FLOWERS FOODS, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 15, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-16247
FLOWERS FOODS, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA
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58-2582379 |
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(State or other jurisdiction
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(I.R.S. Employer Identification |
of incorporation or organization)
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Number) |
1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA
(Address of principal executive offices)
31757
(Zip Code)
229/226-9110
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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TITLE OF EACH CLASS
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OUTSTANDING AT AUGUST 18, 2006 |
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Common Stock, $.01 par value with
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61,268,500 |
Preferred Share Purchase Rights |
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FLOWERS FOODS, INC.
INDEX
2
FORWARD-LOOKING STATEMENTS
Statements contained in this filing and certain other written or oral statements made from
time to time by the company and its representatives that are not historical facts are
forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements relate to current expectations regarding our future financial condition
and results of operations and are often identified by the use of words and phrases such as
anticipate, believe, continue, could, estimate, expect, intend, may, plan,
predict, project, should, will, would, is likely to, is expected to or will
continue, or the negative of these terms or other comparable terminology. These forward looking
statements are based upon assumptions we believe are reasonable.
Forward-looking statements are based on current information and are subject to risks and
uncertainties that could cause our actual results to differ materially from those projected.
Certain factors that may cause actual results, performance, and achievements to differ materially
from those projected are discussed in this report and may include, but are not limited to:
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unexpected changes in any of the following: (i) general economic and business conditions;
(ii) the competitive setting in which we operate, including changes in pricing, advertising
or promotional strategies by us or our competitors, as well as changes in consumer demand;
(iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw
materials costs and availability and hedging counter-party risks; (v) relationships with our
employees, independent distributors and third party service providers; and (vi) laws and
regulations (including environmental and health-related issues), accounting standards or tax
rates in the markets in which we operate; |
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the loss or financial instability of any significant customer(s); |
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our ability to execute our business strategy, which may involve integration of recent
acquisitions or the acquisition or disposition of assets at presently targeted values; |
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our ability to operate existing, and any new, manufacturing lines according to schedule; |
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the level of success we achieve in developing and introducing new products and entering new markets; |
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changes in consumer behavior, trends and preferences, including health and whole grain trends; |
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our ability to implement new technology as required; |
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the credit and business risks associated with our independent distributors and customers
which operate in the highly competitive retail food and foodservice industries, including
the amount of consolidation in these industries; |
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customer and consumer reaction to pricing actions; and |
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any business disruptions due to political instability, armed hostilities, incidents of
terrorism, natural disasters or the responses to or repercussions from any of these or
similar events or conditions and our ability to insure such events. |
The foregoing list of important factors does not include all such factors nor necessarily
present them in order of importance. In addition, you should consult other disclosures made by the
company (such as in our other filings with the Securities and Exchange Commission (SEC) or in
company press releases) for other factors that may cause actual results to differ materially from
those projected by the company. Please refer to Part I, Item 1A., Risk Factors, in the companys
Form 10-K for the year ended December 31, 2005 for additional information regarding factors that
could affect the companys results of operations, financial condition and liquidity.
We caution you not to place undue reliance on forward-looking statements, as they speak only
as of the date made and are inherently uncertain. The company undertakes no obligation to publicly
revise or update such statements, except as required by law. You are advised, however, to consult
any further public disclosures by the company (such as in our filings with the SEC or in company
press releases) on related subjects.
3
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
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JULY 15, 2006 |
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DECEMBER 31, 2005 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
17,644 |
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$ |
11,001 |
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Accounts and notes receivable, net of allowances of $913 and $162, respectively |
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143,659 |
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120,751 |
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Inventories, net: |
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Raw materials |
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12,177 |
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11,042 |
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Packaging materials |
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11,497 |
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10,055 |
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Finished goods |
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20,879 |
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21,704 |
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44,553 |
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42,801 |
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Spare parts and supplies |
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24,302 |
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23,241 |
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Deferred taxes |
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8,311 |
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7,561 |
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Other |
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22,355 |
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32,215 |
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260,824 |
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237,570 |
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Net Property, Plant and Equipment |
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464,356 |
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451,921 |
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Notes Receivable |
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71,412 |
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70,357 |
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Assets Held for Sale Distributor Routes |
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25,158 |
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16,382 |
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Other Assets |
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3,820 |
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2,667 |
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Goodwill |
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76,244 |
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58,567 |
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Other Intangible Assets, net |
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25,200 |
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13,605 |
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$ |
927,014 |
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$ |
851,069 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Current maturities of long-term debt and capital leases |
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$ |
4,942 |
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$ |
4,652 |
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Accounts payable |
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94,732 |
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83,801 |
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Other accrued liabilities |
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84,746 |
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85,822 |
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184,420 |
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174,275 |
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Long-Term Debt and Capital Leases |
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86,932 |
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74,403 |
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Other Liabilities: |
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Post-retirement/post-employment obligations |
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10,134 |
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9,728 |
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Deferred taxes |
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44,427 |
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42,569 |
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Other |
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34,998 |
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33,160 |
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89,559 |
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85,457 |
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Minority Interest in Variable Interest Entity |
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5,359 |
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4,563 |
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Commitments and Contingencies |
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Stockholders Equity: |
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Preferred stock $100 par value, 100,000 authorized and none issued |
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Preferred stock $.01 par value, 900,000 authorized and none issued |
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Common stock $.01 par value, 100,000,000 authorized shares, 67,775,496
shares and 67,775,496 shares issued, respectively |
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678 |
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678 |
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Treasury stock 6,506,996 shares and 7,457,637 shares, respectively |
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(140,240 |
) |
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(148,747 |
) |
Capital in excess of par value |
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479,388 |
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474,708 |
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Retained earnings |
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227,355 |
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198,567 |
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Unearned compensation |
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(898 |
) |
Accumulated other comprehensive loss |
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(6,437 |
) |
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(11,937 |
) |
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560,744 |
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512,371 |
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$ |
927,014 |
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$ |
851,069 |
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(See Accompanying Notes to Condensed Consolidated Financial Statements)
4
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)
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FOR THE TWELVE WEEKS ENDED |
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FOR THE TWENTY -EIGHT WEEKS ENDED |
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JULY 15, 2006 |
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JULY 16, 2005 |
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JULY 15, 2006 |
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JULY 16, 2005 |
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Sales |
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$ |
445,772 |
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$ |
405,300 |
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$ |
1,009,385 |
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$ |
911,340 |
|
Materials, supplies, labor and other
production costs (exclusive of depreciation
and amortization shown separately below) |
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224,025 |
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202,511 |
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503,360 |
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455,275 |
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Selling, marketing and administrative expenses |
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176,016 |
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161,433 |
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406,795 |
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|
|
365,424 |
|
Depreciation and amortization |
|
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15,113 |
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|
|
13,427 |
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|
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33,939 |
|
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|
31,167 |
|
Gain on insurance recovery |
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0 |
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0 |
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(654 |
) |
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0 |
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Income from operations |
|
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30,618 |
|
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|
27,929 |
|
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65,945 |
|
|
|
59,474 |
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Interest expense |
|
|
987 |
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|
|
855 |
|
|
|
2,412 |
|
|
|
1,849 |
|
Interest income |
|
|
(2,273 |
) |
|
|
(2,251 |
) |
|
|
(5,219 |
) |
|
|
(5,342 |
) |
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|
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Income from continuing operations before
income taxes, minority interest and
cumulative effect of a change in accounting
principle |
|
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31,904 |
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|
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29,325 |
|
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|
68,752 |
|
|
|
62,967 |
|
Income tax expense |
|
|
11,566 |
|
|
|
10,843 |
|
|
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25,335 |
|
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24,113 |
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|
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|
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|
|
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Income from continuing operations before
minority interest and cumulative effect of a
change in accounting principle |
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20,338 |
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18,482 |
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43,417 |
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|
38,854 |
|
Minority interest in variable interest entity |
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|
(614 |
) |
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|
(825 |
) |
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(1,433 |
) |
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(1,200 |
) |
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Income from continuing operations before
cumulative effect of a change in accounting
principle |
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19,724 |
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17,657 |
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41,984 |
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37,654 |
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Income from discontinued operations, net of
income tax of $778 |
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0 |
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0 |
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|
1,222 |
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0 |
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Income before cumulative effect of a change
in accounting principle |
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19,724 |
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17,657 |
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|
43,206 |
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|
37,654 |
|
Cumulative effect of a change in accounting
principle, net of income tax benefit of $362 |
|
|
0 |
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0 |
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(568 |
) |
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0 |
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Net income |
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$ |
19,724 |
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$ |
17,657 |
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$ |
42,638 |
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$ |
37,654 |
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Net Income Per Common Share: |
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Basic: |
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Income from continuing operations before
cumulative effect of a change in accounting
principle |
|
$ |
0.32 |
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|
$ |
0.29 |
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|
$ |
0.69 |
|
|
$ |
0.60 |
|
Income from discontinued operations, net of
income tax |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.02 |
|
|
|
0.00 |
|
Cumulative effect of a change in accounting
principle, net of income tax benefit |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
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|
Net income per share |
|
$ |
0.32 |
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|
$ |
0.29 |
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$ |
0.70 |
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$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average shares outstanding |
|
|
61,195 |
|
|
|
60,937 |
|
|
|
61,008 |
|
|
|
62,634 |
|
|
|
|
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|
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Diluted: |
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|
|
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|
Income from continuing operations before
cumulative effect of a change in accounting
principle |
|
$ |
0.32 |
|
|
$ |
0.28 |
|
|
$ |
0.68 |
|
|
$ |
0.58 |
|
Income from discontinued operations, net of
income tax |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.02 |
|
|
|
0.00 |
|
Cumulative effect of a change in accounting
principle, net of income tax benefit |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.32 |
|
|
$ |
0.28 |
|
|
$ |
0.69 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
62,008 |
|
|
|
62,705 |
|
|
|
61,992 |
|
|
|
64,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per common share |
|
$ |
0.125 |
|
|
$ |
0.10 |
|
|
$ |
0.225 |
|
|
$ |
0.183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(See Accompanying Notes to Condensed Consolidated Financial Statements)
5
FLOWERS FOODS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
|
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|
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|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Capital |
|
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|
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|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
in Excess |
|
|
|
|
|
|
Other |
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
Number of |
|
|
Par |
|
|
of Par |
|
|
Retained |
|
|
Comprehensive |
|
|
Number of |
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
Income |
|
|
Shares Issued |
|
|
Value |
|
|
Value |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Shares |
|
|
Cost |
|
|
Compensation |
|
|
Total |
|
|
|
(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 (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
898 |
|
|
|
0 |
|
Net income |
|
$ |
42,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,638 |
|
Derivative instruments |
|
|
5,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
48,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,447,894 |
) |
|
|
(40,162 |
) |
|
|
|
|
|
|
(40,162 |
) |
Exercise of stock options
(includes income tax
benefits of $8,046) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,110 |
) |
|
|
|
|
|
|
|
|
|
|
937,793 |
|
|
|
19,132 |
|
|
|
|
|
|
|
14,022 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,604 |
|
Stock option compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,130 |
|
Stock issued for acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,101 |
|
|
|
|
|
|
|
|
|
|
|
1,300,002 |
|
|
|
26,299 |
|
|
|
|
|
|
|
36,400 |
|
Dividends
paid $0.225 per
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at July 15, 2006 |
|
|
|
|
|
|
67,775,496 |
|
|
$ |
678 |
|
|
$ |
479,388 |
|
|
$ |
227,355 |
|
|
$ |
(6,437 |
) |
|
|
(6,506,996 |
) |
|
$ |
(140,240 |
) |
|
$ |
0 |
|
|
$ |
560,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(See Accompanying Notes to Condensed Consolidated Financial Statements)
6
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
|
JULY 15, 2006 |
|
|
JULY 16, 2005 |
|
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
42,638 |
|
|
$ |
37,654 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle |
|
|
930 |
|
|
|
|
|
Stock based compensation |
|
|
5,025 |
|
|
|
1,777 |
|
Income tax benefit related to stock awards |
|
|
|
|
|
|
7,959 |
|
Depreciation and amortization |
|
|
33,939 |
|
|
|
31,167 |
|
Deferred income taxes |
|
|
(5,868 |
) |
|
|
13,030 |
|
Provision for inventory obsolescence |
|
|
422 |
|
|
|
336 |
|
Allowances for accounts receivable |
|
|
492 |
|
|
|
1,354 |
|
Minority interest in variable interest entity |
|
|
1,433 |
|
|
|
1,200 |
|
Other |
|
|
(793 |
) |
|
|
(244 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and notes receivable, net |
|
|
(19,363 |
) |
|
|
(8,133 |
) |
Inventories, net |
|
|
(1,184 |
) |
|
|
(3,112 |
) |
Other assets |
|
|
24,409 |
|
|
|
(14,674 |
) |
Pension contributions |
|
|
(14,000 |
) |
|
|
(25,000 |
) |
Accounts payable and other accrued liabilities |
|
|
5,788 |
|
|
|
(13,517 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
73,868 |
|
|
|
29,797 |
|
|
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(32,296 |
) |
|
|
(17,029 |
) |
(Purchase of) proceeds from notes receivable |
|
|
(1,437 |
) |
|
|
972 |
|
Acquisitions, net of cash acquired |
|
|
(887 |
) |
|
|
|
|
Other |
|
|
(2,132 |
) |
|
|
604 |
|
|
|
|
|
|
|
|
NET CASH DISBURSED FOR INVESTING ACTIVITIES |
|
|
(36,752 |
) |
|
|
(15,453 |
) |
|
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(13,850 |
) |
|
|
(11,519 |
) |
Exercise of stock options |
|
|
5,981 |
|
|
|
5,519 |
|
Income tax benefit related to stock awards |
|
|
8,132 |
|
|
|
|
|
Stock repurchases |
|
|
(40,162 |
) |
|
|
(107,300 |
) |
Change in book overdraft |
|
|
751 |
|
|
|
13,045 |
|
Payment of financing fees |
|
|
(333 |
) |
|
|
|
|
Proceeds from debt borrowings |
|
|
216,300 |
|
|
|
79,000 |
|
Debt and capital lease obligation payments |
|
|
(207,292 |
) |
|
|
(25,122 |
) |
|
|
|
|
|
|
|
NET CASH DISBURSED FOR FINANCING ACTIVITIES |
|
|
(30,473 |
) |
|
|
(46,377 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
6,643 |
|
|
|
(32,033 |
) |
Cash and cash equivalents at beginning of period |
|
|
11,001 |
|
|
|
47,458 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
17,644 |
|
|
$ |
15,425 |
|
|
|
|
|
|
|
|
(See Accompanying Notes to Condensed Consolidated Financial Statements)
7
FLOWERS FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial
statements of Flowers Foods, Inc. (the company) have been prepared by the companys management in
accordance with generally accepted accounting principles for interim financial information and
applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting
principles for annual financial statements. In the opinion of management, the unaudited condensed
consolidated financial statements included herein contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the companys financial position, the
results of its operations and its cash flows. The results of operations for the twelve and
twenty-eight week periods ended July 15, 2006 and July 16, 2005 are not necessarily indicative of
the results to be expected for a full year. The balance sheet at December 31, 2005 has been derived
from the audited financial statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2005.
