | 25.62 | 414 | $ | 26.01 | 432 | $ | 23.92 | |||||||||||||||
| * | Includes 41,990 additional shares for the 2008 grant that exceeded the S&P TSR by the maximum amount as discussed above. |
As of January 1, 2011, there was $2.8 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 1.01 years.
The fair value of restricted share awards that vested during
fiscal 2010 was $6.1 million on the vesting date which
includes the incremental shares issued when the 2008 award
exceeded the S&P TSR maximum amount discussed above.
Stock
Appreciation Rights
Prior to 2007, the company allowed non-employee directors to
convert their retainers and committee chairman fees into rights.
These rights vest after one year and can be exercised over nine
years. The company records compensation expense for these rights
at a measurement date based on changes between the grant price
and an estimated fair value of the rights using the
Black-Scholes
option-pricing model. The liability for
these rights at January 1, 2011 and January 2, 2010
was $4.2 million and $3.5 million, respectively, and
is recorded in other long-term liabilities. During the fiscal
year ended January 2, 2010, the company paid out the
accrued dividends for those rights granted after 2003. Future
dividends on vested rights granted after 2003 are paid out at
the time dividends are paid to other common shareholders.
The fair value of the rights at January 1, 2011 ranged from
$8.07 to $20.73. The following assumptions were used to
determine fair value of the rights discussed above using the
Black-Scholes
option-pricing model at January 1,
2011: dividend yield 3.0%; expected volatility 29.0%; risk-free
interest rate 2.02% and expected life of 0.35 years to
2.70 years.
F-31
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The rights activity for fiscal years 2010, 2009, and 2008 is set
forth below:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
(Amounts in thousands,
|
||||||||||||
| except price data) | ||||||||||||
|
Balance at beginning of year
|
231 | 231 | 231 | |||||||||
|
Rights vested
|
— | — | — | |||||||||
|
Rights exercised
|
— | — | — | |||||||||
|
Forfeitures
|
— | — | — | |||||||||
|
Balance at end of year
|
231 | 231 | 231 | |||||||||
|
Weighted average — grant date fair value
|
$ | 11.14 | $ | 11.14 | $ | 11.14 | ||||||
Deferred
Stock
Pursuant to the EPIP, the company allows non-employee directors
to convert their retainers into deferred stock. The deferred
stock has a minimum two year vesting period and will be
distributed to the individual at a time designated by the
individual at the date of conversion. During the first quarter
of fiscal 2010 an aggregate of 17,960 shares were
converted. The company records compensation expense for this
deferred stock over the two-year minimum vesting period based on
the closing price of the company’s common stock on the date
of conversion. During the first and second quarter of fiscal
2010 a total of 5,540 shares were exercised for
non-employee retainer conversions granted in 2008.
Pursuant to the EPIP non-employee directors also receive annual
grants of deferred stock. This deferred stock vests over one
year from the grant date. During the second quarter of fiscal
2010, non-employee directors were granted an aggregate of
44,220 shares of deferred stock. There was an additional
grant of 1,860 shares during the first quarter of fiscal
2010 based on a pro-rated share amount for a new director whose
term began on January 1, 2010. 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 first and second quarter of fiscal 2010 a total of
28,380 shares were exercised for deferred shares issued
under the fiscal 2009 grant.
The deferred stock activity for fiscal years 2010, 2009, and
2008 is set forth below:
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Number of
|
Average Fair
|
Number of
|
Average Fair
|
Number of
|
Average Fair
|
|||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||
| (Amounts in thousands, except price data) | ||||||||||||||||||||||||
|
Balance at beginning of year
|
130 | $ | 21.90 | 101 | $ | 23.30 | 55 | $ | 21.03 | |||||||||||||||
|
Issued
|
64 | $ | 23.11 | 48 | $ | 20.08 | 70 | $ | 24.58 | |||||||||||||||
|
Exercised
|
(34 | ) | $ | 20.57 | (19 | ) | $ | 24.72 | (24 | ) | $ | 21.91 | ||||||||||||
|
Balance at end of year
|
160 | $ | 22.66 | 130 | $ | 21.90 | 101 | $ | 23.30 | |||||||||||||||
As of January 1, 2011, there was $0.7 million of total
unrecognized compensation cost related to deferred stock awards
granted under the EPIP. That cost is expected to be recognized
over a weighted-average period of 0.60 years. The fair
value of deferred stock awards that vested during fiscal 2010
was $0.8 million.
F-32
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the company’s stock based
compensation expense for fiscal years 2010, 2009 and 2008:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Stock options
|
$ | 6,931 | $ | 5,070 | $ | 4,408 | ||||||
|
Restricted stock
|
4,727 | 5,359 | 4,827 | |||||||||
|
Stock appreciation rights
|
683 | 63 | 28 | |||||||||
|
Deferred stock
|
1,337 | 1,363 | 1,331 | |||||||||
|
Total stock based compensation
|
$ | 13,678 | $ | 11,855 | $ | 10,594 | ||||||
| Note 18. | Comprehensive Income (Loss) |
The company had other comprehensive income (losses) resulting
from its accounting for derivative financial instruments and
additional minimum liability related to its defined benefit
pension plans. Total comprehensive income (loss), determined as
net income adjusted by other comprehensive income (loss), was
$168.0 million, $167.9 million and $(5.4) million
for fiscal years 2010, 2009 and 2008, respectively.
During fiscal years 2010, 2009 and 2008, changes to accumulated
other comprehensive income (loss), net of income tax, were as
follows:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Accumulated other comprehensive (loss) income, beginning balance
|
$ | (64,672 | ) | $ | (102,279 | ) | $ | 22,141 | ||||
|
Derivative transactions:
|
||||||||||||
|
Net deferred (losses) gains on closed contracts, net of income
tax of $8,103, $(15,847) and $(17,579), respectively
|
12,968 | (25,314 | ) | (28,081 | ) | |||||||
|
Reclassified to earnings (materials, labor and other production
costs), net of income tax of $5,051, $26,257 and $(38),
respectively
|
8,069 | 41,943 | (60 | ) | ||||||||
|
Effective portion of change in fair value of hedging
instruments, net of income tax of $9,223, $7,707 and $(20,145)
respectively
|
14,732 | 12,311 | (32,179 | ) | ||||||||
|
Minimum pension liability, net of income tax of $(3,758), $3,759
and $(40,256), respectively
|
(6,002 | ) | 6,005 | (64,304 | ) | |||||||
|
Amortization of actuarial loss, net of income tax of $815 and
$1,063
|
1,303 | 1,698 | — | |||||||||
|
Amortization of prior service (credits) and costs, net of income
tax of $(67), $603 and $129
|
(107 | ) | 964 | 204 | ||||||||
|
Accumulated other comprehensive loss, ending balance
|
$ | (33,709 | ) | $ | (64,672 | ) | $ | (102,279 | ) | |||
The balance of accumulated other comprehensive income (loss)
consists of the following:
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
| (Amounts in thousands) | ||||||||
|
Derivative financial instruments
|
$ | 23,905 | $ | (11,864 | ) | |||
|
Pension and postretirement related
|
(57,614 | ) | (52,808 | ) | ||||
|
Total
|
$ | (33,709 | ) | $ | (64,672 | ) | ||
F-33
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 19. | Earnings Per Share |
In June 2008, the FASB issued guidance on earnings per share
that now classifies unvested share-based payment awards that
contain rights to receive non-forfeitable dividends (whether
paid or unpaid) as participating securities, and should be
included in the two-class method of computing earnings per
share. The “two-class” method is an earnings
allocation formula that determines earnings per share for each
class of common stock and participating security as if all
earnings for the period had been distributed. Unvested
restricted share awards that earn non-forfeitable dividend
rights qualify as participating securities and are now included
in the basic computation. The company’s unvested restricted
shares participate on an equal basis with common shares;
therefore, there is no difference in undistributed earnings
allocated to each participating security. Accordingly, the
presentation below is prepared on a combined basis and is
presented as earnings per common share. Previously, such
unvested restricted shares were not included as outstanding
within basic earnings per common share and were included in
diluted earnings per common share pursuant to the treasury stock
method. We have retrospectively adjusted earnings per common
share for fiscal 2008. The following is a reconciliation of net
income attributable to Flowers Foods, Inc. and weighted average
shares for calculating basic and diluted earnings per common
share for fiscal years 2010, 2009 and 2008 (amounts in
thousands, except per share data):
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net income attributable to Flowers Foods, Inc.
