On August 4, 2008, the company acquired ButterKrust. ButterKrust manufactures fresh breads and rolls in Lakeland, Florida and its products are available throughout Florida underCountry Hearth,Rich Harvest,andSunbeambrands, 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.
On December 28, 2007, the company acquired certain assets of Key Mix Corporation (“Key Mix”) in Sykesville, Maryland. Key Mix produces a variety of mixes used in the baking industry. The results of operations for Key Mix are included in the warehouse delivery segment.
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 extremely volatile. Agricultural commodity prices reached all time high levels during 2007 and the first half of 2008 and then moderated in the second half of fiscal 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
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 availablemaximum leverage ratio is increased under the new credit capacity, it can comply with the current terms of the credit facility and can meet presently foreseeable financial requirements.facility. As of January 3, 2009 and December 29, 2007,2, 2010, the company was in compliance with all restrictive financial covenants under itsthe new credit facility.
Because we are uncertain as to if or when settlements may occur, these tables do not reflect the company’s Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 119,net liability of $4.3$4.1 million related to uncertain tax positions. Details regarding this liability are presented in Note 21,Income Taxes, of Notes to Consolidated Financial Statements of thisForm 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.
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New Accounting Pronouncements
In September 2006, the FASB issued new accounting guidance on fair value measurements. This guidance establishes a common definition for fair value to be applied to GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. It was effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. Issued in February 2008, a FASB staff position removed leasing transactions from the scope of the new fair value guidance. Also in February 2008, the FASB issued authoritative guidance deferring the effective date of the fair value guidance for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The implementation of these standards did not have a material impact on our condensed consolidated balance sheet or statements of income. See Note 15,Fair Value of Financial Instruments, of Notes to Consolidated Financial Statements of thisForm 10-K for additional disclosures.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations (“SFAS 141R”). SFAS 141Rnew guidance on business combinations. The new standard provides revised guidance on how acquirersacquirors recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS 141RThe new standard also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS 141R isThe standard was effective, on a prospective basis, for fiscal years beginning after December 15, 2008. Upon adoption on January 4, 2009, this standard did not have a material impact on our consolidated financial position and results of operations. We recorded the Cedar Rapids, Iowa acquisition on May 15, 2009 and the Leo’s Foods acquisition on October 17, 2009 in accordance with this guidance as described in Note 9,Acquisitions, of Notes to Consolidated Financial Statements of thisForm 10-K.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160new guidance on noncontrolling interests which establishes requirements for ownership interests in subsidiaries held by parties other than the company (sometimes called “minority interests”) to 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. SFAS 160 isThe new guidance was effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. In fiscal 2009,Upon adoption, the company’s minority interest in a Variable Interest Entity will be included in the consolidated statement of financial position within equity.
In February 2008, the FASB issued Staff PositionNo. FAS 157-2,Effective Date of FASB Statement No. 157(“FSP 157-2”) which delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities that are recognized or disclosed in the financial statements at fair value on a nonrecurring basis only. These include nonfinancial assets and liabilities not measured at fair value on an ongoing basis but subject to fair value adjustments in certain circumstances, for example, assets that have been deemed to be impaired. The company is currently assessing the impact ofFSP 157-2 on its consolidated financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161,Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands quarterly disclosure requirements in SFAS 133 about an entity’s derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The company is currently evaluating the requirements of SFAS 161. The adoption of SFAS 161 is not expected to have an impact on the company’s financial position, results of operations or cash flows as the pronouncement addresses disclosure requirements only.
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not anticipate that the adoption of SFAS 162 will materially impact the company.
In June 2008, the FASB issued FSP EITFNo. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP 03-6-1”). FSP 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” FSP 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The company has assessed the impact of the adoption of FSP 03-6-1 and believes it will not have a material effect on its results of operations or earnings per share.
In October 2008, the FASB issuedFSP 157-3,Determining Fair Value of a Financial Asset in a Market That Is Not Active(“FSP 157-3”).FSP 157-3 clarified the application of SFAS 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive.FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The
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implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
In March 2008, the FASB issued new guidance on disclosures about derivative instruments and hedging activities. The new guidance expands existing quarterly disclosure requirements about an entity’s derivative instruments and hedging activities. The new guidance was effective for fiscal years beginning after November 15, 2008. All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated Other Comprehensive Income (Loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash
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flows of such derivative financial instruments are classified consistent with the underlying hedged item. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations. See Note 10,Derivative Financial Instruments, of Notes to Consolidated Financial Statements of thisForm 10-K for additional derivative and hedging information and disclosures.
In June 2008, the FASB issued accounting guidance on earnings per share which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our nonvested performance contingent restricted stock awards are considered participating securities since the share-based awards contain a non-forfeitable right to dividend equivalents irrespective of whether the awards ultimately vest. We adopted the provisions of this accounting guidance effective January 4, 2009 and computed basic earnings per common share using the two-class method for all periods presented. See Note 19,Earnings Per Share, of Notes to Consolidated Financial Statements of thisForm 10-K for additional disclosure.
In December 2008, the FASB issued a staff position providing guidance on employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance was effective for fiscal years ending after December 15, 2009. See Note 20,Postretirement Plans, of Notes to Consolidated Financial Statements of thisForm 10-K for these new disclosures. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
In April 2009, the FASB issued a staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The guidance was effective for interim and annual periods ending after June 15, 2009. Upon adoption during the second quarter of fiscal 2009, the implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
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 thisForm 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 a material impact on our consolidated financial position and results of operations.
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. Presently, we consolidate a VIE, as disclosed in Note 14,Variable Interest Entity, to the Consolidated Financial Statements of thisForm 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 will cease 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 June 2009, the FASB Accounting Standards Codification (“Codification”) was issued. The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification was effective for financials statements issued for interim and annual periods ending after September 15, 2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
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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, EBITDA, a non-GAAP financial measure, 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 minorityincome 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 theyEBITDA 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.
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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 3, 2009,2, 2010, the company’s hedge portfolio contained commodity derivatives with a fair value of $(21.0)$(3.7) million. Of this fair value, $(8.7)$(1.7) million is based on quoted market prices and $(12.3)$(2.0) million is based on models and other valuation methods. $(20.6)$(3.6) million and $(0.4)$(0.1) million of this fair value relates to instruments that will be utilized in fiscal 20092010 and fiscal 2010,2011, 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 3, 2009,2, 2010, a hypothetical ten percent increase (decrease)change in commodity prices would increase (decrease)or decrease the fair value of the derivative portfolio by $12.9$8.7 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease)or decrease in the fair value of the portfolio would be substantially offset by increases (decreases)or decreases in raw material and packaging prices.
Interest Rate Risk
On July 9, 2008 and August 13, 2008, theThe company enteredhas interest rate swaps with notional amounts of $85.0 million, and $65.0 million, respectively, to fix the interest rate on the $150.0 million term loan entered into on August 1, 2008 to fund the acquisitions of ButterKrust and Holsum. On October 27, 2008, the company entered an
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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 3, 2009,2, 2010, the fair value of these interest rate swaps was $(9.4)
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$(6.7) million. All of this fair value is based on valuation models and $(4.3)$(4.2) million, $(2.6)$(2.0) million, $(1.5) million, $(0.8)$(0.5) million, and $(0.2) millionan immaterial amount of this fair value is related to instruments expiring in 2009fiscal 2010 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 3, 2009,2, 2010, a hypothetical ten percent increase (decrease)change in interest rates would increase (decrease)or decrease the fair value of the interest rate swap by $1.0$0.6 million. The analysis disregards changes in the exposures inherent in the underlying debt; however, the company expects that any increase (decrease)or decrease in payments under the interest rate swap would be substantially offset by increases (decreases)or decreases in interest expense.
The cash effects of the company’s commodity derivatives are included in the Consolidated Statementconsolidated statement of Cash Flowscash flows as cash flow from operating activities.
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Item 8. | Financial Statements and Supplementary Data |
Refer to the Index to Consolidated Financial Statements and the Financial Statement Schedule for the required information.
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
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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 inRule 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 ActRule 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 3, 2009. The company has excluded ButterKrust and Holsum from it’s assessment of internal control over financial reporting as of January 3, 2009 because both were acquired by the company in a purchase business combination in August 2008. Holsum and ButterKrust are wholly-owned subsidiaries whose total assets and aggregate revenues represent 8.2% and 4.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended January 3, 2009.2, 2010.
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The effectiveness of our internal control over financial reporting as of January 3, 20092, 2010 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.
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Item 9B. | Other Information |
None.
PART III
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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 Certain Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the company’s definitive proxy statement for the 20092010 Annual Meeting of Shareholders expected to be filed with the SEC on or prior to May 3, 20092, 2010 (the “proxy”). The information required by this item with respect to executive officers of the company is set forth in Part I of thisForm 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 athttp://www.flowersfoods.comin 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, or controller, 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 onForm 8-K filed with the SEC.
Our Chairman of the Board, President and Chief Executive Officer certified to the New York Stock Exchange (“NYSE”) on June 12, 200810, 2009 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.
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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.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
See Item 5 of thisForm 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.
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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.
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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 20082009 and Fiscal 20072008 Audit Firm Fee Summary” in the proxy.
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PART IV
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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 2, 2010, the fifty-three weeks ended January 3, 2009, and the fifty-two weeks ended December 29, 2007 and December 30, 2006.2007.
Consolidated Balance Sheets at January 2, 2010 and January 3, 2009 and December 29, 2007.2009.
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the fifty-threefifty-two weeks ended January 3, 2009 and the fifty-two weeks ended December 29, 2007 and December 30, 2006.
Consolidated Statements of Cash Flows for2, 2010, the fifty-three weeks ended January 3, 2009, and the fifty-two weeks ended December 29, 20072007.
Consolidated Statements of Cash Flows for the fifty-two weeks ended January 2, 2010, the fifty-three weeks ended January 3, 2009, and the fifty-two weeks ended December 30, 2006.29, 2007.
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 2, 2010, the fifty-three weeks ended January 3, 2009, and the fifty-two weeks ended December 29, 2007 and December 30, 2006.2007.
3. Exhibits.The following documents are filed as exhibits hereto:
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No | No | | | | Name of Exhibit | No | | | | Name of Exhibit |
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| 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 February 9, 2001, FileNo. 1-16247). | 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 February 9, 2001, FileNo. 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 onForm 10-K, dated March 30, 2001, FileNo. 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 onForm 10-K, dated March 30, 2001, FileNo. 1-16247). |
| 3 | .1 | | — | | Restated Articles of Incorporation of Flowers Foods, Inc. as amended on June 1, 2007 (Incorporated by reference to Flowers Foods’ Quarterly Report onForm 10-Q, dated August 23, 2007, FileNo. 1-16247). | 3 | .1 | | — | | Restated Articles of Incorporation of Flowers Foods, Inc. as amended on June 1, 2007 (Incorporated by reference to Flowers Foods’ Quarterly Report onForm 10-Q, dated August 23, 2007, FileNo. 1-16247). |
| 3 | .2 | | — | | Amended and Restated Bylaws of Flowers Foods, Inc. as amended on February 8, 2008 (Incorporated by reference to Flowers Foods’ Current Report onForm 8-K/A dated February 25, 2008, FileNo. 1-16247). | 3 | .2 | | — | | Amended and Restated Bylaws of Flowers Foods, Inc. as amended on February 8, 2008 (Incorporated by reference to Flowers Foods’ Current Report onForm 8-K/A dated February 25, 2008, FileNo. 1-16247). |
| 4 | .1 | | — | | Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 30, 2001, FileNo. 1-16247). | 4 | .1 | | — | | Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 30, 2001, FileNo. 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 onForm 10-K, dated March 30, 2001, FileNo. 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 onForm 10-K, dated March 30, 2001, FileNo. 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 onForm 8-A, dated November 18, 2002, FileNo. 1-16247). |
| | 10 | .1 | | — | | Flowers Foods, Inc. Retirement Plan No. 1 (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 30, 2001, FileNo. 1-16247). |
| | 10 | .2 | | — | | Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (Incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 4, 2009, FileNo. 1-16247). |
| | 10 | .3 | | — | | Flowers Foods, Inc. Stock Appreciation Rights Plan. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 27, 2002, FileNo. 1-16247). |
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Exhibit
| Exhibit
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No | No | | | | Name of Exhibit | No | | | | Name of Exhibit |
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| 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 onForm 8-A, dated November 18, 2002, FileNo. 1-16247). | 10 | .4 | | — | | Flowers Foods, Inc. Annual Executive Bonus Plan. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 27, 2002, FileNo. 1-16247). |
| 10 | .1 | | — | | Flowers Foods, Inc. Retirement Plan No. 1 (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 30, 2001, FileNo. 1-16247). | 10 | .5 | | — | | First Amendment to the Flowers Foods, Inc. Annual Executive Bonus Plan. (Incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, FileNo. 1-16247). |
| 10 | .2 | | — | | Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as amended and restated as of February 11, 2005 (Incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 29, 2005, FileNo. 1-16247). | 10 | .6 | | — | | Flowers Foods, Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 27, 2002, FileNo. 1-16247). |
| 10 | .3 | | — | | Flowers Foods, Inc. Stock Appreciation Rights Plan. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 27, 2002, FileNo. 1-16247). | 10 | .7 | | — | | 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 onForm 10-K, dated March 28, 2003, FileNo. 1-16247). |
| 10 | .4 | | — | | Flowers Foods, Inc. Annual Executive Bonus Plan. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 27, 2002, FileNo. 1-16247). | 10 | .8 | | — | | 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 onForm 10-K, dated March 4, 2009, FileNo. 1-16247). |
| 10 | .5 | | — | | First Amendment to the Flowers Foods, Inc. Annual Executive Bonus Plan. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated February 27, 2008, FileNo. 1-16247). | 10 | .9 | | — | | Ninth Amendment dated November 7, 2005 to the Flowers Foods, Inc. Retirement Plan No. 1 as Amended and restated effective as of March 26, 2001. (Incorporated by reference to Flowers Foods’ Quarterly Report onForm 10-Q dated November 17, 2005, FileNo. 1-16247). |
| 10 | .6 | | — | | Flowers Foods, Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K, dated March 27, 2002, FileNo. 1-16247). | 10 | .10 | | — | | Form of Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated March 1, 2006, FileNo. 1-16247). |
| 10 | .7 | | — | | 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 onForm 10-K, dated March 28, 2003, FileNo. 1-16247). | 10 | .11 | | — | | Form of 2008 Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated February 27, 2008, FileNo. 1-16247). |
| *10 | .8 | | — | | Form of Continuation of Employment Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. | 10 | .12 | | — | | 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 onForm 8-K dated October 11, 2007, FileNo. 1-16247). |
| 10 | .9 | | — | | Ninth Amendment dated November 7, 2005 to the Flowers Foods, Inc. Retirement Plan No. 1 as Amended and restated effective as of March 26, 2001. (Incorporated by reference to Flowers Foods’ Quarterly Report onForm 10-Q dated November 17, 2005, FileNo. 1-16247). | 10 | .13 | | — | | 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 onForm 8-K/A dated June 25, 2008, FileNo. 1-16247). |
| 10 | .10 | | — | | Form of 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 onForm 10-K dated March 1, 2006, FileNo. 1-16247). | 10 | .14 | | — | | 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 onForm 8-K dated August 6, 2008, FileNo. 1-16247). |
| 10 | .11 | | — | | Form of 2008 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 onForm 10-K dated February 27, 2008, FileNo. 1-16247). | 10 | .15 | | — | | Form of 2009 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 onForm 10-K dated March 4, 2009, FileNo. 1-16247). |
| 10 | .12 | | — | | Form of Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated March 1, 2006, FileNo. 1-16247). | 10 | .16 | | — | | 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 onForm 10-K dated March 4, 2009, FileNo. 1-16247). |
| 10 | .13 | | — | | Form of 2008 Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated February 27, 2008, FileNo. 1-16247). | 10 | .17 | | — | | Form of 2009 Deferred Shares Agreement, by and between Flowers Foods, Inc. and certain members of the Board of Directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated March 4, 2009, FileNo. 1-16247). |
| 10 | .14 | | — | | Amended and Restated Credit Agreement, dated as of June 6, 2006, among Flowers Foods, Inc., the Lenders Party thereto from time to time, Bank of America N.A., Harris N.A. and Cooperative CentraleRaiffeisen-Boerenleen Bank, B.A., “Rabsbank International”, New York Branch, asco-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 Form8-K dated June 7, 2006, FileNo. 1-16247). | *10 | .18 | | — | | Form of 2010 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. |
| 10 | .15 | | — | | First Amendment dated August 25, 2006 to the Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as previously amended and restated as of February 11, 2005. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated February 28, 2007, FileNo. 1-16247). | *10 | .19 | | — | | Form of 2010 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc.. |
| 10 | .16 | | — | | Second Amendment dated January 2, 2007 to the Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as previously amended and restated as of February 11, 2005. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated February 28, 2007, FileNo. 1-16247). | *21 | | | — | | Subsidiaries of Flowers Foods, Inc. |
| 10 | .17 | | — | | Third Amendment dated January 23, 2007 to the Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as previously amended and restated as of February 11, 2005. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated February 28, 2007, FileNo. 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. |
4246
| | | | | | |
Exhibit
| | | | |
No | | | | Name of Exhibit |
|
| 10 | .18 | | — | | Fourth Amendment to the Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as previously amended and restated as of February 11, 2005. (Incorporated by reference to Flowers Foods’ Annual Report onForm 10-K dated February 27, 2008, FileNo. 1-16247) |
| 10 | .19 | | — | | Employment Agreement, effective September 15, 2007, by and between Flowers Foods, Inc. and Jimmy M. Woodward. (Incorporated by reference to Flowers Foods’ Current Report onForm 8-K dated August 31, 2007, FileNo. 1-16247). |
| 10 | .20 | | — | | 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 onForm 8-K dated October 11, 2007, FileNo. 1-16247). |
| 10 | .21 | | — | | 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 onForm 8-K/A dated June 25, 2008, FileNo. 1-16247). |
| 10 | .22 | | — | | 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 onForm 8-K dated August 6, 2008, FileNo. 1-16247). |
| *10 | .23 | | — | | Form of 2009 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. |
| *10 | .24 | | — | | Form of 2009 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. |
| *10 | .25 | | — | | Form of 2009 Deferred Shares Agreement, by and between Flowers Foods, Inc. and certain members of the Board of Directors of Flowers Foods, Inc. |
| *21 | | | — | | Subsidiaries of Flowers Foods, Inc. |
| *23 | | | — | | Consent of 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. |
| *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 3, 2009. |
| | | | | | |
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 2, 2010. |
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Flowers Foods, Inc. has duly caused thisForm 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 4th3rd day of March, 2009.2010.
FLOWERS FOODS, INC.
George E. Deese
Chairman of the Board President and
Chief Executive Officer
R. Steve Kinsey
Executive Vice President and
Chief Financial Officer
Karyl H. Lauder
Senior Vice President and Chief Accounting Officer
4447
Pursuant to the requirements of the Securities Exchange Act of 1934, thisForm 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 George E. Deese | | Chairman of the Board President and Chief Executive Officer | | March 4, 20093, 2010 |
| | | | |
/s/ R. STEVE KINSEY R. Steve Kinsey | | Executive Vice President and Chief Financial Officer | | March 4, 20093, 2010 |
| | | | |
/s/ KARYL H. LAUDER Karyl H. Lauder | | Senior Vice President and Chief Accounting Officer | | March 4, 20093, 2010 |
| | | | |
/s/ JOE E. BEVERLY Joe E. Beverly | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ FRANKLIN L. BURKE Franklin L. Burke | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ MANUEL A. FERNANDEZ Manuel A. Fernandez | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ BENJAMIN H. GRISWOLD, IV Benjamin H. Griswold, IV | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ JOSEPH L. LANIER, JR. Joseph L. Lanier, Jr. | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ AMOS R. MCMULLIAN Amos R. McMullian Mcmullian | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ J.V. SHIELDS, JR. J.V. Shields, Jr. | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ DAVID V. SINGER David V. Singer | | Director | | March 3, 2010 |
| | | | |
/s/ MELVIN T. STITH, PH.D. Melvin T. Stith, Ph.D. | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ JACKIE M. WARD Jackie M. Ward | | Director | | March 4, 20093, 2010 |
| | | | |
/s/ C. MARTIN WOOD III C. Martin Wood III | | Director | | March 4, 20093, 2010 |
4548
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
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 appearing 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 2, 2010 and January 3, 2009, and December 29, 2007 and the results of their operations and their cash flows for each of the three years in the period ended January 3, 20092, 2010 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 3, 2009,2, 2010, based on criteria established inInternal Control — Integrated Frameworkissued 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 Overover 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 3 to the consolidated financial statements, the company changed the manner in which it accounts for its non-controlling interest in 2009.
As discussed in Note 20 to the consolidated financial statements, the companyCompany changed the date that it measures plan assets and obligations for its defined benefit and postretirement plans in 2007 and the manner in which it accounts for its defined benefit and postretirement plans effective December 30, 2006.
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.