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. The
company believes the following critical accounting policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements: revenue
recognition, allowance for doubtful accounts, derivative instruments, valuation of long-lived
assets, goodwill and other intangibles, self-insurance reserves, income tax expense and accruals,
pension obligations and distributor accounting. These policies are summarized in the companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2005. In addition to these
critical accounting policies, the company adopted Statement of Financial Accounting Standard
(SFAS) No. 123R, Share Based Payment (SFAS 123R) on January 1, 2006. SFAS 123R requires that
the value of stock options and similar awards be expensed. Prior to the adoption of SFAS 123R, as
permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), the company
applied intrinsic value accounting for its stock option plans under Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. The company applied the
disclosure-only provisions of SFAS 123 and SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure an Amendment of FASB Statement No. 123 (SFAS 148).
REPORTING PERIODS Fiscal 2006 consists of 52 weeks, with the companys quarterly reporting
periods as follows: first quarter ended April 22, 2006 (sixteen weeks), second quarter ended July
15, 2006 (twelve weeks), third quarter ending October 7, 2006 (twelve weeks) and fourth quarter
ending December 30, 2006 (twelve weeks).
SEGMENTS The company consists of two business segments: Flowers Foods Bakeries Group, LLC
(Flowers Bakeries) and Flowers Foods Specialty Group, LLC (Flowers Specialty). Flowers Bakeries
focuses on the production and marketing of bakery products to customers in the southeastern,
southwestern and mid-Atlantic areas of the United States primarily through its direct store
delivery system. Flowers Specialty produces snack cakes for sale to co-pack, retail and vending
customers as well as frozen bread, rolls and buns for sale to retail and foodservice customers
primarily through warehouse distribution.
SIGNIFICANT CUSTOMER Following is the effect our largest customer, Wal-Mart/Sams Club, had on
the companys sales for the twelve and twenty-eight weeks ended July 15, 2006 and July 16, 2005. No
other customer accounted for 10% or more of the companys sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS ENDED |
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
JULY 15, 2006 |
|
JULY 16, 2005 |
|
JULY 15, 2006 |
|
JULY 16, 2005 |
|
|
(Percent of Sales) |
|
(Percent of Sales) |
Flowers Bakeries |
|
|
16.8 |
% |
|
|
14.9 |
% |
|
|
16.2 |
% |
|
|
14.2 |
% |
Flowers Specialty |
|
|
2.5 |
|
|
|
2.9 |
|
|
|
2.6 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
19.3 |
% |
|
|
17.8 |
% |
|
|
18.8 |
% |
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
STOCK BASED COMPENSATION In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 123R. SFAS 123R requires that the value of stock options and similar awards be
expensed. The company adopted SFAS 123R on January 1, 2006 and applied the modified prospective
transition method. This method requires the company to expense the remaining unrecognized portion
of unvested awards outstanding at the effective date and any awards granted or modified after the
effective date, but does not require restatement of prior periods. See Note 11 for information
relating to the companys stock-based compensation. Prior to the adoption of SFAS 123R, as
permitted by SFAS No. 123, the company applied intrinsic value accounting for its stock option
plans under APB 25. Compensation cost for stock options, if any, was measured as the excess of the
market price of the companys common stock at the date of grant over the exercise price to be paid
by the grantee to acquire the stock. The company applied the disclosure-only provisions of SFAS 123
and SFAS 148.
If the company had elected to recognize compensation expense based upon the fair value at the
grant dates for stock options under these plans, the companys net income and net income per share
would have been affected as follows (amounts in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS |
|
|
FOR THE TWENTY-EIGHT WEEKS |
|
|
|
ENDED JULY 16 , 2005 |
|
|
ENDED JULY 16 , 2005 |
|
Net income, as reported |
|
$ |
17,657 |
|
|
$ |
37,654 |
|
Deduct: Stock-based
employee compensation cost,
net of income tax, that
would have been included in
net income under fair value
method |
|
|
(375 |
) |
|
|
(1,170 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
17,282 |
|
|
$ |
36,484 |
|
|
|
|
|
|
|
|
Basic net income per share |
|
|
|
|
|
|
|
|
as reported |
|
$ |
0.29 |
|
|
$ |
0.60 |
|
pro forma |
|
$ |
0.28 |
|
|
$ |
0.58 |
|
Diluted net income per share |
|
|
|
|
|
|
|
|
as reported |
|
$ |
0.28 |
|
|
$ |
0.58 |
|
pro forma |
|
$ |
0.28 |
|
|
$ |
0.57 |
|
2. DISCONTINUED OPERATIONS
On January 30, 2003, the company entered into an agreement to sell its Mrs. Smiths Bakeries
frozen dessert business (Mrs. Smiths) to The Schwan Food Company (Schwan). Included in those
assets were the Stilwell, Oklahoma and Spartanburg, South Carolina production facilities and a
portion of the companys Suwanee, Georgia property. On that date, the assets and liabilities
related to Mrs. Smiths were classified as held for sale in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and recorded at estimable fair value
less costs to dispose. On April 24, 2003, the company completed the sale of substantially all the
assets of Mrs. Smiths. Subsequent to the sale, the company paid various expenses related to its
operation of Mrs. Smiths, no single one of which was material to the financial condition or
results of operations of the company. During the first quarter of fiscal 2004, based on claim
activity, the company established a reserve of $5.1 million ($3.1 million, net of income tax) as an
estimate of future expenses likely to be incurred by the company in connection with Mrs. Smiths.
The balance of this reserve as of July 15, 2006 and December 31, 2005 was $0.1 million and $0.7
million, respectively. Included in this reserve was $1.8 million, net of income tax benefit,
regarding a settlement of a class action lawsuit related to pie shells produced by Mrs. Smiths.
Additional costs of $0.2 million, net of income tax benefit, were recorded as part of discontinued
operations during the third quarter of fiscal 2005 relating to this settlement. 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 this settlement. Activity related to Mrs. Smiths, including the
insurance recovery is recorded as Income from discontinued operations, net of income tax.
The company is under audit by the Internal Revenue Service for tax years 2000, 2001 and 2003.
Finalization of the 2000 and 2001 audit may result in the reversal of previously established tax
reserves, which will be recorded as discontinued operations in the period the audit is finalized.
There were no revenues or results of operations recorded for the discontinued operations in
the twelve or twenty-eight weeks ended July 15, 2006 and July 16, 2005.
9
3. COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) results from derivative financial instruments and additional
minimum pension liabilities. Total comprehensive income, determined as net income adjusted by other
comprehensive income (loss), was $20.6 million and $48.1 million for the twelve and twenty-eight
weeks ended July 15, 2006, respectively. Total comprehensive income was $21.0 million and $42.8
million for the twelve and twenty-eight weeks ended July 16, 2005, respectively.
During the twenty-eight weeks ended July 15, 2006, changes to accumulated other comprehensive
loss, net of income tax, were as follows (amounts in thousands):
|
|
|
|
|
|
|
2006 |
|
Accumulated other comprehensive loss, December 31, 2005 |
|
$ |
(11,937 |
) |
Derivative transactions: |
|
|
|
|
Net deferred gains on closed contracts, net of income tax of $360 |
|
|
574 |
|
Reclassified to earnings, net of income tax benefit of $(516) |
|
|
(825 |
) |
Effective portion of change in fair value of hedging instruments, net of income tax of $3,600 |
|
|
5,751 |
|
|
|
|
|
Accumulated other comprehensive loss, July 15, 2006 |
|
$ |
(6,437 |
) |
|
|
|
|
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the twenty-eight weeks ended July 15, 2006
is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flowers Bakeries |
|
|
Flowers Specialty |
|
|
Total |
|
Balance as of December 31, 2005 |
|
$ |
54,891 |
|
|
$ |
3,676 |
|
|
$ |
58,567 |
|
Acquisition (1) |
|
|
17,677 |
|
|
|
|
|
|
|
17,677 |
|
Segment restructuring (2) |
|
|
(1,896 |
) |
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 15, 2006 |
|
$ |
70,672 |
|
|
$ |
5,572 |
|
|
$ |
76,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The company acquired Derst Baking Company in Savannah, Georgia on February 18, 2006.
See Note 14 for further information regarding this acquisition. |
|
(2) |
|
Effective January 1, 2006, the companys Ft. Smith, Arkansas and Texarkana, Arkansas
facilities were transferred to Flowers Specialty from Flowers Bakeries. |
The changes in the carrying amount of intangible assets, which consist primarily of
trademarks, customer-related intangibles and non-compete agreements, for the twenty-eight weeks
ended July 15, 2006 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flowers Bakeries |
|
|
Flowers Specialty |
|
|
Total |
|
Balance as of December 31, 2005 |
|
$ |
8,373 |
|
|
$ |
5,232 |
|
|
$ |
13,605 |
|
Amortization expense |
|
|
(708 |
) |
|
|
(397 |
) |
|
|
(1,105 |
) |
Acquisition (1) |
|
|
13,602 |
|
|
|
|
|
|
|
13,602 |
|
Reclassification (2) |
|
|
(902 |
) |
|
|
|
|
|
|
(902 |
) |
Segment restructuring (3) |
|
|
(1,074 |
) |
|
|
1,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 15, 2006 |
|
$ |
19,291 |
|
|
$ |
5,909 |
|
|
$ |
25,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As part of the acquisition of Derst Baking Company, the company acquired a trademark, which
is valued at $7.0 million and is being amortized straight-line over 40 years, and customer
relationships valued at $6.6 million, which are being amortized over 15 years using an
accelerated amortization method. |
|
(2) |
|
Relates to distribution routes that were reclassified from intangible assets to assets held
for sale, in connection with the acquisition of Derst Baking Company, as the company expects
to sell these routes to independent distributors in early 2007. |
|
(3) |
|
Effective January 1, 2006, the companys Ft. Smith, Arkansas and Texarkana, Arkansas
facilities were transferred to Flowers
Specialty from Flowers Bakeries. |
10
In October 2002, the company acquired Ideal Baking Company in Batesville, Arkansas. As part of
this acquisition, the Ideal trademark was recorded as an indefinite-lived intangible asset, with a
carrying value of $1.9 million. In September 2001, the company acquired Kotarides Baking Company in
Norfolk, Virginia, which distributes breads and buns under the Mary Jane brand. The company
recorded this trademark as an indefinite-lived intangible asset, with a carrying value of $3.3
million. In December 2005, as a result of the companys growth of its Natures Own trademark, the
company determined that these trademarks should be recorded as definite-lived intangibles with
estimated lives of 20 years for the Ideal trademark and 25 years for the Mary Jane trademark.
Amortization of these trademarks began in the first quarter of fiscal 2006.
Estimated amortization expense for fiscal 2006, fiscal 2007, fiscal 2008, fiscal 2009 and
fiscal 2010 is $2.1 million, $2.0 million, $1.5 million, $1.5 million and $1.4 million,
respectively.