|
$ | 137,047 | $ | 130,297 | $ | 119,233 | ||||||
|
Dividends on restricted shares not expected to vest*
|
— | — | — | |||||||||
|
Net income attributable to common and participating shareholders
|
$ | 137,047 | $ | 130,297 | $ | 119,233 | ||||||
|
Basic Earnings Per Common Share:
|
||||||||||||
|
Weighted average shares outstanding for common stock
|
91,197 | 91,787 | 92,016 | |||||||||
|
Weighted average shares outstanding for participating securities
|
223 | 413 | 416 | |||||||||
|
Basic weighted average shares outstanding per common share
|
91,420 | 92,200 | 92,432 | |||||||||
|
Basic earnings per common share attributable to Flowers Foods,
Inc. common shareholders
|
$ | 1.50 | $ | 1.41 | $ | 1.29 | ||||||
|
Diluted Earnings Per Common Share:
|
||||||||||||
|
Basic weighted average shares outstanding per common share
|
91,420 | 92,200 | 92,432 | |||||||||
|
Add: Shares of common stock assumed issued upon exercise of
stock options and vesting of restricted stock
|
688 | 533 | 725 | |||||||||
|
Diluted weighted average shares outstanding per common share
|
92,108 | 92,733 | 93,157 | |||||||||
|
Diluted earnings per common share attributable to Flowers Foods,
Inc. common shareholders
|
$ | 1.49 | $ | 1.41 | $ | 1.28 | ||||||
| * | The company expects all restricted share awards outstanding at January 1, 2011 and January 2, 2010 to vest. |
Stock options to purchase 1,128,738 shares of common stock
were not included in the computation of diluted earnings per
share for the fifty-two weeks ended January 1, 2011 because
their effect would have been anti-dilutive. Stock options to
purchase 1,841,417 shares of common stock were not included
in the computation of diluted earnings per share for the
fifty-two weeks ended January 2, 2010 because their effect
would have been anti-dilutive. Fiscal 2008 did not have
anti-dilutive shares excluded in the computation.
F-34
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 20. | Postretirement Plans |
For fiscal 2010, the company used a measurement date of
December 31, 2010 which is the last trading date before the
company’s fiscal year end of January 1, 2011.
The following summarizes the company’s balance sheet
related pension and other postretirement benefit plan accounts
at January 1, 2011 as compared to accounts at
January 2, 2010:
| As of | ||||||||
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
| (Amounts in thousands) | ||||||||
|
Current benefit liability
|
$ | 1,011 | $ | 841 | ||||
|
Noncurrent benefit liability
|
$ | 76,086 | $ | 68,140 | ||||
|
Accumulated other comprehensive loss
|
$ | 57,614 | $ | 52,808 | ||||
Defined
Benefit Plans
The company has trusteed, noncontributory defined benefit
pension plans covering certain employees. Benefits under most of
the company’s pension plans are frozen. The company
continues to maintain a plan that covers a small number of
certain union employees. The benefits in this plan are based on
years of service and the employee’s 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”) and
the Pension Protection Act of 2006 (“PPA”). The
company uses a calendar year end for the measurement date since
the plans are based on a calendar year end and because it
approximates the company’s fiscal year end. As of
December 31, 2010 and December 31, 2009, 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. The company
expects pension income of approximately $0.2 million for
fiscal 2011.
The net periodic pension cost (income) for the company’s
pension plans includes the following components for fiscal years
2010, 2009 and 2008:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Service cost
|
$ | 388 | $ | 312 | $ | 293 | ||||||
|
Interest cost
|
18,666 | 18,667 | 17,623 | |||||||||
|
Expected return on plan assets
|
(20,663 | ) | (18,935 | ) | (25,196 | ) | ||||||
|
Amortization:
|
||||||||||||
|
Actuarial loss
|
2,177 | 2,727 | — | |||||||||
|
Net periodic pension cost (income)
|
568 | 2,771 | (7,280 | ) | ||||||||
|
Other changes in plan assets and benefit obligations recognized
in other comprehensive income:
|
||||||||||||
|
Current year actuarial loss (gain)
|
11,924 | (8,153 | ) | 103,002 | ||||||||
|
Amortization of actuarial gain (loss)
|
(2,177 | ) | (2,727 | ) | — | |||||||
|
Total recognized in other comprehensive (loss) income
|
9,747 | (10,880 | ) | 103,002 | ||||||||
|
Total recognized in net periodic benefit (income) cost and other
comprehensive income
|
$ | 10,315 | $ | (8,109 | ) | $ | 95,722 | |||||
F-35
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Actual return (loss) on plan assets for fiscal years 2010, 2009
and 2008 was $27.0 million, $37.9 million and
$(77.5) million, respectively.
Approximately $2.7 million will be amortized from
accumulated other comprehensive income into net periodic benefit
cost in fiscal 2011 relating to the company’s pension plans.
The funded status and the amounts recognized in the Consolidated
Balance Sheets for the company’s pension plans are as
follows:
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
| (Amounts in thousands) | ||||||||
|
Change in benefit obligation:
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 320,040 | $ | 305,974 | ||||
|
Service cost
|
388 | 312 | ||||||
|
Interest cost
|
18,666 | 18,667 | ||||||
|
Actuarial loss
|
18,273 | 10,812 | ||||||
|
Benefits paid
|
(16,294 | ) | (15,725 | ) | ||||
|
Benefit obligation at end of year
|
$ | 341,073 | $ | 320,040 | ||||
|
Change in plan assets:
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | 266,173 | $ | 243,549 | ||||
|
Actual (loss) return on plan assets
|
27,012 | 37,899 | ||||||
|
Employer contribution
|
909 | 450 | ||||||
|
Benefits paid
|
(16,294 | ) | (15,725 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | 277,800 | $ | 266,173 | ||||
|
Funded status, end of year:
|
||||||||
|
Fair value of plan assets
|
$ | 277,800 | $ | 266,173 | ||||
|
Benefit obligations
|
341,073 | 320,040 | ||||||
|
Funded status and amount recognized at end of year
|
$ | (63,273 | ) | $ | (53,867 | ) | ||
|
Amounts recognized in the balance sheet:
|
||||||||
|
Noncurrent liability
|
(63,273 | ) | (53,867 | ) | ||||
|
Amount recognized at end of year
|
$ | (63,273 | ) | $ | (53,867 | ) | ||
|
Amounts recognized in accumulated other comprehensive
income:
|
||||||||
|
Net actuarial loss before taxes
|
$ | 96,638 | $ | 86,891 | ||||
|
Accumulated benefit obligation at end of year
|
$ | 340,211 | $ | 319,279 | ||||
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for pension plans with an
accumulated benefit obligation and projected benefit obligation
in excess of plan assets were $341.1 million,
$340.2 million, and $277.8 million, respectively, at
January 1, 2011. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
pension plans with an accumulated benefit obligation and
projected benefit obligation in excess of plan assets at
January 2, 2010 were $320.0 million,
$319.3 million and $266.2 million, respectively.
