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FLO > SEC Filings for FLO > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for FLOWERS FOODS INC



Quarterly Report


The following discussion of the financial condition and results of operations of the company as of and for the twelve and twenty-eight week periods ended July 13, 2013 should be read in conjunction with the company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012.


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

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

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

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

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

There were several significant events during the twenty-eight weeks ended July 13, 2013 that will provide additional context while reading this discussion. These events include:

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

Sara Lee and Earthgrains acquisition - On February 23, 2013, the company completed its acquisition of certain assets and trademark licenses from BBU, Inc., a subsidiary of Grupo Bimbo ("BBU"). The cash used to acquire these assets was approximately $50.0 million. The company acquired from BBU in the acquisition (1) perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California. In addition, we received a perpetual, exclusive, and royalty-free license to the Earthgrains brand for a broad range of fresh bakery products in the Oklahoma City, Oklahoma, market area. The Oklahoma license purchase was completed during fiscal 2012 for an immaterial cost. We financed this acquisition with cash on hand and debt. We believe the California acquisition resulted in a bargain purchase because the Department of Justice (the "DOJ") required BBU to divest these assets, which resulted in a more favorable price to us than would have normally resulted from a typical arms-length negotiation. Thus, the fair value of the assets acquired exceeded the consideration paid by approximately $51.3 million after tax. The company agreed to a $10.0 million escrow holdback provision as a part of the Sara Lee California acquisition. The escrow holdback is described in more detail in Note 4, Acquisitions.

Acquired Hostess Assets acquisition of a business - On January 11, 2013, the company announced that it had signed two asset purchase agreements with Hostess Brands, Inc. ("Hostess"), as the "stalking horse bidder" for certain Hostess assets. One of the agreements provided for the purchase by the company of Hostess' Wonder, Nature's Pride, Merita, Home Pride and Butternut bread brands, 20 bakeries, and approximately 38 depots (the "Acquired Hostess Assets") for a purchase price of $360.0 million. We received approval for the Acquired Hostess Assets bid on January 25, 2013. The company paid $18.0 million as a deposit for the Acquired Hostess Assets bid that is recorded in other current assets on the condensed consolidated balance sheet as of July 13, 2013. On July 19, 2013, after the end of the company's second quarter of fiscal 2013, the company completed the Acquired Hostess Assets acquisition for $355.0 million as a result of a purchase price adjustment related to the Butternut trademark. Also, the company purchased 36 depots as opposed to the 38 depots included in the original bid. The second Hostess asset purchase agreement provided for the purchase of the Beefsteak brand for $30.0 million, but was topped by another bidder, and, as a result, the agreement terminated and we received a break-up fee of $0.9 million during the first quarter of 2013.

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

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

Securitization facility - On July 17, 2012 the company entered into a two-year $150.0 million accounts receivables loan and security facility (the "securitization facility"), expiring July 17, 2015. Under the terms of the securitization facility, certain affiliates of the company will sell, on an ongoing basis, specified trade receivables to a wholly-owned bankruptcy-remote entity which then sells an undivided interest in the receivable as collateral for any borrowings under the facility. The assets and liabilities of the affiliates will be reflected in our consolidated financial statements. The company used a portion of the available borrowings under the securitization facility to fund part of the purchase price for the Acquired Hostess Assets.


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

Delivery methods and segments

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

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

Consumers and our product portfolio

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

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

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

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Strengths and core competencies

We aim to achieve consistent and sustainable growth in sales and earnings by focusing on improvements in the operating results of our existing businesses and, after detailed analysis, acquiring businesses and properties that add value to the company. We believe this strategy will result in consistent and sustainable growth that will build value for our shareholders.

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

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

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

Competition and risks

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

Sales are principally affected by pricing, quality, brand recognition, new product introductions, product line extensions, marketing and service. Sales for the twelve weeks ended July 13, 2013 increased 31.8% over the twelve weeks ended July 14, 2012. Sales for the twenty-eight weeks ended July 13, 2013 increased 28.4% over the twenty-eight weeks ended July 14, 2012. As disclosed throughout this report, this increase was primarily due to volume increases resulting from the Hostess liquidation and, to a lesser extent, the Lepage acquisition in fiscal 2012 and the Sara Lee and Earthgrainsacquisition in 2013. While we expect sales to grow, we cannot provide any assurance regarding the level of growth considering the current economic environment and competitive landscape in the baking industry. The baking industry will continue to see market fluctuations as companies compete for market position in the absence of Hostess.