5. NEW ACCOUNTING PRONOUNCEMENTS
Inventory Costs. In November 2004, the FASB issued SFAS No. 151, Inventory Costs an
Amendment of ARB No. 43, Chapter 4. (SFAS 151) SFAS 151 clarified the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS 151
is effective for fiscal years beginning after June 15, 2005, the companys fiscal 2006, which began
January 1, 2006. This pronouncement did not have a material effect on the companys results of
operations or financial condition.
Stock Based Compensation. As discussed in Note 1, in December 2004, the FASB issued SFAS 123R,
which requires the value of stock options and similar awards be expensed. The company adopted the
standard on January 1, 2006, and applied the modified prospective transition method. This method
requires the company to expense the remaining unrecognized portion of unvested awards outstanding
at the effective date and any awards granted or modified after the effective date but does not
require restatement of prior periods. See Note 11 for information relating to the companys
stock-based compensation.
Accounting Changes and Error Corrections. In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections. (SFAS 154) SFAS 154 requires that, when a company
changes its accounting policies, it must apply the change retrospectively to all prior periods
presented instead of a cumulative effect adjustment in the period of the change. SFAS 154 may also
apply when the FASB issues new rules requiring changes in accounting. However if the new rule
allows cumulative effect treatment, it would take precedence over SFAS 154. This statement is
effective for accounting changes and error corrections for the companys fiscal year 2006 which
began on January 1, 2006.
Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FASB Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement
No.109. FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprises
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 of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, which will be the companys fiscal 2007 beginning December 31, 2006. The company
is currently assessing the impact FIN 48 will have on its financial statements.
Employers Accounting for Defined Benefit Pension and other Postretirement Plans. On July 26,
2006, the FASB affirmed its previous decision to make the recognition provisions of its proposed
standard, Employers Accounting for Defined Benefit Pension and other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R), effective for public companies for fiscal
years ending after December 15, 2006. This standard will be effective for the companys fiscal 2006
ending December 30, 2006. The FASB is expected to issue its final standard on or before September
29, 2006.
6. 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 companys primary raw materials are flour,
sugar and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas,
which is used as oven fuel, is also an important commodity input to production.
As of July 15, 2006, the companys hedge portfolio contained commodity derivatives with a fair
value of $13.0 million, which is recorded in other current and long-term assets and liabilities.
The positions held in the portfolio are used to hedge economic exposure to changes in various raw
material prices and effectively fix the price, or limit increases in prices, for a period of time
extending into fiscal 2007. Under SFAS 133, these instruments are designated as cash-flow hedges.
The effective portion of changes in fair value for
11
these derivatives is recorded each period in other comprehensive income (loss), and any
ineffective portion of the change in fair value is recorded to current period earnings in selling,
marketing and administrative expenses. The company held no commodity derivatives at July 15, 2006
or December 31, 2005 that did not qualify for hedge accounting under SFAS 133.
7. DEBT AND OTHER OBLIGATIONS
Long-term debt and capital leases consisted of the following at July 15, 2006 and December 31,
2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
JULY 15, 2006 |
|
|
DECEMBER 31, 2005 |
|
Unsecured credit facility |
|
$ |
56,400 |
|
|
$ |
50,000 |
|
Capital lease obligations |
|
|
28,696 |
|
|
|
24,866 |
|
Other notes payable |
|
|
6,778 |
|
|
|
4,189 |
|
|
|
|
|
|
|
|
|
|
|
91,874 |
|
|
|
79,055 |
|
Less current maturities |
|
|
4,942 |
|
|
|
4,652 |
|
|
|
|
|
|
|
|
Total long-term debt and capital leases |
|
$ |
86,932 |
|
|
$ |
74,403 |
|
|
|
|
|
|
|
|
On June 6, 2006, the company further amended and restated its credit facility (the new credit
facility), which was previously amended and restated on October 29, 2004 (the former credit
facility). The new credit facility is a five-year, $250.0 million unsecured revolving loan
facility that provides for lower rates on future borrowings than the companys former credit
facility through June 6, 2011. 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 as either rates
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 0.20% for base rate loans and from 0.40%
to 1.075% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.30% is due
quarterly on all commitments under the new credit facility. Both the interest margin and the
facility fee are based on the companys leverage ratio. There were $56.4 million in outstanding
borrowings under the new credit facility at July 15, 2006.
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 company believes that, given its current cash position, its
cash flow from operating activities and its available credit capacity, it can comply with the
current terms of the new credit facility and can meet presently foreseeable financial requirements.
As of July 15, 2006, the company was in compliance with all restrictive financial covenants under
the new credit facility.
The company paid financing costs of $0.4 million in connection with its new credit facility.
These costs were deferred and, along with unamortized costs of $0.5 million relating to the
companys former credit facility are being amortized over the term of the new credit facility.
On October 29, 2004, the company amended and restated its then existing credit facility. The
former credit facility was in effect at December 31, 2005 and was a five-year, $150.0 million
unsecured revolving loan facility. The company could request to increase its borrowings under the
former credit facility up to an aggregate of $225.0 million upon the satisfaction of certain
conditions. Interest on the former credit facility was due quarterly in arrears on any outstanding
borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The
underlying rate was defined as either rates offered in the interbank Eurodollar market or the
higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranged from
0.0% to 0.20% for base rate loans and from 0.625% to 1.20% for Eurodollar loans. In addition, a
facility fee ranging from 0.125% to 0.30% was due quarterly on all commitments under the former
credit facility. Both the interest margin and the facility fee were based on the companys leverage
ratio. Financial covenants and other restrictions under the former credit facility were the same as
those under the new credit facility.
Included in accounts payable in the condensed consolidated balance sheets are book overdrafts
of $20.4 million and $19.6 million as of July 15, 2006 and December 31, 2005, respectively.
12
8. VARIABLE INTEREST ENTITY
The company maintains a transportation agreement with a thinly capitalized entity. This entity
transports a significant portion of the companys fresh bakery products from the companys
production facilities to outlying distribution centers. The company represents a significant
portion of the entitys revenue. This entity qualifies as a Variable Interest Entity (VIE), but
not a Special Purpose Entity and under FASB Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, the company is the primary beneficiary. In accordance with FIN 46, the
company consolidated this entity effective with the first quarter of fiscal 2004. 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 VIEs creditors have no recourse
against the general credit of the company.
Following is the effect of the VIE during the twelve and twenty-eight weeks ended July 15,
2006 and July 16, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TWELVE WEEKS |
|
TWELVE WEEKS |
|
TWENTY-EIGHT WEEKS |
|
TWENTY-EIGHT WEEKS |
|
|
ENDED JULY 15, 2006 |
|
ENDED JULY 16, 2005 |
|
ENDED JULY 15, 2006 |
|
ENDED JULY 16, 2005 |
|
|
|
|
|
|
% OF |
|
|
|
|
|
% OF |
|
|
|
|
|
% OF |
|
|
|
|
|
% OF |
|
|
VIE |
|
TOTAL |
|
VIE |
|
TOTAL |
|
VIE |
|
TOTAL |
|
VIE |
|
TOTAL |
|
|
(Dollars in thousands) |
Assets as of respective quarter ends |
|
$ |
32,547 |
|
|
|
3.5 |
% |
|
$ |
23,569 |
|
|
|
2.8 |
% |
|
$ |
32,547 |
|
|
|
3.5 |
% |
|
$ |
23,569 |
|
|
|
2.8 |
% |
Sales |
|
$ |
3,599 |
|
|
|
0.8 |
% |
|
$ |
3,460 |
|
|
|
0.9 |
% |
|
$ |
6,514 |
|
|
|
0.6 |
% |
|
$ |
6,541 |
|
|
|
0.7 |
% |
Income from continuing operations before
income taxes, minority interest and
cumulative effect of a change in
accounting principle |
|
$ |
614 |
|
|
|
1.9 |
% |
|
$ |
825 |
|
|
|
2.8 |
% |
|
$ |
1,433 |
|
|
|
2.1 |
% |
|
$ |
1,200 |
|
|
|
1.9 |
% |
The
assets consist primarily of $23.8 million and $16.4 million
as of July 15, 2006 and December 31, 2005, respectively, of
transportation equipment recorded as capital lease obligations.
9. LITIGATION
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.
10. EARNINGS PER SHARE
The following table calculates basic earnings per common share and diluted earnings per common
share at July 15, 2006 and
July 16, 2005 (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS ENDED |
|
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
|
JULY 15, 2006 |
|
|
JULY 16, 2005 |
|
|
JULY 15, 2006 |
|
|
JULY 16, 2005 |
|
Basic Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
cumulative effect of a change in
accounting principle |
|
$ |
19,724 |
|
|
$ |
17,657 |
|
|
$ |
41,984 |
|
|
$ |
37,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
61,195 |
|
|
|
60,937 |
|
|
|
61,008 |
|
|
|
62,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.32 |
|
|
$ |
0.29 |
|
|
$ |
0.69 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
cumulative effect of a change in
accounting principle |
|
$ |
19,724 |
|
|
$ |
17,657 |
|
|
$ |
41,984 |
|
|
$ |
37,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
61,195 |
|
|
|
60,937 |
|
|
|
61,008 |
|
|
|
62,634 |
|
Add: Shares of common stock assumed issued
upon exercise of stock options and vesting
of restricted stock |
|
|
813 |
|
|
|
1,768 |
|
|
|
984 |
|
|
|
1,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
62,008 |
|
|
|
62,705 |
|
|
|
61,992 |
|
|
|
64,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.32 |
|
|
$ |
0.28 |
|
|
$ |
0.68 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Stock options to purchase 435,400 shares of common stock were not included in the computation
of diluted earnings per share for the twelve and twenty-eight weeks ended July 15, 2006 because
their effect would have been anti-dilutive.
11. STOCK BASED COMPENSATION
Effective January 1, 2006, the company adopted SFAS 123R, which requires that the value of
stock options and similar awards be expensed. SFAS 123R applies to any unvested awards that were
outstanding on the effective date and to all new awards granted or modified after the effective
date. The company adopted SFAS 123R using the modified prospective transition method. This method
requires the company to expense the remaining unrecognized portion of unvested awards outstanding
at the effective date and any awards granted or modified after the effective date, but does not
require restatement of prior periods. Therefore, the companys income statement for the twelve and
twenty-eight weeks ended July 16, 2005 have not been restated to reflect the impact of SFAS 123R.
See Note 1 for disclosure of pro forma results for these reporting periods. Under this transition
method, compensation expense recognized during the twelve and twenty-eight weeks ended July 15,
2006 included: (i) compensation expense for share-based awards granted prior to, but not vested as
of, December 31, 2005, based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and (ii) compensation expense for share-based awards granted subsequent to
December 31, 2005, based on the grant date fair value estimated in accordance with the provisions
of SFAS 123R.
In accordance with FASB Staff Position FAS 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.
Flowers Foods 2001 Equity and Performance Incentive Plan as amended and restated as of
February 11, 2005 (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 9,750,000 shares. Over the life of the EPIP, the company has only issued options
and restricted 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 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 each of the stock-based awards
outstanding under the EPIP:
Stock Options
On January 3, 2006 and during fiscal 2003 and fiscal 2001, non-qualified stock options
(NQSOs) to purchase 437,300 shares, 2,138,175 shares and 3,445,200 shares, respectively were
granted to eligible employees pursuant to the EPIP. In fiscal 2001, NQSOs to purchase 303,750
shares were granted to non-employee directors. The optionees are required to pay the market value,
determined as of the grant date, which was $28.02 for the fiscal 2006 grant, $14.01 for the fiscal
2003 grant and $6.31 for the fiscal 2001 grant, to exercise these options. During fiscal 2005, the
employee options awarded in fiscal 2001 vested. As of July 15, 2006, there were 302,388 NQSOs
outstanding with an exercise price of $6.31, 2,055,000 NQSOs outstanding with an exercise price of
$14.01, which will vest in July 2007, and 435,400 NQSOs outstanding with an exercise price of
$28.02, which will vest in January 2009.
The stock option activity for the twenty-eight weeks ended July 15, 2006 pursuant to the EPIP
is set forth below (amounts in thousands except price data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Options |
|
|
Exercise Price |
|
Outstanding at December 31, 2005 |
|
|
3,306 |
|
|
$ |
11.14 |
|
Granted |
|
|
437 |
|
|
$ |
28.02 |
|
Exercised |
|
|
(937 |
) |
|
$ |
6.37 |
|
Forfeitures |
|
|
(13 |
) |
|
$ |
9.58 |
|
|
|
|
|
|
|
|
|
Outstanding at July 15, 2006 |
|
|
2,793 |
|
|
$ |
15.36 |
|
|
|
|
|
|
|
|
|
Exercisable at July 15, 2006 |
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price of
options granted during the twenty-eight
weeks ended July 15 , 2006 |
|
$ |
28.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
As of July 15, 2006, all options outstanding under the EPIP had an average exercise price of
$15.36 and a weighted average remaining contractual life of 6.7 years.