As described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, management has excluded ButterKrust Bakery and Holsum Bakery, Inc. from its assessment of internal control over financial reporting as of January 3, 2009 because both were acquired by the Company in a purchase business combination in August 2008. We have also excluded ButterKrust Bakery and Holsum Bakery, Inc. from our audit of internal control over financial reporting. ButterKrust Bakery and Holsum Bakery, Inc. are wholly-owned subsidiaries whose aggregate total assets and aggregate total revenues represent 8.2% and 4.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended January 3, 2009.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 4, 20093, 2010
F-2
FLOWERS FOODS, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | | | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | For the 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 20091 | | 20071 | |
| | (Amounts in thousands, except per share data) | | | (Amounts in thousands, except per share data) | |
|
Sales | | $ | 2,414,892 | | | $ | 2,036,674 | | | $ | 1,888,654 | | | $ | 2,600,849 | | | $ | 2,414,892 | | | $ | 2,036,674 | |
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) | | | 1,263,962 | | | | 1,039,011 | | | | 949,612 | | | | 1,390,183 | | | | 1,263,962 | | | | 1,039,011 | |
Selling, marketing and administrative expenses | | | 894,800 | | | | 787,821 | | | | 759,387 | | | | 926,418 | | | | 894,800 | | | | 787,821 | |
Depreciation and amortization | | | 73,312 | | | | 66,094 | | | | 64,250 | | | | 80,928 | | | | 73,312 | | | | 66,094 | |
Gain on acquisition | | | | (3,013 | ) | | | — | | | | — | |
Gain on sale of assets | | | (2,306 | ) | | | — | | | | — | | | | — | | | | (2,306 | ) | | | — | |
Asset impairment | | | 3,108 | | | | — | | | | — | | | | — | | | | 3,108 | | | | — | |
Gain on insurance recovery | | | (686 | ) | | | (933 | ) | | | (3,088 | ) | | | — | | | | (686 | ) | | | (933 | ) |
| | | | | | | | | | | | | | |
Income from operations | | | 182,702 | | | | 144,681 | | | | 118,493 | | | | 206,333 | | | | 182,702 | | | | 144,681 | |
Interest expense | | | 6,137 | | | | 3,450 | | | | 4,923 | | | | 11,587 | | | | 6,137 | | | | 3,450 | |
Interest income | | | (13,486 | ) | | | (11,854 | ) | | | (9,869 | ) | | | (13,013 | ) | | | (13,486 | ) | | | (11,854 | ) |
| | | | | | | | | | | | | | |
Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle | | | 190,051 | | | | 153,085 | | | | 123,439 | | |
Income before income taxes | | | | 207,759 | | | | 190,051 | | | | 153,085 | |
Income tax expense | | | 67,744 | | | | 54,970 | | | | 45,304 | | | | 74,047 | | | | 67,744 | | | | 54,970 | |
| | | | | | | | | | | | | | |
Income from continuing operations before minority interest and cumulative effect of a change in accounting principle | | | 122,307 | | | | 98,115 | | | | 78,135 | | |
Minority interest in variable interest entity | | | (3,074 | ) | | | (3,500 | ) | | | (3,255 | ) | |
Net income | | | | 133,712 | | | | 122,307 | | | | 98,115 | |
Less: net income attributable to noncontrolling interest | | | | (3,415 | ) | | | (3,074 | ) | | | (3,500 | ) |
| | | | | | | | | | | | | | |
Income from continuing operations before cumulative effect of a change in accounting principle | | | 119,233 | | | | 94,615 | | | | 74,880 | | |
Income from discontinued operations, net of income tax benefit of $4,731 | | | — | | | | — | | | | 6,731 | | |
Cumulative effect of a change in accounting principle, net of income tax benefit of $362 | | | — | | | | — | | | | (568 | ) | |
| | | | | | | | |
Net income | | $ | 119,233 | | | $ | 94,615 | | | $ | 81,043 | | |
Net income attributable to Flowers Foods, Inc. | | | $ | 130,297 | | | $ | 119,233 | | | $ | 94,615 | |
| | | | | | | | | | | | | | |
Net Income Per Common Share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | |
Income from continuing operations before cumulative effect of a change in accounting principle | | $ | 1.30 | | | $ | 1.04 | | | $ | 0.82 | | |
Income from discontinued operations, net of income tax | | | — | | | | — | | | | 0.08 | | |
Cumulative effect of a change in accounting principle, net of income tax benefit | | | — | | | | — | | | | (0.01 | ) | |
| | | | | | | | |
Net income per share | | $ | 1.30 | | | $ | 1.04 | | | $ | 0.89 | | |
Net income attributable to Flowers Foods, Inc. common shareholders per share | | | $ | 1.41 | | | $ | 1.29 | | | $ | 1.03 | |
| | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 92,016 | | | | 90,970 | | | | 91,233 | | | | 92,200 | | | | 92,432 | | | | 91,505 | |
| | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | |
Income from continuing operations before cumulative effect of a change in accounting principle | | $ | 1.28 | | | $ | 1.02 | | | $ | 0.81 | | |
Income from discontinued operations, net of income tax | | | — | | | | — | | | | 0.08 | | |
Cumulative effect of a change in accounting principle, net of income tax benefit | | | — | | | | — | | | | (0.01 | ) | |
| | | | | | | | |
Net income per share | | $ | 1.28 | | | $ | 1.02 | | | $ | 0.88 | | |
Net income attributable to Flowers Foods, Inc. common shareholders per share | | | $ | 1.41 | | | $ | 1.28 | | | $ | 1.02 | |
| | | | | | | | | | | | | | |
Weighted average shares outstanding | | | 93,036 | | | | 92,368 | | | | 92,600 | | | | 92,733 | | | | 93,157 | | | | 92,513 | |
| | | | | | | | | | | | | | |
| | |
1. | | Earnings per share has been restated to conform to new guidance requiring certain share-based payment awards to be treated as participating securities as discussed in Note 19,Earnings Per Share. |
See Accompanying Notes to Consolidated Financial Statements
F-3
FLOWERS FOODS, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | |
| | January 3, 2009 | | December 29, 2007 | | | January 2, 2010 | | January 3, 2009 | |
| | (Amounts in thousands, except
| | | (Amounts in thousands, except
| |
| | share data) | | | share data) | |
|
ASSETS | ASSETS | ASSETS |
Current Assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 19,964 | | | $ | 19,978 | | | $ | 18,948 | | | $ | 19,964 | |
| | | | | | | | | | |
Accounts and notes receivable, net | | | 178,077 | | | | 137,682 | | | | 178,708 | | | | 178,077 | |
| | | | | | | | | | |
Inventories, net: | | | | | | | | | | | | | | | | |
Raw materials | | | 18,032 | | | | 14,257 | | | | 20,952 | | | | 18,032 | |
Packaging materials | | | 12,162 | | | | 10,809 | | | | 12,065 | | | | 12,162 | |
Finished goods | | | 23,984 | | | | 22,271 | | | | 27,979 | | | | 23,984 | |
| | | | | | | | | | |
| | | 54,178 | | | | 47,337 | | | | 60,996 | | | | 54,178 | |
| | | | | | | | | | |
Spare parts and supplies | | | 32,541 | | | | 28,574 | | | | 35,437 | | | | 32,541 | |
| | | | | | | | | | |
Deferred income taxes | | | 38,745 | | | | 1,863 | | | | 20,714 | | | | 38,745 | |
| | | | | | | | | | |
Other | | | 28,738 | | | | 33,800 | | | | 24,152 | | | | 28,738 | |
| | | | | | | | | | |
| | | 352,243 | | | | 269,234 | | |
Total current assets | | | | 338,955 | | | | 352,243 | |
| | | | | | | | | | |
Property, Plant and Equipment: | | | | | | | | | | | | | | | | |
Land | | | 61,355 | | | | 44,826 | | | | 64,816 | | | | 61,355 | |
Buildings | | | 305,472 | | | | 280,806 | | | | 323,860 | | | | 305,472 | |
Machinery and equipment | | | 694,875 | | | | 612,983 | | | | 737,150 | | | | 694,875 | |
Furniture, fixtures and transportation equipment | | | 94,762 | | | | 87,870 | | | | 102,331 | | | | 94,762 | |
Construction in progress | | | 32,663 | | | | 16,997 | | | | 27,006 | | | | 32,663 | |
| | | | | | | | | | |
| | | 1,189,127 | | | | 1,043,482 | | | | 1,255,163 | | | | 1,189,127 | |
Less: accumulated depreciation | | | (601,931 | ) | | | (556,960 | ) | | | (652,587 | ) | | | (601,931 | ) |
| | | | | | | | | | |
| | | 587,196 | | | | 486,522 | | | | 602,576 | | | | 587,196 | |
| | | | | | | | | | |
Notes Receivable | | | 94,652 | | | | 88,469 | | | | 94,457 | | | | 94,652 | |
| | | | | | | | | | |
Assets Held for Sale — Distributor Routes | | | 7,995 | | | | 12,396 | | | | 6,535 | | | | 7,995 | |
| | | | | | | | | | |
Other Assets | | | 4,830 | | | | 32,525 | | | | 4,157 | | | | 4,830 | |
| | | | | | | | | | |
Goodwill | | | 200,035 | | | | 76,338 | | | | 201,682 | | | | 200,035 | |
| | | | | | | | | | |
Other Intangible Assets, net | | | 106,293 | | | | 22,051 | | | | 103,080 | | | | 106,293 | |
| | | | | | | | | | |
| | $ | 1,353,244 | | | $ | 987,535 | | | $ | 1,351,442 | | | $ | 1,353,244 | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | Current Liabilities: | | | | | | | | | | | | | | | | |
Current maturities of long-term debt and capital leases | | $ | 22,538 | | | $ | 6,920 | | | $ | 25,763 | | | $ | 22,538 | |
Accounts payable | | | 116,818 | | | | 98,302 | | | | 92,692 | | | | 116,818 | |
Other accrued liabilities | | | 125,713 | | | | 108,423 | | | | 103,317 | | | | 125,713 | |
| | | | | | | | | | |
| | | 265,069 | | | | 213,645 | | |
Total current liabilities | | | | 221,772 | | | | 265,069 | |
| | | | | | | | | | |
Long-Term Debt and Capital Leases | | | 263,879 | | | | 22,508 | | | | 225,905 | | | | 263,879 | |
| | | | | | | | | | |
Other Liabilities: | | | | | | | | | | | | | | | | |
Post-retirement/post-employment obligations | | | 78,897 | | | | — | | | | 68,140 | | | | 78,897 | |
Deferred income taxes | | | 55,510 | | | | 50,974 | | | | 63,748 | | | | 55,510 | |
Other | | | 45,835 | | | | 36,391 | | | | 43,851 | | | | 45,835 | |
| | | | | | | | | | |
| | | 180,242 | | | | 87,365 | | |
| | | | | | |
Minority Interest in Variable Interest Entity | | | 9,335 | | | | 7,802 | | |
Total other liabilities | | | | 175,739 | | | | 180,242 | |
| | | | | | | | | | |
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 8,913,142 shares and 9,755,350 shares, respectively | | | (157,799 | ) | | | (154,801 | ) | |
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 10,200,387 shares and 8,913,142 shares, respectively | | | | (189,250 | ) | | | (157,799 | ) |
Capital in excess of par value | | | 524,383 | | | | 484,472 | | | | 531,326 | | | | 524,383 | |
Retained earnings | | | 369,397 | | | | 303,386 | | | | 437,524 | | | | 369,397 | |
Accumulated other comprehensive (loss) income | | | (102,279 | ) | | | 22,141 | | |
Accumulated other comprehensive loss | | | | (64,672 | ) | | | (102,279 | ) |
| | | | | | | | | | |
Total Flowers Foods, Inc. stockholders’ equity | | | | 715,945 | | | | 634,719 | |
Noncontrolling interest | | | | 12,081 | | | | 9,335 | |
| | | 634,719 | | | | 656,215 | | | | | | |
Total stockholders’ equity | | | | 728,026 | | | | 644,054 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | | $ | 1,351,442 | | | $ | 1,353,244 | |
| | $ | 1,353,244 | | | $ | 987,535 | | | | | | |
| | | | | | |
See Accompanying Notes to Consolidated Financial Statements
F-4
FLOWERS FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS) INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | | | |
| | | | Common Stock | | Capital
| | | | Other
| | | | | | | | | | | | | Common Stock | | Capital
| | | | Other
| | | | | | | | | |
| | Comprehensive
| | Number of
| | | | in Excess
| | | | Comprehensive
| | Treasury Stock | | | | | | | Comprehensive
| | Number of
| | | | in Excess
| | | | Comprehensive
| | Treasury Stock | | | | | |
| | Income
| | Shares
| | Par
| | of Par
| | Retained
| | Income
| | Number of
| | | | Unearned
| | | | | Income
| | Shares
| | Par
| | of Par
| | Retained
| | Income
| | Number of
| | | | Noncontrolling
| | | |
| | (Loss) | | Issued | | Value | | Value | | Earnings | | (Loss) | | Shares | | Cost | | Compensation | | Total | | | (Loss) | | Issued | | Value | | Value | | Earnings | | (Loss) | | Shares | | Cost | | Interest | | Total | |
| | (Amounts in thousands, except share data) | | | (Amounts in thousands, except share data) | |
|
Balances at December 31, 2005 | | | | | | | 67,775,496 | | | $ | 678 | | | $ | 474,708 | | | $ | 198,567 | | | $ | (11,937 | ) | | | (7,457,637 | ) | | $ | (148,747 | ) | | $ | (898 | ) | | $ | 512,371 | | |
Reclassification due to change in accounting principle (See Note 17) | | | | | | | | | | | | | | | (898 | ) | | | | | | | | | | | | | | | | | | | 898 | | | | — | | |
Cumulative effect of change in accounting principle (See Note 20) | | | | | | | | | | | | | | | | | | | | | | | (9,630 | ) | | | | | | | | | | | | | | | (9,630 | ) | |
Net income | | $ | 81,043 | | | | | | | | | | | | | | | | 81,043 | | | | | | | | | | | | | | | | | | | | 81,043 | | |
Derivative instruments | | | (878 | ) | | | | | | | | | | | | | | | | | | | (878 | ) | | | | | | | | | | | | | | | (878 | ) | |
Reduction in minimum pension liability | | | 14,225 | | | | | | | | | | | | | | | | | | | | 14,225 | | | | | | | | | | | | | | | | 14,225 | | |
| | | | |
Comprehensive income | | $ | 94,390 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
Stock repurchases | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,326,300 | ) | | | (63,617 | ) | | | | | | | (63,617 | ) | |
Exercise of stock options (includes income tax benefits of $8,529) | | | | | | | | | | | | | | | (5,572 | ) | | | | | | | | | | | 998,330 | | | | 20,459 | | | | | | | | 14,887 | | |
Issuance and vesting of restricted stock awards (includes income tax benefits of $86) | | | | | | | | | | | | | | | (3,160 | ) | | | | | | | | | | | 161,340 | | | | 3,251 | | | | | | | | 91 | | |
Reversion of restricted stock award | | | | | | | | | | | | | | | 13 | | | | | | | | | | | | (600 | ) | | | (13 | ) | | | | | | | — | | |
Restricted stock award compensation | | | | | | | | | | | | | | | 3,015 | | | | | | | | | | | | | | | | | | | | | | | | 3,015 | | |
Stock option compensation | | | | | | | | | | | | | | | 3,950 | | | | | | | | | | | | | | | | | | | | | | | | 3,950 | | |
Stock issued for acquisition | | | | | | | | | | | | | | | 10,101 | | | | | | | | | | | | 1,300,002 | | | | 26,299 | | | | | | | | 36,400 | | |
Dividends paid — $0.317 per common share | | | | | | | | | | | | | | | | | | | (28,994 | ) | | | | | | | | | | | | | | | | | | | (28,994 | ) | |
| | | | | | | | | | | | | | | | | | | | |
Balances at December 30, 2006 | | | | | | | 67,775,496 | | | $ | 678 | | | $ | 482,157 | | | $ | 250,616 | | | $ | (8,220 | ) | | | (7,324,865 | ) | | $ | (162,368 | ) | | $ | 0 | | | $ | 562,863 | | | | | | | | 67,775,496 | | | $ | 678 | | | $ | 482,157 | | | $ | 250,616 | | | $ | (8,220 | ) | | | (7,324,865 | ) | | $ | (162,368 | ) | | $ | 5,870 | | | $ | 568,733 | |
Cumulative effect of a change in accounting principle — FIN 48 (Note 21) | | | | | | | | | | | | | | | | | | | (382 | ) | | | | | | | | | | | | | | | | | | | (382 | ) | |
Cumulative effect of a change in accounting principle — SFAS 158 (Note 20) | | | | | | | | | | | | | | | | | | | 657 | | | | 5,036 | | | | | | | | | | | | | | | | 5,693 | | |
Cumulative effect of a change in accounting principle for income taxes (Note 21) | | | | | | | | | | | | | | | | | | | | (382 | ) | | | | | | | | | | | | | | | | | | | (382 | ) |
Cumulative effect of a change in accounting principle for postretirement plans (Note 20) | | | | | | | | | | | | | | | | | | | | 657 | | | | 5,036 | | | | | | | | | | | | | | | | 5,693 | |
Net income | | $ | 94,615 | | | | | | | | | | | | | | | | 94,615 | | | | | | | | | | | | | | | | | | | | 94,615 | | | $ | 98,115 | | | | | | | | | | | | | | | | 94,615 | | | | | | | | | | | | | | | | 3,500 | | | | 98,115 | |
Derivative instruments | | | 18,107 | | | | | | | | | | | | | | | | | | | | 18,107 | | | | | | | | | | | | | | | | 18,107 | | | | 18,107 | | | | | | | | | | | | | | | | | | | | 18,107 | | | | | | | | | | | | | | | | 18,107 | |
Amortization of prior service costs | | | | | | | | | | | | | | | | | | | | | | | 204 | | | | | | | | | | | | | | | | 204 | | | | | | | | | | | | | | | | | | | | | | | | 204 | | | | | | | | | | | | | | | | 204 | |
Reduction in minimum pension liability | | | 7,014 | | | | | | | | | | | | | | | | | | | | 7,014 | | | | | | | | | | | | | | | | 7,014 | | | | 7,014 | | | | | | | | | | | | | | | | | | | | 7,014 | | | | | | | | | | | | | | | | 7,014 | |
| | | | | | |
Comprehensive income | | $ | 119,736 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 123,236 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income attributable to noncontrolling interest | | | | (3,500 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
Comprehensive income attributable to Flowers Foods, Inc. | | | $ | 119,736 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Adjustment for3-for-2 stock split (Note 16) | | | | | | | 33,884,428 | | | | 339 | | | | (339 | ) | | | | | | | | | | | (3,425,133 | ) | | | | | | | | | | | — | | | | | | | | 33,884,428 | | | | 339 | | | | (339 | ) | | | | | | | | | | | (3,425,133 | ) | | | | | | | | | | | — | |
Exercise of stock options (includes income tax benefits of $11,211) | | | | | | | | | | | | | | | (4,271 | ) | | | | | | | | | | | 2,344,968 | | | | 37,567 | | | | | | | | 33,296 | | | | | | | | | | | | | | | | (4,271 | ) | | | | | | | | | | | 2,344,968 | | | | 37,567 | | | | | | | | 33,296 | |
Issuance of restricted stock award | | | | | | | | | | | | | | | (3,312 | ) | | | | | | | | | | | 149,400 | | | | 3,312 | | | | | | | | — | | | | | | | | | | | | | | | | (3,312 | ) | | | | | | | | | | | 149,400 | | | | 3,312 | | | | | | | | — | |
Restricted/deferred stock compensation | | | | | | | | | | | | | | | 5,605 | | | | | | | | | | | | | | | | | | | | | | | | 5,605 | | | | | | | | | | | | | | | | 5,605 | | | | | | | | | | | | | | | | | | | | | | | | 5,605 | |
Stock option compensation | | | | | | | | | | | | | | | 4,568 | | | | | | | | | | | | | | | | | | | | | | | | 4,568 | | | | | | | | | | | | | | | | 4,568 | | | | | | | | | | | | | | | | | | | | | | | | 4,568 | |
Restricted stock award reversion | | | | | | | | | | | | | | | 16 | | | | | | | | | | | | (1,050 | ) | | | (16 | ) | | | | | | | — | | | | | | | | | | | | | | | | 16 | | | | | | | | | | | | (1,050 | ) | | | (16 | ) | | | | | | | — | |
Income tax benefit of restricted stock award vesting | | | | | | | | | | | | | | | 48 | | | | | | | | | | | | | | | | | | | | | | | | 48 | | | | | | | | | | | | | | | | 48 | | | | | | | | | | | | | | | | | | | | | | | | 48 | |
Distributions from noncontrolling interest to owners | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,568 | ) | | | (1,568 | ) |
Stock repurchases | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,498,670 | ) | | | (33,296 | ) | | | | | | | (33,296 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,498,670 | ) | | | (33,296 | ) | | | | | | | (33,296 | ) |
Dividends paid — $0.458 per common share | | | | | | | | | | | | | | | | | | | (42,120 | ) | | | | | | | | | | | | | | | | | | | (42,120 | ) | | | | | | | | | | | | | | | | | | | (42,120 | ) | | | | | | | | | | | | | | | | | | | (42,120 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 29, 2007 | | | | | | | 101,659,924 | | | $ | 1,017 | | | $ | 484,472 | | | $ | 303,386 | | | $ | 22,141 | | | | (9,755,350 | ) | | $ | (154,801 | ) | | $ | 0 | | | $ | 656,215 | | | | | | | | 101,659,924 | | | $ | 1,017 | | | $ | 484,472 | | | $ | 303,386 | | | $ | 22,141 | | | | (9,755,350 | ) | | $ | (154,801 | ) | | $ | 7,802 | | | $ | 664,017 | |
Net income | | $ | 119,233 | | | | | | | | | | | | | | | | 119,233 | | | | | | | | | | | | | | | | | | | | 119,233 | | | $ | 122,307 | | | | | | | | | | | | | | | | 119,233 | | | | | | | | | | | | | | | | 3,074 | | | | 122,307 | |
Derivative instruments | | | (60,320 | ) | | | | | | | | | | | | | | | | | | | (60,320 | ) | | | | | | | | | | | | | | | (60,320 | ) | | | (60,320 | ) | | | | | | | | | | | | | | | | | | | (60,320 | ) | | | | | | | | | | | | | | | (60,320 | ) |
Amortization of prior service costs | | | | | | | | | | | | | | | | | | | | | | | 204 | | | | | | | | | | | | | | | | 204 | | | | | | | | | | | | | | | | | | | | | | | | 204 | | | | | | | | | | | | | | | | 204 | |
Increase in minimum pension liability | | | (64,304 | ) | | | | | | | | | | | | | | | | | | | (64,304 | ) | | | | | | | | | | | | | | | (64,304 | ) | | | (64,304 | ) | | | | | | | | | | | | | | | | | | | (64,304 | ) | | | | | | | | | | | | | | | (64,304 | ) |
| | | | | | |
Comprehensive loss | | $ | (5,391 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,720,148 | ) | | | (44,072 | ) | | | | | | | (44,072 | ) |
Exercise of stock options | | | | | | | | | | | | | | | (1,947 | ) | | | | | | | | | | | 289,775 | | | | 4,626 | | | | | | | | 2,679 | | | | | | | | | | | | | | | | (1,947 | ) | | | | | | | | | | | 289,775 | | | | 4,626 | | | | | | | | 2,679 | |
Issuance of restricted stock awards | | | | | | | | | | | | | | | (3,984 | ) | | | | | | | | | | | 249,880 | | | | 3,984 | | | | | | | | — | | | | | | | | | | | | | | | | (3,984 | ) | | | | | | | | | | | 249,880 | | | | 3,984 | | | | | | | | — | |
Issuance of deferred stock awards | | | | | | | | | | | | | | | (386 | ) | | | | | | | | | | | 24,045 | | | | 386 | | | | | | | | — | | | | | | | | | | | | | | | | (386 | ) | | | | | | | | | | | 24,045 | | | | 386 | | | | | | | | — | |
Amortization of deferred and restricted stock awards | | | | | | | | | | | | | | | 6,158 | | | | | | | | | | | | | | | | | | | | | | | | 6,158 | | | | | | | | | | | | | | | | 6,158 | | | | | | | | | | | | | | | | | | | | | | | | 6,158 | |
Stock option compensation | | | | | | | | | | | | | | | 4,408 | | | | | | | | | | | | | | | | | | | | | | | | 4,408 | | | | | | | | | | | | | | | | 4,408 | | | | | | | | | | | | | | | | | | | | | | | | 4,408 | |
Income tax benefits related to share-based payments | | | | | | | | | | | | | | | 2,229 | | | | | | | | | | | | | | | | | | | | | | | | 2,229 | | | | | | | | | | | | | | | | 2,229 | | | | | | | | | | | | | | | | | | | | | | | | 2,229 | |
Conversion of deferred compensation (Note 13) | | | | | | | | | | | | | | | 1,134 | | | | | | | | | | | | | | | | | | | | | | | | 1,134 | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | 32,299 | | | | | | | | | | | | 1,998,656 | | | | 32,078 | | | | | | | | 64,377 | |
Dividends paid — $0.575 per common share | | | | | | | | | | | | | | | | | | | (53,222 | ) | | | | | | | | | | | | | | | | | | | (53,222 | ) | | | | | | | | | | | | | | | | | | | (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 | ) | | $ | 0 | | | $ | 634,719 | | | | | | | | 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 deferred and restricted stock awards | | | | | | | | | | | | | | | | 6,722 | | | | | | | | | | | | | | | | | | | | | | | | 6,722 | |
Stock option compensation | | | | | | | | | | | | | | | | 5,070 | | | | | | | | | | | | | | | | | | | | | | | | 5,070 | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
See Accompanying Notes to Consolidated Financial Statements
F-5
FLOWERS FOODS, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | | | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | For the 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Cash flows provided by (disbursed for) operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 119,233 | | | $ | 94,615 | | | $ | 81,043 | | | $ | 133,712 | | | $ | 122,307 | | | $ | 98,115 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash expenses related to discontinued operations | | | — | | | | — | | | | (5,509 | ) | |
Cumulative effect of a change in accounting principle | | | — | | | | — | | | | 930 | | |
Depreciation and amortization | | | 73,312 | | | | 66,094 | | | | 64,250 | | | | 80,928 | | | | 73,312 | | | | 66,094 | |
Stock based compensation | | | 10,594 | | | | 15,151 | | | | 8,595 | | | | 11,855 | | | | 10,594 | | | | 15,151 | |
Loss reclassified from accumulated other comprehensive income to net income | | | | 63,026 | | | | 49 | | | | 2,148 | |
Gain on sale of assets | | | (2,306 | ) | | | — | | | | — | | | | — | | | | (2,306 | ) | | | — | |
Gain on acquisition | | | | (3,013 | ) | | | — | | | | — | |
Asset impairment | | | 3,108 | | | | — | | | | — | | | | — | | | | 3,108 | | | | — | |
Deferred income taxes | | | 2,814 | | | | (6,075 | ) | | | (11,644 | ) | | | 3,307 | | | | 2,814 | | | | (6,075 | ) |
Provision for inventory obsolescence | | | 1,121 | | | | 553 | | | | 910 | | | | 498 | | | | 1,121 | | | | 553 | |
Allowances for accounts receivable | | | 640 | | | | 812 | | | | 717 | | | | 2,077 | | | | 640 | | | | 812 | |
Reserve for hedging counterparty receivable (See Note 11) | | | — | | | | — | | | | 229 | | |
Minority interest in variable interest entity | | | 3,074 | | | | 3,500 | | | | 3,255 | | |
Pension and postretirement plans expense (benefit) | | | | 5,112 | | | | (5,772 | ) | | | (5,377 | ) |
Other | | | (2,472 | ) | | | (1,327 | ) | | | (731 | ) | | | 39 | | | | (2,472 | ) | | | (1,327 | ) |
Changes in assets and liabilities, net of acquisitions and disposals: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | (22,340 | ) | | | (5,036 | ) | | | (7,314 | ) | | | (476 | ) | | | (22,340 | ) | | | (5,036 | ) |
Inventories, net | | | (4,242 | ) | | | (3,612 | ) | | | (844 | ) | | | (3,525 | ) | | | (4,242 | ) | | | (3,612 | ) |
Other assets | | | (52,058 | ) | | | 28,381 | | | | 20,580 | | | | 24,623 | | | | (52,058 | ) | | | 28,381 | |
Pension obligations | | | — | | | | (1,000 | ) | | | (14,000 | ) | |
Pension contributions | | | | (450 | ) | | | — | | | | (1,000 | ) |
Accounts payable and other accrued liabilities | | | (35,606 | ) | | | 22,542 | | | | 10,809 | | | | (81,704 | ) | | | (29,883 | ) | | | 25,771 | |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 94,872 | | | | 214,598 | | | | 151,276 | | | | 236,009 | | | | 94,872 | | | | 214,598 | |
| | | | | | | | | | | | | | |
Cash flows provided by (disbursed for) investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of property, plant and equipment | | | (86,861 | ) | | | (88,125 | ) | | | (61,792 | ) | | | (72,093 | ) | | | (86,861 | ) | | | (88,125 | ) |
Increase of notes receivable, net | | | (7,279 | ) | | | (15,211 | ) | | | (4,955 | ) | |
Issuance of notes receivable | | | | (12,436 | ) | | | (18,633 | ) | | | (25,334 | ) |
Proceeds from notes receivable | | | | 12,126 | | | | 11,354 | | | | 10,123 | |
Acquisition of businesses, net of cash acquired | | | (170,077 | ) | | | (1,515 | ) | | | (887 | ) | | | (24,565 | ) | | | (170,077 | ) | | | (1,515 | ) |
Proceeds from sale of property, plant and equipment | | | | 6,919 | | | | 4,899 | | | | 1,858 | |
Other | | | 3,420 | | | | 1,983 | | | | (4,082 | ) | | | 440 | | | | 62 | | | | 1,693 | |
| | | | | | | | | | | | | | |
Net cash disbursed for investing activities | | | (260,797 | ) | | | (102,868 | ) | | | (71,716 | ) | | | (89,609 | ) | | | (259,256 | ) | | | (101,300 | ) |
| | | | | | | | | | | | | | |
Cash flows provided by (disbursed for) financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends paid | | | (53,222 | ) | | | (42,120 | ) | | | (28,994 | ) | | | (62,170 | ) | | | (53,222 | ) | | | (42,120 | ) |
Exercise of stock options | | | 2,679 | | | | 22,087 | | | | 6,363 | | | | 2,614 | | | �� | 2,679 | | | | 22,087 | |
Excess windfall tax benefit related to stock awards | | | 1,976 | | | | 9,288 | | | | 8,615 | | | | 1,386 | | | | 1,976 | | | | 9,288 | |
Payment of financing fees | | | (788 | ) | | | (320 | ) | | | (391 | ) | | | — | | | | (788 | ) | | | (320 | ) |
Stock repurchases | | | (44,072 | ) | | | (33,296 | ) | | | (63,617 | ) | | | (40,531 | ) | | | (44,072 | ) | | | (33,296 | ) |
Change in book overdraft. | | | 6,702 | | | | (4,201 | ) | | | (3,212 | ) | | | (7,735 | ) | | | 6,702 | | | | (4,201 | ) |
Proceeds from credit facility borrowings | | | 645,250 | | | | 146,500 | | | | 347,400 | | |
Proceeds from debt borrowings | | | | 848,326 | | | | 645,250 | | | | 146,500 | |
Debt and capital lease obligation payments | | | (392,614 | ) | | | (203,604 | ) | | | (342,811 | ) | | | (888,637 | ) | | | (392,614 | ) | | | (203,604 | ) |
Other | | | | (669 | ) | | | (1,541 | ) | | | (1,568 | ) |
| | | | | | | | | | | | | | |
Net cash provided by (disbursed for) financing activities | | | 165,911 | | | | (105,666 | ) | | | (76,647 | ) | |
Net cash (disbursed for) provided by financing activities | | | | (147,416 | ) | | | 164,370 | | | | (107,234 | ) |
| | | | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (14 | ) | | | 6,064 | | | | 2,913 | | | | (1,016 | ) | | | (14 | ) | | | 6,064 | |
Cash and cash equivalents at beginning of period | | | 19,978 | | | | 13,914 | | | | 11,001 | | | | 19,964 | | | | 19,978 | | | | 13,914 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 19,964 | | | $ | 19,978 | | | $ | 13,914 | | | $ | 18,948 | | | $ | 19,964 | | | $ | 19,978 | |
| | | | | | | | | | | | | | |
Schedule of non cash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for acquisitions | | $ | 64,377 | | | $ | — | | | $ | 36,400 | | | $ | — | | | $ | 64,377 | | | $ | — | |
Conversion of deferred compensation to common stock equivalent units | | $ | 1,134 | | | $ | — | | | $ | — | | | $ | 95 | | | $ | 1,134 | | | $ | — | |
Capital lease obligations | | $ | 1,804 | | | $ | 2,378 | | | $ | 6,349 | | | $ | 4,362 | | | $ | 1,804 | | | $ | 2,378 | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 6,029 | | | $ | 2,792 | | | $ | 4,559 | | |
Income taxes paid, net of refunds of $252, $189 and $10,533, respectively | | $ | 65,255 | | | $ | 46,972 | | | $ | 31,385 | | |
Interest, net of capitalized interest | | | $ | 11,275 | | | $ | 6,029 | | | $ | 2,792 | |
Income taxes paid, net of refunds of $1,167, $252 and $189, respectively | | | $ | 75,310 | | | $ | 65,255 | | | $ | 46,972 | |
See Accompanying Notes to Consolidated Financial Statements
F-6
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”), formerly referred to as Flowers Foods Bakeries Group, and warehouse delivery, formerly referred to as Flowers Foods Specialty Group.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 and bunsbakery products for sale to retail and foodservice customers nationwide primarily through warehouse distribution.