F-36
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Assumptions used in accounting for the company’s pension
plans at each of the respective fiscal years ending are as
follows:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted average assumptions used to determine benefit
obligations:
|
||||||||||||
|
Measurement date
|
12/31/2010 | 12/31/2009 | 12/31/2008 | |||||||||
|
Discount rate
|
5.48 | % | 5.98 | % | 6.25 | % | ||||||
|
Rate of compensation increase
|
3.50 | % | 3.50 | % | 3.50 | % | ||||||
|
Weighted average assumptions used to determine net (income) cost:
|
||||||||||||
|
Measurement date
|
1/1/2010 | 1/1/2009 | 1/1/2008 | |||||||||
|
Discount rate
|
5.98 | % | 6.25 | % | 6.25 | %(1) | ||||||
|
Expected return on plan assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate of compensation increase
|
3.50 | % | 3.50 | % | 3.50 | % | ||||||
| (1) | The ButterKrust pension plans were acquired August 4, 2008. The discount rate used to determine net periodic benefit (income) cost for these plans was 6.75%. |
In developing the expected long-term rate of return on plan
assets at each measurement date, the company considers the plan
assets’ historical actual returns, targeted asset
allocations, and the anticipated future economic environment and
long-term performance of individual asset classes, based on the
company’s investment strategy. While appropriate
consideration is given to recent and historical investment
performance, the assumption represents management’s best
estimate of the long-term prospective return. Based on these
factors the expected long-term rate of return assumption for the
plans was set at 8.0% for fiscal 2010, as compared with the
average annual return on the plan assets over the last
15 years of approximately 9.1% (net of expenses).
Plan
Assets
The Finance Committee (“committee”) of the Board of
Directors establishes investment guidelines and strategies and
regularly monitors the performance of the plans’ assets.
Management is responsible for executing these strategies and
investing the pension assets in accordance with ERISA and
fiduciary standards. The investment objective of the pension
plans is to preserve the plans’ capital and maximize
investment earnings within acceptable levels of risk and
volatility. The committee and members of management meet on a
regular basis with its investment advisors to review the
performance of the plans’ assets. Based upon performance
and other measures and recommendations from its investment
advisors, the committee rebalances the plans’ assets to the
targeted allocation
F-37
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
when considered appropriate. The fair values of all of the
company pension plan assets at December 31, 2010 and
December 31, 2009, by asset class are as follows (amounts
in thousands):
| Fair value of Pension Plan Assets as of December 31, 2010 | ||||||||||||||||
|
Quoted prices in
|
||||||||||||||||
|
active markets
|
Significant
|
Significant
|
||||||||||||||
|
for identical
|
Observable Inputs
|
Unobservable
|
||||||||||||||
| Asset Class | assets (Level 1) | (Level 2) | Inputs (Level 3) | Total | ||||||||||||
|
Short term investments and cash
|
$ | 4,930 | $ | — | $ | — | $ | 4,930 | ||||||||
|
Equity securities:
|
||||||||||||||||
|
U.S. companies
|
111,098 | — | — | 111,098 | ||||||||||||
|
International companies
|
4,475 | — | — | 4,475 | ||||||||||||
|
International equity funds(a)
|
— | 35,498 | — | 35,498 | ||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Domestic mutual funds(b)
|
17,679 | — | — | 17,679 | ||||||||||||
|
Private equity funds(c)
|
— | 12,502 | — | 12,502 | ||||||||||||
|
Real estate(d)
|
— | — | 8,881 | 8,881 | ||||||||||||
|
Other types of investments:
|
||||||||||||||||
|
Guaranteed insurance contracts(e)
|
— | — | 9,657 | 9,657 | ||||||||||||
|
Hedged equity funds(f)
|
— | — | 31,929 | 31,929 | ||||||||||||
|
Absolute return funds(c)
|
— | — | 40,110 | 40,110 | ||||||||||||
|
Other assets and (liabilities)(g)
|
— | — | 960 | 960 | ||||||||||||
|
Accrued income(g)
|
— | — | 81 | 81 | ||||||||||||
|
Total
|
$ | 138,182 | $ | 48,000 | $ | 91,618 | $ | 277,800 | ||||||||
| Fair value of Pension Plan Assets as of December 31, 2009 | ||||||||||||||||
|
Quoted prices in
|
||||||||||||||||
|
active markets
|
Significant
|
Significant
|
||||||||||||||
|
for identical
|
Observable Inputs
|
Unobservable
|
||||||||||||||
| Asset Class | assets (Level 1) | (Level 2) | Inputs (Level 3) | Total | ||||||||||||
|
Short term investments and cash
|
$ | 8,729 | $ | — | $ | — | $ | 8,729 | ||||||||
|
Equity securities:
|
||||||||||||||||
|
U.S. companies
|
98,899 | — | — | 98,899 | ||||||||||||
|
International companies
|
4,941 | — | — | 4,941 | ||||||||||||
|
International equity funds(a)
|
— | 33,946 | — | 33,946 | ||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Domestic mutual funds(b)
|
20,870 | — | — | 20,870 | ||||||||||||
|
Convertible equity
|
398 | — | — | 398 | ||||||||||||
|
Private equity funds(c)
|
— | — | 13,235 | 13,235 | ||||||||||||
|
Real estate(d)
|
— | — | 7,762 | 7,762 | ||||||||||||
|
Other types of investments:
|
||||||||||||||||
|
Guaranteed insurance contracts(e)
|
— | — | 9,286 | 9,286 | ||||||||||||
|
Hedged equity funds(f)
|
— | — | 29,913 | 29,913 | ||||||||||||
|
Absolute return funds(c)
|
— | — | 38,038 | 38,038 | ||||||||||||
|
Other assets and liabilities(g)
|
— | — | 22 | 22 | ||||||||||||
|
Accrued income(g)
|
— | — | 134 | 134 | ||||||||||||
|
Total
|
$ | 133,837 | $ | 33,946 | $ | 98,390 | $ | 266,173 | ||||||||
F-38
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (a) | This class includes funds with the principal strategy to invest primarily in long positions in international equity securities. | |
| (b) | This class invests primarily in U.S. government issued securities. | |
| (c) | This class invests primarily in absolute return strategy funds. | |
| (d) | This class includes funds that invest primarily in U.S. commercial real estate. | |
| (e) | This class invests primarily guaranteed insurance contracts through various U.S. insurance companies. | |
| (f) | This class invests primarily in hedged equity funds. | |
| (g) | This class includes accrued interest, dividends, and amounts receivable from asset sales and amounts payable for asset purchases. |
The following table provides information on the Pension Plan
assets that are reported using significant unobservable inputs
in the estimation of fair value (amounts in thousands):
| 2010 Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
|
Fixed income
|
Guaranteed
|
Absolute
|
Other assets and
|
|||||||||||||||||||||||||
|
securities -
|
Real Estate
|
Insurance
|
Hedged Equity
|
Return
|
liabilities and
|
|||||||||||||||||||||||