During the twelve and twenty-eight weeks ended July 15, 2006 and July 16, 2005, the company
recorded stock-based compensation expense of $0.9 million and $0 million, respectively, and $2.1
million and $0 million, respectively relating to stock options using the Black-Scholes
option-pricing model applying the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2003 Grant |
|
2006 Grant |
Weighted average fair value per share ($) |
|
|
6.15 |
|
|
|
9.30 |
|
Dividend yield (%) |
|
|
1.61 |
|
|
|
1.60 |
|
Expected volatility (%) |
|
|
36.89 |
|
|
|
36.00 |
|
Risk-free interest rate (%) |
|
|
4.35 |
|
|
|
4.25 |
|
Expected option life (years) |
|
|
10.00 |
|
|
|
5.00 |
|
The following is a description of the methods used to arrive at the above assumptions:
2003 Grant:
Dividend yield estimated dividend yield based on an annual dividend of $0.27.
Expected volatility based on historical volatility over two years using daily stock prices.
Risk-free interest rate United States Treasury Constant Maturity rates as of July 16, 2003 (grant date).
Expected option life equals expected life of grant.
2006 Grant:
Dividend yield estimated yield based on the historical dividend payment for the four most recent
dividend payments prior to the grant date.
Expected volatility based on historical volatility over five years using daily stock prices.
Risk-free interest rate United States Treasury Constant Maturity rates as of January 3, 2006
(grant date).
Expected option life assumption is based on simplified formula determined in accordance with
Staff Accounting Bulletin No. 107, Share-Based Payment.
As of July 15, 2006, there was $5.9 million of total unrecognized compensation expense related
to stock options. This cost is expected to be recognized on a straight-line basis over a
weighted-average period of 1.8 years.
Cash received from option exercises for the twenty-eight weeks ended July 15, 2006 and July
16, 2005 was $6.0 million and $5.5 million, respectively. The cash tax benefit realized for the tax
deductions from option exercises was $8.1 million and $8.0 million, respectively, for the
twenty-eight weeks ended July 15, 2006 and July 16, 2005. The total intrinsic value of stock
options exercised was $20.6 million and $20.4 million for the twenty-eight weeks ended July 15,
2006 and July 16, 2005, respectively.
Restricted Stock
On January 4, 2004, the effective date of his election as Chief Executive Officer, George
Deese was granted 75,000 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 become fully
vested on the fourth anniversary of the date of grant. The company recorded $0.1 million and $0.2
million in compensation expense during the twelve and twenty-eight weeks ended July 15, 2006,
respectively, and $0.1 million and $0.2 million for the twelve and twenty-eight weeks ended July
16, 2005, respectively, related to this restricted stock.
During the second quarter of fiscal 2006, the second quarter of fiscal 2005 and the first
quarter of fiscal 2005 non-employee directors were granted an aggregate of 25,640 shares, 29,340
shares and 1,404 shares, respectively, of restricted stock. The fair value
15
of these restricted shares on the date of grant
was $0.7 million, $0.6 million and $0.1 million, respectively. These shares become fully vested on
the first anniversary of the date of grant. The company recorded $0.2 million and $0.2 million in
compensation expense during the twelve weeks ended July 15, 2006 and July 16, 2005, respectively,
and $0.4 million and $0.3 million of compensation expense during the twenty-eight weeks ended July
15, 2006 and July 16, 2005, respectively, related to this restricted stock.
On January 3, 2006, certain key employees were granted 135,700 shares of restricted stock,
which contain certain performance and market conditions, at a grant date price of $28.02. These
shares vest on January 3, 2008. In order for these shares to vest and become nonforfeitable on this
date, the following performance measure must be achieved by the company: the companys average
return on invested capital calculated on continuing operations for the cumulative two year vesting
period (fiscal 2006 and fiscal 2007) must equal or exceed its weighted average cost of capital for
the same two year period. In the event this performance measure is achieved, the awards vest.
However the number of awards exercisable will be adjusted according to achievement of a management
objective based on the relative performance of the companys total return to shareholders
(companys TSR) determined for its 2006 and 2007 fiscal years compared to the total return to
shareholders of the Standard & Poors 500 Packaged Food and Meat Index (S&P TSR) for the same, or
approximately the same, period (a market condition). Based on this comparison, the grant will be
modified as follows: (i) if the companys TSR is equal to the fiftieth percentile S&P TSR, there
will be no adjustment; (ii) if the companys TSR is less than the S&P TSR, the grant will be
reduced by 1.3% for each percentile below the fiftieth by which the companys TSR is less than the
S&P TSR at the fiftieth percentile, but in no event will the reduction exceed twenty percent; and
(iii) if the companys TSR exceeds the S&P TSR at the fiftieth percentile, the grant will be
increased by 1.3% for each percentile above the fiftieth by which the companys TSR exceeds the S&P
TSR at the fiftieth percentile, but in no event will the increase exceed twenty percent. The
estimated fair value of this restricted stock is $29.16, and the company recorded expense of $0.5
million and $1.1 million, respectively, for the twelve and twenty-eight weeks ended July 15, 2006
related to this restricted stock. The fair value estimate was determined using a Monte Carlo
simulation model, which utilizes multiple input variables to determine the probability of the
company achieving the market condition discussed above. Inputs into the model included the
following for the company and comparator companies: (i) total stockholder return from the beginning
of the performance cycle through the measurement date; (ii) volatility; (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 restricted stock activity for the twenty-eight weeks ended July 15, 2006 is set forth
below (amounts in thousands, except price data):
|
|
|
|
|
|
|
|
|
|
|
Number of shares |
|
Weighted average fair value |
Beginning balance at December 31, 2005 |
|
|
106 |
|
|
$ |
18.67 |
|
Granted |
|
|
162 |
|
|
$ |
29.17 |
|
Forfeited |
|
|
(1 |
) |
|
$ |
29.16 |
|
Vested |
|
|
(31 |
) |
|
$ |
22.09 |
|
|
|
|
|
|
|
|
|
|
Ending balance at July 15, 2006 |
|
|
236 |
|
|
$ |
25.39 |
|
|
|
|
|
|
|
|
|
|
As of July 15, 2006, there was $4.0 million of total unrecognized compensation expense related
to restricted stock. This cost is expected to be recognized on a straight-line basis over a
weighted-average period of 1.4 years.
Stock Appreciation Rights
The company previously awarded stock appreciation rights (rights) to key employees
throughout the company. These rights vest at the end of four years and are payable in cash equal to
the difference between the grant price and the fair market value of the rights on the vesting date.
In accordance with SFAS 123R, the company records compensation expense for these rights on
measurement dates based on changes between the grant price and an estimated fair value of the
rights using the Black-Scholes option-pricing model. During the twelve and twenty-eight weeks ended
July 15, 2006, the company recorded expense of $0.3 million and $1.1 million, respectively, and
during the twelve and twenty-eight weeks ended July 16, 2005, the company recorded expense of $1.4
million and $0.8 million, respectively, related to these rights.
The company also allows non-employee directors to convert their retainers and committee
chairman fees into rights. These rights vest after one year and can be exercised over nine years.
The company records compensation expense for these rights at a measurement date based on changes
between the grant price and an estimated fair value of the rights using the Black-Scholes
option-pricing model. During the twelve and twenty-eight weeks ended July 15, 2006 the company
recorded a credit of $0.1 million and
expense of $0.1 million, respectively, and during the twelve and twenty-eight weeks ended July
15, 2005, the company recorded expense of $0.6 million and $0.5 million, respectively, related to
these rights.
16
The fair value of the rights at July 15, 2006 ranged from $29.80 to $41.25. The following
assumptions were used to determine fair value of the rights discussed above using the Black-Scholes
option-pricing model at July 15, 2006: dividend yield 1.60%; expected volatility 36.00%; risk-free
interest rate 5.09% and expected life of 1.00 years to 5.40 years.
The rights activity for the twenty-eight weeks ended July 15, 2006 is set forth below (amounts
in thousands, except price data):
|
|
|
|
|
Beginning balance at December 31, 2005 |
|
|
623 |
|
Rights granted |
|
|
25 |
|
Rights exercised |
|
|
(29 |
) |
|
|
|
|
|
Ending balance at July 15, 2006 |
|
|
619 |
|
|
|
|
|
|
Weighted average grant date fair value |
|
$ |
14.68 |
|
|
|
|
|
|
As a result of the adoption of SFAS 123R on January 1, 2006, the company recorded as an
expense a cumulative effect of a change in accounting principle of $0.9 million ($0.6 million, net
of income tax benefit) relating to its stock appreciation rights. This was a result of the
liability as of January 1, 2006 (the day of adoption of SFAS 123R) as computed using the
Black-Scholes pricing model being greater than the recorded liability on that day. Prior to the
adoption of SFAS 123R, the company computed expense on the vested portion of the rights as the
difference between the grant date market value of its stock and the market value of its stock at
the end of the respective reporting period.
Stock-Based Compensation Expense Summary under SFAS 123R
Stock-based compensation expense recognized during the twelve and twenty-eight weeks ended
July 15, 2006 is set forth below (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
TWELVE WEEKS |
|
|
TWENTY-EIGHT WEEKS |
|
Total stock-based
compensation expense included in
selling, marketing and
administrative expenses |
|
$ |
1,855 |
|
|
$ |
5,025 |
|
Income tax effect |
|
|
673 |
|
|
|
1,849 |
|
|
|
|
|
|
|
|
Total stock-based compensation
expense included in income from
continuing operations before
cumulative effect of a change in
accounting principle |
|
$ |
1,182 |
|
|
$ |
3,176 |
|
|
|
|
|
|
|
|
Impact on earnings per share on
income from continuing operations
before cumulative effect of a
change in accounting principle: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
Diluted |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
12. POST-RETIREMENT PLANS
Defined Benefit Plans
The company has trusteed, noncontributory defined benefit pension plans covering certain
employees. The benefits are based on years of service and the employees career earnings. The plans
are funded at amounts deductible for income tax purposes but not less than the minimum funding
required by the Employee Retirement Income Security Act of 1974 (ERISA). As of July 15, 2006, 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 uses a September 30 measurement date for
its plans.
Effective January 1, 2006, the company curtailed the defined benefit plan that covers the
majority of its workforce. Benefits under this plan were frozen, and no future benefits will accrue
under this plan. The company continues to maintain a plan that covers a small number of certain
union employees.
During the first quarter of fiscal 2006, the company made a voluntary cash contribution to its
defined benefit pension plan of $14.0 million. This contribution was not required to be made by the
minimum funding requirements of ERISA, but the company believed, due to its strong cash flow and
balance sheet, it was an appropriate time to make the contribution to reduce the amount of future
contributions. The company does not intend to make further contributions to the pension plan for
the remainder of fiscal 2006.
17
The net periodic pension cost for the companys plans include the following components
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS ENDED |
|
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
|
JULY 15, 2006 |
|
|
JULY 16, 2005 |
|
|
JULY 15, 2006 |
|
|
JULY 16, 2005 |
|
Service cost |
|
$ |
58 |
|
|
$ |
1,444 |
|
|
$ |
1,696 |
|
|
$ |
3,370 |
|
Interest cost |
|
|
3,615 |
|
|
|
3,698 |
|
|
|
8,525 |
|
|
|
8,628 |
|
Expected return on plan assets |
|
|
(4,798 |
) |
|
|
(4,220 |
) |
|
|
(11,196 |
) |
|
|
(9,846 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
25 |
|
Amortization of net loss |
|
|
6 |
|
|
|
460 |
|
|
|
14 |
|
|
|
1,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit costs |
|
$ |
(1,119 |
) |
|
$ |
1,393 |
|
|
$ |
(961 |
) |
|
$ |
3,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement Benefit Plan
The company provides certain medical and life insurance benefits for eligible retired
employees. The medical plan covers eligible retirees under the active medical plan. The
plan incorporates an up-front deductible, coinsurance payments and retiree contributions at COBRA
premium levels. 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.
The net periodic postretirement benefit expense for the company includes the following
components (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS ENDED |
|
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
|
JULY 15, 2006 |
|
|
JULY 16, 2005 |
|
|
JULY 15, 2006 |
|
|
JULY 16, 2005 |
|
Service cost |
|
$ |
74 |
|
|
$ |
62 |
|
|
$ |
174 |
|
|
$ |
146 |
|
Interest cost |
|
|
91 |
|
|
|
80 |
|
|
|
207 |
|
|
|
186 |
|
Amortization of prior service cost |
|
|
77 |
|
|
|
77 |
|
|
|
179 |
|
|
|
179 |
|
Amortization of net loss |
|
|
5 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit costs |
|
$ |
247 |
|
|
$ |
219 |
|
|
$ |
571 |
|
|
$ |
511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) Retirement Savings Plan
The Flowers Foods 401(k) Retirement Savings Plan (the Plan) covers substantially all of the
companys employees who have completed certain service requirements. Generally, the cost and
contributions for those employees who also participate in the defined benefit pension plan is 25%
of the first $400 contributed by the employee. Prior to January 1, 2006, 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 the twelve and twenty-eight weeks ended July 15, 2006, the total cost and
contributions were $2.9 million and $6.9 million, respectively. During the twelve and twenty-eight
weeks ended July 16, 2005 the total cost and contributions were
$1.4 million and $3.4 million,
respectively. The increase in the cost of the Plan year over year is due to increased participation
in the Plan as a result of the curtailment of the defined benefit plan discussed above, and the
increase in the companys contribution from 2% to 3%.