Sale of Mrs. Smith’s Bakeries Frozen Dessert Business. On April 24, 2003, the company completed the sale of substantially all the assets of its Mrs. Smith’s Bakeries, LLC (“Mrs. Smith’s Bakeries”) frozen dessert business to The Schwan Food Company (“Schwan”). The company retained the frozen bread and roll portion of the Mrs. Smith’s Bakeries business. The frozen dessert business of Mrs. Smith’s Bakeries is reported as a discontinued operation. For further information, see Note 6 below.
Stock Split. On June 1, 2007, the Board of Directors declared a3-for-2 stock split of the company’s common stock in the form of a 50% stock dividend. The record date for the split was June 15, 2007, and new shares were issued on June 29, 2007.
| |
Note 2. | Summary of Significant Accounting Policies |
Principles of Consolidation. The Consolidated Financial Statements include the accounts of Flowers Foodsthe company and its wholly-owned subsidiaries. The company maintains a transportation agreement with a thinly capitalized entity. The company is the primary beneficiary of this entity and, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46”),Consolidation of Variable Interest Entities,as a result, the company consolidates this entity in its Consolidated Financial Statements. For further information, see Note 14 below. Intercompany transactions and balances are eliminated in consolidation.
Fiscal Year End. The company operates on a52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2009 consisted of 52 weeks. Fiscal 2008 consisted of 53 weeks. Fiscal 2007 and fiscal 2006 consisted of 52 weeks. Fiscal 20092010 will consist of 52 weeks.
Revenue Recognition. Pursuant to Staff Accounting Bulletin No. 104,Revenue Recognition(“SAB 104”), theThe 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, marketing 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 aspay-by-scan (“PBS”). In fiscal years 2009, 2008 fiscaland 2007 and fiscal 2006 the company recorded $674.9 million, $651.5 million $539.1 million and $477.3$539.1 million, respectively, in sales through PBS.
The company’s production facilities deliver the products to independent distributors, who deliver the product to outlets of national retail accounts that are within the distributors’ geographic territory as described in the Distributor Agreement.territory. PBS is utilized only in outlets of national retail accounts with whom the company has
F-7
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
executed a PBS Protocol Agreement (“PBS Outlet”). In accordance with SAB 104, noNo revenue is recognized by the company upon delivery of the product by the company to the distributor or upon delivery of the product by the distributor to a PBS Outlet. The product inventory in the PBS Outlet is reflected as inventory on the company’s balance sheet. The balance of PBS inventory at January 2, 2010 and January 3, 2009 and December 29, 2007 was $3.2$3.8 million and $3.4$3.2 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.
F-7
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2009, 2008 fiscal 2007 and fiscal 2006.2007.
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, as 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, marketing 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. In the event the sales price of the territory exceeds the carrying amount of the territory, the gain is deferred and recorded over the10-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 $3.9 million during fiscal 2009, $2.1 million during fiscal 2008 and $0.9 million during fiscal 2007 and $0.8 million during fiscal 2006 related to the sale of territories as a component of selling, marketing 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. Allowances of $0.6$2.1 million and $0.1$0.6 million were recorded at January 2, 2010 and January 3, 2009, and December 29, 2007, respectively. 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 management and generally any accounts older than seven weeks are considered delinquent.
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 2009, 2008 fiscaland 2007 and fiscal 2006 accounted for 45.6%46.0%, 43.0%45.6% and 42.0%43.0% of sales, respectively. Following is the effect our largest customer, Wal-Mart/Sam’s Club, had on the company’s sales for fiscal years 2009, 2008 and 2007.
| | | | | | | | | | | | |
| | Percent of Sales |
| | | | Warehouse
| | |
| | DSD | | Delivery | | Total |
|
Fiscal 2009 | | | 18.1 | % | | | 2.9 | % | | | 21.0 | % |
Fiscal 2008 | | | 18.0 | % | | | 2.5 | % | | | 20.5 | % |
Fiscal 2007 | | | 17.4 | % | | | 2.5 | % | | | 19.9 | % |
F-8
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respectively. Following is the effect our largest customer, Wal-Mart/Sam’s Club, had on the company’s sales for fiscal 2008, fiscal 2007, and fiscal 2006.
| | | | | | | | | | | | |
| | Percent of Sales | |
| | | | | Warehouse
| | | | |
| | DSD | | | Delivery | | | Total | |
|
Fiscal 2008 | | | 18.0 | % | | | 2.5 | % | | | 20.5 | % |
Fiscal 2007 | | | 17.4 | % | | | 2.5 | % | | | 19.9 | % |
Fiscal 2006 | | | 16.3 | % | | | 2.6 | % | | | 18.9 | % |
Inventories. Inventories at January 2, 2010 and January 3, 2009 and December 29, 2007 are valued at the lower of cost or market using thefirst-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, marketing and administrative line item of the consolidated statements of income. For fiscal years 2009, 2008, and 2007, shipping costs were $578.0 million, $548.4 million, and $453.9 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 thefirst-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 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 $14.5$15.3 million and $12.2$14.5 million at January 2, 2010 and January 3, 2009, and December 29, 2007, respectively.
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 2009, 2008 fiscaland 2007 and fiscal 2006 was $75.1 million, $70.3 million and $64.6 million, respectively. The company recorded capitalized interest of $0.2 million during fiscal 2009 and $62.7$0.2 million respectively.during fiscal 2008. The company did not have any capitalized interest during fiscal 2007 or fiscal 2006 but had $0.2 million of capitalized interest during fiscal 2008.2007.
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. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets(“SFAS 142”), theThe 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. SFAS 142 requires companies to testThe 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 2009, 2008 fiscal 2007 or fiscal 2006. SFAS 142 also requires2007. Identifiable intangible assets that an identifiable intangible asset that isare determined to have an indefinite useful economic life are not be 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. In accordance with SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets(“SFAS 144”), theThe company determines whether there has been an impairment
F-9
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
F-9
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
an impairment charge of $3.1 million as discussed in Note 5. There were no impairment charges during fiscal 20072009 and fiscal 2006.
Fair Value of Financial Instruments. Effective December 30, 2007, we adopted SFAS No. 157,Fair Value Measurements(“SFAS 157”), except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSPNo. 157-2. SFAS No. 157 clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value, and expands disclosures about fair value measurements. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:
Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.2007.
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 1110,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 generally expensed as incurred or no later than when the advertisement appears orfirst time the event is run.advertising takes place. Advertising and marketing costs were $11.3 million, $12.6 million $18.1 million and $17.9$18.1 million for fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, 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 accountsrecognizes these compensation costs net of an estimated forfeiture rate, and recognizes compensation cost only for its stock-based compensation in accordance with SFAS 123R,Share-Based Payment(“SFAS 123R”). SFAS 123R requires thatthose shares expected to vest on a straight-line basis over the fair valuerequisite service period of stock options and similar awards be expensed.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 $3.1$2.5 million and $4.7$3.1 million at January 2, 2010 and January 3, 2009, and December 29, 2007, respectively. Amortization expense of capitalized software development costs, which is included in depreciation expense in the consolidated statements of income, was $2.8$1.1 million, $4.2$2.8 million and $4.2 million in fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, respectively.
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Taxes. The company accounts for income taxes using anthe asset and liability approachmethod 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 carrying amountsfinancial statement and the tax basesbasis of assets and liabilities. 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.
In June 2006, the FASBnew guidance was issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifiesthat clarified the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement ofstatements. The guidance provides that a tax benefit from an uncertain tax position taken or expected tomay be taken in a tax return. FIN 48recognized when its more likely than not that the position will be sustained upon examination. It also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48The standard was adopted by the company as of December 31, 2006. As a result of the
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
adoption, of FIN 48, the company recorded a cumulative effect adjustment which reduced retained earnings $0.4 million as of December 31, 2006.
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 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.
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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Note 3. | New Accounting Pronouncements |
In September 2006, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on fair value measurements. This guidance establishes a common definition for fair value to be applied to GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. It was effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. Issued in February 2008, a FASB staff position removed leasing transactions from the scope of the new fair value guidance. Also in February 2008, the FASB issued authoritative guidance deferring the effective date of the fair value guidance for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The implementation of these standards did not have a material impact on our consolidated balance sheet or statements of income. See Note 15,Fair Value of Financial Instruments, for additional disclosures.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations (“SFAS 141R”). SFAS 141Rnew guidance on business combinations. The new standard provides revised guidance on how acquirersacquirors recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS 141RThe new standard also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS 141R isThe standard was effective, on a prospective basis, for fiscal years beginning after December 15, 2008. Upon adoption on January 4, 2009, this standard did not have a material impact on our consolidated financial position and results of operations. We recorded the acquisition of a bakery mix operation in Cedar Rapids, Iowa on May 15, 2009 and the Leo’s Foods acquisition on October 17, 2009 in accordance with this guidance as described in Note 9,Acquisitions.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160new guidance on noncontrolling interests which establishes requirements for ownership interests in subsidiaries held by parties other than the company (sometimes(formerly called “minority interests”) to 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
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. SFAS 160 isThe new guidance was effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. In fiscal 2009, the company’s minorityThe noncontrolling interest portion of our VIE, as further discussed in Note 14, is now recorded as a Variable Interest Entity will be included in thecomponent of total stockholders’ equity for each reporting period presented. The implementation of this standard did not have a material impact on our consolidated statementresults of financial position within equity.operations or cash flows.
In FebruaryMarch 2008, the FASB issued Staff PositionNo. FAS 157-2,Effective Date of FASB Statement No. 157(“FSP 157-2”) which delayed thenew guidance on disclosures about derivative instruments and hedging activities. The new guidance expands existing quarterly disclosure requirements about an entity’s derivative instruments and hedging activities. The new guidance was effective date of SFAS 157 tofor fiscal years beginning after November 15, 2008 for all nonfinancial2008. All derivatives are recorded on the balance sheet as assets andor liabilities that are recognized or disclosed in the financial statements at fair value on a nonrecurring basis only. These include nonfinancial assets and liabilities not measured at fair value on an ongoing basis but subject tovalue. For derivatives designated as hedges of the fair value adjustmentsof assets or liabilities, the changes in certain circumstances,fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated Other Comprehensive Income (Loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged item. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations. See Note 10,Derivative Financial Instruments, for example,additional derivative and hedging information and disclosures.
In fiscal 2009 new accounting guidance on earnings per share became effective which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our nonvested performance contingent restricted stock awards are considered participating securities since the share-based awards contain a non-forfeitable right to dividend equivalents irrespective of whether the awards ultimately vest. We adopted the provisions of this accounting guidance effective January 4, 2009 and computed basic earnings per common share using the two-class method for all periods presented. See Note 19,Earnings Per Share, for additional disclosure.
In December 2008, the FASB issued a staff position providing guidance on employer’s disclosures about plan assets thatof a defined benefit pension or other postretirement plan. The guidance was effective for fiscal years ending after December 15, 2009. See Note 20,Postretirement Plans, for these disclosures. The implementation of this standard did not have been deemed to be impaired. The company is currently assessing thea material impact ofFSP 157-2on itsour consolidated financial position and results of operations.
In March 2008,April 2009, the FASB issued SFAS No. 161,Disclosures About Derivative Instrumentsa staff position requiring fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The guidance was effective for interim and Hedging Activitiesannual periods ending after June 15, 2009. Upon adoption during the second quarter of fiscal 2009, the implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
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 a material impact on our consolidated financial position and results of operations.
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2009, the FASB issued an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands quarterlyto the accounting and disclosure requirements in SFAS No. 133 about an entity’s derivative instrumentsfor the consolidation of variable interest entities. The guidance affects the overall consolidation analysis and hedging activities. SFAS No. 161requires enhanced disclosures on involvement with variable interest entities. The guidance is effective for fiscal years beginning after November 15, 2008.2009. Presently, we consolidate a VIE, as disclosed in Note 14,Variable Interest Entity, to the Consolidated Financial Statements of thisForm 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 will prospectively cease consolidating the VIE beginning in the first quarter of fiscal 2010. The company is currently evaluating the requirements of SFAS 161. The adoption of SFAS 161 is not expectedwill continue to have an impact on the company’s financial position, results of operations or cash flows as the pronouncement addresses disclosure requirements only.
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approvalrecord certain of the Public Company Accounting Oversight Board amendmentstrucks and trailers the VIE uses for distributing our products as right to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not anticipate that the adoption of SFAS 162 will materially impact the company.use leases.
In June 2008,2009, the FASB issued FSP EITFNo. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating SecuritiesAccounting Standards Codification (“FSP 03-6-1”Codification”). FSP 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need was issued. The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.”applied by nongovernmental entities. The FSP 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP 03-6-1 isCodification was effective for fiscal years beginningfinancials statements issued for interim and annual periods ending after DecemberSeptember 15, 2008; earlier application is not permitted. The company has assessed the impact of the adoption of FSP 03-6-1 and believes it will not have a material effect on its results of operations or earnings per share.
In October 2008, the FASB issuedFSP 157-3,Determining Fair Value of a Financial Asset in a Market That Is Not Active(“FSP 157-3”).FSP 157-3 clarified the application of SFAS 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive.FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.2009. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
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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
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, marketing and administrative expenses.
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 recent acquisitions of Holsum and ButterKrust. These facilities will not be utilized in the future.
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Note 6. | Discontinued Operations |
Certain transactions related to the company’s previously owned Mrs. Smith’s Bakeries and Keebler businesses are included inIncome from discontinued operations, net of income taxin the consolidated statements of income. An analysis of this line item is as follows:
| | | | |
| | For the 52 Weeks Ended | |
| | December 30, 2006 | |
| | (Amounts in thousands) | |
|
Insurance recovery | | $ | 2,000 | |
| | | | |
Pre-tax discontinued operations | | | 2,000 | |
Income tax benefit | | | 4,731 | |
| | | | |
Income from discontinued operations, net of income tax | | $ | 6,731 | |
| | | | |
During the first quarter of fiscal 2006, the company received an insurance recovery of $2.0 million ($1.2 million, net of income tax) relating to the settlement of a class action lawsuit related to pie shells produced by Mrs. Smith’s and such recovery is recorded in discontinued operations for the 52 weeks ended December 30, 2006.
During fiscal 2006, the Internal Revenue Service (“IRS”) finalized its audit of the company’s tax years 2000 and 2001. Based upon the results of this audit, the company reversed previously established tax reserves in the amount of $6.0 million related to the deductibility of certain transaction costs incurred in connection with the divestiture of the company’s Keebler investment in 2001. A deduction was allowed for the majority of these costs; therefore, the reserve was reversed through discontinued operations in the 52 weeks ended December 30, 2006.
The IRS also finalized the results of its audit of the company’s fiscal 2003 income tax return during fiscal 2006. Based on the results of this audit, the company accrued $0.5 million of income tax expense related to Mrs. Smith’s. This adjustment is also recorded in discontinued operations in the consolidated statement of income for the 52 weeks ended December 30, 2006.
Between September 1996 and March 2001, the independent distributor notes, entered into in connection with the purchase of the distributors’ territories (“distributor notes”), were made directly between the distributor and a third party financial institution. In March 2001, theThe company purchased the aggregate outstanding distributor note balance of $77.6 million from the third party financial institution. The purchase price of the distributor note balance represented the notional and fair value of the notes at the purchase date. Since that time, the company has providedprovides 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 years bearing an interest rate of 12%. During fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006,$12.9 million, $13.0 million $11.2 million and $9.7$11.2 million, respectively, were recorded as interest income relating to the distributor notes. The distributor notes are collateralized by the independent distributors’ territories. At January 2, 2010 and January 3, 2009, and December 29, 2007, the outstanding balance of the
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
distributor notes was $106.8$107.1 million and $99.5$106.8 million, respectively, of which the current portion of $12.1$12.6 million and $11.0$12.1 million, respectively, is recorded in accounts and notes receivable, net. At January 2, 2010 and January 3, 2009, and December 29, 2007, the company has evaluated the collectibility of the distributor notes and determined that a reserve is not necessary. Payments on these distributor notes are collected by the company weekly in the distributor settlement process.
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Note 8.7. | 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
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2, 2010 and January 3, 2009, and December 29, 2007, territories recorded as assets held for sale were $8.0$6.5 million and $12.4$8.0 million, respectively. The company held and operated 202155 and 332202 such independent distributor territories held for sale at January 2, 2010 and January 3, 2009, and December 29, 2007, respectively. The carrying value of each territory is recorded as an asset held for sale, is not amortized and is evaluated for impairment in accordance with the provisions of SFAS 142.as required.
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. Prior to July of 2006, the company was required to repurchase the territory at the original purchase price plus interest paid by the distributor in the six-month period following the sale of a territory to the independent distributor; beginning July 2006, theThe 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 $0.7$0.6 million and $0.9$0.7 million as of January 2, 2010 and January 3, 2009, and December 29, 2007, respectively. Should the independent distributor wish to sell the territory after the six-month period has expired, the company has the right of first refusal.