| Alternative | Funds | Contracts | Funds | Funds | accrued income | Totals | ||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 13,235 | $ | 7,762 | $ | 9,286 | $ | 29,913 | $ | 38,038 | $ | 156 | $ | 98,390 | ||||||||||||||
|
Actual return on plan assets:
|
— | |||||||||||||||||||||||||||
|
Relating to assets still held at the measurement date
|
— | 1,274 | 282 | 2,016 | 3,072 | — | 6,644 | |||||||||||||||||||||
|
Relating to assets sold during the period
|
— | (106 | ) | — | — | — | — | (106 | ) | |||||||||||||||||||
|
Transfers out of Level 3*
|
(13,235 | ) | — | — | — | — | — | (13,235 | ) | |||||||||||||||||||
|
Purchases, sales, and settlements
|
— | (49 | ) | 89 | — | (1,000 | ) | 885 | (75 | ) | ||||||||||||||||||
|
Ending balance at December 31, 2010
|
$ | — | $ | 8,881 | $ | 9,657 | $ | 31,929 | $ | 40,110 | $ | 1,041 | $ | 91,618 | ||||||||||||||
| * | The alternative fixed income security was transferred out of a Level 3 classified security in Fiscal 2009 and into a Level 2 classified security for Fiscal 2010. The asset was transferred because the company received better information during Fiscal 2010 about the nature of the underlying assets and believes that at December 31, 2010 that appropriate classification of these securities is Level 2. |
The company’s investment policy includes various guidelines
and procedures designed to ensure assets are invested in a
manner necessary to meet expected future benefits earned by
participants. The investment guidelines consider a broad range
of economic conditions. The plan asset allocation as of the
measurement dates December 31, 2010 and December 31,
2009, and target asset allocations for fiscal 2011 are as
follows:
|
Percentage of Plan
|
||||||||||||
|
Target
|
Assets at the
|
|||||||||||
|
Allocation
|
Measurement Date | |||||||||||
| Asset Category | 2011 | 2010 | 2009 | |||||||||
|
Equity securities
|
40-60 | % | 53.4 | 51.8 | ||||||||
|
Fixed income securities
|
10-40 | % | 9.4 | 13.0 | ||||||||
|
Real estate
|
0-25 | % | 3.5 | 2.9 | ||||||||
|
Other diversifying strategies(1)
|
0-40 | % | 31.8 | 29.0 | ||||||||
|
Short term investments and cash
|
0-25 | % | 1.9 | 3.3 | ||||||||
|
Other
|
0 | % | 0.0 | 0.0 | ||||||||
|
Total
|
100.0 | % | 100.0 | % | ||||||||
| (1) | Includes absolute return funds, hedged equity funds, and guaranteed insurance contracts. |
Equity securities include Flowers’ common stock of
1,346,828 shares and 1,346,828 shares in the amount of
$36.2 million and $32.0 million (13.0% and 12.0% of
total plan assets) as of December 31, 2010 and
December 31, 2009, respectively.
F-39
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The objectives of the target allocations are to maintain
investment portfolios that diversify risk through prudent asset
allocation parameters, achieve asset returns that meet or exceed
the plans’ actuarial assumptions, and achieve asset returns
that are competitive with like institutions employing similar
investment strategies.
Cash
Flows
Company contributions are as follows:
| Year | Required | Discretionary | ||||||
| (Amounts in thousands) | ||||||||
|
2008
|
$ | — | $ | — | ||||
|
2009
|
$ | 450 | $ | — | ||||
|
2010
|
$ | 461 | $ | 448 | ||||
All contributions are made in cash. The discretionary
contributions made during fiscal 2010 were not required to be
made by the minimum funding requirements of ERISA, but the
company believed, due to its strong cash flow and financial
position, this was an appropriate time at which to make the
contribution in order to reduce the impact of future
contributions. Because of lower than expected asset returns
during 2008, contributions in future years are expected to
increase. During 2011, the company expects to contribute
approximately $2.7 million to its pension plans. This
amount represents estimated minimum pension contributions
required under ERISA and the PPA as well as discretionary
contributions to avoid benefit restrictions. This amount
represents estimates that are based on assumptions that are
subject to change. The Worker, Retiree, and Employer Recovery
Act of 2008 (“WRERA”) was signed into law on
December 23, 2008. WRERA granted plan sponsors relief from
certain funding requirements and benefit restrictions, and also
provided some technical corrections to the PPA. One of the
technical corrections allowed the use of asset smoothing, with
limitations, for up to a
24-month
period in determining funding requirements. The company elected
to use asset smoothing for the 2009 and 2010 plan years. As a
result, contributions may be deferred to later years or reduced
through market recovery. In October 2009, the IRS released final
regulations on certain aspects of minimum funding requirements
and benefit restrictions under the PPA. The effective date of
the final regulations is for plan years beginning on or after
January 1, 2010. The company continues to review various
contribution scenarios based on current market conditions and
options available to plan sponsors under the final PPA
regulations.
Benefit
Payments
The following are benefits paid under the plans during fiscal
years 2010, 2009 and 2008 and expected to be paid from fiscal
2011 through fiscal 2020. All benefits are expected to be paid
from the plans’ assets.
| Pension Benefits | ||||
| (Amounts in thousands) | ||||
|
2008
|
$ | 14,348 | ||
|
2009
|
$ | 15,725 | ||
|
2010
|
$ | 16,294 | ||
|
Estimated Future Payments:
|
||||
|
2011
|
$ | 17,215 | ||
|
2012
|
$ | 17,706 | ||
|
2013
|
$ | 18,225 | ||
|
2014
|
$ | 18,564 | ||
|
2015
|
$ | 18,925 | ||
|
2016 – 2020
|
$ | 104,390 | ||
F-40
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Postretirement
Benefit Plans
The company provides certain medical and life insurance benefits
for eligible retired employees. The Flowers medical plan covers
eligible retirees under the active medical and dental plans. The
plan incorporates coinsurance payments and employee
contributions at COBRA premium levels. Coverage in the medical
plan does not extend past age 65. Eligibility and maximum
period of coverage is based on age and length of service. The
life insurance plan offers coverage to a closed group of
retirees. In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (“MMA”) was
enacted. The MMA established a voluntary prescription drug
benefit under Medicare, known as “Medicare
Part D,” and a federal subsidy to sponsors of retiree
health care benefit plans that provide a prescription drug
benefit that is at least actuarially equivalent to Medicare
Part D. Since the plan does not provide benefits to
retirees beyond age 65, it is not eligible for the Medicare
Part D subsidy.
On August 4, 2008 the company assumed sponsorship of a
medical and life insurance benefits plan for eligible retired
employees from the acquisition of ButterKrust (see Note 9,
Acquisitions
). The ButterKrust plan provides medical
coverage to a limited group. Eligibility for benefits is based
on the attainment of certain age and service requirements.