13. SEGMENT REPORTING
Flowers Bakeries produces fresh and frozen packaged bread and rolls and Flowers Specialty
produces frozen bread and rolls and snack products. The company evaluates each segments
performance based on income or loss before interest and income taxes, excluding unallocated
expenses and charges which the companys management deems to be an overall corporate cost or a cost
not reflective of the segments core operating businesses. Information regarding the operations in
these reportable segments is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS ENDED |
|
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
|
JULY 15 , 2006 |
|
|
JULY 16 , 2005 |
|
|
JULY 15 , 2006 |
|
|
JULY 16 , 2005 |
|
SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flowers Bakeries |
|
$ |
363,900 |
|
|
$ |
325,127 |
|
|
$ |
820,339 |
|
|
$ |
727,700 |
|
Flowers Specialty |
|
|
102,614 |
|
|
|
97,850 |
|
|
|
237,130 |
|
|
|
223,756 |
|
Eliminations: Sales from Flowers Specialty
to Flowers Bakeries |
|
|
(15,304 |
) |
|
|
(12,479 |
) |
|
|
(35,822 |
) |
|
|
(29,019 |
) |
Sales from Flowers Bakeries To Flowers
Specialty |
|
|
(5,438 |
) |
|
|
(5,198 |
) |
|
|
(12,262 |
) |
|
|
(11,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
445,772 |
|
|
$ |
405,300 |
|
|
$ |
1,009,385 |
|
|
$ |
911,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS ENDED |
|
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
|
JULY 15 , 2006 |
|
|
JULY 16 , 2005 |
|
|
JULY 15 , 2006 |
|
|
JULY 16 , 2005 |
|
DEPRECIATION AND AMORTIZATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flowers Bakeries |
|
$ |
12,113 |
|
|
$ |
10,627 |
|
|
$ |
26,991 |
|
|
$ |
25,020 |
|
Flowers Specialty |
|
|
3,030 |
|
|
|
2,752 |
|
|
|
7,070 |
|
|
|
6,095 |
|
Unallocated |
|
|
(30 |
) |
|
|
48 |
|
|
|
(122 |
) |
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,113 |
|
|
$ |
13,427 |
|
|
$ |
33,939 |
|
|
$ |
31,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, MINORITY INTEREST AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flowers Bakeries |
|
$ |
32,121 |
|
|
$ |
28,651 |
|
|
$ |
71,006 |
|
|
$ |
58,262 |
|
Flowers Specialty |
|
|
3,736 |
|
|
|
5,967 |
|
|
|
8,715 |
|
|
|
15,551 |
|
Unallocated |
|
|
(5,239 |
) |
|
|
(6,689 |
) |
|
|
(13,776 |
) |
|
|
(14,339 |
) |
Interest income, net |
|
|
1,286 |
|
|
|
1,396 |
|
|
|
2,807 |
|
|
|
3,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,904 |
|
|
$ |
29,325 |
|
|
$ |
68,752 |
|
|
$ |
62,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product category in each reportable segment are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 12 Weeks Ended July 15, 2006 |
|
|
For the 12 Weeks Ended July 16, 2005 |
|
|
Flowers Bakeries |
|
Flowers Specialty |
|
Total |
|
Flowers Bakeries |
|
Flowers Specialty |
|
Total |
|
Branded Retail |
|
$ |
213,394 |
|
|
$ |
22,242 |
|
|
$ |
235,636 |
|
|
$ |
188,926 |
|
|
$ |
20,503 |
|
|
$ |
209,429 |
|
Store Branded Retail |
|
|
47,605 |
|
|
|
6,080 |
|
|
|
53,685 |
|
|
|
41,800 |
|
|
|
5,543 |
|
|
|
47,343 |
|
Foodservice and Other |
|
|
97,463 |
|
|
|
58,988 |
|
|
|
156,451 |
|
|
|
89,203 |
|
|
|
59,325 |
|
|
|
148,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
358,462 |
|
|
$ |
87,310 |
|
|
$ |
445,772 |
|
|
$ |
319,929 |
|
|
$ |
85,371 |
|
|
$ |
405,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 28 Weeks Ended July 15, 2006 |
|
|
For the 28 Weeks Ended July 16, 2005 |
|
|
|
Flowers Bakeries |
|
|
Flowers Specialty |
|
|
Total |
|
|
Flowers Bakeries |
|
|
Flowers Specialty |
|
|
Total |
|
Branded Retail |
|
$ |
477,062 |
|
|
$ |
51,028 |
|
|
$ |
528,090 |
|
|
$ |
419,698 |
|
|
$ |
43,523 |
|
|
$ |
463,221 |
|
Store Branded Retail |
|
|
101,024 |
|
|
|
14,173 |
|
|
|
115,197 |
|
|
|
86,627 |
|
|
|
11,933 |
|
|
|
98,560 |
|
Foodservice and Other |
|
|
229,991 |
|
|
|
136,107 |
|
|
|
366,098 |
|
|
|
210,278 |
|
|
|
139,281 |
|
|
|
349,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
808,077 |
|
|
$ |
201,308 |
|
|
$ |
1,009,385 |
|
|
$ |
716,603 |
|
|
$ |
194,737 |
|
|
$ |
911,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. ACQUISITIONS
On February 18, 2006, the company acquired Derst Baking Company (Derst), a Savannah,
Georgia-based bakery. Derst, with annual sales of approximately $50 million, produces breads and
rolls distributed to customers and consumers in South Carolina, eastern Georgia and north Florida.
(See Note 4)
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 15, 2006 should be read in
conjunction with the companys Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
CRITICAL ACCOUNTING POLICIES:
Our financial statements are prepared in accordance with generally accepted accounting
principles (GAAP). These principles are numerous and complex. Our significant accounting policies
are summarized in the companys Annual Report on Form 10-K for the fiscal year ended December 31,
2005. 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. In our Form 10-K for the fiscal year ended December 31,
2005, we discuss the areas where we believe that the estimates, judgments or interpretations
that we have made, if different, would have yielded the most significant differences in our
financial statements and we urge you to review that discussion. In addition to these critical
accounting policies, the company adopted Statement of Financial Accounting Standard (SFAS) No.
123R, Share Based
19
Payment (SFAS 123R) on January 1, 2006. SFAS 123R requires that the value of
stock options and similar awards be expensed. Prior to the adoption of SFAS 123R, as permitted by
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), the company applied intrinsic
value accounting for its stock option plans under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. The company applied the disclosure-only provisions of
SFAS 123 and SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure an
Amendment of FASB Statement No. 123.
MATTERS AFFECTING ANALYSIS:
Insurance Proceeds from Losses Incurred from Hurricane Katrina. On August 29, 2005, Hurricane
Katrina struck the gulf coast of the United States and caused catastrophic damage to the area,
particularly New Orleans, Louisiana. The company operates a bakery in New Orleans that was affected
by the hurricane. The New Orleans bakery was out of operation until December 8, 2005 due to the
many problems in the New Orleans area that were not within the companys control.
The company received insurance payments of $5.5 million during fiscal 2005 relating to damage
associated with Hurricane Katrina. During the second quarter of fiscal 2006, the company received
additional insurance proceeds of $1.7 million primarily for business interruption during the
twenty-eight weeks of fiscal 2006. Of these proceeds, $1.0 million and $0.7 million were allocated
to materials, supplies, labor and other production costs and to selling, marketing and
administrative expenses, respectively. The company has filed additional insurance claims with its insurance provider relating to losses incurred from Hurricane Katrina. At this time, the company is unable to determine the amount and timing of any additional proceeds to be received.
RESULTS OF OPERATIONS:
Results of operations, expressed as a percentage of sales, for the twelve and
twenty-eight-week periods ended July 15, 2006 and July 16, 2005, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE TWELVE WEEKS ENDED |
|
FOR THE TWENTY-EIGHT WEEKS ENDED |
|
|
JULY 15, 2006 |
|
JULY 16, 2005 |
|
JULY 15, 2006 |
|
JULY 16, 2005 |
Sales |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
100.00 |
% |
Gross margin |
|
|
49.74 |
|
|
|
50.03 |
|
|
|
50.13 |
|
|
|
50.04 |
|
Selling, marketing and administrative expenses |
|
|
39.48 |
|
|
|
39.83 |
|
|
|
40.30 |
|
|
|
40.10 |
|
Depreciation and amortization |
|
|
3.39 |
|
|
|
3.31 |
|
|
|
3.36 |
|
|
|
3.42 |
|
Gain on insurance recovery |
|
|
|
|
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
Interest income, net |
|
|
(0.29 |
) |
|
|
(0.34 |
) |
|
|
(0.28 |
) |
|
|
(0.38 |
) |
Income from continuing operations before income
taxes, minority interest and cumulative effect of a
change in accounting principle |
|
|
7.16 |
|
|
|
7.24 |
|
|
|
6.81 |
|
|
|
6.90 |
|
Income tax expense |
|
|
2.59 |
|
|
|
2.68 |
|
|
|
2.51 |
|
|
|
2.65 |
|
Minority interest in variable interest entity |
|
|
(0.14 |
) |
|
|
(0.20 |
) |
|
|
(0.14 |
) |
|
|
(0.13 |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
0.12 |
|
|
|
|
|
Cumulative effect of a change in accounting principle |
|
|
|
|
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
Net income |
|
|
4.43 |
% |
|
|
4.36 |
% |
|
|
4.22 |
% |
|
|
4.12 |
% |
CONSOLIDATED AND SEGMENT RESULTS
TWELVE WEEKS ENDED JULY 15, 2006 COMPARED TO TWELVE WEEKS ENDED JULY 16, 2005
Consolidated Sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 12 Weeks Ended |
|
|
For the 12 Weeks Ended |
|
|
|
|
|
|
July 15, 2006 |
|
|
July 16, 2005 |
|
|
|
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
% Increase |
|
|
|
(Amounts in |
|
|
|
|
|
|
(Amounts in |
|
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
|
|
|
Branded Retail |
|
$ |
235,636 |
|
|
|
52.9 |
% |
|
$ |
209,429 |
|
|
|
51.7 |
% |
|
|
12.5 |
% |
Store Branded Retail |
|
|
53,685 |
|
|
|
12.0 |
|
|
|
47,343 |
|
|
|
11.7 |
|
|
|
13.4 |
% |
Foodservice and Other |
|
|
156,451 |
|
|
|
35.1 |
|
|
|
148,528 |
|
|
|
36.6 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
445,772 |
|
|
|
100.0 |
% |
|
$ |
405,300 |
|
|
|
100.0 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The 10.0% increase in sales was attributable to price increases of 6.4% and favorable product
mix shifts of 5.0%, partially offset by unit volume declines of 1.4%. The 3.6% increase in mix, net
of the decrease in volume, resulted from the expansion of the companys DSD system into new markets
and new products, which contributed 0.5%, the February 2006 acquisition of Derst Baking Company,
which contributed 2.9%, and the September 2005 acquisition of Royal Cake Company, which contributed
0.9%, partially offset by a volume decrease in the companys core business of 0.7%. The increase in
branded retail sales was due primarily to the acquisitions and increases in volume and pricing. The
companys branded white bread labels and its Natures Own products were the key components of these
sales. The increase in store branded retail sales was due to volume and price increases. The
increase in foodservice and other sales was primarily due to price increases and favorable product
mix shifts, partially offset by a decrease in volume, primarily contract manufacturing.
Flowers Bakeries Sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 12 Weeks Ended |
|
|
For the 12 Weeks Ended |
|
|
|
|
|
|
July 15, 2006 |
|
|
July 16, 2005 |
|
|
|
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
% Increase |
|
|
|
(Amounts in |
|
|
|
|
|
|
(Amounts in |
|
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
|
|
|
Branded Retail |
|
$ |
213,394 |
|
|
|
59.5 |
% |
|
$ |
188,926 |
|
|
|
59.1 |
% |
|
|
13.0 |
% |
Store Branded Retail |
|
|
47,605 |
|
|
|
13.3 |
|
|
|
41,800 |
|
|
|
13.1 |
|
|
|
13.9 |
% |
Foodservice and Other |
|
|
97,463 |
|
|
|
27.2 |
|
|
|
89,203 |
|
|
|
27.8 |
|
|
|
9.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
358,462 |
|
|
|
100.0 |
% |
|
$ |
319,929 |
|
|
|
100.0 |
% |
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 12.0% increase in sales was attributable to volume increases and favorable product mix
shifts of 7.1%, while price increases contributed 4.9%. 3.6% of the total increase is related to
the February 2006 acquisition of Derst Baking Company. The increase in branded retail sales was due
to the Derst acquisition as well as price and volume increases. Flowers Bakeries branded white
bread labels and its Natures Own products were the key components of these sales. The increase in
store branded retail sales was primarily due to increased volume and favorable pricing. The
increase in foodservice and other sales was primarily due to price increases and increased volume.