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Note 9.8. | Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill during fiscal 2008,2009, are as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | DSD | | Warehouse delivery | | Total | | | DSD | | Warehouse delivery | | Total | |
|
Balance as of December 29, 2007 | | $ | 71,861 | | | $ | 4,477 | | | $ | 76,338 | | |
Balance as of January 3, 2009 | | | $ | 195,558 | | | $ | 4,477 | | | $ | 200,035 | |
Goodwill adjustments during the year | | | | (977 | ) | | | — | | | | (977 | ) |
Goodwill acquired during the year | | | 123,697 | | | | — | | | | 123,697 | | | | — | | | | 2,624 | | | | 2,624 | |
| | | | | | | | | | | | | | |
Balance as of January 3, 2009 | | $ | 195,558 | | | $ | 4,477 | | | $ | 200,035 | | |
Balance as of January 2, 2010 | | | $ | 194,581 | | | $ | 7,101 | | | $ | 201,682 | |
| | | | | | | | | | | | | | |
During the fifty-three52 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 that are included in the DSD operating segment. See Note 109,Acquisitions, for goodwill and amortizable intangible asset increases related to thesethe Holsum and ButterKrust acquisitions.
As of January 2, 2010 and January 3, 2009, the company had the following amounts related to amortizable intangible assets (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 2, 2010 | | | January 3, 2009 | |
| | | | | Accumulated
| | | | | | | | | Accumulated
| | | | |
Asset | | Cost | | | Amortization | | | Net Value | | | Cost | | | Amortization | | | Net Value | |
|
Trademarks | | $ | 35,268 | | | $ | 3,144 | | | $ | 32,124 | | | $ | 33,608 | | | $ | 1,633 | | | $ | 31,975 | |
Customer relationships | | | 75,434 | | | | 9,738 | | | | 65,696 | | | | 75,434 | | | | 5,784 | | | | 69,650 | |
Non-compete agreements | | | 1,874 | | | | 1,309 | | | | 565 | | | | 1,874 | | | | 1,239 | | | | 635 | |
Distributor relationships | | | 2,600 | | | | 240 | | | | 2,360 | | | | 2,600 | | | | 67 | | | | 2,533 | |
Supplier agreements | | | 1,050 | | | | 215 | | | | 835 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 116,226 | | | $ | 14,646 | | | $ | 101,580 | | | $ | 113,516 | | | $ | 8,723 | | | $ | 104,793 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 3, 2009 and December 29, 2007, the company had the following amounts related to amortizable intangible assets (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 3, 2009 | | | December 29, 2007 | |
| | | | | Accumulated
| | | | | | | | | Accumulated
| | | | |
Asset | | Cost | | | Amortization | | | Net Value | | | Cost | | | Amortization | | | Net Value | |
|
Trademarks | | $ | 33,608 | | | $ | 1,633 | | | $ | 31,975 | | | $ | 12,208 | | | $ | 826 | | | $ | 11,382 | |
Customer relationships | | | 75,434 | | | | 5,784 | | | | 69,650 | | | | 13,434 | | | | 3,426 | | | | 10,008 | |
Non-compete agreements | | | 1,874 | | | | 1,239 | | | | 635 | | | | 1,874 | | | | 1,213 | | | | 661 | |
Distributor relationships | | | 2,600 | | | | 67 | | | | 2,533 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 113,516 | | | $ | 8,723 | | | $ | 104,793 | | | $ | 27,516 | | | $ | 5,465 | | | $ | 22,051 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 10.9,Acquisitions. In connection with the sale of Mrs. Smith’s Bakeries frozen dessert business in April 2003, the company entered into a5-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 fifty-three53 weeks ended January 3, 2009.
Aggregate amortization expense for the fifty-three52 weeks ended January 2, 2010, the 53 weeks ended January 3, 2009 and the fifty-two52 weeks ended December 29, 2007 and December 30, 2006 were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2008 | | Fiscal 2007 | | Fiscal 2006 | | | Fiscal 2009 | | Fiscal 2008 | | Fiscal 2007 | |
|
Amortizable intangible assets expense | | $ | 3,258 | | | $ | 2,216 | | | $ | 2,324 | | | $ | 5,923 | | | $ | 3,258 | | | $ | 2,216 | |
Amortizable intangible liabilities (income) | | | (196 | ) | | | (600 | ) | | | (600 | ) | | | (44 | ) | | | (240 | ) | | | (743 | ) |
Other | | | (44 | ) | | | (143 | ) | | | (186 | ) | |
| | | | | | | | | | | | | | |
Total | | $ | 3,018 | | | $ | 1,473 | | | $ | 1,538 | | | $ | 5,879 | | | $ | 3,018 | | | $ | 1,473 | |
| | | | | | | | | | | | | | |
Estimated amortization of intangibles for 20092010 and the next four years is as follows (amounts in thousands):
| | | | | | | | |
| | Amortization of
| | | Amortization of
|
| | Intangibles | | | Intangibles |
|
2009 | | $ | 5,612 | | |
2010 | | $ | 5,570 | | | $ | 6,003 | |
2011 | | $ | 5,515 | | | $ | 5,948 | |
2012 | | $ | 5,460 | | | $ | 5,677 | |
2013 | | $ | 5,405 | | | $ | 5,488 | |
2014 | | | $ | 5,389 | |
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 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.ButterKrust Bakery (“ButterKrust”). ButterKrust manufactures fresh breads and rolls in Lakeland, Florida and its products are available throughout Florida under theCountry Hearth,Rich Harvest, andSunbeambrands, 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
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FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 company’s third quarter fiscal 2008Form 10-Q included an allocation of the purchase price based on preliminary data. Subsequent to filing the company’s third quarterForm 10-Q an adjustment was made to goodwill of $0.8 million primarily due to deferred taxes and a postretirement liability adjustment after finalizing actuarial valuations. 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 | |
| | | | | | | | |
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 theHolsum,Aunt Hattie’s, andRoman Mealbrands. 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.
F-16
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 value of the shares issued was determined based on application of Emerging Issues Task Force Issue97-15,Accounting for Contingency Arrangements Based on Security Prices in a Purchase Business Combination (“Issue”). The contingent consideration payment of up to $5.0 million is payable to the sellers in cash should the company’s common stock not trade over a target price for ten consecutive trading days
F-16
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Any future contingent payment made will affect the company’s equity and not goodwill.
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 | | | | | | | $ | 80,026 | | | | | |
Common stock | | | 64,377 | | | | | | | | 64,377 | | | | | |
Working capital adjustment | | | (476 | ) | | | | | | | (476 | ) | | | | |
| | | | | | |
Total consideration | | | | | | $ | 143,927 | | | | | | | $ | 143,927 | |
| | | | | | |
Allocation of purchase price: | | | | | | | | | | | | | | | | |
Current assets, including a current deferred tax asset of $0.3 million | | $ | 18,626 | | | | | | | $ | 18,626 | | | | | |
Property, plant, and equipment | | | 54,019 | | | | | | | | 54,019 | | | | | |
Other assets | | | 330 | | | | | | | | 1,202 | | | | | |
Intangible assets | | | 64,900 | | | | | | | | 64,900 | | | | | |
Goodwill | | | 66,131 | | | | | | | | 65,154 | | | | | |
| | | | | | |
Total assets acquired | | | | | | $ | 204,006 | | | | | | | $ | 203,901 | |
Current liabilities | | $ | 17,972 | | | | | | | $ | 17,972 | | | | | |
Deferred taxes | | | 33,623 | | | | | | | | 33,518 | | | | | |
Long-term liabilities | | | 8,484 | | | | | | | | 8,484 | | | | | |
| | | | | | |
Total liabilities assumed | | | | | | $ | 60,079 | | | | | | | $ | 59,974 | |
| | | | | | |
Net assets acquired | | | | | | $ | 143,927 | | | | | | | $ | 143,927 | |
| | | | | | |
The company’s third quarter fiscal 2008Form 10-Q included an allocation of the purchase price based on preliminary data. Subsequent to filing the company’s third quarterForm 10-Q an adjustment to goodwill of $1.3 million was recorded primarily related to property, plant and equipment final valuations and deferred taxes. 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.
F-17
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill of $66.1 million is allocated to the DSD operating segment. None of the intangible assets, including goodwill, are deductible for tax purposes.
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions of ButterKrust and Holsum occurred at the beginning of each period presented (amounts in thousands, except per share data):
| | | | | | | | | | | | |
| | 2008 | | 2007 | | | 2008 |
|
Sales | | $ | 2,565,768 | | | $ | 2,227,883 | | | $ | 2,565,768 | |
Net income | | $ | 116,574 | | | $ | 92,203 | | | $ | 116,574 | |
Net income per share — Basic | | $ | 1.25 | | | $ | 0.99 | | | $ | 1.25 | |
Net income per share — Diluted | | $ | 1.24 | | | $ | 0.98 | | | $ | 1.24 | |
These amounts have been calculated after adjusting the results of ButterKrust and Holsum to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and amortizable intangible assets had been applied from the beginning of each period presented. In addition, pro forma adjustments have been made for the common shares issued for Holsum and the interest incurred for financing the acquisitions. Taxes have also been adjusted for the effect of the items discussed.
On December 28, 2007, the company acquired certain assets of Key Mix Corporation (“Key Mix”) in Sykesville, Maryland. Key Mix produces a variety of mixes used in the baking industry.
On February 18, 2006, the company acquired Derst Baking Company (“Derst”), a Savannah, Georgia-based bakery. Derst produces breads and rolls distributed to customers and consumers in South Carolina, eastern Georgia and north Florida.
| |
Note 11.10. | Derivative Financial Instruments |
In the first fiscal quarter of fiscal 2008, the company began measuring the fair value of its derivative portfolio using common definitions under SFAS 157, which definesthe 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. Under SFAS 157,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.
F-18
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 3, 2009,2, 2010, the company’s commodity hedge portfolio contained derivatives with a fair value of $(21.0)$(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 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other long-term | | | 0.2 | | | | — | | | | — | | | | 0.2 | |
| | | | | | | | | | | | | | | | |
Total | | | 0.2 | | | | — | | | | — | | | | 0.2 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Other current | | | (8.9 | ) | | | (11.7 | ) | | | — | | | | (20.6 | ) |
Other long-term | | | — | | | | (0.6 | ) | | | — | | | | (0.6 | ) |
| | | | | | | | | | | | | | | | |
Total | | | (8.9 | ) | | | (12.3 | ) | | | — | | | | (21.2 | ) |
| | | | | | | | | | | | | | | | |
Net Fair Value | | $ | (8.7 | ) | | $ | (12.3 | ) | | $ | — | | | $ | (21.0 | ) |
| | | | | | | | | | | | | | | | |
As of December 29, 2007, the company’s commodity hedge portfolio contained derivatives with a fair value of $21.9 million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total | |
|
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other current | | $ | 22.9 | | | $ | — | | | $ | — | | | $ | 22.9 | | | $ | 2.5 | | | $ | — | | | $ | — | | | $ | 2.5 | |
Other long-term | | | — | | | | 0.1 | | | | — | | | | 0.1 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | | 22.9 | | | | 0.1 | | | | — | | | | 23.0 | | | | 2.5 | | | | — | | | | — | | | | 2.5 | |
| | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other current | | | — | | | | (1.1 | ) | | | — | | | | (1.1 | ) | | | (4.2 | ) | | | (1.9 | ) | | | — | | | | (6.1 | ) |
Other long-term | | | — | | | | — | | | | — | | | | — | | | | — | | | | (0.1 | ) | | | — | | | | (0.1 | ) |
| | | | | | | | | | | | | | | | | | |
Total | | | — | | | | (1.1 | ) | | | — | | | | (1.1 | ) | | | (4.2 | ) | | | (2.0 | ) | | | — | | | | (6.2 | ) |
| | | | | | | | | | | | | | | | | | |
Net Fair Value | | $ | 22.9 | | | $ | (1.0 | ) | | $ | — | | | $ | 21.9 | | | $ | (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 2010. Under SFAS 133, these2011. These instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives (as defined in SFAS 133) is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. The company held no commodity derivatives at January 3, 20092, 2010 that did not qualify for hedge accounting under SFAS 133.accounting. During fiscal 2007years 2009, 2008 and fiscal 2006,2007 there was no income or expense recorded due to ineffectiveness in current earnings due to changes in fair value of these instruments. During the fifty-three weeks ended January 3, 2009, $0.5 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.
As of January 3, 2009,2, 2010, the balance in accumulated other comprehensive income related to commodity derivative transactions was $35.0$7.7 million. Of this total, approximately $12.7$2.2 million and $0.2$0.1 million were related to instruments expiring in 20092010 and 2010,2011, respectively, and $22.1$5.4 million was related to deferred gains on cash flow hedge positions.
F-19
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
As of During the 53 weeks ended January 3, 2009, the company’s various commodity and ingredient purchasing agreements, which meet the normal purchases exception under SFAS 133, effectively commit the company to purchase approximately $118.5 million of raw materials. These commitments are expected to be used in production during fiscal 2009.
As of January 3, 2009, the company had $17.5 million recorded in other current assets representing collateral for hedged positions. As of December 29, 2007 there was $19.4 million recorded in other accrued liabilities for collateral of hedged positions.
On October 10, 2005, Refco, Inc., the parent company of Refco Capital Markets, Ltd., at that time a hedging counterparty (collectively “Refco”) filed for bankruptcy protection under chapter 11 of the United States Bankruptcy Code. The exposure to the company as a result of the bankruptcy is approximately $1.8 million, representing the amount due from Refco to the company. The company has no open positions with Refco. Based on preliminary information released by the bankruptcy court and management’s best estimate, approximately $0.9 million of the balance due from Refco was charged to earnings during the fourth quarter of fiscal 2005. An additional $0.2$0.6 million was chargedrecorded to earningsincome 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 fourth quarter of fiscal 2006 as a result of more detailed information that became available at that time. This charge reduced the company’s receivable to $0.7 million. The company has received payments totaling $0.8 million through fiscal 2008. The company intends to take measures to collect the maximum available through the bankruptcy court, and we do not believe the ultimate resolution of this matter will have a material adverse effect on the results of operations or financial condition of the company.commodity hedge portfolio.
Interest Rate Risk
On July 9, 2008 and August 13, 2008, theThe 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 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 facilityfacility.
F-19
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. Under SFAS 133, theseThese 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, marketing and administrative expenses.
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 2009 and fiscal 2008, interest expense of $5.2 million and $0.1 million, respectively, was recognized due to periodic settlements of the swaps.
As of January 2, 2010, the balance in accumulated other comprehensive income related to interest rate derivative transactions was $4.1 million. Of this total, approximately $2.6 million, $1.2 million, $0.3 million, and an immaterial amount, were related to instruments expiring in 2010 through 2013, respectively.
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 2, 2010 | | | January 3, 2009 | | | January 2, 2010 | | | January 3, 2009 | |
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 | | | $ | 4,271 | | | | liabilities | | | $ | 4,311 | |
| | | | | | | | | | | | | | | | | | | Other long term | | | | | | | | Other long term | | | | | |
Interest rate contracts | | | — | | | | — | | | | — | | | | — | | | | liabilities | | | | 2,459 | | | | liabilities | | | | 5,137 | |
| | | | | | | | | | | | | | | | | | | Other current | | | | | | | | Other current | | | | | |
Commodity contracts | | | Other current assets | | | | 2,501 | | | | Other current assets | | | | — | | | | liabilities | | | | 6,143 | | | | liabilities | | | | 20,668 | |
| | | | | | | | | | | | | | | | | | | Other long term | | | | | | | | Other long term | | | | | |
Commodity contracts | | | Other long term assets | | | | — | | | | Other long term assets | | | | 249 | | | | liabilities | | | | 78 | | | | liabilities | | | | 618 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | $ | 2,501 | | | | | | | $ | 249 | | | | | | | $ | 12,951 | | | | | | | $ | 30,734 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-20
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The company had the following derivative instruments recorded on the consolidated statements of income, all of which are utilized for the risk management purposes detailed above (amounts in thousands):
| | | | | | | | | | | | |
| | Amount of Gain or (Loss)
| |
| | Recognized in OCI on
| |
| | Derivative (Effective Portion) | |
| | For the 52
| | | For the 53
| | | For the 52
| |
Derivatives in
| | Weeks Ended
| | | Weeks Ended
| | | Weeks Ended
| |
Cash Flow Hedging
| | January 2,
| | | January 3,
| | | December 29,
| |
Relationships | | 2010 | | | 2009 | | | 2007 | |
|
Interest rate contracts | | $ | 1,671 | | | $ | (5,810 | ) | | $ | — | |
Commodity contracts | | | — | | | | — | | | | — | |
Commodity contracts | | | 10,640 | | | | (26,369 | ) | | | 11,903 | |
| | | | | | | | | | | | |
Total | | $ | 12,311 | | | $ | (32,179 | ) | | $ | 11,903 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Amount of Gain or (Loss) Reclassified
| | | |
| | from Accumulated OCI into Income
| | | |
| | (Effective Portion) | | | |
| | For the 52
| | | For the 53
| | | For the 52
| | | Location of Gain or (Loss)
|
Derivatives in
| | Weeks Ended
| | | Weeks Ended
| | | Weeks Ended
| | | Reclassified from AOCI
|
Cash Flow Hedging
| | January 2,
| | | January 3,
| | | December 29,
| | | into Income
|
Relationships | | 2010 | | | 2009 | | | 2007 | | | (Effective Portion) |
|
Interest rate contracts | | $ | — | | | $ | — | | | $ | — | | | Interest expense (income) |
Commodity contracts | | | (1,475 | ) | | | — | | | | — | | | Selling, marketing and administrative |
Commodity contracts | | | (37,285 | ) | | | (30 | ) | | | (1,321 | ) | | Production costs(1) |
| | | | | | | | | | | | | | |
Total | | $ | (38,760 | ) | | $ | (30 | ) | | $ | (1,321 | ) | | |
| | | | | | | | | | | | | | |
| | |
1. | | Included in Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately). |
| | | | | | | | | | | | | | |
| | Amount of Gain or (Loss) Recognized in Income on
| | | |
| | Derivative (Ineffective Portion and Amount Excluded from
| | | |
| | Effectiveness Testing) | | | |
| | For the
| | | | | | | | | Location of Gain or (Loss)
|
| | 52 Weeks
| | | For the 53
| | | For the 52
| | | Recognized in Income on
|
| | Ended
| | | Weeks Ended
| | | Weeks Ended
| | | Derivative (Ineffective
|
Derivatives in Cash
| | January 2,
| | | January 3,
| | | December 29,
| | | Portion and Amount
|
Flow Hedging Relationships | | 2010 | | | 2009 | | | 2007 | | | Excluded from) |
|
Interest rate contracts | | $ | — | | | $ | — | | | $ | — | | | Selling, marketing and administrative expenses |
Commodity contracts | | | (698 | ) | | | 582 | | | | (5 | ) | | Selling, marketing and administrative expenses |
| | | | | | | | | | | | | | |
Total | | $ | (698 | ) | | $ | 582 | | | $ | (5 | ) | | |
| | | | | | | | | | | | | | |
F-21
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 3, 2009,2, 2010, the fair value ofcompany had entered into the following financial contracts to hedge commodity and interest rate swaps was $(9.4) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):risk:
| | | | | | | | | | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
|
Assets: | | | | | | | | | | | | | | | | |
Other current | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other long-term | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Other current | | | — | | | | (4.3 | ) | | | — | | | | (4.3 | ) |
Other long-term | | | — | | | | (5.1 | ) | | | — | | | | (5.1 | ) |
| | | | | | | | | | | | | | | | |
Total | | | — | | | | (9.4 | ) | | | — | | | | (9.4 | ) |
| | | | | | | | | | | | | | | | |
Net Fair Value | | $ | — | | | $ | (9.4 | ) | | $ | — | | | $ | (9.4 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
Derivatives in Cash Flow Hedging Relationships | | Notional amount | |
| | (Millions) | |
|
Interest rate contracts | | $ | 131.3 | |
Wheat contracts | | | 66.0 | |
Soybean oil contracts | | | 14.1 | |
Natural gas contracts | | | 10.5 | |
| | | | |
Total | | $ | 221.9 | |
| | | | |
During the fifty-three weeks endedThe company’s derivative instruments contained no credit-risk-related contingent features at January 3, 2009, interest expense2, 2010. As of $0.1 million was recognized due to periodic settlements of the swaps.
As ofJanuary 2, 2010 and January 3, 2009, the balance in accumulated other comprehensive income related to interest rate derivative transactions was $5.8 million. Of this total, approximately $2.7 million, $1.6 million, $0.9 million, $0.5company had $7.0 million and $0.1$16.5 million, were related to instruments expiringrespectively, recorded in 2009 through 2013, respectively.other current assets, and $0.8 million and $0.0 million, respectively, recorded in other accrued liabilities representing cash collateral for hedged positions.
| |
Note 11. | Other Current Assets |
Other current assets consist of:
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2010 | | | 2009 | |
| | (Amounts in thousands) | |
|
Prepaid assets | | $ | 9,022 | | | $ | 8,306 | |
Collateral for derivative positions | | | 7,023 | | | | 16,533 | |
Derivative instruments | | | 2,501 | | | | — | |
Federal income tax receivable | | | 3,616 | | | | — | |
Other | | | 1,990 | | | | 3,899 | |
| | | | | | | | |
Total | | $ | 24,152 | | | $ | 28,738 | |
| | | | | | | | |
| |
Note 12. | Other Accrued Liabilities |
Other accrued liabilities consist of:
| | | | | | | | | | | | | | | | |
| | January 3,
| | December 29,
| | | January 2,
| | January 3,
| |
| | 2009 | | 2007 | | | 2010 | | 2009 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Employee compensation | | $ | 59,137 | | | $ | 47,858 | | | $ | 47,780 | | | $ | 59,137 | |
Due to derivative counterparties | | | — | | | | 19,403 | | |
Derivative instruments | | | 24,979 | | | | 1,351 | | | | 10,414 | | | | 24,979 | |
Insurance | | | 17,935 | | | | 17,838 | | | | 17,521 | | | | 17,935 | |
Accrued taxes | | | | 459 | | | | 4,693 | |
Other | | | 23,662 | | | | 21,973 | | | | 27,143 | | | | 18,969 | |
| | | | | | | | | | |
Total | | $ | 125,713 | | | $ | 108,423 | | | $ | 103,317 | | | $ | 125,713 | |
| | | | | | | | | | |
F-21F-22
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 13. | Debt, Lease and Other Commitments |
Long-term debt consisted of the following at January 2, 2010 and January 3, 2009 and December 29, 2007:2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest Rate at
| | | | | | | | | Interest Rate at
| | | | | | | |
| | January 3,
| | Final
| | January 3,
| | December 29,
| | | January 2,
| | Final
| | January 2,
| | January 3,
| |
| | 2009 | | Maturity | | 2009 | | 2007 | | | 2010 | | Maturity | | 2010 | | 2009 | |
| | (Amounts in thousands) | | | | | (Amounts in thousands) | | | |
|
Unsecured credit facility | | | 2.73 | % | | | 2012 | | | $ | 110,000 | | | $ | — | | | | 1.47 | % | | | 2012 | | | $ | 89,000 | | | $ | 110,000 | |
Unsecured term loan | | | 5.25 | % | | | 2013 | | | | 146,250 | | | | — | | | | 5.00 | % | | | 2013 | | | | 131,250 | | | | 146,250 | |
Capital lease obligations | | | 6.05 | % | | | 2015 | | | | 24,978 | | | | 23,796 | | | | 5.87 | % | | | 2015 | | | | 26,555 | | | | 24,978 | |
Other notes payable | | | 4.81 | % | | | 2013 | | | | 5,189 | | | | 5,632 | | | | 5.04 | % | | | 2013 | | | | 4,863 | | | | 5,189 | |
| | | | | | | | | | |
| | | | | | | | | | | 286,417 | | | | 29,428 | | | | | | | | | | | | 251,668 | | | | 286,417 | |
Due within one year | | | | | | | | | | | 22,538 | | | | 6,920 | | | | | | | | | | | | 25,763 | | | | 22,538 | |
| | | | | | | | | | |
Due after one year | | | | | | | | | | $ | 263,879 | | | $ | 22,508 | | | | | | | | | | | $ | 225,905 | | | $ | 263,879 | |
| | | | | | | | | | |
On August 1, 2008, the company entered into a Credit Agreement (“term loan”) with various lending parties.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 maximum amount permitted to be outstanding under the term loan is $150.0 million. 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 3, 2009,2, 2010, the amount outstanding under the term loan was $146.3$131.3 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.