Additionally, non-union employees hired after March 1, 2004
are not eligible. Union employees who meet the medical
eligibility requirements are also eligible for life insurance
benefits. Medical premium levels for retirees and spouses vary
by group. The company has determined that the prescription drug
benefits provided to some participants in the ButterKrust plan
are at least actuarially equivalent to Medicare Part D for
certain non-union and all union participants. Other participants
in the plan are not eligible for prescription drug benefits.
As a result of union negotiations in October 2009, eligibility
for the ButterKrust plan will only be extended through the end
of the current contract period (October 26, 2012) for
union employees. Only eligible union employees who retire prior
to October 26, 2012 will receive benefits under the
ButterKrust plan. In addition, certain medical plan provisions
were changed in the ButterKrust plan and measured at year-end
2009. During 2010, minimal mid-year accounting adjustments were
made to the postretirement benefit plans to reflect
clarification of the provisions of the October 2009 negotiations.
The company evaluated options for delivery of postretirement
benefits under the health care reform legislation. As a result
of this review, the company established a retiree-only plan as
of January 1, 2011 to deliver postretirement medical
benefits. Therefore, benefits provided under the company
postretirement benefit plans are exempt from lifetime and annual
dollar limits on essential health benefits and other health care
reform mandates based on long-standing exemptions for such plans
under ERISA and the Internal Revenue Code. In addition, the
company has communicated to current and future retirees that any
excise taxes that may apply to these benefits in the future due
to the legislation will be paid by plan participants. As a
result, no changes in plan provisions were measured at year-end
2010 due to health care reform.
F-41
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The net periodic benefit cost for the company postretirement
benefit plans includes the following components for fiscal years
2010, 2009 and 2008:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Service cost
|
$ | 632 | $ | 861 | $ | 514 | ||||||
|
Interest cost
|
875 | 1,113 | 661 | |||||||||
|
Amortization:
|
||||||||||||
|
Prior service cost
|
(59 | ) | 333 | 333 | ||||||||
|
Actuarial loss
|
(174 | ) | 34 | — | ||||||||
|
Total net periodic benefit cost
|
1,274 | 2,341 | 1,508 | |||||||||
|
Other changes in plan assets and benefit obligations recognized
in other comprehensive income:
|
||||||||||||
|
Current year actuarial (gain) loss*
|
(2,055 | ) | (1,612 | ) | 1,559 | |||||||
|
Current year prior service (credit) cost
|
— | (1,234 | ) | — | ||||||||
|
Mid-year accounting adjustment prior service (credit)
|
(109 | ) | — | — | ||||||||
|
Amortization of actuarial gain (loss)
|
59 | (34 | ) | — | ||||||||
|
Amortization of prior service (cost) credit
|
174 | (333 | ) | (333 | ) | |||||||
|
Total recognized in other comprehensive (loss) income
|
(1,931 | ) | (3,213 | ) | 1,226 | |||||||
|
Total recognized in net periodic benefit cost and other
comprehensive income
|
$ | (657 | ) | $ | (872 | ) | $ | 2,734 | ||||
| * | Includes gain related to higher than expected Part D subsidy receipts. |
Approximately $(0.3) million will be amortized from
accumulated other comprehensive income into net periodic benefit
cost in fiscal 2011 relating to the company’s
postretirement benefit plans.
F-42
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The unfunded status and the amounts recognized in the
Consolidated Balance Sheets for the company’s
postretirement benefit plans are as follows:
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
| (Amounts in thousands) | ||||||||
|
Change in benefit obligation:
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 15,114 | $ | 17,395 | ||||
|
Mid-year accounting adjustment
|
(109 | ) | — | |||||
|
Service cost
|
632 | 861 | ||||||
|
Interest cost
|
875 | 1,113 | ||||||
|
Participant contributions
|
392 | 412 | ||||||
|
Actuarial loss (gain)
|
(2,053 | ) | (1,612 | ) | ||||
|
Benefits paid
|
(1,085 | ) | (1,903 | ) | ||||
|
Less federal subsidy on benefits paid
|
58 | 82 | ||||||
|
Plan amendments
|
— | (1,234 | ) | |||||
|
Benefit obligation at end of year
|
$ | 13,824 | $ | 15,114 | ||||
|
Change in plan assets:
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | — | $ | — | ||||
|
Employer contributions
|
693 | 1,491 | ||||||
|
Participant contributions
|
392 | 412 | ||||||
|
Benefits paid
|
(1,085 | ) | (1,903 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | — | $ | — | ||||
|
Funded status, end of year:
|
||||||||
|
Fair value of plan assets
|
$ | — | $ | — | ||||
|
Benefit obligations
|
13,824 | 15,114 | ||||||
|
Funded status and amount recognized at end of year
|
$ | (13,824 | ) | $ | (15,114 | ) | ||
|
Amounts recognized in the balance sheet:
|
||||||||
|
Current liability
|
$ | (1,011 | ) | $ | (841 | ) | ||
|
Noncurrent liability
|
(12,813 | ) | (14,273 | ) | ||||
|
Amount recognized at end of year
|
$ | (13,824 | ) | $ | (15,114 | ) | ||
|
Amounts recognized in accumulated other comprehensive (loss)
income:
|
||||||||
|
Net actuarial (gain) loss before taxes
|
$ | (1,870 | ) | $ | 126 | |||
|
Prior service (credit) cost before taxes
|
(1,085 | ) | (1,150 | ) | ||||
|
Amounts recognized in accumulated other comprehensive (loss)
income
|
$ | (2,955 | ) | $ | (1,024 | ) | ||
F-43
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Assumptions used in accounting for the company’s
postretirement benefit plans at each of the respective fiscal
years ending are as follows:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
Weighted average assumptions used to determine benefit
obligations:
|
||||||||||||||||||||||||
|
Measurement date
|
12/31/2010 | 12/31/2009 | 12/31/2008 | |||||||||||||||||||||
|
Discount rate
|
5.00 | % | 5.75 | % | 6.25 | % | ||||||||||||||||||
|
Rate of compensation increase
|
N/A | N/A | N/A | |||||||||||||||||||||
|
Health care cost trend rate used to determine benefit
obligations:
|
||||||||||||||||||||||||
|
Initial rate
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||||||||||||||
|
Ultimate rate
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||||||||
|
Year trend reaches the ultimate rate
|
2017 | 2016 | 2015 | |||||||||||||||||||||
|
Weighted average assumptions used to determine net periodic cost:
|
||||||||||||||||||||||||
|
Measurement date
|
1/1/2010 | 1/1/2009 | 1/1/2008 | |||||||||||||||||||||
|
Discount rate
|
5.75 | % | 6.25 | % | 6.00 | %(1) | ||||||||||||||||||
|
Expected return on plan assets
|
N/A | N/A | N/A | |||||||||||||||||||||
|
Rate of compensation increase
|
N/A | N/A | N/A | |||||||||||||||||||||
|
Health care cost trend rate used to determine net cost:
|
||||||||||||||||||||||||
|
Initial rate
|
8.00 | % | 8.00 | % | 8.50 | % | ||||||||||||||||||
|
Ultimate rate
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||||||||
|
Year trend reaches the ultimate rate
|
2016 | 2015 | 2015 | |||||||||||||||||||||
| (1) | The ButterKrust postretirement benefit plan was acquired August 4, 2008. The discount rate used to determine net periodic benefit cost for this plan was 6.75%. |
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A
one-percentage change in assumed health care cost trend rates
would have the following effects for fiscal years 2010, 2009 and
2008:
| One-Percentage Point Decrease | One-Percentage Point Increase | |||||||||||||||||||||||
| For the Year Ended | For the Year Ended | |||||||||||||||||||||||
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
|||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2007 | |||||||||||||||||||
| (Amounts in thousands) | ||||||||||||||||||||||||
|
Effect on total of service and interest cost
|
$ | (150 | ) | $ | (187 | ) | $ | (109 | ) | $ | 171 | $ | 214 | $ | 125 | |||||||||
|
Effect on postretirement benefit obligation
|
$ | (867 | ) | $ | (1,134 | ) | $ | (1,254 | ) | $ | 955 | $ | 1,258 | $ | 1,417 | |||||||||
F-44
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash
Flows
Company contributions are as follows (amounts in thousands):
|
Employer Net
|
||||
| Year | Contribution | |||
|
2008
|
$ | 719 | ||
|
2009
|
$ | 1,409 | ||
|
2010
|
$ | 635 | ||
|
2011 (Expected)
|
$ | 1,011 | ||
The table above reflects only the company’s share of the
benefit cost. The company contributions shown are net of income
from federal subsidy payments received pursuant to the MMA. MMA
subsidy payments, which reduce the company’s cost for the
plans, are shown separately in the benefits table below. Of the
$1.0 million expected funding for postretirement benefit
plans during 2011, the entire amount will be required to pay for
benefits. Contributions by participants to postretirement
benefits were $0.4 million, $0.4 million and
$0.4 million for fiscal years 2010, 2009 and 2008,
respectively.