Flowers Specialty Sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 12 Weeks Ended |
|
|
For the 12 Weeks Ended |
|
|
|
|
|
|
July 15, 2006 |
|
|
July 16, 2005 |
|
|
% Increase |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
(Decrease) |
|
|
|
(Amounts in |
|
|
|
|
|
|
(Amounts in |
|
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
|
|
|
Branded Retail |
|
$ |
22,242 |
|
|
|
25.5 |
% |
|
$ |
20,503 |
|
|
|
24.0 |
% |
|
|
8.5 |
% |
Store Branded Retail |
|
|
6,080 |
|
|
|
7.0 |
|
|
|
5,543 |
|
|
|
6.5 |
|
|
|
9.7 |
% |
Foodservice and Other |
|
|
58,988 |
|
|
|
67.5 |
|
|
|
59,325 |
|
|
|
69.5 |
|
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
87,310 |
|
|
|
100.0 |
% |
|
$ |
85,371 |
|
|
|
100.0 |
% |
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2.3% increase in sales was attributable to price increases of 10.1%, partially offset by
volume declines, net of favorable product mix shifts, of 7.8%. 4.0% of the total increase is
related to the acquisition of Royal Cake Company. The increase in branded retail sales was
primarily the result of favorable pricing and positive mix shifts, partially offset by volume
declines. The increase in store branded retail sales was primarily due to price increases. The
decrease in foodservice and other sales, which include contract production and vending, was due to
decreased volume, partially offset by favorable product mix shifts and pricing. The decrease in
volume was due to the expected decline in contract snack cake sales. The company expects the
decline in contract snack cake sales to continue as the company moves to a more favorable mix with
its branded products.
Gross Margin (defined as sales less materials, supplies, labor and other production costs,
excluding depreciation, amortization and distributor discounts). Gross margin for the second
quarter of fiscal 2006 was $221.7 million, or 9.3% higher than gross margin reported for the same
period of the prior year of $202.8 million. As a percent of sales, gross margin decreased to 49.7%
as compared to 50.0% in the second quarter of fiscal 2005. This decrease was primarily due to
start-up costs associated with two new production lines, costs related to the decline in contract
snack cake production discussed above and start-up costs associated with the introduction
of a new product for a foodservice customer. These negative items were partially offset by pricing
gains, lower ingredient costs and receipt of the insurance proceeds discussed above.
21
Flowers Bakeries gross margin decreased to 54.8% of sales for the second quarter of fiscal
2006, compared to 55.3% of sales for the prior years second quarter. This decrease as a percent of
sales was primarily due to start-up costs associated with two new production lines, partially
offset by increased sales, receipt of the insurance proceeds discussed above, and lower ingredient
costs.
Flowers Specialtys gross margin decreased to 29.1% of sales for the second quarter of fiscal
2006, compared to 30.1% of sales for the same period of fiscal 2005. This decrease as a percent of
sales was primarily a result of higher ingredient, labor, inbound freight and freezer storage
costs, start-up costs associated with the introduction of a new product for a foodservice customer
and the decline in contract snack cake production discussed above. These negative items were
partially offset by decreased packaging costs and less outsourcing of production.
Selling, Marketing and Administrative Expenses. For the second quarter of fiscal 2006,
selling, marketing and administrative expenses were $176.0 million, or 39.5% of sales as compared
to $161.4 million, or 39.8% of sales reported for the second quarter of fiscal 2005. This decrease
as a percent of sales was due to increased sales and lower pension and advertising costs and
receipt of the insurance proceeds discussed above. Partially offsetting these positive items was
income of $1.4 million received during the second quarter of fiscal 2005 as a result of a
settlement of a class action lawsuit against several of the companys high fructose corn syrup
suppliers as a result of pricing irregularities.
Flowers Bakeries selling, marketing and administrative expenses include discounts paid to the
independent distributors utilized in our DSD system. Flowers Bakeries selling, marketing and
administrative expenses were $152.1 million, or 42.4% of sales during the second quarter of fiscal
2006, as compared to $137.8 million, or 43.1% of sales during the same period of fiscal 2005. The
decrease as a percent of sales was primarily due to increased sales and lower distribution,
advertising and labor costs. The receipt of the insurance proceeds discussed above also
contributed to the decrease. These positive items were partially offset by the income during the
second quarter of fiscal 2005 from the class action lawsuit discussed above.
Flowers Specialtys selling, marketing and administrative expenses were $18.7 million, or
21.4% of sales during the second quarter of fiscal 2006, as compared to $17.0 million, or 19.9% of
sales during the second quarter of fiscal 2005. This increase as a percent of sales was primarily
attributable to higher distribution and labor costs. The higher distribution costs were due
primarily to increased fuel costs and the continued shift of business from contract to mass
merchandisers and convenience stores. Contract customers normally pick up the product sold, whereas
the company delivers product to mass merchandisers and convenience store customers.
Depreciation and Amortization. Depreciation and amortization expense was $15.1 million for the
second quarter of fiscal 2006, an increase of 12.6% from the second quarter of fiscal 2005, which
was $13.4 million.
Flowers Bakeries depreciation and amortization expense increased to $12.1 million for the
second quarter of fiscal 2006 from $10.6 million in the same period of fiscal 2005. This increase
was primarily the result of increased depreciation expense due to capital expenditures placed in
service subsequent to the second quarter of fiscal 2005 and the amortization of a trademark and
customer relationships associated with the acquisition in February of 2006 of Derst Baking Company.
See Note 4 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further
information regarding these intangibles.
Flowers Specialtys depreciation and amortization expense increased to $3.0 million for the
second quarter of fiscal 2006 as compared to $2.8 million for the same period of fiscal 2005. This
increase was primarily the result of increased depreciation expense due to capital expenditures
placed in service subsequent to the second quarter of fiscal 2005.
Net Interest Income. For the second quarter of fiscal 2006, net interest income was $1.3
million, a decrease of $0.1 million from the second quarter of fiscal 2005, which was $1.4 million.
The decrease was related to an increase in interest expense as a result of a higher average amount
of debt outstanding under the companys credit facility.
Income From Continuing Operations Before Income Taxes and Minority Interest. Income from
continuing operations before income taxes and minority interest for the second quarter of fiscal
2006 was $31.9 million, an increase of $2.6 million from the $29.3 million reported for the second
quarter of fiscal 2005.
The improvement was primarily the result of improvements in the operating results of Flowers
Bakeries of $3.5 million and a decrease in unallocated corporate expenses of $1.4 million. These
positive items were partially offset by a decrease in the operating results of Flowers Specialty of
$2.2 million and a decrease in net interest income of $0.1 million. The increase at Flowers
Bakeries
was primarily attributable to higher sales and lower ingredient, advertising and distribution costs
and the insurance proceeds discussed above, partially offset by start-up costs associated with two
new production lines and the settlement of the class action lawsuit during
22
the second quarter of
fiscal 2005 discussed above. The decrease at Flowers Specialty was primarily a result of higher
labor, ingredient and in-bound freight costs, as well as costs associated with the shift of
business from contract to mass merchandisers and convenience stores as discussed above. Start-up
costs associated with the introduction of a new product for a foodservice customer also contributed
to the decrease. These negative items were partially offset by decreased packaging costs and less
outsourcing of production. The decrease in unallocated corporate expenses was primarily due to
lower pension costs. See Net Interest Income above for a discussion of the decrease in this area.
Income Taxes. The effective tax rate for the second quarter of fiscal 2006 was 36.3% compared
to 37.0% for the same period of fiscal 2005. This difference was primarily due to a deferred tax
benefit of approximately $0.3 million due to a change in the
Texas state tax law, which was signed into effect in May 2006. The difference in the
effective rate and the statutory rate is primarily due to state income taxes, the non-taxable
earnings of the consolidated variable interest entity and the Section 199 qualifying production
activities deduction.
Minority Interest. Minority interest represents all the earnings of the companys variable
interest entity (VIE) under the consolidation provisions of Financial Accounting Standards Board
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. All the earnings of
the VIE are eliminated through minority interest due to the company not having any equity ownership
in the VIE. The company is required to consolidate this VIE due to the VIE being capitalized with a
less than substantive amount of legal form capital investment and the company accounting for a
significant portion of the VIEs revenues. See Note 8 of Notes to Condensed Consolidated Financial
Statements of this Form 10-Q for further information regarding the companys VIE.
TWENTY-EIGHT WEEKS ENDED JULY 15, 2006 COMPARED TO TWENTY-EIGHT WEEKS ENDED JULY 16, 2005
Consolidated Sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 28 Weeks Ended |
|
|
For the 28 Weeks Ended |
|
|
|
|
|
|
July 15, 2006 |
|
|
July 16, 2005 |
|
|
|
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
% Increase |
|
|
|
(Amounts in |
|
|
|
|
|
|
(Amounts in |
|
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
|
|
|
Branded Retail |
|
$ |
528,090 |
|
|
|
52.3 |
% |
|
$ |
463,221 |
|
|
|
50.8 |
% |
|
|
14.0 |
% |
Store Branded Retail |
|
|
115,197 |
|
|
|
11.4 |
|
|
|
98,560 |
|
|
|
10.8 |
|
|
|
16.9 |
% |
Foodservice and Other |
|
|
366,098 |
|
|
|
36.3 |
|
|
|
349,559 |
|
|
|
38.4 |
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,009,385 |
|
|
|
100.0 |
% |
|
$ |
911,340 |
|
|
|
100.0 |
% |
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 10.8% increase in sales was attributable to price increases of 6.9% and favorable product
mix shifts of 4.8%, partially offset by unit volume declines of 0.9%. The 3.9% increase in mix, net
of the decrease in volume, resulted from the expansion of the companys DSD system into new markets
and new products, which contributed 0.7%, the February 2006 acquisition of Derst Baking Company,
which contributed 2.2%, and the September 2005 acquisition of Royal Cake Company, which contributed
1.0%. The increase in branded retail sales was due primarily to the acquisitions and increases in
volume and pricing. The companys branded white bread labels and its Natures Own products were the
key components of these sales. The increase in store branded retail sales was due to price and
volume increases. The increase in foodservice and other sales was primarily due to price increases
and favorable product mix shifts, partially offset by a decrease in volume, primarily contract.
Flowers Bakeries Sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 28 Weeks Ended |
|
|
For the 28 Weeks Ended |
|
|
|
|
|
|
July 15, 2006 |
|
|
July 16, 2005 |
|
|
|
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
% Increase |
|
|
|
(Amounts in |
|
|
|
|
|
|
(Amounts in |
|
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
|
|
|
Branded Retail |
|
$ |
477,062 |
|
|
|
59.0 |
% |
|
$ |
419,698 |
|
|
|
58.6 |
% |
|
|
13.7 |
% |
Store Branded Retail |
|
|
101,024 |
|
|
|
12.5 |
|
|
|
86,627 |
|
|
|
12.1 |
|
|
|
16.6 |
% |
Foodservice and Other |
|
|
229,991 |
|
|
|
28.5 |
|
|
|
210,278 |
|
|
|
29.3 |
|
|
|
9.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
808,077 |
|
|
|
100.0 |
% |
|
$ |
716,603 |
|
|
|
100.0 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The 12.8% increase in sales was attributable to volume increases and favorable product mix
shifts of 7.5%, while price increases contributed 5.3%. 2.8% of the total increase is related to
the February 2006 acquisition of Derst Baking Company. The increase in branded retail sales was due
to the Derst acquisition as well as volume and price increases. Flowers Bakeries branded white
bread labels and its Natures Own products were the key components of these sales. The increase in
store branded retail sales was primarily due to increased volume and favorable pricing. The
increase in foodservice and other sales was primarily due to price increases and increased volume.
Flowers Specialty Sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 28 Weeks Ended |
|
|
For the 28 Weeks Ended |
|
|
|
|
|
|
July 15, 2006 |
|
|
July 16, 2005 |
|
|
% Increase |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
(Decrease) |
|
|
|
(Amounts in |
|
|
|
|
|
|
(Amounts in |
|
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
thousands) |
|
|
|
|
|
|
|
|
|
Branded Retail |
|
$ |
51,028 |
|
|
|
25.4 |
% |
|
$ |
43,523 |
|
|
|
22.3 |
% |
|
|
17.2 |
% |
Store Branded Retail |
|
|
14,173 |
|
|
|
7.0 |
|
|
|
11,933 |
|
|
|
6.1 |
|
|
|
18.8 |
% |
Foodservice and Other |
|
|
136,107 |
|
|
|
67.6 |
|
|
|
139,281 |
|
|
|
71.6 |
|
|
|
(2.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
201,308 |
|
|
|
100.0 |
% |
|
$ |
194,737 |
|
|
|
100.0 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 3.4% increase in sales was attributable to price increases of 11.4%, partially offset by
volume declines, net of favorable product mix shifts, of 8.0%. 4.5% of the total increase is
related to the acquisition of Royal Cake Company. The increase in branded retail sales was
primarily the result of favorable pricing and positive mix shifts. The increase in store branded
retail sales was due to increased volume and price increases. The decrease in foodservice and other
sales, which include contract production and vending, was due to decreased volume, partially offset
by favorable product mix shifts and pricing. The decrease in volume was due to Flowers Specialty
experiencing a decline in contract snack cake sales, as expected. The company expects the decline
from prior year in contract snack cake sales to continue, as the company moves to a more favorable
mix with its branded products. During the first quarter of fiscal 2005, Flowers Specialty began
producing a new product for a foodservice customer. Sales of this product decreased approximately
$2.1 million year over year due to strong sales promotion by the foodservice customer during the
product introduction in 2005.