Effective October 5, 2007, the company further amended its credit facility (the “new credit facility”), which was previously amended and restated on June 6, 2006 (“the former credit facility”). The new credit facility is a five-year, $250.0 million unsecured revolving loan facility with two one-year extension options. The company may request to increase its borrowings under the new credit facility up to an aggregate of $350.0 million upon the satisfaction of certain conditions.
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 either ratesthe 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 new credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The maximum leverage ratio is increased under the new credit facility. As of January 3, 2009,2, 2010, the company was in compliance with all restrictive financial covenants under the new credit facility.
F-22F-23
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The company paid financing costs of $0.3 million in connection with its new credit facility.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 new credit facility.
IncludedBook 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 accounts payablefunding 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 current liabilities on our consolidated balance sheets are book overdraftssheets. As of $18.9 millionJanuary 2, 2010 and $12.2 million as of January 3, 2009, the book overdraft balance was $11.1 million and December 29, 2007,$18.8 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 $1.2$0.8 million and $1.2 million in leases at January 2, 2010 and January 3, 2009, and December 29, 2007, 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, marketing and administrative expenses and amounted to $2.6 million, $3.0 million $3.4 million and $4.3$3.4 million for fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, 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 2, 2010 and January 3, 2009, and December 29, 2007, was approximately $5.8$4.7 million and $9.7$5.8 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 2, 2010 and January 3, 2009 and December 29, 2007 related to this obligation.
The company also had standby letters of credit (“LOCs”) outstanding of $10.8$4.8 million and $3.9$10.8 million at January 2, 2010 and January 3, 2009, and December 29, 2007, respectively, which reduce the availability of funds under the new 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.
Aggregate maturities of debt outstanding, including capital leases, as of January 3, 2009,2, 2010, are as follows (amounts in thousands):
| | | | | | | | |
2009 | | $ | 22,538 | | |
2010 | | | 25,020 | | | $ | 25,763 | |
2011 | | | 29,887 | | | | 30,733 | |
2012 | | | 152,646 | | | | 133,175 | |
2013 | | | 53,812 | | | | 55,385 | |
2014 and thereafter | | | 2,514 | | |
2014 | | | | 3,555 | |
2015 and thereafter | | | | 3,057 | |
| | | | | | |
Total | | $ | 286,417 | | | $ | 251,668 | |
| | | | | | |
F-24
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
The company leases certain property and equipment under various operating and capital lease arrangements that expire over the next 23 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
F-23
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 | | | Capital Leases | | Operating Leases | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
2009 | | $ | 7,545 | | | $ | 40,708 | | |
2010 | | | 7,322 | | | | 34,510 | | | $ | 8,396 | | | $ | 43,526 | |
2011 | | | 5,730 | | | | 27,110 | | | | 6,357 | | | | 34,791 | |
2012 | | | 3,579 | | | | 24,547 | | | | 4,950 | | | | 29,706 | |
2013 | | | 2,410 | | | | 20,926 | | | | 3,991 | | | | 26,467 | |
2014 and thereafter | | | 2,328 | | | | 81,610 | | |
2014 | | | | 3,584 | | | | 21,744 | |
2015 and thereafter | | | | 2,981 | | | | 107,237 | |
| | | | | | | | | | |
Total minimum payments | | | 28,914 | | | $ | 229,411 | | | | 30,259 | | | $ | 263,471 | |
| | | | | | |
Amount representing interest | | | 3,936 | | | | | | | | 3,704 | | | | | |
| | | | | | |
Obligations under capital leases | | | 24,978 | | | | | | | | 26,555 | | | | | |
Obligations due within one year | | | 6,259 | | | | | | | | 7,168 | | | | | |
| | | | | | |
Long-term obligations under capital leases | | $ | 18,719 | | | | | | | $ | 19,387 | | | | | |
| | | | | | |
Rent expense for all operating leases amounted to $59.3 million for fiscal 2009, $56.0 million for fiscal 2008 and $54.3 million for fiscal 2007 and $45.7 million for fiscal 2006.2007.
In September of 2007, the company entered into a Master Agency Agreement and a Master Lease (collectively, the “lease”“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 lease,Master Lease, on behalf of the lessor, the company may either develop on behalf of the lessor, distribution facilities or sell and lease-back 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 leaseMaster Lease does not include financial covenants.
During the fiscal year ended December 29, 2007, the company entered into approximately $26.9 million of operating lease commitments under the lease. During the fiscal year ended January 3, 2009, the company entered into an additional $25.6 million of operating lease commitments under the lease. UnderMaster Lease. During the currentfiscal year ended January 2, 2010, the company did not enter into any additional operating lease commitments under the lease payments will aggregate to approximately $30.0 million during fiscal 2009 through fiscal 2013.Master Lease.
F-25
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 highly compensated employeeskey members of the company or of one of its wholly-owned subsidiariesmanagement 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
F-24
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. 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.
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.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 3, 2009.2, 2010.
| |
Note 14. | Variable Interest Entity |
The company maintains a transportation agreement with a thinly capitalized entity. This entity transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualifies as a Variable Interest Entityvariable interest entity (“VIE”), but not a Special Purpose Entity and, under FIN 46,special purpose entity. We have concluded that the company is the primary beneficiary and in accordance with FIN 46, the company consolidateswe consolidate this entity. 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.
Following is the effect of the VIE during fiscal 2008, fiscal 2007 and fiscal 2006:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2008 | | | Fiscal 2007 | | | Fiscal 2006 | |
| | VIE | | | % of Total | | | VIE | | | % of Total | | | VIE | | | % of Total | |
| | (Dollars in thousands) | |
|
Assets as of respective fiscal year ends | | $ | 33,452 | | | | 2.5 | % | | $ | 34,300 | | | | 3.5 | % | | $ | 33,194 | | | | 3.7 | % |
Sales | | $ | 10,369 | | | | 0.4 | % | | $ | 12,544 | | | | 0.6 | % | | $ | 12,633 | | | | 0.7 | % |
Income from continuing operations before income taxes, minority interest, and cumulative effect of a change in accounting principle | | $ | 3,074 | | | | 1.6 | % | | $ | 3,500 | | | | 2.3 | % | | $ | 3,255 | | | | 2.6 | % |
F-25F-26
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following is the effect of the VIE during fiscal years 2009, 2008 and 2007:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2009 | | Fiscal 2008 | | Fiscal 2007 |
| | VIE | | % of Total | | VIE | | % of Total | | VIE | | % of Total |
| | | | | | (Dollars in thousands) | | | | |
|
Assets as of respective fiscal year ends | | $ | 39,606 | | | | 2.9 | % | | $ | 33,452 | | | | 2.5 | % | | $ | 34,300 | | | | 3.5 | % |
Sales | | $ | 12,370 | | | | 0.5 | % | | $ | 10,369 | | | | 0.4 | % | | $ | 12,544 | | | | 0.6 | % |
Income before income taxes | | $ | 3,415 | | | | 1.6 | % | | $ | 3,074 | | | | 1.6 | % | | $ | 3,500 | | | | 2.3 | % |
As of January 2, 2010, January 3, 2009 and December 29, 2007, and December 30, 2006, the assets consist primarily of $27.5 million, $23.2 million $23.8 million and $23.9$23.8 million, respectively, of transportation equipment recorded as capital lease obligations.
In conjunction with the adoption of the new accounting pronouncement for variable interest entities, the company has determined that beginning in fiscal 2010 we are no longer the primary beneficiary. As a result, we will not consolidate the VIE starting in our first quarter of fiscal 2010. The primary reasons for this determination are that the VIE has sufficient capital to meet its capital lease and other debt obligations and the VIE’s creditors have no recourse against the general credit of the company. In addition, the company has no explicit or implied power over any of the significant activities needed to operate the VIE. The company will continue to record certain of the trucks and trailers the VIE uses for distributing our products as right to use leases.
| |
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. SFAS No. 107,Disclosures about Fair ValueNotes receivable are entered into in connection with the purchase of Financial Instruments, statesdistributors’ 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 should beis the currentprevailing market rate at which similar loans would be made to distributors with similar credit ratings and for the same maturities. However, the company utilizes approximately 3,6223,530 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.rate to apply to the notes. The carrying value of the distributor notes at January 3, 2009 and December 29, 2007 were $106.8 million and $99.5 million, respectively, withterritories are generally financed over ten years bearing an interest rate of 12%. These amounts and the distributor notes are recorded as notes receivable with $12.1 million and $11.0 million, respectively, included incollateralized by the current portion of notes receivable.independent distributors’ territories. The fair value of the company’s long-term debt at January 3, 20092, 2010 approximates the recorded value duevalue.
During fiscal years 2009, 2008, and 2007, $12.9 million, $13.0 million, and $11.2 million, respectively was recorded as interest income relating to the variable naturedistributor notes. At January 2, 2010 and January 3, 2009, the carrying value of the stated interest rates.distributor notes was $107.1 million and $106.8 million, respectively, of which the current portion of $12.6 million and $12.1 million, respectively, is recorded in accounts and notes receivable, net. At January 2, 2010 and January 3, 2009, the company has evaluated the collectibility 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,
F-27
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$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 orwinding-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 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
F-26
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
On December 19, 2002, theOur Board of Directors has approved a plan that authorized stock repurchases of up to 16.930.0 million shares of the company’s common stock. On November 18, 2005, the Board of Directors increased the number of authorized shares to 22.9 million shares. On February 8, 2008, the Board of Directors increased the number of authorized shares to 30.0 million shares. 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
F-28
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 3, 2009, 20.92, 2010, 22.7 million shares at a cost of $324.5$365.0 million have been purchased under this plan. Included in these amounts are 1.71.8 million shares at a cost of $44.1$40.5 million purchased during fiscal 2008.2009.
Dividends
During fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, the company paid dividends of $62.2 million, or $0.675 per share, $53.2 million, or $0.575 per share and $42.1 million, or $0.458 per share and $29.0 million, or $0.317 per share, respectively.
Stock Split
On June 1, 2007, the Board of Directors declared a3-for-2 stock split payable on June 29, 2007, which resulted in the issuance of 33.9 million shares.
| |
Note 17. | Stock-Based Compensation |
The company accounts for its stock-based compensation in accordance with SFAS 123R, which requires that the value of stock options and similar awards be expensed. In accordance with FASB Staff PositionFAS 123R-3,Transition Election to Accounting for the Tax Effects of Share Based Payment Awards, the company applied the short-cut method for determining its Capital in Excess of Par Value Pool (“APIC Pool”). This includes simplified methods to establish the beginning balance of the APIC Pool related to the tax effects of share-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of share-based awards that are outstanding upon adoption of SFAS 123R.
F-27
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 performance 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 14,625,00018,625,000 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. Options granted prior to January 1, 2006 may not be exercised later than ten years after the date of grant and become exercisable four years from the date of grant and generally vest at that time or upon change in control of Flowers Foods. Options granted on January 3, 2006 and thereafter may not be exercised later than seven years after the date of grant and become exercisable three years from the date of grant and generally vest at that time or upon change in control of Flowers Foods. Non-employee director options generally become exercisable one year from the date of grant and vest at that time. The following is a summary of stock options, restricted stock, and deferred stock issuedoutstanding under the EPIP. Information relating to the company’s stock appreciation rights which are not issued under the EPIP is also disclosed below.
Stock Options
The following non-qualified stock options (“NQSOs”) have been granted under the EPIP since fiscal 2006.2007. 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 | | 2/4/2008 | | 2/5/2007 | | 1/3/2006 | | | 2/9/2009 | | 2/4/2008 | | 2/5/2007 |
|
Shares granted | | | 850 | | | | 831 | | | | 656 | | | | 993 | | | | 850 | | | | 831 | |
Exercise price($) | | | 24.75 | | | | 19.57 | | | | 18.68 | | | | 23.84 | | | | 24.75 | | | | 19.57 | |
Vesting date | | | 2/4/2011 | | | | 2/5/2010 | | | | 1/3/2009 | | | | 2/9/2012 | | | | 2/4/2011 | | | | 2/5/2010 | |
Fair value per share($) | | | 5.80 | | | | 6.30 | | | | 6.20 | | | | 5.87 | | | | 5.80 | | | | 6.30 | |
Dividend yield(%)(1) | | | 1.90 | | | | 1.70 | | | | 1.60 | | | | 2.20 | | | | 1.90 | | | | 1.70 | |
Expected volatility(%)(2) | | | 27.30 | | | | 33.90 | | | | 36.00 | | | | 31.80 | | | | 27.30 | | | | 33.90 | |
Risk-free interest rate(%)(3) | | | 2.79 | | | | 4.74 | | | | 4.25 | | | | 2.00 | | | | 2.79 | | | | 4.74 | |
Expected option life (years)(4) | | | 5.00 | | | | 5.00 | | | | 5.00 | | | | 5.00 | | | | 5.00 | | | | 5.00 | |
Outstanding at January 3, 2009 | | | 848 | | | | 824 | | | | 647 | | |
Outstanding at January 2, 2010 | | | | 993 | | | | 848 | | | | 824 | |
| | |
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 — for the 2006 and 2007 grants the assumption is based on the simplified formula determined in accordance with Staff Accounting Bulletin No. 107. The 2008 grant assumption is based on the simplified formula determined in accordance with Staff Accounting Bulletin No. 110. The company does not have sufficient historical exercise behavior data to reasonably estimate the expected option life and the terms of the awards issued in 2008 are different from the awards that have fully vested. |
F-28
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The stock option activity for fiscal 2008, fiscal 2007 and fiscal 2006 pursuant to the EPIP is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | | | |
| | 53 Weeks Ended | | | For the 52 Weeks Ended | |
| | January 3, 2009 | | | December 29, 2007 | | | December 30, 2006 | |
| | | | | 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 | | | 2,417 | | | $ | 15.15 | | | | 4,098 | | | $ | 10.37 | | | | 4,959 | | | $ | 7.43 | |
Granted | | | 850 | | | $ | 24.75 | | | | 831 | | | $ | 19.57 | | | | 656 | | | $ | 18.68 | |
Exercised | | | (288 | ) | | $ | 9.25 | | | | (2,508 | ) | | $ | 8.81 | | | | (1,497 | ) | | $ | 4.25 | |
Forfeitures | | | (4 | ) | | $ | 22.30 | | | | (4 | ) | | $ | 19.05 | | | | (20 | ) | | $ | 10.75 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 2,975 | | | $ | 18.46 | | | | 2,417 | | | $ | 15.15 | | | | 4,098 | | | $ | 10.37 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at end of year | | | 1,303 | | | | | | | | 1,193 | | | | | | | | 900 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average fair value of options granted during the year | | $ | 24.75 | | | | | | | $ | 19.57 | | | | | | | $ | 18.68 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
As of January 3, 2009, all options outstanding under the EPIP had an average exercise price of $18.46 and a weighted average remaining contractual life of 4.95 years.
During the fiscal years ended January 3, 2009, December 29, 2007 and December 30, 2006, the company recorded stock-based compensation expense of $4.4 million, $4.6 million and $3.9 million, respectively, relating to NQSOs using theBlack-Scholesoption-pricing model.
As of January 3, 2009, 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 1.75 years.
The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for fiscal years 2008, 2007 and 2006 are set forth below (amounts in thousands):
| | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
|
Cash received from option exercises | | $ | 2,679 | | | $ | 22,087 | | | $ | 6,363 | |
Cash tax windfall benefit | | $ | 1,543 | | | $ | 11,211 | | | $ | 8,529 | |
Intrinsic value of stock options exercised | | $ | 4,470 | | | $ | 32,146 | | | $ | 21,867 | |
Restricted Stock
On January 4, 2004, the effective date of his election as Chief Executive Officer, George Deese was granted 112,500 shares of restricted stock pursuant to the EPIP. The fair value of these restricted shares on the date of grant was approximately $1.3 million. These shares became fully vested on January 4, 2008. The company recorded no compensation expense during fiscal 2008, $0.3 million in compensation expense for fiscal 2007, and $0.3 million in compensation expense for fiscal 2006 related to this restricted stock.
During the second quarter of fiscal 2006, non-employee directors were granted an aggregate of 38,460 shares of restricted stock. The fair value of these restricted shares on the date of grant was $0.7 million. These shares fully vested on the first anniversary of the date of grant. The company recorded no compensation expense during fiscal 2008, $0.3 million during fiscal 2007, and $0.4 million during fiscal 2006 related to this restricted stock.
Certain key employees have been granted performance-contingent restricted stock. Vesting generally occurs two years from the date of grant for the 2006 and 2007 awards if, on this date, the company’s average “return on
F-29
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
invested capital”
| | |
4. | | Expected option life — for the 2007 grant the assumption is based on the simplified formula determined in accordance with Staff Accounting Bulletin No. 107. The 2008 and 2009 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 the two fiscal years immediately prior2009, 2008 and 2007 pursuant to vesting equals or exceeds itsthe EPIP is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | | For the
| | | For the
| |
| | 52 Weeks Ended | | | 53 Weeks Ended | | | 52 Weeks Ended | |
| | January 2, 2010 | | | January 3, 2009 | | | December 29, 2007 | |
| | | | | 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 | | | 2,975 | | | $ | 18.46 | | | | 2,417 | | | $ | 15.15 | | | | 4,098 | | | $ | 10.37 | |
Granted | | | 993 | | | $ | 23.84 | | | | 850 | | | $ | 24.75 | | | | 831 | | | $ | 19.57 | |
Exercised | | | (232 | ) | | $ | 11.04 | | | | (288 | ) | | $ | 9.25 | | | | (2,508 | ) | | $ | 8.81 | |
Forfeitures | | | (2 | ) | | $ | 18.68 | | | | (4 | ) | | $ | 22.30 | | | | (4 | ) | | $ | 19.05 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 3,734 | | | $ | 20.34 | | | | 2,975 | | | $ | 18.46 | | | | 2,417 | | | $ | 15.15 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at end of year | | | 1,069 | | | | | | | | 1,303 | | | | | | | | 1,193 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average fair value of options granted during the year | | $ | 5.87 | | | | | | | $ | 5.80 | | | | | | | $ | 6.30 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
As of January 2, 2010, all options outstanding under the EPIP had an average exercise price of $20.34 and a weighted average “costremaining contractual life of capital”4.56 years.
During fiscal years 2009, 2008 and 2007, the company recorded stock-based compensation expense of $5.1 million, $4.4 million and $4.6 million, respectively, relating to NQSOs using theBlack-Scholesoption-pricing model.
As of January 2, 2010, there was $5.9 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 1.58 years.
The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for the same period (the “ROI Target”).fiscal years 2009, 2008 and 2007 are set forth below (amounts in thousands):
| | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 |
|
Cash received from option exercises | | $ | 2,614 | | | $ | 2,679 | | | $ | 22,085 | |
Cash tax windfall benefit, net | | $ | 909 | | | $ | 1,543 | | | $ | 11,211 | |
Intrinsic value of stock options exercised | | $ | 2,948 | | | $ | 4,470 | | | $ | 32,146 | |
Performance-Contingent Restricted Stock
Certain key employees have been granted performance-contingent restricted stock. The 2008 and 2009 awards generally vest two years from the date of grant and require the “return on invested capital” to exceed the weighted average “cost of capital” by 2.5% for(the “ROI Target”) over the same period.two fiscal years immediately preceding the vesting
F-30
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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%. |
IfIn connection with the vesting of 222,525 shares of restricted stock granted in February 2007, during the fiscal year ended January 2, 2010, an additional 44,505 common shares were issued because the company exceeded the S&P TSR by the maximum amount.
For grants prior to 2009, if the grantee dies, becomes disabled or retires, the performance-contingent restricted stock generally vests immediately. For the 2009 grant, if the grantee dies or becomes disabled the performance-contingent restricted stock generally vests immediately. However, at retirement grantees under the 2009 grant 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. The fair value estimate was determined using aMonte Carlosimulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.
The following restricted stock awards have been granted under the EPIP since 2006fiscal 2007 (amounts in thousands, except price data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Grant date | | 2/4/2008 | | 2/5/2007 | | 6/6/2006 | | 1/3/2006 | | | 2/9/2009 | | 2/4/2008 | | 2/5/2007 |
|
Shares granted | | | 210 | | | | 224 | | | | 39 | | | | 204 | | | | 204 | | | | 210 | | | | 224 | |
Vesting date | | | 2/4/2010 | | | | 2/5/2009 | | | | 6/6/2007 | | | | 1/3/2008 | | | | 2/9/2011 | | | | 2/4/2010 | | | | 2/5/2009 | |
Fair value per share | | $ | 27.03 | | | $ | 20.98 | | | $ | 19.50 | | | $ | 19.44 | | | $ | 24.96 | | | $ | 27.03 | | | $ | 20.98 | |
Expense during the fifty-three weeks ended January 3, 2009 | | $ | 2,619 | | | $ | 2,208 | | | $ | — | | | $ | — | | |
Expense during the fifty-two weeks ended December 29, 2007 | | $ | — | | | $ | 2,361 | | | $ | 288 | | | $ | 1,981 | | |
Expense during the fifty-two weeks ended December 30, 2006 | | $ | — | | | $ | — | | | $ | 461 | | | $ | 1,978 | | |
Expense during the 52 weeks ended January 2, 2010 | | | $ | 2,352 | | | $ | 2,837 | | | $ | 170 | |
Expense during the 53 weeks ended January 3, 2009 | | | $ | — | | | $ | 2,619 | | | $ | 2,208 | |
Expense during the 52 weeks ended December 29, 2007 | | | $ | — | | | $ | — | | | $ | 2,361 | |
F-30F-31
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The restricted stock activity for fiscal years 2009, 2008 fiscaland 2007 and fiscal 2006 is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 53
| | | | | For the 52
| | For the 53
| | For the 52
| |
| | Weeks Ended | | For the 52 Weeks Ended | | | Weeks Ended | | Weeks Ended | | Weeks Ended | |
| | January 3, 2009 | | December 29, 2007 | | December 30, 2006 | | | January 2, 2010 | | January 3, 2009 | | December 29, 2007 | |
| | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | | Weighted
| | | | Weighted
| | | | Weighted
| |
| | Number of
| | Average Fair
| | Number of
| | Average Fair
| | Number of
| | Average Fair
| | | Number of
| | Average Fair
| | Number of
| | Average Fair
| | Number of
| | Average Fair
| |
| | Shares | | Value | | Shares | | Value | | Shares | | Value | | | Shares | | Value | | Shares | | Value | | Shares | | Value | |
| | (Amounts in thousands, except price data) | | | (Amounts in thousands, except price data) | |
|
Balance at beginning of year | | | 536 | | | $ | 18.41 | | | | 354 | | | $ | 16.91 | | | | 160 | | | $ | 12.45 | | | | 432 | | | $ | 23.92 | | | | 536 | | | $ | 18.41 | | | | 354 | | | $ | 16.91 | |
Granted | | | 210 | | | $ | 27.03 | | | | 224 | | | $ | 20.98 | | | | 243 | | | $ | 19.44 | | | | 204 | | | $ | 24.96 | | | | 210 | | | $ | 27.03 | | | | 224 | | | $ | 20.98 | |
Vested | | | (314 | ) | | $ | 16.59 | | | | (41 | ) | | $ | 19.54 | | | | (47 | ) | | $ | 14.83 | | | | (222 | ) | | $ | 20.98 | | | | (314 | ) | | $ | 16.59 | | | | (41 | ) | | $ | 19.54 | |
Forfeitures | | | — | | | $ | — | | | | (1 | ) | | $ | 19.99 | | | | (2 | ) | | $ | 19.44 | | | | — | | | $ | — | | | | — | | | $ | — | | | | (1 | ) | | $ | 19.99 | |
| | | | | | | | | | | | | | |
Balance at end of year | | | 432 | | | $ | 23.92 | | | | 536 | | | $ | 18.41 | | | | 354 | | | $ | 16.91 | | | | 414 | | | $ | 26.01 | | | | 432 | | | $ | 23.92 | | | | 536 | | | $ | 18.41 | |
| | | | | | | | | | | | | | |
As of January 3, 2009,2, 2010, there was $3.2$3.0 million of total unrecognized compensation cost related to nonvested restricted stock granted under the EPIP. That cost is expected to be recognized over a weighted-average period of 0.570.59 years. The fair value of restricted share awards that vested during fiscal 20082009 was $7.1$5.3 million on the vesting date.