Benefit
Payments
The following are benefits paid by the company during fiscal
years 2010, 2009 and 2008 and expected to be paid from fiscal
2011 through fiscal 2020. All benefits are expected to be paid
from the company’s assets. The expected benefits show the
company’s cost without regard to income from federal
subsidy payments received pursuant to the MMA. Expected MMA
subsidy payments, which reduce the company’s cost for the
plans, are shown separately.
| Postretirement Benefits | ||||||||
| (Amounts in thousands) | ||||||||
|
Employer Gross
|
MMA Subsidy
|
|||||||
| Contribution | (Income) | |||||||
|
2008
|
$ | 750 | $ | (31 | ) | |||
|
2009
|
$ | 1,491 | $ | (82 | ) | |||
|
2010
|
$ | 693 | $ | (58 | ) | |||
|
Estimated Future Payments:
|
||||||||
|
2011
|
$ | 1,078 | $ | (67 | ) | |||
|
2012
|
$ | 1,092 | $ | (71 | ) | |||
|
2013
|
$ | 1,156 | $ | (75 | ) | |||
|
2014
|
$ | 1,220 | $ | (79 | ) | |||
|
2015
|
$ | 1,254 | $ | (83 | ) | |||
|
2016 – 2020
|
$ | 6,494 | $ | (469 | ) | |||
Other
Plans
The company contributes to various multiemployer,
company-administered money purchase and defined contribution
pension plans. Benefits provided under the multiemployer pension
plans are generally based on years of service and employee age.
Expense under these plans was $3.1 million for fiscal 2010,
$2.0 million for fiscal 2009 and $0.9 million for
fiscal 2008. The increase from fiscal 2009 to fiscal 2010 is
attributed to the company’s partial withdrawal from one of
these plans. The company recorded a liability of
$1.2 million for this partial withdrawal which was paid on
February 10, 2011. At January 1, 2011 and
January 2, 2010 the company owed payments of
$1.2 million and $0.1 million, respectively, to these
types of plans.
F-45
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Flowers Foods 401(k) Retirement Savings Plan covers
substantially all of the company’s employees who have
completed certain service requirements. The cost and
contributions for those employees who also participate in the
defined benefit pension plan is 25% of the first $400
contributed by the employee. Effective April 1, 2001, the
costs and contributions for employees who do not participate in
the defined benefit pension plan was 2% of compensation and 50%
of the employees’ contributions, up to 6% of compensation.
Effective January 1, 2006, the costs and contributions for
employees who do not participate in the defined benefit pension
plan increased to 3% of compensation and 50% of the
employees’ contributions, up to 6% of compensation. During
fiscal years 2010, 2009 and 2008, the total cost and
contributions were $17.2 million, $15.6 million and
$14.9 million, respectively.
As of January 1, 2011, the company also had two smaller
401(k) plans associated with recent acquisitions that will be
merged into the Flowers Foods 401(k) Retirement Savings Plan
after receipt of final determination letters. During fiscal
2011, the company merged one of these 401(k) plans in the
Flowers Foods 401(k) Retirement Savings Plan.
| Note 21. | Income Taxes |
The company’s income tax expense consists of the following
for fiscal years 2010, 2009 and 2008:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Current Taxes:
|
||||||||||||
|
Federal
|
$ | 60,472 | $ | 63,280 | $ | 61,005 | ||||||
|
State
|
8,973 | 7,460 | 4,158 | |||||||||
| 69,445 | 70,740 | 65,163 | ||||||||||
|
Deferred Taxes:
|
||||||||||||
|
Federal
|
4,372 | 1,147 | 1,763 | |||||||||
|
State
|
(484 | ) | 2,160 | 818 | ||||||||
| 3,888 | 3,307 | 2,581 | ||||||||||
|
Income tax expense
|
$ | 73,333 | $ | 74,047 | $ | 67,744 | ||||||
F-46
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred tax assets (liabilities) are comprised of the following:
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
| (Amounts in thousands) | ||||||||
|
Self-insurance
|
$ | 5,846 | $ | 5,194 | ||||
|
Compensation and employee benefits
|
10,909 | 10,499 | ||||||
|
Deferred income
|
6,542 | 7,417 | ||||||
|
Loss carryforwards
|
6,490 | 8,324 | ||||||
|
Equity-based compensation
|
10,764 | 9,130 | ||||||
|
Hedging
|
— | 7,894 | ||||||
|
Pension
|
23,259 | 20,360 | ||||||
|
Other
|
13,124 | 11,594 | ||||||
|
Deferred tax assets valuation allowance
|
(2,691 | ) | (3,647 | ) | ||||
|
Deferred tax assets
|
74,243 | 76,765 | ||||||
|
Depreciation
|
(83,378 | ) | (76,431 | ) | ||||
|
Hedging
|
(14,953 | ) | — | |||||
|
Intangible Assets
|
(39,802 | ) | (40,950 | ) | ||||
|
Other
|
(1,695 | ) | (2,418 | ) | ||||
|
Deferred tax liabilities
|
(139,828 | ) | (119,799 | ) | ||||
|
Net deferred tax liability
|
$ | (65,585 | ) | $ | (43,034 | ) | ||
The company and various subsidiaries have state net operating
loss carryforwards of $82.4 million with expiration dates
through fiscal 2023. The utilization of a portion of these
carryforwards could be limited in the future; therefore, a
valuation allowance has been recorded. Should the company
determine at a later date that certain of these losses which
have been reserved for may be utilized, a benefit may be
recognized in the consolidated statement of income. Likewise,
should the company determine at a later date that certain of
these net operating losses for which a deferred tax asset has
been recorded may not be utilized, a charge to the consolidated
statement of income may be necessary.