Gross Margin (defined as sales less materials, supplies, labor and other production costs,
excluding depreciation, amortization and distributor discounts). Gross margin for the twenty-eight
weeks of fiscal 2006 was $506.0 million, or 11.0% higher than gross margin reported for the same
period of the prior year of $456.1 million. As a percent of sales, gross margin increased slightly
to 50.1% as compared to 50.0% in the twenty-eight weeks of fiscal 2005. This increase as a percent
of sales was primarily due to pricing gains and lower ingredient and packaging costs, partially
offset by start-up costs associated with two new production lines, costs related to the decline in
contract snack cake production discussed above and start-up costs associated with the introduction
of a new product for a foodservice customer.
Flowers Bakeries gross margin decreased to 55.2% of sales for the twenty-eight weeks of
fiscal 2006, compared to 55.3% of sales for the same period of the prior year. This slight decrease
as a percent of sales was due to start-up costs associated with two new production lines, partially
offset by higher sales and lower ingredient costs.
Flowers Specialtys gross margin decreased to 29.6% of sales for the twenty-eight weeks of
fiscal 2006, compared to 30.7% of sales for the same period of fiscal 2005. This decrease as a
percent of sales was primarily a result of higher ingredient, labor, inbound freight and freezer
storage costs, start-up costs associated with the introduction of a new product for a foodservice
customer and the decline in contract snack cake production. These negative items were partially
offset by decreased packaging costs and less outsourcing of production.
Selling, Marketing and Administrative Expenses. For the twenty-eight weeks of fiscal 2006,
selling, marketing and administrative expenses were $406.8 million, or 40.3% of sales as compared
to $365.4 million, or 40.1% of sales reported for the twenty-eight weeks of fiscal 2005. This
slight increase as a percent of sales was due to higher stock-based compensation costs, the income
from the class action lawsuit in fiscal 2005 discussed above and higher distribution costs. These
increases were partially offset by increased sales and lower advertising and pension costs. As a
result of the companys adoption of SFAS 123R on January 1, 2006 and an increase in stock-based
compensation costs related to awards previously expensed, $3.2 million more stock-based
compensation expense, or $0.03 per share, was recorded during the twenty-eight weeks of fiscal 2006
as compared to the twenty-eight weeks of fiscal 2005. See
24
Note 11 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information
regarding the companys stock-based compensation.
Flowers Bakeries selling, marketing and administrative expenses include discounts paid to the
independent distributors utilized in our DSD system. Flowers Bakeries selling, marketing and
administrative expenses were $348.4 million, or 43.1% of sales during the twenty-eight weeks of
fiscal 2006, as compared to $312.9 million, or 43.7% of sales during the same period of fiscal
2005. The decrease as a percent of sales was primarily due to increased sales and lower
distribution and advertising costs. These positive items were partially offset by increased
stock-based compensation costs of $1.2 million discussed above and the income during fiscal 2005
relating to the class action lawsuit discussed above.
Flowers Specialtys selling, marketing and administrative expenses were $43.8 million, or
21.8% of sales during the twenty-eight weeks of fiscal 2006, as compared to $38.2 million, or 19.6%
of sales during the same time period of fiscal 2005. This increase as a percent of sales was
primarily attributable to higher distribution, labor and freezer storage costs. The higher
distribution costs were due primarily to costs associated with the transition to a new centralized
distribution center, increased fuel costs and the continued shift of business from contract to mass
merchandisers and convenience stores. Contract customers normally pick up the product sold, whereas
the company delivers product to mass merchandisers and convenience store customers.
Depreciation and Amortization. Depreciation and amortization expense was $33.9 million for the
twenty-eight weeks of fiscal 2006, an increase of 8.9% from the twenty-eight weeks of fiscal 2005,
which was $31.2 million.
Flowers Bakeries depreciation and amortization expense increased to $27.0 million for the
twenty-eight weeks of fiscal 2006 from $25.0 million in the same period of fiscal 2005. This
increase was primarily the result of increased depreciation expense due to capital expenditures
placed in service subsequent to the second quarter of fiscal 2005 and the amortization of a
trademark and customer relationships associated with the acquisition in February of 2006 of Derst
Baking Company. See Note 4 of Notes to Condensed Consolidated Financial Statements of this Form
10-Q for further information regarding these intangibles.
Flowers Specialtys depreciation and amortization expense increased to $7.0 million for the
twenty-eight weeks of fiscal 2006 as compared to $6.1 million for the same period of fiscal 2005.
This increase was primarily the result of increased depreciation expense due to capital
expenditures placed in service subsequent to the second quarter of fiscal 2005.
Gain on Insurance Recovery. During the first quarter of fiscal 2006, certain equipment was
destroyed by fire at the companys Montgomery, Alabama production facility (a part of Flowers
Specialty). Property damage insurance proceeds of $1.1 million were received during the first
quarter of fiscal 2006 under the companys insurance policy. The net book value of the equipment at
the time of the fire was $0.4 million, resulting in a gain of $0.7 million. This equipment was
replaced during the first quarter and is fully operational. The company has also filed insurance
claims for business interruption, but at this time, these claims have not been settled or recorded
in the companys consolidated financial statements at July 15, 2006.
Net Interest Income. For the twenty-eight weeks of fiscal 2006, net interest income was $2.8
million, a decrease of $0.7 million from the twenty-eight weeks of fiscal 2005, which was $3.5
million. The decrease was primarily related to an increase in interest expense of $0.6 million
primarily as a result of a higher average amount of debt outstanding under the companys credit
facility.
Income From Continuing Operations Before Income Taxes, Minority Interest and Cumulative Effect
of a Change in Accounting Principle. Income from continuing operations before income taxes,
minority interest and a change in accounting principle for the twenty-eight weeks of fiscal 2006
was $68.8 million, an increase of $5.8 million from the $63.0 million reported for the first
quarter of fiscal 2005.
The improvement was primarily the result of improvements in the operating results of Flowers
Bakeries of $12.7 million and a decrease in unallocated corporate expenses of $0.6 million,
partially offset by a decrease in the operating results of Flowers Specialty of $6.8 million and a
decrease in net interest income of $0.7 million. The increase at Flowers Bakeries was primarily
attributable to higher sales and lower ingredient, advertising and distribution costs, partially
offset by higher stock-based compensation costs, start-up costs associated with two new production
lines and the income in fiscal 2005 from `proceeds received from the class action lawsuit. The
decrease at Flowers Specialty was primarily a result of higher labor, ingredient, in-bound freight
and freezer storage costs, as well as costs associated with the transition to a new centralized
distribution center and the shift of business from contract to mass merchandisers and convenience
stores as discussed above. Start-up costs associated with the introduction of a new product for a
foodservice customer also contributed to the decrease. These negative items were partially offset
by decreased packaging costs, less outsourcing of production and the gain on the insurance recovery
discussed above. The decrease in unallocated corporate expenses
25
was primarily due to lower pension costs, partially offset by higher stock-based compensation
expense. See Net Interest Income above for a discussion of the decrease in this area.
Income Taxes. The effective tax rate for the twenty-eight weeks of fiscal 2006 was 36.8%
compared to 38.3% for the same period of fiscal 2005. This decrease is primarily the result of an
increase in the benefit of the Section 199 qualifying production activities deduction and $0.6
million, net of the federal benefit of $0.3 million, of state tax expense accrued in the first
quarter of fiscal 2005 based on the outcome of a state tax audit that was settled in the first
quarter of fiscal 2005. Also contributing to the decrease was a deferred tax benefit of
approximately $0.3 million due to a change in the Texas state
tax law, which was signed into effect in May 2006. The difference in the effective rate
and the statutory rate is primarily due to state income taxes, the non-taxable earnings of the
consolidated variable interest entity and the Section 199 qualifying production activities
deduction.
Minority Interest. Minority interest represents all the earnings of the companys VIE under
the consolidation provisions of FIN 46. All the earnings of the VIE are eliminated through minority
interest due to the company not having any equity ownership in the VIE. The company is required to
consolidate this VIE due to the VIE being capitalized with a less than substantive amount of legal
form capital investment and the company accounting for a significant portion of the VIEs revenues.
See Note 8 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further
information regarding the companys VIE.
Discontinued Operations. During fiscal 2004, the company announced an agreement to settle a
class action lawsuit related to pie shells produced by a former operating facility. The costs of
this settlement, $1.8 million, net of income tax benefit were recorded by the company as part of
discontinued operations. 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 this settlement. The
recovery is recorded as Income from discontinued operations, net of income tax, in the condensed
consolidated statement of income for the twenty-eight weeks ended July 15, 2006.
The company is under audit by the Internal Revenue Service for tax years 2000, 2001 and 2003.
Finalization of the 2000 and 2001 audit may result in the reversal of previously established tax
reserves, which will be recorded as discontinued operations in the period the audit is finalized.
Cumulative Effect of a Change in Accounting Principle. As a result of the adoption of SFAS
123R on January 1, 2006, the company recorded as an expense a cumulative effect of a change in
accounting principle of $0.9 million ($0.6 million, net of income tax benefit) relating to its
stock appreciation rights. This was a result of the liability as of January 1, 2006 (the day of
adoption of SFAS 123R) as computed using the Black-Scholes pricing model being greater than the
recorded liability on that day. Prior to the adoption of SFAS 123R, the company computed expense on
the vested portion of the rights as the difference between the grant date market value of its stock
and the market value of its stock at the end of the respective reporting period.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity represents our ability to generate sufficient cash flows from operating activities
to meet our obligations and commitments as well as our ability to obtain appropriate financing and
convert into cash those assets that are no longer required to meet existing strategic and financing
objectives. Therefore, liquidity cannot be considered separately from capital resources that
consist primarily of current and potentially available funds for use in achieving long-range
business objectives. Currently, the companys liquidity needs arise primarily from working capital
requirements, capital expenditures and stock repurchases. The companys strategy for use of its
cash flow includes paying dividends to shareholders, making acquisitions, growing internally and
repurchasing shares of its common stock when appropriate.
Cash Flows
Flowers Foods cash and cash equivalents increased to $17.6 million at July 15, 2006 from
$11.0 million at December 31, 2005. The increase resulted from $73.9 million provided by operating
activities, partially offset by $36.8 million and $30.5 million disbursed for investing activities
and financing activities, respectively.
Net cash of $73.9 million provided by operating activities during the twenty-eight weeks ended
July 15, 2006 consisted primarily of $42.6 million in net income, adjusted for certain non-cash
items of $35.6 million. Cash disbursed for working capital and other activities was $4.3 million.
Included in the cash disbursed for working capital and other activities was a pension contribution
of $14.0 million and a federal income tax refund of $10.5 million.
26
Net cash disbursed for investing activities during the twenty-eight weeks ended July 15, 2006
of $36.8 million consisted primarily of capital expenditures of $32.3 million. The capital
expenditures were $15.3 million higher than the same period of the prior year due primarily to
certain projects planned for the last half of fiscal 2005 being delayed until the first half of
fiscal 2006. Capital expenditures at Flowers Bakeries and Flowers Specialty were $24.3 million and
$6.0 million, respectively. The company also leases certain production machinery and equipment
through various operating leases.
Net
cash disbursed for financing activities of $30.5 million during the twenty-eight weeks
ended July 15, 2006 consisted primarily of stock repurchases and dividends paid of $40.2 million
and $13.9 million, respectively, partially offset by net debt borrowings of $9.0 million and
proceeds of $6.0 million from the exercise of stock options. In accordance with SFAS 123R, cash
income tax benefits of $8.1 million related to stock award activity during the first and second
quarters of fiscal 2006 are classified as cash inflows from financing activities. Because the
company applied the modified prospective transition method in adopting SFAS 123R, prior period cash
flow statements are not restated. Therefore, cash income tax benefits of $8.0 million related to
stock award activity during the first and second quarters of fiscal 2005 are classified as cash
inflows from operating activities.
Credit Facility
On June 6, 2006, the company further amended and restated its credit facility (the new credit
facility). The new credit facility is a five-year, $250.0 million unsecured revolving loan
facility that expires June 6, 2011 and provides for lower rates on future borrowings than the
companys former credit facility. 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.