Stock Appreciation Rights
The company previously awarded stock appreciation rights (“rights”) to key employees throughout the company. These rights vested at the end of four years and were payable in cash equal to the difference between the grant price and the fair market value of the rights on the vesting date. On July 16, 2007 (the company’s third quarter), 653,175 rights granted in 2003 vested. The company recorded compensation expense for these rights on measurement dates based on changes between the grant price and an estimated fair value of the rights using theBlack-Scholesoption-pricing model. During fiscal 2009 and 2008 the company did not record any compensation expense for these rights since they all vested and were settled during the third quarter of fiscal 2007. During fiscal 2007, and fiscal 2006, the company recorded expense of $3.7 million and $1.5 million, respectively, related to these 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 theBlack-Scholesoption-pricing model. During fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, respectively, the company recorded expense of $0.1 million, $0.03 million, $1.3 million, and $0.1$1.3 million related to these rights. 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 3, 20092, 2010 ranged from $10.20$8.65 to $20.60.$21.10. The following assumptions were used to determine fair value of the rights discussed above using theBlack-Scholesoption-pricing model at January 3, 2009:2, 2010: dividend yield 2.2%3.0%; expected volatility 32.0%31.0%; risk-free interest rate 1.73%2.71% and expected life of 1.350.85 years to 3.703.20 years.
F-31F-32
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The rights activity for fiscal years 2009, 2008, fiscaland 2007 and fiscal 2006 is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | | | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | For the 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands, except price data) | | | (Amounts in thousands, except price data) | |
|
Balance at beginning of year | | | 231 | | | | 929 | | | | 934 | | | | 231 | | | | 231 | | | | 929 | |
Rights granted | | | — | | | | — | | | | 38 | | |
Rights vested | | | — | | | | (653 | ) | | | — | | | | — | | | | — | | | | (653 | ) |
Rights exercised | | | — | | | | (15 | ) | | | (43 | ) | | | — | | | | — | | | | (15 | ) |
Forfeitures | | | — | | | | (30 | ) | | | — | | | | — | | | | — | | | | (30 | ) |
| | | | | | | | | | | | | | |
Balance at end of year | | | 231 | | | | 231 | | | | 929 | | | | 231 | | | | 231 | | | | 231 | |
| | | | | | | | | | | | | | |
Weighted average — grant date fair value | | $ | 11.14 | | | $ | 11.14 | | | $ | 9.79 | | | $ | 11.14 | | | $ | 11.14 | | | $ | 11.14 | |
| | | | | | | | | | | | | | |
Deferred Stock
ThePursuant 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 after that time at a designated time selecteddesignated by the individual at the date of conversion. During the first quarter of fiscal 2007 and fiscal 2008 an aggregate of 20,520 and 22,160 shares respectively, were converted. During the fourth quarter of fiscal 2008 an additional 12,630 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. The individual non-employee directors who converted their retainer in the fourth quarter of fiscal 2008 received an additional 600 shares, in the aggregate, when the retainer was increased during the second quarter of fiscal 2009.
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 2007 and fiscal 2008,2009, non-employee directors were granted an aggregate of 34,350 and 35,80047,300 shares respectively, of deferred stock that has a minimum one year vesting period.stock. The deferred stock will be distributed to the grantee after that time at a designated time selecteddesignated 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 second quarter of fiscal 20082009 a total of 24,02514,320 shares were exercised.exercised for deferred shares issued under the fiscal 2008 grant.
The deferred stock activity for fiscal years 2009, 2008, fiscaland 2007 and fiscal 2006 is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | For the
| | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands, except price data) | | | (Amounts in thousands, except price data) | |
|
Balance at beginning of year | | | 55 | | | | — | | | | — | | | | 101 | | | | 55 | | | | — | |
Issued | | | 70 | | | | 55 | | | | — | | | | 48 | | | | 70 | | | | 55 | |
Exercised | | | (24 | ) | | | — | | | | — | | | | (19 | ) | | | (24 | ) | | | — | |
| | | | | | | | | | | | | | |
Balance at end of year | | | 101 | | | | 55 | | | | — | | | | 130 | | | | 101 | | | | 55 | |
| | | | | | | | | | | | | | |
Weighted average — grant date fair value | | $ | 23.30 | | | $ | 20.35 | | | $ | 0.00 | | | $ | 21.90 | | | $ | 23.30 | | | $ | 20.35 | |
| | | | | | | | | | | | | | |
F-32F-33
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 2009, 2008 fiscal 2007 and fiscal 2006:2007:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | For the
| | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Stock options | | $ | 4,408 | | | $ | 4,568 | | | $ | 3,950 | | | $ | 5,070 | | | $ | 4,408 | | | $ | 4,568 | |
Restricted stock | | | 4,827 | | | | 4,958 | | | | 3,015 | | | | 5,359 | | | | 4,827 | | | | 4,958 | |
Stock appreciation rights | | | 28 | | | | 4,978 | | | | 1,630 | | | | 63 | | | | 28 | | | | 4,978 | |
Deferred stock | | | 1,331 | | | | 647 | | | | — | | | | 1,363 | | | | 1,331 | | | | 647 | |
| | | | | | | | | | | | | | |
Total stock based compensation | | $ | 10,594 | | | $ | 15,151 | | | $ | 8,595 | | | $ | 11,855 | | | $ | 10,594 | | | $ | 15,151 | |
| | | | | | | | | | | | | | |
| |
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 $167.9 million, $(5.4) million $119.7 million and $94.4$119.7 million for fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, respectively.
During fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, changes to accumulated other comprehensive income (loss), net of income tax, were as follows:
| | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
| | (Amounts in thousands) | |
|
Accumulated other comprehensive income (loss), beginning balance | | $ | 22,141 | | | $ | (8,220 | ) | | $ | (11,937 | ) |
Derivative transactions: | | | | | | | | | | | | |
Net deferred (losses) gains on closed contracts, net of income tax of $(17,598), $4,711 and $981, respectively | | | (28,111 | ) | | | 7,525 | | | | 1,567 | |
Reclassified to earnings (materials, labor and other production costs), net of income tax of $(19), $(827) and $(1,095), respectively | | | (30 | ) | | | (1,321 | ) | | | (1,748 | ) |
Effective portion of change in fair value of hedging instruments, net of income tax of $(20,145), $7,452 and $(436) respectively | | | (32,179 | ) | | | 11,903 | | | | (697 | ) |
Minimum pension liability, net of income tax of $(40,256), $4,391 and $8,904, respectively | | | (64,304 | ) | | | 7,014 | | | | 14,225 | |
Amortization of prior service costs, net of income tax of $129 and $129 | | | 204 | | | | 204 | | | | — | |
Cumulative effect of change in accounting principle (See Note 20), net of income tax of $3,153 and $(6,027), respectively | | | — | | | | 5,036 | | | | (9,630 | ) |
| | | | | | | | | | | | |
Accumulated other comprehensive (loss) income, ending balance | | $ | (102,279 | ) | | $ | 22,141 | | | $ | (8,220 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Amounts in thousands) | |
|
Accumulated other comprehensive (loss) income, beginning balance | | $ | (102,279 | ) | | $ | 22,141 | | | $ | (8,220 | ) |
Derivative transactions: | | | | | | | | | | | | |
Net deferred (losses) gains on closed contracts, net of income tax of $(13,855), $(17,598) and $4,711, respectively | | | (22,131 | ) | | | (28,111 | ) | | | 7,525 | |
Reclassified to earnings (materials, labor and other production costs), net of income tax of $24,266, $(19) and $(827), respectively | | | 38,760 | | | | (30 | ) | | | (1,321 | ) |
Effective portion of change in fair value of hedging instruments, net of income tax of $7,707, $(20,145) and $7,452 respectively | | | 12,311 | | | | (32,179 | ) | | | 11,903 | |
Minimum pension liability, net of income tax of $3,759, $(40,256) and $4,391, respectively | | | 6,005 | | | | (64,304 | ) | | | 7,014 | |
Amortization of actuarial loss, net of income tax of $1,063 | | | 1,698 | | | | — | | | | — | |
Amortization of prior service costs and credits, net of income tax of $603, $129 and $129 | | | 964 | | | | 204 | | | | 204 | |
Cumulative effect of change in accounting principle for postretirement plans (See Note 20), net of income tax of $3,153 | | | — | | | | — | | | | 5,036 | |
| | | | | | | | | | | | |
Accumulated other comprehensive (loss) income, ending balance | | $ | (64,672 | ) | | $ | (102,279 | ) | | $ | 22,141 | |
| | | | | | | | | | | | |
F-33F-34
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The balance of accumulated other comprehensive (loss) incomeloss consists of the following:
| | | | | | | | | | | | | | | | |
| | January 3,
| | December 29,
| | | January 2,
| | January 3,
| |
| | 2009 | | 2007 | | | 2010 | | 2009 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Derivative financial instruments | | $ | (40,804 | ) | | $ | 19,516 | | | $ | (11,864 | ) | | $ | (40,804 | ) |
Pension and postretirement related | | | (61,475 | ) | | | 2,625 | | | | (52,808 | ) | | | (61,475 | ) |
| | | | | | | | | | |
Total | | $ | (102,279 | ) | | $ | 22,141 | | | $ | (64,672 | ) | | $ | (102,279 | ) |
| | | | | | | | | | |
| |
Note 19. | Earnings Per Share |
Net incomeIn 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 calculated usingan 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 all periods presented prior to January 4, 2009. The following is a reconciliation of net income attributable to Flowers Foods, Inc. and weighted average number of common and common equivalent shares outstanding during each period. The common stock equivalents consists primarily of the incremental shares associated with the company’s stock compensation plans. The following table sets forth the computation offor calculating basic and diluted net income per share:
| | | | | | | | | | | | |
| | For the
| | | | |
| | 53 Weeks
| | | | |
| | Ended | | | For the 52 Weeks Ended | |
| | January 3,
| | | December 29,
| | | December 30,
| |
| | 2009 | | | 2007 | | | 2006 | |
| | (Amounts in thousands, except per share data) | |
|
Numerator | | | | | | | | | | | | |
Income from continuing operations before cumulative effect of a change in accounting principle | | $ | 119,233 | | | $ | 94,615 | | | $ | 74,880 | |
Income from discontinued operations | | | — | | | | — | | | | 6,731 | |
Cumulative effect of a change in accounting principle | | | — | | | | — | | | | (568 | ) |
| | | | | | | | | | | | |
Net income | | $ | 119,233 | | | $ | 94,615 | | | $ | 81,043 | |
| | | | | | | | | | | | |
Denominator | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 92,016 | | | | 90,970 | | | | 91,233 | |
Add: Shares of common stock assumed upon vesting and exercise of stock awards | | | 1,020 | | | | 1,398 | | | | 1,367 | |
| | | | | | | | | | | | |
Diluted weighted average shares outstanding | | | 93,036 | | | | 92,368 | | | | 92,600 | |
| | | | | | | | | | | | |
Net Income Per Common Share: | | | | | | | | | | | | |
Basic | | | | | | | | | | | | |
Income from continuing operations before cumulative effect of a change in accounting principle | | $ | 1.30 | | | $ | 1.04 | | | $ | 0.82 | |
Income from discontinued operations | | | — | | | | — | | | | 0.08 | |
Cumulative effect of a change in accounting principle | | | — | | | | — | | | | (0.01 | ) |
| | | | | | | | | | | | |
Net income | | $ | 1.30 | | | $ | 1.04 | | | $ | 0.89 | |
| | | | | | | | | | | | |
Diluted | | | | | | | | | | | | |
Income from continuing operations before cumulative effect of a change in accounting principle | | $ | 1.28 | | | $ | 1.02 | | | $ | 0.81 | |
Income from discontinued operations | | | — | | | | — | | | | 0.08 | |
Cumulative effect of a change in accounting principle | | | — | | | | — | | | | (0.01 | ) |
| | | | | | | | | | | | |
Net income | | $ | 1.28 | | | $ | 1.02 | | | $ | 0.88 | |
| | | | | | | | | | | | |
F-34F-35
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and diluted earnings per common share for fiscal years 2009, 2008 and 2007 (amounts in thousands, except per share data):
| | | | | | | | | | | | |
| | For the
| | | For the
| | | For the
| |
| | 52 Weeks Ended | | | 53 Weeks Ended | | | 52 Weeks Ended | |
| | January 2,
| | | January 3,
| | | December 29,
| |
| | 2010 | | | 2009 | | | 2007 | |
|
Net income attributable to Flowers Foods, Inc. | | $ | 130,297 | | | $ | 119,233 | | | $ | 94,615 | |
Dividends on restricted shares not expected to vest* | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Net income attributable to common and participating shareholders | | $ | 130,297 | | | $ | 119,233 | | | $ | 94,615 | |
| | | | | | | | | | | | |
Basic Earnings Per Common Share: | | | | | | | | | | | | |
Weighted average shares outstanding for common stock | | | 91,787 | | | | 92,016 | | | | 90,970 | |
Weighted average shares outstanding for participating securities | | | 413 | | | | 416 | | | | 535 | |
| | | | | | | | | | | | |
Basic weighted average shares outstanding per common share | | | 92,200 | | | | 92,432 | | | | 91,505 | |
| | | | | | | | | | | | |
Basic earnings per common share attributable to Flowers Foods, Inc. common shareholders | | $ | 1.41 | | | $ | 1.29 | | | $ | 1.03 | |
| | | | | | | | | | | | |
Diluted Earnings Per Common Share: | | | | | | | | | | | | |
Basic weighted average shares outstanding per common share | | | 92,200 | | | | 92,432 | | | | 91,505 | |
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock | | | 533 | | | | 725 | | | | 1,008 | |
| | | | | | | | | | | | |
Diluted weighted average shares outstanding per common share | | | 92,733 | | | | 93,157 | | | | 92,513 | |
| | | | | | | | | | | | |
Diluted earnings per common share attributable to Flowers Foods, Inc. common shareholders | | $ | 1.41 | | | $ | 1.28 | | | $ | 1.02 | |
| | | | | | | | | | | | |
| | |
* | | The company expects all restricted share awards outstanding at January 2, 2010 and January 3, 2009 to vest. |
Stock options to purchase 653,1001,841,417 shares of common stock and 239,985 shares of restricted stock were not included in the computation of diluted earnings per share for the fifty-two weeks ended December 30, 2006January 2, 2010 because their effect would have been anti-dilutive. Neither fiscal 2008 nor fiscal 2007 had anti-dilutive shares excluded in the computation.
F-36
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have retrospectively adjusted the prior periods to reflect the results that would have been reported had we classified our unvested restricted stock as participating securities. Diluted earnings per common share were not effected in fiscal years 2008 and 2007. The effects of the change as it relates to our basic earnings per common share for fiscal years 2008 and 2007 are as follows:
| | | | | | | | |
| | For the
| | | For the
| |
| | 53 Weeks Ended | | | 52 Weeks Ended | |
| | January 3,
| | | December 29,
| |
| | 2009 | | | 2007 | |
| | Basic | | | Basic | |
|
As previously reported | | $ | 1.30 | | | $ | 1.04 | |
Effect of two-class method adoption for participating securities | | | (0.01 | ) | | | (0.01 | ) |
| | | | | | | | |
As retrospectively adjusted | | $ | 1.29 | | | $ | 1.03 | |
| | | | | | | | |
| |
Note 20. | Postretirement Plans |
On September 29, 2006, the FASB issued SFAS No. 158,Employees’ Accounting for Defined Benefit Pension and other Postretirement Plans — An amendment of FASB Statements No. 87, 88, 106, and 132 (“SFAS 158”),guidance which requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158,the guidance, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and FASB Statement No. 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS 106”) that have not yet been recognized through net periodic benefit costs will be recognized in accumulated other comprehensive income, net of tax benefits, until they are amortized as a component of net periodic cost. SFAS 158 doesThe guidance did not change how pensions and other postretirement benefits are accounted for and reported in the income statement. We will continue to follow the existing guidance in SFAS 87,FASB Statement No. 88,Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefitsand SFAS 106. SFAS 158 wasThese changes were effective for public companies for fiscal years ending after December 15, 2006. The company adopted the balance sheet recognition provisions of SFAS 158 at December 30, 2006, the end of its fiscal year 2006.
SFAS 158 also requires that employersThe company is required to measure the benefit obligation and plan assets as of the fiscal year end for fiscal years ending after December 15, 2008 (the company’s fiscal 2008). In fiscal 2006 and earlier, the company used a September 30 measurement date for its pension and other postretirement benefit plans. The company eliminated the early measurement date in fiscal 2007 and applied the remeasurement alternative in accordance with SFAS 158.alternative. Under this alternative, postretirement benefit income measured for the three-month period October 1, 2006 to December 31, 2006 (determined using the September 30, 2006 measurement date) was credited to beginning 2007 retained earnings. As a result, the company increased retained earnings $0.7 million, net of taxes of $0.5 million, and increased the postretirement benefit asset and liability by $1.3 million and $0.1 million, respectively.respectively during fiscal 2007. The funded status of the company’s postretirement benefit plans was then remeasured at January 1, 2007, resulting in an adjustment to the balance sheet asset, liability and accumulated other comprehensive income. As a result, the postretirement benefit asset was increased $7.4 million and the postretirement benefit liability was decreased $0.7 million, with an offsetting credit to accumulated other comprehensive income of $5.0 million, net of taxes of $3.1 million. For fiscal 2009, the company used a measurement date of December 31, 2009 which is the last trading date before the company’s fiscal year end of January 2, 2010.
The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at January 3, 20092, 2010 as compared to accounts at December 29, 2007:January 3, 2009:
| | | | | | | | | | | | | | | | |
| | As of | | | As of |
| | January 3,
| | December 29,
| | | January 2,
| | January 3,
|
| | 2009 | | 2007 | | | 2010 | | 2009 |
| | (Amounts in thousands) | | | (Amounts in thousands) |
|
Noncurrent benefit asset | | $ | — | | | $ | 34,471 | | |
Current benefit liability | | $ | 922 | | | $ | 403 | | | $ | 841 | | | $ | 922 | |
Noncurrent benefit liability | | $ | 78,897 | | | $ | 6,599 | | | $ | 68,140 | | | $ | 78,897 | |
Accumulated other comprehensive loss (income) | | $ | 61,475 | | | $ | (2,625 | ) | |
Accumulated other comprehensive loss | | | $ | 52,808 | | | $ | 61,475 | |
The amounts above include activity for fiscal 2008 and fiscal 2007 as well as adjustments relating to the elimination of the early measurement date at the beginning of fiscal 2007.
F-35F-37
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 January 3,December 31, 2009 and December 29, 2007,31, 2008, 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 cost of approximately $2.8$0.6 million for fiscal 2009.2010.
The net periodic pension incomecost (income) for the company’s pension plans includes the following components:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | For the
| | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Service cost | | $ | 293 | | | $ | 259 | | | $ | 1,812 | | | $ | 312 | | | $ | 293 | | | $ | 259 | |
Interest cost | | | 17,623 | | | | 16,335 | | | | 15,755 | | | | 18,667 | | | | 17,623 | | | | 16,335 | |
Expected return on plan assets | | | (25,196 | ) | | | (22,996 | ) | | | (20,792 | ) | | | (18,935 | ) | | | (25,196 | ) | | | (22,996 | ) |
Amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Actuarial loss | | | — | | | | — | | | | 25 | | | | 2,727 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Net periodic pension (income) | | | (7,280 | ) | | | (6,402 | ) | | | (3,200 | ) | |
Net periodic pension cost (income) | | | | 2,771 | | | | (7,280 | ) | | | (6,402 | ) |
Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Current year actuarial loss (gain) | | | 103,002 | | | | (11,641 | ) | | | — | | | | (8,153 | ) | | | 103,002 | | | | (11,641 | ) |
Amortization of actuarial gain (loss) | | | | (2,727 | ) | | | — | | | | — | |
| | | | | | | | |
Total recognized in other comprehensive (loss) income | | | | (10,880 | ) | | | 103,002 | | | | (11,641 | ) |
| | | | | | | | | | | | | | |
Total recognized in net periodic benefit (income) cost and other comprehensive income | | $ | 95,722 | | | $ | (18,043 | ) | | $ | (3,200 | ) | | $ | (8,108 | ) | | $ | 95,722 | | | $ | (18,043 | ) |
| | | | | | | | | | | | | | |
Actual return (loss) on plan assets for fiscal years 2009, 2008 fiscaland 2007 and fiscal 2006 was $37.9 million, $(77.5) million $30.8 million and $24.0$30.8 million, respectively.
Approximately $2.7$2.2 million will be amortized from accumulated other comprehensive income into net periodic benefit cost in fiscal 20092010 relating to the company’s pension plans.
F-36F-38
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The funded status and the amounts recognized in the Consolidated Balance Sheets for the company’s pension plans are as follows:
| | | | | | | | | | | | | | | | |
| | January 3,
| | December 29,
| | | January 2,
| | January 3,
| |
| | 2009 | | 2007 | | | 2010 | | 2009 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 277,804 | | | $ | 276,865 | | | $ | 305,974 | | | $ | 277,804 | |
Elimination of early measurement date | | | — | | | | 1,090 | | |
Service cost | | | 293 | | | | 259 | | | | 313 | | | | 293 | |
Interest cost | | | 17,623 | | | | 16,335 | | | | 18,667 | | | | 17,623 | |
Actuarial loss (gain) | | | 287 | | | | (3,792 | ) | |
Acquisitions (relates to the acquisition of ButterKrust — see Note 10) | | | 24,315 | | | | — | | |
Actuarial loss | | | | 10,811 | | | | 287 | |
Acquisitions (relates to the acquisition of ButterKrust — see Note 9) | | | | — | | | | 24,315 | |
Benefits paid | | | (14,348 | ) | | | (12,953 | ) | | | (15,725 | ) | | | (14,348 | ) |
| | | | | | | | | | |
Benefit obligation at end of year | | $ | 305,974 | | | $ | 277,804 | | | $ | 320,040 | | | $ | 305,974 | |
| | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 312,275 | | | $ | 282,840 | | | $ | 243,549 | | | $ | 312,275 | |
Elimination of early measurement date | | | — | | | | 10,543 | | |
Actual (loss) return on plan assets | | | (77,519 | ) | | | 30,845 | | | | 37,899 | | | | (77,519 | ) |
Employer contribution | | | — | | | | 1,000 | | | | 450 | | | | — | |
Acquisitions (relates to the acquisition of ButterKrust — see Note 10) | | | 23,141 | | | | — | | |
Acquisitions (relates to the acquisition of ButterKrust — see Note 9) | | | | — | | | | 23,141 | |
Benefits paid | | | (14,348 | ) | | | (12,953 | ) | | | (15,725 | ) | | | (14,348 | ) |
| | | | | | | | | | |
Fair value of plan assets at end of year | | $ | 243,549 | | | $ | 312,275 | | | $ | 266,173 | | | $ | 243,549 | |
| | | | | | | | | | |
Funded status, end of year: | | | | | | | | | | | | | | | | |
Fair value of plan assets | | $ | 243,549 | | | $ | 312,275 | | | $ | 266,173 | | | $ | 243,549 | |
Benefit obligations | | | 305,974 | | | | 277,804 | | | | 320,040 | | | | 305,974 | |
| | | | | | | | | | |
Funded status and amount recognized at end of year | | $ | (62,425 | ) | | $ | 34,471 | | | $ | (53,867 | ) | | $ | (62,425 | ) |
| | | | | | | | | | |
Amounts recognized in the balance sheet: | | | | | | | | | | | | | | | | |
Noncurrent asset | | $ | — | | | $ | 34,471 | | |
Noncurrent liability | | | (62,425 | ) | | | — | | | | (53,867 | ) | | | (62,425 | ) |
| | | | | | | | | | |
Amount recognized at end of year | | $ | (62,425 | ) | | $ | 34,471 | | | $ | (53,867 | ) | | $ | (62,425 | ) |
| | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income: | | | | | | | | | | | | | | | | |
Net actuarial loss (gain) before taxes | | $ | 97,771 | | | $ | (5,231 | ) | |
Net actuarial loss before taxes | | | $ | 86,891 | | | $ | 97,771 | |
| | | | | | | | | | |
Accumulated benefit obligation at end of year | | $ | 305,423 | | | $ | 277,191 | | | $ | 319,279 | | | $ | 305,423 | |
| | | | | | | | | | |
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 all zero$320.0 million, $319.3 million, and $266.2 million, respectively, at December 29, 2007.January 2, 2010. 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 3, 2009 were $306.0 million, $305.4 million and $243.5 million, respectively.