Income tax expense differs from the amount computed by applying
the U.S. federal income tax rate (35%) because of the
effect of the following items for fiscal years 2010, 2009 and
2008:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Tax at U.S. federal income tax rate
|
$ | 73,633 | $ | 72,716 | $ | 66,518 | ||||||
|
State income taxes, net of federal income tax benefit
|
5,795 | 7,170 | 4,165 | |||||||||
|
Decrease in valuation allowance
|
(279 | ) | (186 | ) | (129 | ) | ||||||
|
Section 199 qualifying production activities
|
(6,019 | ) | (3,999 | ) | (3,720 | ) | ||||||
|
Jobs tax credit
|
(228 | ) | (244 | ) | (133 | ) | ||||||
|
Other
|
431 | (1,410 | ) | 1,043 | ||||||||
|
Income tax expense
|
$ | 73,333 | $ | 74,047 | $ | 67,744 | ||||||
The gross amount of unrecognized tax benefits was
$4.8 million and $4.6 million as of January 1,
2011 and January 2, 2010, respectively. These amounts are
exclusive of interest accrued and are recorded in other
long-term
F-47
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
liabilities on the consolidated balance sheet. If recognized,
the $4.8 million (less $0.9 million related to tax
imposed in other jurisdictions) would impact the effective rate.
The company accrues interest expense and penalties related to
income tax liabilities as a component of income before taxes. No
accrual of penalties is reflected on the company’s balance
sheet as the company believes the accrual of penalties is not
necessary based upon the merits of its income tax positions. The
company had an accrued interest balance of approximately
$0.3 million at January 1, 2011 and January 2,
2010. An immaterial amount of interest expense was recognized
during fiscal 2010, and an interest benefit of $0.2 million
and $0.4 million was recognized for fiscal 2009 and fiscal
2008, respectively.
At this time, we do not anticipate material changes to the
amount of gross unrecognized tax benefits over the next twelve
months.
The company defines the federal jurisdiction as well as various
state jurisdictions as “major” jurisdictions. During
fiscal 2010, the IRS completed the audit of fiscal years 2007
and 2008. The results of the audit were immaterial and the
company is no longer subject to federal examination for years
prior to 2009. With limited exceptions, the company is no longer
subject to state examinations for years prior to 2007.
The following is a reconciliation of the total amounts of
unrecognized tax benefits for fiscal years 2010, 2009 and 2008
(amounts in thousands):
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Unrecognized tax benefit at beginning of fiscal year
|
$ | 4,629 | $ | 4,547 | $ | 4,585 | ||||||
|
Gross increases — tax positions in a current period
|
553 | 658 | — | |||||||||
|
Gross increases — tax positions in a prior period
|
— | 831 | 3,103 | |||||||||
|
Settlements
|
— | — | (2,091 | ) | ||||||||
|
Lapses of statutes of limitations
|
(359 | ) | (1,407 | ) | (1,050 | ) | ||||||
|
Unrecognized tax benefit at end of fiscal year
|
$ | 4,823 | $ | 4,629 | $ | 4,547 | ||||||
| Note 22. | Commitments and Contingencies |
The company and its subsidiaries from time to time are parties
to, or targets of, lawsuits, claims, investigations and
proceedings, including personal injury, commercial, contract,
environmental, antitrust, product liability, health and safety
and employment matters, 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 has recorded current liabilities of
$19.7 million and $16.7 million related to
self-insurance reserves at January 1, 2011 and
January 2, 2010, respectively. The reserves include an
estimate of expected settlements on pending claims, defense
costs and a provision for claims incurred but not reported.
These estimates are based on the company’s assessment of
potential liability using an analysis of available information
with respect to pending claims, historical experience and
current cost trends. The amount of the company’s ultimate
liability in respect of these matters may differ materially from
these estimates.
In the event the company ceases to utilize the independent
distribution form of doing business or exits a territory, the
company is contractually required to purchase the territory from
the independent distributor for ten times average weekly branded
sales.
See Note 13,
Debt, Lease and Other Commitments
, for
additional information.
F-48
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 23. | Segment Reporting |
DSD produces fresh and frozen packaged bread and rolls and
tortillas and warehouse delivery produces frozen bread and rolls
and tortillas and snack products. The company evaluates each
segment’s performance based on income or loss before
interest and income taxes, excluding unallocated expenses and
charges which the company’s management deems to be an
overall corporate cost or a cost not reflective of the
segments’ core operating businesses. Information regarding
the operations in these reportable segments is as follows for
fiscal years 2010, 2009 and 2008:
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
|
Sales:
|
||||||||||||
|
DSD
|
$ | 2,096,100 | $ | 2,159,065 | $ | 2,013,927 | ||||||
|
Warehouse delivery
|
613,627 | 577,614 | 512,970 | |||||||||
|
Eliminations:
|
||||||||||||
|
Sales from Warehouse delivery to DSD
|
(111,214 | ) | (111,893 | ) | (97,371 | ) | ||||||
|
Sales from DSD to Warehouse delivery
|
(24,744 | ) | (23,937 | ) | (14,634 | ) | ||||||
| $ | 2,573,769 | $ | 2,600,849 | $ | 2,414,892 | |||||||
|
Depreciation and amortization:
|
||||||||||||
|
DSD
|
$ | 65,977 | $ | 64,578 | $ | 57,447 | ||||||
|
Warehouse delivery
|
18,985 | 16,062 | 15,549 | |||||||||
|
Other(1)
|
156 | 288 | 316 | |||||||||
| $ | 85,118 | $ | 80,928 | $ | 73,312 | |||||||
|
Income from operations:
|
||||||||||||
|
DSD
|
$ | 194,972 | $ | 192,539 | $ | 185,292 | ||||||
|
Warehouse delivery
|
47,925 | 51,326 | 25,666 | |||||||||
|
Other(1)
|
(37,035 | ) | (37,532 | ) | (28,256 | ) | ||||||
| $ | 205,862 | $ | 206,333 | $ | 182,702 | |||||||
|
Net interest income
|
$ | 4,518 | $ | 1,426 | $ | 7,349 | ||||||
|
Income before income taxes
|
$ | 210,380 | $ | 207,759 | $ | 190,051 | ||||||
|
Capital expenditures:
|
||||||||||||
|
DSD
|
$ | 69,252 | $ | 54,586 | $ | 71,413 | ||||||
|
Warehouse delivery
|
24,693 | 14,670 | 12,212 | |||||||||
|
Other(1)
|
4,459 | 2,837 | 3,236 | |||||||||
| $ | 98,404 | $ | 72,093 | $ | 86,861 | |||||||
F-49
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| As of | ||||||||
|
January 1,
|
January 2,
|
|||||||
| 2011 | 2010 | |||||||
|
Assets:
|
||||||||
|
DSD
|
$ | 1,011,944 | $ | 1,050,398 | ||||
|
Warehouse delivery
|
232,481 | 226,515 | ||||||
|
Other(2)
|
81,064 | 74,529 | ||||||
| $ | 1,325,489 | $ | 1,351,442 | |||||
| (1) | Represents Flowers Foods’ corporate head office amounts. | |
| (2) | Represents Flowers Foods’ corporate head office assets including primarily cash and cash equivalents, deferred taxes and deferred financing costs. |
Sales by product category in each reportable segment are as
follows for fiscal years 2010, 2009 and 2008 (amounts in
thousands):
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||||||||||||||||||||||||||
|
Warehouse
|
Warehouse
|
Warehouse
|
||||||||||||||||||||||||||||||||||
| DSD | delivery | Total | DSD | delivery | Total | DSD | delivery | Total | ||||||||||||||||||||||||||||
|
Branded Retail
|
$ | 1,221,074 | $ | 108,517 | $ | 1,329,591 | $ | 1,213,217 | $ | 134,361 | $ | 1,347,578 | $ | 1,161,594 | $ | 112,704 | $ | 1,274,298 | ||||||||||||||||||
|
Store Branded Retail
|
332,109 | 105,953 | 438,062 | 358,700 | 59,326 | 418,026 | 303,193 | 52,197 | 355,390 | |||||||||||||||||||||||||||
|
Non-retail and Other
|
518,173 | 287,943 | 806,116 | 563,211 | 272,034 | 835,245 | 534,506 | 250,698 | 785,204 | |||||||||||||||||||||||||||
|
Total
|
$ | 2,071,356 | $ | 502,413 | $ | 2,573,769 | $ | 2,135,128 | $ | 465,721 | $ | 2,600,849 | $ | 1,999,293 | $ | 415,599 | $ | 2,414,892 | ||||||||||||||||||
F-50
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Note 24. | Unaudited Quarterly Financial Information |
Results of operations for each of the four quarters in the
respective fiscal years are as follows. Each quarter represents
a period of twelve weeks, except the first quarter, which
includes sixteen weeks.