Commodities, such as our baking ingredients, periodically experience price fluctuations, and, for that reason, we continually monitor the market for these commodities. The cost of these inputs may fluctuate widely due to government policy and regulation, weather conditions, domestic and international demand or other unforeseen circumstances. We anticipate that our commodity costs will rise during 2013. We enter into forward purchase agreements and other derivative financial instruments in an effort to manage the impact of such volatility in raw material prices. Any decrease in the availability of these agreements and instruments could increase the effective price of these raw materials to us and significantly affect our earnings.


Our financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). These principles are numerous and complex. Our significant accounting policies are summarized in the company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Please see our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K filed for the year ended December 29, 2012.

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Results of operations, expressed as a percentage of sales and the dollar and
percentage change from period to period, for the twelve week periods ended
July 13, 2013 and July 14, 2012, are set forth below (dollars in thousands):

                                                                                  For the Twelve Weeks Ended
                                                                                            Percentage of Sales                Increase (Decrease)
                                          July 13, 2013        July 14, 2012        July 13, 2013         July 14, 2012        Dollars           %
DSD segment                              $       740,470      $       564,409                 82.4                  82.8     $   176,061         31.2
Warehouse segment                                157,683              117,152                 17.6                  17.2          40,531         34.6

Total                                    $       898,153      $       681,561                100.0                 100.0     $   216,592         31.8

Materials, supplies, labor and other
production costs (exclusive of
depreciation and amortization shown
separately below)
DSD segment(1)                           $       356,176      $       277,455                 48.1                  49.2     $    78,721         28.4
Warehouse segment (1)                            115,438               88,203                 73.2                  75.3          27,235         30.9

Total                                    $       471,614      $       365,658                 52.5                  53.7     $   105,956         29.0

Selling, distribution and
administrative expenses
DSD segment (1)                          $       286,123      $       217,237                 38.6                  38.5     $    68,886         31.7
Warehouse segment(1)                              23,205               18,482                 14.7                  15.8           4,723         25.6
Corporate(2)                                      16,618               10,512                    -                     -           6,106         58.1

Total                                    $       325,946      $       246,231                 36.3                  36.1     $    79,715         32.4

Depreciation and amortization
DSD segment(1)                           $        21,729      $        18,148                  2.9                   3.2     $     3,581         19.7
Warehouse segment(1)                               3,882                4,147                  2.5                   3.5            (265 )       (6.4 )
Corporate(2)                                         132                  (40 )                  -                     -             172           NM

Total                                    $        25,743      $        22,255                  2.9                   3.3     $     3,488         15.7

Income from operations
DSD segment(1)                           $        76,442      $        51,569                 10.3                   9.1     $    24,873         48.2
Warehouse segment(1)                              15,158                6,320                  9.6                   5.4           8,838        139.8
Corporate(2)                                     (16,750 )            (10,472 )                  -                     -          (6,278 )      (60.0 )

Total                                    $        74,850      $        47,417                  8.3                   7.0     $    27,433         57.9

Interest expense, net                    $         2,700      $         2,935                  0.3                   0.4     $      (235 )       (8.0 )
Income taxes                             $        25,690      $        16,102                  2.9                   2.4     $     9,588         59.5

Net income                               $        46,460      $        28,380                  5.2                   4.2     $    18,080         63.7

1. As a percentage of revenue within the reporting segment.

2. The corporate segment has no revenues.

NM. Not meaningful.

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Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twenty-eight week periods ended July 13, 2013 and July 14, 2012, are set forth below (dollars in thousands):

                                                                             For the Twenty-Eight Weeks Ended
                                                                                          Percentage of Sales                Increase (Decrease)
                                        July 13, 2013        July 14, 2012        July 13, 2013         July 14, 2012        Dollars           %
DSD segment                            $     1,662,874      $     1,301,707                 82.0                  82.4     $   361,167         27.7
Warehouse segment                              366,089              278,060                 18.0                  17.6          88,029         31.7

Total                                  $     2,028,963      $     1,579,767                100.0                 100.0     $   449,196         28.4