F-37F-39
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 period-endsfiscal years ending are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
|
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 |
|
Weighted average assumptions used to determine benefit obligations: | | | | | | | | | | | | | | | | | | | | | |
Measurement date | | | 12/31/2008 | | | | 12/31/2007 | | | | 9/30/2006 | | | | 12/31/2009 | | | | 12/31/2008 | | | | 12/31/2007 | |
Discount rate | | | 6.25 | % | | | 6.25 | % | | | 6.00 | % | | | 5.98 | % | | | 6.25 | % | | | 6.25 | % |
Rate of compensation increase | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % |
Weighted average assumptions used to determine net (income) cost: | | | | | | | | | | | | | | | | | | | | | |
Measurement date | | | 1/1/2008 | | | | 1/1/2007 | | | | 10/1/2005 | | | | 1/1/2009 | | | | 1/1/2008 | | | | 1/1/2007 | |
Discount rate | | | 6.25 | %(1) | | | 6.00 | % | | | 5.75 | % | | | 6.25 | % | | | 6.25 | %(1) | | | 6.00 | % |
Expected return on plan assets | | | 8.00 | % | | | 8.00 | % | | | 8.00 | % | | | 8.00 | % | | | 8.00 | % | | | 8.00 | % |
Rate of compensation increase | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 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 2009,2010, as compared with the average annual return on the plan assets over the last 15 years of approximately 7.8%8.9% (net of investment expenses).
Plan Assets
The plan asset allocation as of the measurement dates January 3, 2009 and December 29, 2007, and target asset allocations for fiscal 2009 are as follows:
| | | | | | | | | | | | |
| | | | | Percentage of Plan
| |
| | Target
| | | Assets at the
| |
| | Allocation
| | | Measurement Date | |
Asset Category | | 2009 | | | 2008 | | | 2007 | |
|
Equity securities | | | 40-60 | % | | | 59.2 | % | | | 66.6 | % |
Debt securities | | | 10-40 | % | | | 12.3 | % | | | 9.3 | % |
Real estate | | | 0-25 | % | | | 4.4 | % | | | 6.7 | % |
Other diversifying strategies(1) | | | 0-40 | % | | | 14.0 | % | | | 13.7 | % |
Cash | | | 0-25 | % | | | 6.3 | % | | | 0.7 | % |
Other | | | 0 | % | | | 3.8 | % | | | 3.0 | % |
| | | | | | | | | | | | |
Total | | | | | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | |
| | |
(1) | | Includes, but not limited to, absolute return funds. |
Equity securities include Flowers’ common stock of 1,346,828 shares and 1,846,828 shares in the amount of $32.1 million and $44.2 million (13.2% and 14.1% of total plan assets) as of January 3, 2009 and December 29, 2007, respectively.
F-38
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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-40
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, 2009, by asset category are as follows (amounts in thousands):
| | | | | | | | | | | | | | | | |
| | Fair value of Pension Plan Assets as of December 31, 2009 | |
| | Quoted prices in
| | | | | | | | | | |
| | active markets
| | | Significant
| | | Significant
| | | | |
| | for identical
| | | Observable Inputs
| | | Unobservable
| | | | |
Asset Category | | 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 | |
| | | | | | | | | | | | | | | | |
| | |
(a) | | This category includes funds with the principal strategy to invest primarily in long positions in international equity securities. |
|
(b) | | This category invests primarily in U.S. government issued securities. |
|
(c) | | This category invests primarily in absolute return strategy funds. |
|
(d) | | This category includes funds that invest primarily in U.S. commercial real estate. |
|
(e) | | This category invests primarily guaranteed insurance contracts through various U.S. insurance companies. |
|
(f) | | This category invests primarily in hedged equity funds. |
|
(g) | | This category 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 Changes in Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Fixed income
| | | | Guaranteed
| | | | | | Other assets and
| | |
| | securities -
| | Real Estate
| | Insurance
| | Hedged Equity
| | Absolute Return
| | liabilities and
| | |
| | Alternative | | Funds | | Contracts | | Funds | | Funds | | accrued income | | Totals |
|
Balance at December 31, 2008 | | $ | 11,327 | | | $ | 14,795 | | | $ | 8,768 | | | $ | 25,909 | | | $ | 32,265 | | | $ | — | | | $ | 93,064 | |
Actual return on plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | — | |
Relating to assets still held at the reporting date | | | 3,460 | | | | (7,025 | ) | | | 620 | | | | 4,004 | | | | 5,773 | | | | 134 | | | | 6,966 | |
Relating to assets sold during the period | | | 448 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 448 | |
Purchases, sales, and settlements | | | (2,000 | ) | | | (8 | ) | | | (102 | ) | | | — | | | | — | | | | 22 | | | | (2,088 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance at December 31, 2009 | | $ | 13,235 | | | $ | 7,762 | | | $ | 9,286 | | | $ | 29,913 | | | $ | 38,038 | | | $ | 156 | | | $ | 98,390 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-41
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2009 and December 31, 2008, and target asset allocations for fiscal 2010 are as follows:
| | | | | | | | | | | | |
| | | | Percentage of Plan
|
| | Target
| | Assets at the
|
| | Allocation
| | Measurement Date |
Asset Category | | 2010 | | 2009 | | 2008 |
|
Equity securities | | | 40-60 | % | | | 51.8 | | | | 47.6 | |
Fixed income securities | | | 10-40 | % | | | 13.0 | | | | 12.3 | |
Real estate | | | 0-25 | % | | | 2.9 | | | | 6.1 | |
Other diversifying strategies(1) | | | 0-40 | % | | | 29.0 | | | | 27.5 | |
Short term investments and cash | | | 0-25 | % | | | 3.3 | | | | 6.3 | |
Other | | | 0 | % | | | 0.0 | | | | 0.2 | |
| | | | | | | | | | | | |
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 $32.0 million and $32.1 million (12.0% and 13.2% of total plan assets) as of December 31, 2009 and December 31, 2008, respectively.
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 | | | Required | | Discretionary |
| | (Amounts in thousands) | | | (Amounts in thousands) |
|
2006 | | $ | — | | | $ | 14,000 | | |
2007 | | $ | — | | | $ | 1,000 | | | $ | — | | | $ | 1,000 | |
2008 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
2009 | | | $ | 450 | | | $ | — | |
All contributions are made in cash. The contributions made during fiscal 2006 and fiscal 2007 were not required to be made by the minimum funding requirements of ERISA, but the company believes,believed, due to its strong cash flow and financial position, these were thethis was an appropriate times intime at which to make the contributionscontribution 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 2009,2010, the company expects to contribute approximately $2.2$0.8 million to its pension plans. This amount represents estimated minimum pension contributions required under ERISA and the Pension Protection Act of 2006 (“PPA”)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 amount may also change due to additional regulatory guidance under the PPA which is forthcoming. The Worker, Retiree, and Employer Recovery Act of 2008 (“WRERA”) was signed into law on December 23, 2008. WRERA grantsgranted plan sponsors relief from certain funding requirements and benefit restrictions, and also providesprovided some technical corrections to the PPA. One of the technical corrections allowsallowed the use of asset smoothing, with limitations, for up to a24-month period in determining funding requirements. The company has not yet determined whether it will elect this option. Ifelected to use asset smoothing for the company were to elect this option,2009 plan year. As a result, contributions may be deferred to later years or reduced through market recovery. The company continues to review various contribution scenarios basedIn October 2009, the IRS released final regulations on current market conditionscertain aspects of minimum funding requirements and options available to plan sponsorsbenefit restrictions under the PPA. The
F-39F-42
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2009, 2008 fiscaland 2007 fiscal 2006 and expected to be paid from fiscal 20092010 through fiscal 2018.2019. All benefits are expected to be paid from the plans’ assets.
| | | | | | | | |
| | Pension Benefits | | | Pension Benefits |
| | (Amounts in thousands) | | | (Amounts in thousands) |
|
2006 | | $ | 12,271 | | |
2007 | | $ | 12,953 | | | $ | 12,953 | |
2008 | | $ | 14,348 | | | $ | 14,348 | |
2009 | | | $ | 15,725 | |
Estimated Future Payments: | | | | | | | |
2009 | | $ | 16,171 | | |
2010 | | $ | 16,472 | | | $ | 16,769 | |
2011 | | $ | 16,783 | | | $ | 16,984 | |
2012 | | $ | 17,081 | | | $ | 17,446 | |
2013 | | $ | 17,671 | | | $ | 18,002 | |
2014 – 2018 | | $ | 97,612 | | |
2014 | | | $ | 18,437 | |
2015 – 2019 | | | $ | 101,577 | |
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 an up-front deductible, 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 10)9,Acquisitions). The ButterKrust plan provides medical coverage to retirees and their spouses. 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; other union employees at the Lakeland facility will be eligible for the Flowers plan. In addition, certain medical plan provisions were changed in the ButterKrust plan. These changes resulted in a remeasurement and subsequent transfer of
F-40F-43
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
benefit obligations from the ButterKrust plan to the Flowers plan. Following this interplan transfer, benefit obligations were remeasured to reflect benefits in the Flowers plan which resulted in a decrease in obligations.
The net periodic postretirement benefit cost for the company postretirement benefit plans includes the following components:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | For the
| | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Service cost | | $ | 514 | | | $ | 302 | | | $ | 321 | | | $ | 861 | | | $ | 514 | | | $ | 302 | |
Interest cost | | | 661 | | | | 389 | | | | 404 | | | | 1,113 | | | | 661 | | | | 389 | |
Amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Prior service cost | | | 333 | | | | 333 | | | | 333 | | | | 333 | | | | 333 | | | | 333 | |
Actuarial loss | | | — | | | | — | | | | 21 | | | | 34 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total net periodic benefit cost | | | 1,508 | | | | 1,024 | | | | 1,079 | | | | 2,341 | | | | 1,508 | | | | 1,024 | |
Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Current year actuarial loss | | | 1,559 | | | | 237 | | | | — | | |
Current year actuarial (gain) loss | | | | (1,612 | ) | | | 1,559 | | | | 237 | |
Current year prior service (credit) cost | | | | (1,234 | ) | | | — | | | | — | |
Amortization of actuarial gain (loss) | | | | (34 | ) | | | — | | | | — | |
Amortization of prior service (cost) credit | | | (333 | ) | | | (333 | ) | | | — | | | | (333 | ) | | | (333 | ) | | | (333 | ) |
| | | | | | | | |
Total recognized in other comprehensive (loss) income | | | | (3,213 | ) | | | 1,226 | | | | (96 | ) |
| | | | | | | | | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive income | | $ | 2,734 | | | $ | 928 | | | $ | 1,079 | | | $ | (872 | ) | | $ | 2,734 | | | $ | 928 | |
| | | | | | | | | | | | | | |
Approximately $0.4$(0.1) million will be amortized from accumulated other comprehensive income into net periodic benefit cost in fiscal 20092010 relating to the company’s postretirement benefit plan.plans.
F-41F-44
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 3,
| | December 29,
| | | January 2,
| | January 3,
| |
| | 2009 | | 2007 | | | 2010 | | 2009 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 7,002 | | | $ | 6,586 | | | $ | 17,395 | | | $ | 7,002 | |
Elimination of early measurement date | | | — | | | | 70 | | |
Service cost | | | 514 | | | | 302 | | | | 861 | | | | 514 | |
Interest cost | | | 661 | | | | 389 | | | | 1,113 | | | | 661 | |
Participant contributions | | | 398 | | | | 221 | | | | 412 | | | | 398 | |
Actuarial loss (gain) | | | 1,559 | | | | 237 | | | | (1,612 | ) | | | 1,559 | |
Benefits paid | | | (1,148 | ) | | | (803 | ) | | | (1,903 | ) | | | (1,148 | ) |
Less federal subsidy on benefits paid | | | 31 | | | | — | | | | 82 | | | | 31 | |
Acquisition (relates to the acquisition of ButterKrust — see Note 10) | | | 8,378 | | | | — | | |
Plan amendments | | | | (1,234 | ) | | | — | |
Acquisition (relates to the acquisition of ButterKrust — see Note 9) | | | | — | | | | 8,378 | |
| | | | | | | | | | |
Benefit obligation at end of year | | $ | 17,395 | | | $ | 7,002 | | | $ | 15,114 | | | $ | 17,395 | |
| | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Employer contributions | | | 750 | | | | 582 | | | | 1,491 | | | | 750 | |
Participant contributions | | | 398 | | | | 221 | | | | 412 | | | | 398 | |
Benefits paid | | | (1,148 | ) | | | (803 | ) | | | (1,903 | ) | | | (1,148 | ) |
| | | | | | | | | | |
Fair value of plan assets at end of year | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Funded status, end of year: | | | | | | | | | | | | | | | | |
Fair value of plan assets | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Benefit obligations | | | 17,395 | | | | 7,002 | | | | 15,114 | | | | 17,395 | |
| | | | | | | | | | |
Funded status and amount recognized at end of year | | $ | (17,395 | ) | | $ | (7,002 | ) | | $ | (15,114 | ) | | $ | (17,395 | ) |
| | | | | | | | | | |
Amounts recognized in the balance sheet: | | | | | | | | | | | | | | | | |
Current liability | | $ | (922 | ) | | $ | (403 | ) | | $ | (841 | ) | | $ | (922 | ) |
Noncurrent liability | | | (16,473 | ) | | | (6,599 | ) | | | (14,273 | ) | | | (16,473 | ) |
| | | | | | | | | | |
Amount recognized at end of year | | $ | (17,395 | ) | | $ | (7,002 | ) | | $ | (15,114 | ) | | $ | (17,395 | ) |
| | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income: | | | | | | | | | |
Amounts recognized in accumulated other comprehensive (loss) income: | | | | | | | | | |
Net actuarial loss before taxes | | $ | 1,772 | | | $ | 214 | | | $ | 126 | | | $ | 1,772 | |
Prior service cost before taxes | | | 416 | | | | 749 | | |
Prior service (credit) cost before taxes | | | | (1,150 | ) | | | 416 | |
| | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income | | $ | 2,188 | | | $ | 963 | | |
Amounts recognized in accumulated other comprehensive (loss) income | | | $ | (1,024 | ) | | $ | 2,188 | |
| | | | | | | | | | |
F-42F-45
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumptions used in accounting for the company’s unfunded postretirement benefit plans at each of the respective period-endsfiscal years ending are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
|
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 |
|
Weighted average assumptions used to determine benefit obligations: | | | | | | | | | | | | | | | | | | | | | |
Measurement date | | | 12/31/2008 | | | | 12/31/2007 | | | | 9/30/2006 | | | | 12/31/2009 | | | | 12/31/2008 | | | | 12/31/2007 | |
Discount rate | | | 6.25 | % | | | 6.00 | % | | | 5.75 | % | | | 5.75 | % | | | 6.25 | % | | | 6.00 | % |
Rate of compensation increase | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Health care cost trend rate used to determine benefit obligations: | | | | | | | | | | | | | | | | | | | | | |
Initial rate | | | 8.00 | % | | | 8.50 | % | | | 9.00 | % | | | 8.00 | % | | | 8.00 | % | | | 8.50 | % |
Ultimate rate | | | 5.00 | % | | | 5.00 | % | | | 5.50 | % | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
Year trend reaches the ultimate rate | | | 2015 | | | | 2015 | | | | 2011 | | | | 2016 | | | | 2015 | | | | 2015 | |
Weighted average assumptions used to determine net cost: | | | | | | | | | | | | | |
Weighted average assumptions used to determine net periodic cost: | | | | | | | | | | |
Measurement date | | | 1/1/2008 | | | | 1/1/2007 | | | | 10/1/2005 | | | | 1/1/2009 | | | | 1/1/2008 | | | | 1/1/2007 | |
Discount rate | | | 6.00 | %(1) | | | 5.75 | % | | | 5.75 | % | | | 6.25 | % | | | 6.00 | %(1) | | | 5.75 | % |
Expected return on plan assets | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Rate of compensation increase | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Health care cost trend rate used to determine net cost: | | | | | | | | | | | | | | | | | | | | | |
Initial rate | | | 8.50 | % | | | 9.00 | % | | | 10.00 | % | | | 8.00 | % | | | 8.50 | % | | | 9.00 | % |
Ultimate rate | | | 5.00 | % | | | 5.50 | % | | | 5.50 | % | | | 5.00 | % | | | 5.00 | % | | | 5.50 | % |
Year trend reaches the ultimate rate | | | 2015 | | | | 2011 | | | | 2011 | | | | 2015 | | | | 2015 | | | | 2011 | |
| | |
(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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One-Percentage Point Decrease | | One-Percentage Point Increase | | | One-Percentage Point Decrease | | One-Percentage Point Increase |
| | For the Year Ended | | For the Year Ended | | | For the Year Ended | | For the Year Ended |
| | January 3,
| | December 29,
| | December 30,
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| | January 2,
| | January 3,
| | December 29,
|
| | 2009 | | 2007 | | 2006 | | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | | 2010 | | 2009 | | 2007 |
| | (Amounts in thousands) | | | (Amounts in thousands) |
|
Effect on total of service and interest cost | | $ | (109 | ) | | $ | (75 | ) | | $ | (74 | ) | | $ | 125 | | | $ | 66 | | | $ | 65 | | | $ | (187 | ) | | $ | (109 | ) | | $ | (75 | ) | | $ | 214 | | | $ | 125 | | | $ | 66 | |
Effect on postretirement benefit obligation | | $ | (1,254 | ) | | $ | (484 | ) | | $ | (392 | ) | | $ | 1,417 | | | $ | 556 | | | $ | 451 | | | $ | (1,134 | ) | | $ | (1,254 | ) | | $ | (484 | ) | | $ | 1,258 | | | $ | 1,417 | | | $ | 556 | |
F-43F-46
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash Flows
Company contributions are as follows:follows (amounts in thousands):
| | | | | | | | |
| | Employer Net
| | | Employer Net
|
Year | | Contribution | | | Contribution |
|
2006 | | $ | 398 | | |
2007 | | $ | 582 | | | $ | 582 | |
2008 | | $ | 750 | | | $ | 719 | |
2009 (Expected) | | $ | 954 | | |
2009 | | | $ | 1,409 | |
2010 (Expected) | | | $ | 865 | |
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$0.9 million expected funding for postretirement benefit plans during 2009,2010, the entire amount will be required to pay for benefits. Contributions by participants to postretirement benefits were $0.4 million, $0.2$0.4 million and $0.2 million for fiscal years 2009, 2008 fiscaland 2007, and fiscal 2006, respectively.
Benefit Payments
The following are benefits paid by the company during fiscal years 2009, 2008 fiscaland 2007 and fiscal 2006 and expected to be paid from fiscal 20092010 through fiscal 2018.2019. 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 | | | Postretirement Benefits |
| | (Amounts in thousands) | | | (Amounts in thousands) |
| | Employer Gross
| | MMA Subsidy
| | | Employer Gross
| | MMA Subsidy
|
| | Contribution | | (Income) | | | Contribution | | (Income) |
|
2006 | | $ | 398 | | | $ | — | | |
2007 | | $ | 582 | | | $ | — | | | $ | 582 | | | $ | — | |
2008 | | $ | 781 | | | $ | (31 | ) | | $ | 750 | | | $ | (31 | ) |
2009 | | | $ | 1,491 | | | $ | (82 | ) |
Estimated Future Payments: | | | | | | | | | | | | | | |
2009 | | $ | 1,036 | | | $ | (83 | ) | |
2010 | | $ | 1,091 | | | $ | (90 | ) | | $ | 923 | | | $ | (58 | ) |
2011 | | $ | 1,200 | | | $ | (96 | ) | | $ | 1,034 | | | $ | (63 | ) |
2012 | | $ | 1,289 | | | $ | (106 | ) | | $ | 1,097 | | | $ | (68 | ) |
2013 | | $ | 1,408 | | | $ | (114 | ) | | $ | 1,211 | | | $ | (71 | ) |
2014 – 2018 | | $ | 8,786 | | | $ | (425 | ) | |
2014 | | | $ | 1,291 | | | $ | (74 | ) |
2015 – 2019 | | | $ | 7,697 | | | $ | (345 | ) |
Other Plans
The company contributes to various multiemployer, union-administered defined benefit 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 $2.0 million for fiscal 2009, $0.9 million for fiscal 2008 $0.5 million for fiscal 2007 and $0.5 million for fiscal 2006.2007. The increaseincreases from fiscal 2007 to fiscal 2008 and from fiscal 2008 to fiscal 2009 is primarily due to the ButterKrust and Holsum acquisitions. At January 2, 2010 and January 3, 2009 and December 29, 2007 the company owed payments of $0.1 million and $0.03$0.1 million, respectively, to these types of plans.
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
F-44F-47
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2009, 2008 fiscaland 2007, and fiscal 2006, the total cost and contributions were $15.6 million, $14.9 million $12.7 million and $11.9$12.7 million, respectively.
The company also has several 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.