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||||||
|
Sales
|
2010 | $ | 795,026 | $ | 607,716 | $ | 597,894 | $ | 573,133 | |||||||||||
| 2009 | $ | 807,007 | $ | 614,448 | $ | 602,570 | $ | 576,824 | ||||||||||||
|
Materials, supplies, labor and other production costs (exclusive
of depreciation and amortization shown separately)
|
2010 | $ | 414,798 | $ | 318,553 | $ | 316,141 | $ | 297,298 | |||||||||||
| 2009 | $ | 429,462 | $ | 333,339 | $ | 322,245 | $ | 305,137 | ||||||||||||
|
Net income attributable to Flowers Foods, Inc.
|
2010 | $ | 40,687 | $ | 33,756 | $ | 31,166 | $ | 31,438 | |||||||||||
| 2009 | $ | 37,381 | $ | 30,341 | $ | 31,926 | $ | 30,649 | ||||||||||||
|
Basic net income attributable to Flowers Foods, Inc. common
shareholders per share
|
2010 | $ | 0.44 | $ | 0.37 | $ | 0.34 | $ | 0.35 | |||||||||||
| 2009 | $ | 0.40 | $ | 0.33 | $ | 0.35 | $ | 0.33 | ||||||||||||
|
Diluted net income attributable to Flowers Foods, Inc. common
shareholders per share
|
2010 | $ | 0.44 | $ | 0.37 | $ | 0.34 | $ | 0.34 | |||||||||||
| 2009 | $ | 0.40 | $ | 0.33 | $ | 0.34 | $ | 0.33 | ||||||||||||
| Note 25. | Subsequent Events |
Dividend.
On February 17, 2011, the Board
of Directors declared a dividend of $0.20 per share on the
company’s common stock to be paid on March 17, 2011 to
shareholders of record on March 3, 2011.
Shelf registration.
On February 8, 2011,
the company filed a universal shelf registration statement on
Form S-3
with the Securities and Exchange Commission (“SEC”),
which will allow the company to sell, from time to time, certain
securities, including common stock, preferred stock, debt
securities
and/or
warrants, either individually or in units, in one or more
offerings. The company has no specific plans to offer the
securities covered by the registration statement, and is not
required to offer the securities in the future pursuant to the
registration statement. The terms of any offering under the
registration statement will be established at the time of the
offering. Proceeds from the sale of any securities will be used
for general corporate purposes, which may include, share
repurchases, refinancing existing indebtedness, capital
expenditures, and possible acquisitions. The company has not
allocated a specific portion of the net proceeds for any
particular use at this time. The universal shelf registration
statement is intended to provide the company with flexibility to
raise funds through one or more offerings of its securities,
subject to market conditions and the company’s capital
needs.
Contingent acquisition payment.
In connection
with the acquisition of Holsum in 2008, the company will make
payments of up to $5.0 million in cash to the former
shareholders of Holsum in contingent consideration because the
company’s stock did not trade over a target price for ten
consecutive trading days during the two year period beginning
February 11, 2009. We expect these payments to be made
during the first quarter of fiscal 2011.
F-51
Table of Contents
FLOWERS
FOODS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
SCHEDULE II
VALUATION
AND QUALIFYING ACCOUNTS
Those valuation and qualifying accounts which are deducted in
the balance sheet from the assets to which they apply:
|
Additions
|
||||||||||||||||
|
Beginning
|
(Reductions)
|
Ending
|
||||||||||||||
| Balance | to Expenses | Deductions | Balance | |||||||||||||
| (Amounts in thousands) | ||||||||||||||||
|
Classification:
|
||||||||||||||||
|
Fiscal Year Ended January 1, 2011
|
||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 469 | 547 | 494 | $ | 522 | ||||||||||
|
Inventory reserves
|
$ | 82 | 1,047 | 898 | $ | 231 | ||||||||||
|
Deferred tax asset valuation allowance
|
$ | 3,647 | (279 | ) | (677 | ) | $ | 2,691 | ||||||||
|
Fiscal Year Ended January 2, 2010
|
||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 378 | 2,077 | 1,986 | $ | 469 | ||||||||||
|
Inventory reserves
|
$ | 594 | 498 | 1,010 | $ | 82 | ||||||||||
|
Deferred tax asset valuation allowance
|
$ | 4,520 | (186 | ) | (687 | ) | $ | 3,647 | ||||||||
|
Fiscal Year Ended January 3, 2009
|
||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 131 | 640 | 393 | $ | 378 | ||||||||||
|
Inventory reserves
|
$ | 134 | 1,121 | 661 | $ | 594 | ||||||||||
|
Deferred tax asset valuation allowance
|
$ | 4,649 | (129 | ) | — | $ | 4,520 | |||||||||
F-52
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. [removed and Reserved]printPart IIprintItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accounting Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement SchedulesprintNote 1. Basis Of PresentationprintNote 2. Summary Of Significant Accounting PoliciesprintNote 3. New Accounting PronouncementsprintNote 4. Gain on Sale Of AssetsprintNote 5. Asset ImpairmentprintNote 6. Notes ReceivableprintNote 7. Assets Held For Sale Distributor RoutesprintNote 8. Goodwill and Other Intangible AssetsprintNote 9. AcquisitionsprintNote 10. Derivative Financial InstrumentsprintNote 11. Other Current AssetsprintNote 12. Other Accrued LiabilitiesprintNote 13. Debt, Lease and Other CommitmentsprintNote 14. Variable Interest EntityprintNote 15. Fair Value Of Financial InstrumentsprintNote 16. Stockholders EquityprintNote 17. Stock-based CompensationprintNote 18. Comprehensive Income (loss)printNote 19. Earnings Per ShareprintNote 20. Postretirement PlansprintNote 21. Income TaxesprintNote 22. Commitments and ContingenciesprintNote 23. Segment ReportingprintNote 24. Unaudited Quarterly Financial InformationprintNote 25. Subsequent Eventsprint