Materials, supplies, labor and other
production costs (exclusive of
depreciation and amortization shown
separately below)
DSD segment(1)                         $       787,585      $       636,664                 47.4                  48.9     $   150,921         23.7
Warehouse segment(1)                           269,327              207,972                 73.6                  74.8          61,355         29.5

Total                                  $     1,056,912      $       844,636                 52.1                  53.5     $   212,276         25.1

Selling, distribution and
administrative expenses
DSD segment(1)                         $       647,255      $       507,684                 38.9                  39.0     $   139,571         27.5
Warehouse segment(1)                            53,747               44,101                 14.7                  15.9           9,646         21.9
Corporate(2)                                    36,383               24,718                   -                     -           11,665         47.2

Total                                  $       737,385      $       576,503                 36.3                  36.5     $   160,882         27.9

Depreciation and amortization
DSD segment(1)                         $        50,424      $        41,968                  3.0                   3.2     $     8,456         20.1
Warehouse segment(1)                             9,197               10,073                  2.5                   3.6            (876 )       (8.7 )
Corporate(2)                                       311                  (47 )                 -                     -              358           NM

Total                                  $        59,932      $        51,994                  3.0                   3.3     $     7,938         15.3

Gain on acquisition
DSD segment(1)                         $        51,320      $            -                   3.1                    -      $    51,320           NM
Warehouse segment(1)                                -                    -                    -                     -               -            -
Corporate(2)                                        -                    -                    -                     -               -            -

Total                                  $        51,320      $            -                   2.5                    -      $    51,320           NM

Income from operations
DSD segment(1)                         $       228,930      $       115,391                 13.8                   8.9     $   113,539         98.4
Warehouse segment(1)                            33,818               15,914                  9.2                   5.7          17,904        112.5
Corporate(2)                                   (36,694 )            (24,671 )                 -                     -          (12,023 )      (48.7 )

Total                                  $       226,054      $       106,634                 11.1                   6.7     $   119,420        112.0

Interest expense, net                  $         7,255      $         2,959                  0.4                   0.2     $     4,296           NM
Income taxes                           $        59,064      $        37,352                  2.9                   2.4     $    21,712         58.1

Net income                             $       159,735      $        66,323                  7.9                   4.2     $    93,412        140.8

1. As a percentage of revenue within the reporting segment.

2. The corporate segment has no revenues.

NM. Not meaningful.

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Consolidated Sales.

                                For the                       For the
                           Twelve Weeks Ended            Twelve Weeks Ended
                             July 13, 2013                 July 14, 2012
 Sales category              $              %              $              %         % Increase
                        (Amounts in                   (Amounts in
                         thousands)                    thousands)
 Branded Retail         $    492,091        54.8 %    $    358,087        52.5 %           37.4 %
 Store Branded Retail        160,260        17.8           125,134        18.4             28.1 %
 Non-Retail and Other        245,802        27.4           198,340        29.1             23.9 %

 Total                  $    898,153       100.0 %    $    681,561       100.0 %           31.8 %

The 31.8% increase in sales was generally attributable to the following across all sales categories:

       Percentage Point Change in Sales Attributed to:    (Unfavorable)
       Pricing/Mix                                                  (0.9 )%
       Volume                                                       21.8 %
       Acquisition                                                  10.9 %

       Total Percentage Change in Sales                             31.8 %

Sales category discussion

Overall, sales increased due to significant volume increases and the Lepage and Sara Lee California acquisitions, partially offset by unfavorable net pricing/mix that was the result of a significant increase in the sale of single serve cake items. The increase in branded retail sales was due primarily to significant volume increases and, to a lesser extent, the Lepage and Sara Lee California acquisitions. Significant increases in branded soft variety, white bread, and snack cake drove the increase and were primarily attributable to volume growth. The increase in store branded retail sales was due primarily to large volume increases and the Lepage acquisition contribution. Increases in buns and rolls, white bread, and variety bread categories primarily drove the volume increases. The increase in non-retail and other sales was due to significant volume increases, largely foodservice and vending and, to a lesser extent, the Lepage acquisition contribution.

Direct-Store-Delivery Sales.

                                For the                       For the
                           Twelve Weeks Ended            Twelve Weeks Ended
                             July 13, 2013                 July 14, 2012
 Sales Category              $              %              $              %         % Increase
                        (Amounts in                   (Amounts in
. . .
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