The company’s income tax expense consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the
| | For the
| | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Current Taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | $ | 61,005 | | | $ | 52,866 | | | $ | 50,587 | | | $ | 63,280 | | | $ | 61,005 | | | $ | 52,866 | |
State | | | 4,158 | | | | 8,179 | | | | 6,361 | | | | 7,460 | | | | 4,158 | | | | 8,179 | |
| | | | | | | | | | | | | | |
| | | 65,163 | | | | 61,045 | | | | 56,948 | | | | 70,740 | | | | 65,163 | | | | 61,045 | |
| | | | | | | | | | | | | | |
Deferred Taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | 1,763 | | | | (6,046 | ) | | | (11,236 | ) | | | 1,147 | | | | 1,763 | | | | (6,046 | ) |
State | | | 818 | | | | (29 | ) | | | (408 | ) | | | 2,160 | | | | 818 | | | | (29 | ) |
| | | | | | | | | | | | | | |
| | | 2,581 | | | | (6,075 | ) | | | (11,644 | ) | | | 3,307 | | | | 2,581 | | | | (6,075 | ) |
| | | | | | | | | | | | | | |
Income tax expense | | $ | 67,744 | | | $ | 54,970 | | | $ | 45,304 | | | $ | 74,047 | | | $ | 67,744 | | | $ | 54,970 | |
| | | | | | | | | | | | | | |
Deferred tax assets (liabilities) are comprised of the following:
| | | | | | | | |
| | January 2,
| | | January 3,
| |
| | 2010 | | | 2009 | |
| | (Amounts in thousands) | |
|
Self-insurance | | $ | 5,194 | | | $ | 5,212 | |
Compensation and employee benefits | | | 10,499 | | | | 11,510 | |
Deferred income | | | 7,417 | | | | 6,949 | |
Loss carryforwards | | | 8,324 | | | | 10,056 | |
Equity-based compensation | | | 9,130 | | | | 6,846 | |
Hedging | | | 7,894 | | | | 25,663 | |
Pension | | | 20,360 | | | | 24,883 | |
Other | | | 11,594 | | | | 11,499 | |
Deferred tax assets valuation allowance | | | (3,647 | ) | | | (4,520 | ) |
| | | | | | | | |
Deferred tax assets | | | 76,765 | | | | 98,098 | |
| | | | | | | | |
Depreciation | | | (76,431 | ) | | | (71,040 | ) |
Intangible Assets | | | (40,950 | ) | | | (40,856 | ) |
Other | | | (2,418 | ) | | | (2,967 | ) |
| | | | | | | | |
Deferred tax liabilities | | | (119,799 | ) | | | (114,863 | ) |
| | | | | | | | |
Net deferred tax liability | | $ | (43,034 | ) | | $ | (16,765 | ) |
| | | | | | | | |
F-45F-48
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax assets (liabilities) are comprised of the following:
| | | | | | | | |
| | January 3,
| | | December 29,
| |
| | 2009 | | | 2007 | |
| | (Amounts in thousands) | |
|
Self-insurance | | $ | 5,212 | | | $ | 5,738 | |
Compensation and employee benefits | | | 11,510 | | | | 8,883 | |
Deferred income | | | 6,949 | | | | 5,530 | |
Loss carryforwards | | | 10,056 | | | | 7,557 | |
Equity-based compensation | | | 6,846 | | | | 5,139 | |
Hedging | | | 25,663 | | | | — | |
Pension | | | 24,883 | | | | — | |
Other | | | 11,499 | | | | 7,091 | |
Deferred tax assets valuation allowance | | | (4,520 | ) | | | (4,649 | ) |
| | | | | | | | |
Deferred tax assets | | | 98,098 | | | | 35,289 | |
| | | | | | | | |
Depreciation | | | (71,040 | ) | | | (50,126 | ) |
Hedging | | | — | | | | (12,217 | ) |
Intangible Assets | | | (40,856 | ) | | | (7,040 | ) |
Pension | | | — | | | | (12,874 | ) |
Other | | | (2,967 | ) | | | (2,143 | ) |
| | | | | | | | |
Deferred tax liabilities | | | (114,863 | ) | | | (84,400 | ) |
| | | | | | | | |
Net deferred tax liability | | $ | (16,765 | ) | | $ | (49,111 | ) |
| | | | | | | | |
VariousThe company and various subsidiaries have state net operating loss carryforwards of $151.8$118.9 million with expiration dates through fiscal 2023. The utilization 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 the
| | For the
| | | For the
| | For the
| | For the
| |
| | 53 Weeks Ended | | 52 Weeks Ended | | | 52 Weeks Ended | | 53 Weeks Ended | | 52 Weeks Ended | |
| | January 3,
| | December 29,
| | December 30,
| | | January 2,
| | January 3,
| | December 29,
| |
| | 2009 | | 2007 | | 2006 | | | 2010 | | 2009 | | 2007 | |
| | (Amounts in thousands) | | | (Amounts in thousands) | |
|
Tax at U.S. federal income tax rate | | $ | 66,518 | | | $ | 53,580 | | | $ | 43,204 | | | $ | 72,716 | | | $ | 66,518 | | | $ | 53,580 | |
State income taxes, net of federal income tax benefit | | | 4,165 | | | | 5,730 | | | | 4,080 | | | | 7,170 | | | | 4,165 | | | | 5,730 | |
Decrease in valuation allowance | | | (129 | ) | | | (54 | ) | | | (223 | ) | | | (186 | ) | | | (129 | ) | | | (54 | ) |
Section 199 qualifying production activities | | | (3,720 | ) | | | (2,977 | ) | | | (1,304 | ) | | | (3,999 | ) | | | (3,720 | ) | | | (2,977 | ) |
Jobs tax credit | | | (133 | ) | | | (245 | ) | | | (153 | ) | | | (244 | ) | | | (133 | ) | | | (245 | ) |
Other | | | 1,043 | | | | (1,064 | ) | | | (300 | ) | | | (1,410 | ) | | | 1,043 | | | | (1,064 | ) |
| | | | | | | | | | | | | | |
Income tax expense | | $ | 67,744 | | | $ | 54,970 | | | $ | 45,304 | | | $ | 74,047 | | | $ | 67,744 | | | $ | 54,970 | |
| | | | | | | | | | | | | | |
F-46
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, the company recognized income tax benefits in discontinued operations of $4.7 million for fiscal 2006 (See Note 6). The company also recognized an income tax benefit during fiscal 2006 of $0.4 million related to the cumulative effect of a change in accounting principle as a result of the adoption of SFAS 123(R).
During fiscal 2006, the IRS finalized its audit of the company’s tax years 2000 and 2001. Based upon the results of this audit, the company reversed previously established tax reserves in the amount of $6.0 million related to the deductibility of certain transaction costs incurred in connection with the divestiture of the company’s Keebler investment in 2001. A deduction was allowed for the majority of these costs; therefore, the reserve was reversed through discontinued operations in the third quarter of fiscal 2006.
The IRS also finalized the results of its audit of the company’s fiscal 2003 income tax return during fiscal 2006. Based on the results of this audit, the company accrued $0.5 million of income tax expense related to Mrs. Smith’s, which was sold during fiscal 2003. This adjustment is also recorded in discontinued operations in the consolidated statement of income for the fifty-two weeks ended December 30, 2006.
The company is currently under audit by the IRS for the fiscal 20062007 and 2008 tax year.years.
In June 2006, the FASBnew guidance was issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifiesthat clarified the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute forstatements. The guidance provides that the financial statement recognition and measurementbenefit of aan uncertain tax position taken or expected to be taken in a tax return. FIN 48return may be recognized when it is more likely than not that the position will be sustained upon examination. It also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 wasThe company adopted by the companythis standard as of December 31, 2006. As a result of the adoption, of FIN 48, the company recorded a cumulative effect adjustment which reduced retained earnings $0.4 million as of December 31, 2006. The gross amount of unrecognized tax benefits was $4.5$4.6 million and $4.6$4.5 million as of January 2, 2010 and January 3, 2009, and December 29, 2007, respectively. These amounts are exclusive of interest accrued and are recorded in other long-term liabilities on the Consolidated Balance Sheet.consolidated balance sheet. If recognized, the $4.5$4.6 million (less $0.8 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 accrued interest of approximately $0.5$0.3 million and $0.9$0.5 million at January 2, 2010 and January 3, 2009, and December 29, 2007, 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 (within the meaning of FIN 48).jurisdictions. The company is no longer subject to federal examination for years prior to 2005,2006, and is no longer subject to state examination with limited exceptions for years prior to 2003.
The following is a reconciliation of the total amounts of unrecognized tax benefits for fiscal 2008 (amounts in thousands):
| | | | |
Unrecognized tax benefit at December 29, 2007 | | $ | 4,585 | |
Gross increases — tax positions in a prior period | | | 3,103 | |
Settlements | | | (2,091 | ) |
Lapses of statutes of limitations | | | (1,050 | ) |
| | | | |
Unrecognized tax benefit at January 3, 2009 | | $ | 4,547 | |
| | | | |
2004.
F-47F-49
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a reconciliation of the total amounts of unrecognized tax benefits for fiscal years 2009, 2008 and 2007 (amounts in thousands):
| | | | | | | | | | | | |
| | For the
| | | For the
| | | For the
| |
| | 52 Weeks Ended | | | 53 Weeks Ended | | | 52 Weeks Ended | |
| | January 2,
| | | January 3,
| | | December 29,
| |
| | 2010 | | | 2009 | | | 2007 | |
| | (Amounts in thousands) | |
|
Unrecognized tax benefit at beginning of fiscal year | | $ | 4,547 | | | $ | 4,585 | | | $ | 4,408 | |
Gross decreases — tax positions in a prior period | | | — | | | | — | | | | (342 | ) |
Gross increases — tax positions in a current period | | | 658 | | | | — | | | | 935 | |
Gross increases — tax positions in a prior period | | | 831 | | | | 3,103 | | | | — | |
Settlements | | | — | | | | (2,091 | ) | | | (132 | ) |
Lapses of statutes of limitations | | | (1,407 | ) | | | (1,050 | ) | | | (284 | ) |
| | | | | | | | | | | | |
Unrecognized tax benefit at end of fiscal year | | $ | 4,629 | | | $ | 4,547 | | | $ | 4,585 | |
| | | | | | | | | | | | |
| |
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 $16.6$16.7 million and $17.6$16.6 million related to self-insurance reserves at January 2, 2010 and January 3, 2009, and December 29, 2007, 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 relating to debt, leases and other commitments.
F-50
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. DuringInformation regarding the second quarter of fiscal 2008, the company’s Tucker, Georgia operation was transferred from the DSD segment to theoperations in these reportable segments is as follows:
| | | | | | | | | | | | |
| | For the
| | | For the
| | | For the
| |
| | 52 Weeks Ended | | | 53 Weeks Ended | | | 52 Weeks Ended | |
| | January 2,
| | | January 3,
| | | December 29,
| |
| | 2010 | | | 2009 | | | 2007 | |
| | (Amounts in thousands) | |
|
Sales: | | | | | | | | | | | | |
DSD | | $ | 2,159,065 | | | $ | 2,013,927 | | | $ | 1,656,837 | |
Warehouse delivery | | | 577,614 | | | | 512,970 | | | | 470,030 | |
Eliminations: | | | | | | | | | | | | |
Sales from Warehouse delivery to DSD | | | (111,893 | ) | | | (97,371 | ) | | | (82,448 | ) |
Sales from DSD to Warehouse delivery | | | (23,937 | ) | | | (14,634 | ) | | | (7,745 | ) |
| | | | | | | | | | | | |
| | $ | 2,600,849 | | | $ | 2,414,892 | | | $ | 2,036,674 | |
| | | | | | | | | | | | |
Depreciation and amortization: | | | | | | | | | | | | |
DSD | | $ | 64,578 | | | $ | 57,447 | | | $ | 52,222 | |
Warehouse delivery | | | 16,062 | | | | 15,549 | | | | 13,992 | |
Other(1) | | | 288 | | | | 316 | | | | (120 | ) |
| | | | | | | | | | | | |
| | $ | 80,928 | | | $ | 73,312 | | | $ | 66,094 | |
| | | | | | | | | | | | |
Income from operations: | | | | | | | | | | | | |
DSD | | $ | 192,539 | | | $ | 185,292 | | | $ | 147,127 | |
Warehouse delivery | | | 51,326 | | | | 25,666 | | | | 26,046 | |
Other(1) | | | (37,532 | ) | | | (28,256 | ) | | | (28,492 | ) |
| | | | | | | | | | | | |
| | $ | 206,333 | | | $ | 182,702 | | | $ | 144,681 | |
| | | | | | | | | | | | |
Net interest income | | $ | 1,426 | | | $ | 7,349 | | | $ | 8,404 | |
| | | | | | | | | | | | |
Income before income taxes | | $ | 207,759 | | | $ | 190,051 | | | $ | 153,085 | |
| | | | | | | | | | | | |
Capital expenditures: | | | | | | | | | | | | |
DSD | | $ | 54,586 | | | $ | 71,413 | | | $ | 45,328 | |
Warehouse delivery | | | 14,670 | | | | 12,212 | | | | 39,448 | |
Other(1) | | | 2,837 | | | | 3,236 | | | | 3,349 | |
| | | | | | | | | | | | |
| | $ | 72,093 | | | $ | 86,861 | | | $ | 88,125 | |
| | | | | | | | | | | | |
F-48F-51
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
warehouse delivery segment. Prior period information has been reclassified to reflect this change. Information regarding the operations in these reportable segments is as follows:
| | | | | | | | | | | | |
| | For the
| | | For the
| |
| | 53 Weeks Ended | | | 52 Weeks Ended | |
| | January 3,
| | | December 29,
| | | December 30,
| |
| | 2009 | | | 2007 | | | 2006 | |
| | (Amounts in thousands) | |
|
Sales: | | | | | | | | | | | | |
DSD | | $ | 2,013,927 | | | $ | 1,656,837 | | | $ | 1,518,822 | |
Warehouse delivery | | | 512,970 | | | | 470,030 | | | | 457,644 | |
Eliminations: | | | | | | | | | | | | |
Sales from Warehouse delivery to DSD | | | (97,371 | ) | | | (82,448 | ) | | | (81,713 | ) |
Sales from DSD to Warehouse delivery | | | (14,634 | ) | | | (7,745 | ) | | | (6,099 | ) |
| | | | | | | | | | | | |
| | $ | 2,414,892 | | | $ | 2,036,674 | | | $ | 1,888,654 | |
| | | | | | | | | | | | |
Depreciation and Amortization: | | | | | | | | | | | | |
DSD | | $ | 57,447 | | | $ | 52,222 | | | $ | 50,352 | |
Warehouse delivery | | | 15,549 | | | | 13,992 | | | | 14,075 | |
Other(1) | | | 316 | | | | (120 | ) | | | (177 | ) |
| | | | | | | | | | | | |
| | $ | 73,312 | | | $ | 66,094 | | | $ | 64,250 | |
| | | | | | | | | | | | |
Income (Loss) from Operations: | | | | | | | | | | | | |
DSD | | $ | 185,292 | | | $ | 147,127 | | | $ | 125,056 | |
Warehouse delivery | | | 25,666 | | | | 26,046 | | | | 19,671 | |
Other(1) | | | (28,256 | ) | | | (28,492 | ) | | | (26,234 | ) |
| | | | | | | | | | | | |
| | $ | 182,702 | | | $ | 144,681 | | | $ | 118,493 | |
| | | | | | | | | | | | |
Net Interest Income | | $ | 7,349 | | | $ | 8,404 | | | $ | 4,946 | |
| | | | | | | | | | | | |
Income From Continuing Operations Before Income Taxes, Minority Interest and Cumulative Effect of a Change in Accounting Principle | | $ | 190,051 | | | $ | 153,085 | | | $ | 123,439 | |
| | | | | | | | | | | | |
Capital Expenditures: | | | | | | | | | | | | |
DSD | | $ | 71,413 | | | $ | 45,328 | | | $ | 43,267 | |
Warehouse delivery | | | 12,212 | | | | 39,448 | | | | 13,547 | |
Other(1) | | | 3,236 | | | | 3,349 | | | | 4,978 | |
| | | | | | | | | | | | |
| | $ | 86,861 | | | $ | 88,125 | | | $ | 61,792 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | As of | | | As of | |
| | January 3,
| | December 29,
| | | January 2,
| | January 3,
| |
| | 2009 | | 2007 | | | 2010 | | 2009 | |
|
Assets: | | | | | | | | | | | | | | | | |
DSD | | $ | 1,044,791 | | | $ | 702,253 | | | $ | 1,050,398 | | | $ | 1,044,791 | |
Warehouse delivery | | | 193,451 | | | | 190,179 | | | | 226,515 | | | | 193,451 | |
Other(2) | | | 115,002 | | | | 95,103 | | | | 74,529 | | | | 115,002 | |
| | | | | | | | | | |
| | $ | 1,353,244 | | | $ | 987,535 | | | $ | 1,351,442 | | | $ | 1,353,244 | |
| | | | | | | | | | |
| | |
(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 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 52 Weeks Ended | | | For the 53 Weeks Ended | | | For the 52 Weeks Ended | |
| | January 2, 2010 | | | January 3, 2009 | | | December 29, 2007 | |
| | | | | Warehouse
| | | | | | | | | Warehouse
| | | | | | | | | Warehouse
| | | | |
| | DSD | | | delivery | | | Total | | | DSD | | | delivery | | | Total | | | DSD | | | delivery | | | Total | |
|
Branded Retail | | $ | 1,212,198 | | | $ | 136,748 | | | $ | 1,348,946 | | | $ | 1,161,594 | | | $ | 112,704 | | | $ | 1,274,298 | | | $ | 974,941 | | | $ | 95,583 | | | $ | 1,070,524 | |
Store Branded Retail | | | 358,647 | | | | 56,405 | | | | 415,052 | | | | 303,193 | | | | 52,197 | | | | 355,390 | | | | 222,172 | | | | 44,499 | | | | 266,671 | |
Non-retail and Other | | | 564,283 | | | | 272,568 | | | | 836,851 | | | | 534,506 | | | | 250,698 | | | | 785,204 | | | | 451,979 | | | | 247,500 | | | | 699,479 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,135,128 | | | $ | 465,721 | | | $ | 2,600,849 | | | $ | 1,999,293 | | | $ | 415,599 | | | $ | 2,414,892 | | | $ | 1,649,092 | | | $ | 387,582 | | | $ | 2,036,674 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-49F-52
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales by product category in each reportable segment are as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 53 Weeks Ended | | | For the 52 Weeks Ended | |
| | January 3, 2009 | | | December 29, 2007 | | | December 30, 2006 | |
| | | | | Warehouse
| | | | | | | | | Warehouse
| | | | | | | | | Warehouse
| | | | |
| | DSD | | | delivery | | | Total | | | DSD | | | delivery | | | Total | | | DSD | | | delivery | | | Total | |
|
Branded Retail | | $ | 1,164,269 | | | $ | 112,844 | | | $ | 1,277,113 | | | $ | 974,941 | | | $ | 95,583 | | | $ | 1,070,524 | | | $ | 887,838 | | | $ | 95,267 | | | $ | 983,105 | |
Store Branded Retail | | | 303,224 | | | | 52,066 | | | | 355,290 | | | | 222,172 | | | | 44,499 | | | | 266,671 | | | | 197,157 | | | | 45,174 | | | | 242,331 | |
Foodservice and Other | | | 531,800 | | | | 250,689 | | | | 782,489 | | | | 451,979 | | | | 247,500 | | | | 699,479 | | | | 427,728 | | | | 235,490 | | | | 663,218 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,999,293 | | | $ | 415,599 | | | $ | 2,414,892 | | | $ | 1,649,092 | | | $ | 387,582 | | | $ | 2,036,674 | | | $ | 1,512,723 | | | $ | 375,931 | | | $ | 1,888,654 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
Note 24. | Unaudited Quarterly Financial Information |
Results of operations for each of the four quarters in the respective fiscal years are as follows. For fiscal 2009 each quarter represents a period of twelve weeks, except the first quarter, which includes sixteen weeks. For fiscal 2008, each quarter represents a period of twelve weeks, except the first quarter, which includes sixteen weeks and the fourth quarter, which includes thirteen weeks. For fiscal 2007 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 | | | 2008 | | | $ | 676,707 | | | $ | 540,656 | | | $ | 575,937 | | | $ | 621,592 | |
| | | 2007 | | | $ | 609,947 | | | $ | 477,838 | | | $ | 475,225 | | | $ | 473,664 | |
Gross margin (defined as sales less materials, supplies, labor and other production costs, excluding depreciation, amortization and distributor discounts) | | | 2008 | | | $ | 326,737 | | | $ | 247,062 | | | $ | 277,145 | | | $ | 299,986 | |
| | | 2007 | | | $ | 302,995 | | | $ | 232,896 | | | $ | 230,904 | | | $ | 230,868 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 2008 | | | $ | 35,783 | | | $ | 23,949 | | | $ | 27,415 | | | $ | 32,086 | |
| | | 2007 | | | $ | 28,493 | | | $ | 22,190 | | | $ | 22,501 | | | $ | 21,431 | |
Basic net income per common share | | | 2008 | | | $ | 0.39 | | | $ | 0.26 | | | $ | 0.30 | | | $ | 0.35 | |
| | | 2007 | | | $ | 0.32 | | | $ | 0.24 | | | $ | 0.25 | | | $ | 0.23 | |
Diluted net income per common share | | | 2008 | | | $ | 0.39 | | | $ | 0.26 | | | $ | 0.29 | | | $ | 0.34 | |
| | | 2007 | | | $ | 0.31 | | | $ | 0.24 | | | $ | 0.24 | | | $ | 0.23 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | (Amounts in thousands, except per share data) |
|
Sales | | | 2009 | | | $ | 807,007 | | | $ | 614,448 | | | $ | 602,570 | | | $ | 576,824 | |
| | | 2008 | | | $ | 676,707 | | | $ | 540,656 | | | $ | 575,937 | | | $ | 621,592 | |
Gross margin (defined as sales less materials, supplies, labor and other production costs, excluding depreciation, amortization and distributor discounts) | | | 2009 | | | $ | 377,545 | | | $ | 281,109 | | | $ | 280,325 | | | $ | 271,687 | |
| | | 2008 | | | $ | 326,737 | | | $ | 247,062 | | | $ | 277,145 | | | $ | 299,986 | |
Net income attributable to Flowers Foods, Inc. | | | 2009 | | | $ | 37,381 | | | $ | 30,341 | | | $ | 31,926 | | | $ | 30,649 | |
| | | 2008 | | | $ | 35,783 | | | $ | 23,949 | | | $ | 27,415 | | | $ | 32,086 | |
Basic net income attributable to Flowers Foods, Inc. common shareholders per share | | | 2009 | | | $ | 0.40 | | | $ | 0.33 | | | $ | 0.35 | | | $ | 0.33 | |
| | | 2008 | | | $ | 0.39 | | | $ | 0.26 | | | $ | 0.30 | | | $ | 0.35 | |
Diluted net income attributable to Flowers Foods, Inc. common shareholders per share | | | 2009 | | | $ | 0.40 | | | $ | 0.33 | | | $ | 0.34 | | | $ | 0.33 | |
| | | 2008 | | | $ | 0.39 | | | $ | 0.26 | | | $ | 0.29 | | | $ | 0.34 | |
| |
Note 25. | Subsequent Events |
The company has evaluated subsequent events since January 2, 2010, the date of these financial statements. There were no events or transactions discovered during this evaluation that require recognition or disclosure in the financial statements, other than the dividend discussed below.
Dividend. On February 20, 2009,16, 2010, the Board of Directors declared a dividend of $0.15$0.175 per share on the company’s common stock to be paid on March 20, 200916, 2010 to shareholders of record on March 6, 2009.2, 2010.
F-50F-53
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
| | | | | | | | | Additions
| | | | |
| | Beginning
| | (Reductions)
| | | | Ending
| | | Beginning
| | (Reductions)
| | | | Ending
|
| | Balance | | to Expenses | | Deductions | | Balance | | | Balance | | to Expenses | | Deductions | | Balance |
| | (Amounts in thousands) | | | (Amounts in thousands) |
|
Classification: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
Year Ended January 3, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 131 | | | | 640 | | | | 393 | | | $ | 378 | | | $ | 131 | | | | 640 | | | | 393 | | | $ | 378 | |
Inventory reserves | | $ | 134 | | | | 1,121 | | | | 661 | | | $ | 594 | | | $ | 134 | | | | 1,121 | | | | 661 | | | $ | 594 | |
Deferred tax asset valuation allowance | | $ | 4,649 | | | | (129 | ) | | | — | | | $ | 4,520 | | | $ | 4,649 | | | | (129 | ) | | | — | | | $ | 4,520 | |
Year Ended December 29, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 160 | | | | 812 | | | | 841 | | | $ | 131 | | | $ | 160 | | | | 812 | | | | 841 | | | $ | 131 | |
Inventory reserves | | $ | 201 | | | | 553 | | | | 620 | | | $ | 134 | | | $ | 201 | | | | 553 | | | | 620 | | | $ | 134 | |
Deferred tax asset valuation allowance | | $ | 5,434 | | | | (54 | ) | | | 731 | | | $ | 4,649 | | | $ | 5,434 | | | | (54 | ) | | | 731 | | | $ | 4,649 | |
Year Ended December 30, 2006 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 162 | | | | 717 | | | | 719 | | | $ | 160 | | |
Inventory reserves | | $ | 366 | | | | 910 | | | | 1,075 | | | $ | 201 | | |
Deferred tax asset valuation allowance | | $ | 6,915 | | | | (223 | ) | | | 1,258 | | | $ | 5,434 | | |