Proceeds from the new credit facility may be used for working capital and general corporate
purposes, including acquisition financing, refinancing of indebtedness and share repurchases. 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 company believes that, given its current cash position, its cash flow
from operating activities and its available credit capacity, it can comply with the current terms
of the new credit facility and can meet presently foreseeable financial requirements. As of July
15, 2006 and December 31, 2005, the company was in compliance with all restrictive financial
covenants under its credit facility.
Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar
rate or the base rate plus the applicable margin. The underlying rate is defined as either rates
offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds
rate plus 0.5%. The applicable margin ranges from 0.00% to 0.20% for base rate loans and from 0.40%
to 1.075% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.30% is due
quarterly on all commitments under the new credit facility. Both the interest margin and the
facility fee are based on the companys leverage ratio. Outstanding borrowings under the new credit
facility were $56.4 million at July 15, 2006. Subsequent to the end of the second quarter of fiscal
2006, the company repaid $2.9 million of these borrowings. As excess funds become available, the
company may, from time to time during the remainder of fiscal 2006 repay a portion or all of these
borrowings.
The company paid financing costs of $0.4 million in connection with its new credit facility.
These costs were deferred and, along with unamortized costs of $0.5 million relating to the
companys former credit facility are being amortized over the term of the new credit facility.
Currently, the companys credit ratings by Standard and Poors, Moodys Investor Service and
Fitch Ratings are BBB-, Baa3, and BBB, respectively. Changes in the companys credit ratings do not
trigger a change in the companys available borrowings or costs under the new credit facility, but
could affect future credit availability.
Uses of Cash
On June 2, 2006, the Board of Directors declared a dividend of $0.125 per share on the
companys common stock that was paid on June 30, 2006 to shareholders of record on June 16, 2006.
This dividend payment was $7.7 million, bringing dividends paid to $13.9 million for the
twenty-eight weeks ended July 15, 2006.
During the first quarter of fiscal 2006, the company made a voluntary cash contribution to its
defined benefit pension plan of $14.0 million. This contribution was funded with borrowings under
the credit facility and is tax deductible. Although this contribution was not required to be made
by the minimum funding requirements of the Employee Retirement Income Security Act of 1974, the
company believed, due to its strong cash flow and balance sheet, it was an appropriate time to make
the contribution to reduce the amount of future contributions. The company does not intend to make
further contributions to the pension plan for the remainder of
27
fiscal 2006. In assessing different scenarios, the company believes its strong cash flow and
balance sheet will allow it to fund future pension needs without adversely affecting the business
strategy of the company.
On December 19, 2002, the Board of Directors approved a plan that authorized stock repurchases
of up to 11.3 million shares of the companys common stock. On November 18, 2005, the Board of
Directors increased the number of authorized shares to 15.3 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 companys best interest. These purchases may be
commenced or suspended without prior notice depending on then-existing business or market
conditions and other factors. During the second quarter of fiscal 2006, 0.3 million shares at a cost of
$9.1 million were purchased under the plan. During the twenty-eight weeks ended July 15, 2006,
1.4 million shares at a cost of $40.1 million were purchased under the plan. From the inception of
the plan through July 15, 2006, 10.9 million shares at a cost of $223.6 million have been purchased
under the plan.
During the first quarter of fiscal 2006, the company paid $16.6 million related to fiscal 2005
bonuses.
NEW ACCOUNTING PRONOUNCEMENTS:
Inventory Costs. In November 2004, the FASB issued SFAS No. 151, Inventory Costs an
Amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarified the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS 151
is effective for fiscal years beginning after June 15, 2005, the companys fiscal 2006, which began
January 1, 2006. This pronouncement did not have a material effect on the companys results of
operations or financial condition.
Stock Based Compensation. In December 2004, the FASB issued SFAS 123R, which requires the
value of stock options and similar awards be expensed. SFAS 123R applies to any unvested awards
that are outstanding on the effective date and to all new awards granted or modified after the
effective date. The remaining unrecognized portion of the original fair value of the unvested
awards will be recognized in the income statement at their fair value that the company estimated
for purposes of preparing its SFAS 123 pro forma disclosures. The company adopted SFAS 123R on
January 1, 2006 and applied the modified prospective transition method. This method requires the
company to expense the remaining unrecognized portion of unvested awards outstanding at the
effective date and any awards granted or modified after the effective date but does not require
restatement of prior periods. Stock-based compensation expense related to all stock-based awards
for the twelve weeks ended July 15, 2006 was approximately $1.2 million, net of income tax, or
$0.02 per diluted share and for the twelve weeks ended July 16, 2005 was approximately $1.4
million, net of income tax, or $0.02 per diluted share. Stock-based compensation expense related to
all stock-based awards for the twenty-eight weeks ended July 15, 2006 was approximately $3.2
million, net of income tax, or $0.05 per diluted share and for the twenty-eight weeks ended July
16, 2005 was approximately $1.1 million, net of income tax, or
$0.02 per diluted share. Total
pre-tax unrecognized compensation expense at July 15, 2006 related to non-vested stock options and
restricted stock awards of $9.9 million will be recognized over a weighted-average period of 1.7
years. See Note 11 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information relating
to the companys stock-based compensation.
Accounting Changes and Error Corrections. In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections (SFAS 154). SFAS 154 requires that, when a company
changes its accounting policies, it must apply the change retrospectively to all prior periods
presented instead of a cumulative effect adjustment in the period of the change. SFAS 154 may also
apply when the FASB issues new rules requiring changes in accounting. However if the new rule
allows cumulative effect treatment, it would take precedence over SFAS 154. This statement is
effective for accounting changes and error corrections for the companys fiscal year 2006 which
began on January 1, 2006.
Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FASB Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement
No.109. FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprises
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 of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, which will be the companys fiscal 2007 beginning December 31, 2006. The company
is currently assessing the impact FIN 48 will have on its financial statements.
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. On July 26,
2006, the FASB affirmed its previous decision to make the recognition provisions of its proposed
standard, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R), effective for public companies for
28
fiscal years ending after December 15, 2006. This standard will be effective for the companys
fiscal 2006 ending December 30, 2006. The FASB is expected to issue its final standard on or before
September 29, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company uses derivative financial instruments as part of an overall strategy to manage
market risk. The company uses forward, futures, swap and option contracts to hedge existing or
future exposure to changes in interest rates and commodity prices. The company does not enter into
these derivative financial instruments for trading or speculative purposes. If actual market
conditions are less favorable than those anticipated, raw material prices could increase
significantly, adversely affecting the margins from the sale of our products.
COMMODITY PRICE RISK
The company enters into commodity forward, futures and option contracts and swap agreements
for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and
consistent commodity price and thereby reduce the impact of volatility in its raw material and
packaging prices. At July 15, 2006, the fair market value of the companys commodity derivative
portfolio was $13.0 million. Of this fair value, $8.5 million is based on quoted market prices and
$4.5 million is based on models and other valuation methods. $8.0 million and $5.0 million of this
fair value relates to instruments that will be utilized in fiscal 2006 and 2007, respectively. A
sensitivity analysis has been prepared to estimate the companys exposure to commodity price risk.
Based on the companys derivative portfolio as of July 15, 2006, a hypothetical ten percent
increase in commodity prices under normal market conditions could potentially have an $11.7 million
effect on the fair value of the derivative portfolio. The analysis disregards changes in the
exposures inherent in the underlying hedged item; however, the company expects that any gain in
fair value of the portfolio would be substantially offset by increases in raw material and
packaging prices.
ITEM 4. CONTROLS AND PROCEDURES
Managements 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
(the Exchange Act), is accumulated and communicated to management in a timely fashion and is
recorded, processed, summarized and reported within the time periods specified by the SECs rules
and forms. An evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act was performed as of
the end of the period covered by this quarterly report. This evaluation was performed under the
supervision and with the participation of management, including our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO). Based upon that evaluation, our CEO and CFO have concluded
that these disclosure controls and procedures were effective as of the end of the period covered by
this quarterly report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our last fiscal quarter ended July 15, 2006 that have materially affected or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company and its subsidiaries from time to time are parties to, or targets of, lawsuits,
claims, investigations and proceedings, 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 companys facilities are subject to various federal, state and local laws and regulations
regarding the discharge of material into the environment and the protection of the environment in
other ways. The company is not a party to any material proceedings arising
29
under these regulations. The company believes that compliance with existing environmental laws
and regulations will not materially affect the consolidated financial condition or the competitive
position of the company. The company is currently in substantial compliance with all material
environmental regulations affecting the company and its properties.
ITEM 1A. RISK FACTORS
Please refer to Part I, Item 1A., Risk Factors, in the companys Form 10-K for the year ended
December 31, 2005 for information regarding factors that could affect the companys results of
operations, financial condition and liquidity. There have been no changes to our risk factors
during the twenty-eight weeks of fiscal 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 19, 2002, the Board of Directors approved a plan that authorized stock repurchases
of up to 11.3 million shares of the companys common stock. On November 18, 2005, the Board of
Directors increased the number of authorized shares to 15.3 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 companys best interest. These purchases may be
commenced or suspended without prior notice depending on then-existing business or market
conditions and other factors. The following chart sets forth the amounts of our common stock
purchased by the company during the second quarter of fiscal 2006 under the stock repurchase plan
(amounts in thousands, except price data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Maximum Number of Shares |
|
|
|
Total Number of |
|
|
Average Price |
|
|
Purchased as Part of Publicly |
|
|
That May Yet Be Purchased |
|
|
|
Shares Purchased |
|
|
Paid Per Share |
|
|
Announced Plan or Programs |
|
|
Under the Plans or Programs |
|
April 23, 2006 May 20, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
4,699 |
|
May 21, 2006 June 17, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
4,699 |
|
June 18, 2006 July 15, 2006 |
|
|
327 |
|
|
$ |
27.90 |
|
|
|
327 |
|
|
|
4,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
327 |
|
|
$ |
27.90 |
|
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The companys Annual Meeting of Shareholders was held on June 2, 2006 in Thomasville, Georgia
for the following purposes and with the following voting results:
(1) |
|
To elect three nominees as directors of the company to serve for a term of three years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
|
Broker Non-Votes |
Class II Directors: |
|
|
|
|
|
|
|
|
|
|
|
|
Joe E. Beverly |
|
|
47,172,756 |
|
|
|
10,537,218 |
|
|
|
|
|
Amos R. McMullian |
|
|
47,174,187 |
|
|
|
10,535,788 |
|
|
|
|
|
J.V. Shields, Jr. |
|
|
47,180,913 |
|
|
|
10,529,062 |
|
|
|
|
|
(2) |
|
To ratify the selection of PricewaterhouseCoopers LLP to serve as the independent registered
public accounting firm for Flowers Foods for the fiscal year ending December 30, 2006: |
|
|
|
|
|
For |
|
|
56,104,088 |
|
Against |
|
|
1,581,215 |
|
Abstain |
|
|
24,669 |
|
Broker Non-Votes |
|
|
0 |
|
Director-nominees received a plurality of votes cast in the election of directors and were
elected to serve until 2009. Proposal 2 received a majority of votes cast and passed.
ITEM 6. EXHIBITS
Exhibits filed as part of this report are listed in the Exhibit Index attached hereto.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
FLOWERS FOODS, INC. |
|
|
|
|
|
|
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By:
|
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/s/ George E. Deese |
|
|
|
|
|
|
|
Name:
|
|
George E. Deese |
|
|
Title:
|
|
Chairman of the Board, President and Chief Executive Officer |
|
|
|
|
|
|
|
By:
|
|
/s/ Jimmy M. Woodward |
|
|
|
|
|
|
|
Name:
|
|
Jimmy M. Woodward |
|
|
Title:
|
|
Senior Vice President, Chief Financial Officer and Chief Accounting Officer
|
|
|
Date: August 24, 2006
31
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
|
|
Name of Exhibit |
2.1
|
|
|
|
Distribution Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc., dated as
of October 26, 2000 (Incorporated by reference to Flowers Foods Registration Statement on Form
10, dated February 9, 2001, File No. 1-16247). |
|
|
|
|
|
2.2
|
|
|
|
Amendment No. 1 to Distribution Agreement, dated as of March 12, 2001, between Flowers Industries,
Inc. and Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual Report on Form
10-K, dated March 30, 2001, File No. 1-16247). |
|
|
|
|
|
2.3
|
|
|
|
Asset Purchase Agreement dated January 29, 2003 by and among The Schwan Food Company, Flowers
Foods, Inc. and Mrs. Smiths Bakeries, LLC (Incorporated by reference to Flowers Foods Current
Report on Form 8-K dated May 9, 2003). |
|
|
|
|
|
2.4
|
|
|
|
First Amendment to Asset Purchase Agreement dated April 24, 2003 by and among The Schwan Food
Company, Flowers Foods, Inc. and Mrs. Smiths Bakeries, LLC (Incorporated by reference to Flowers
Foods Current Report on Form 8-K dated May 9, 2003). |
|
|
|
|
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3.1
|
|
|
|
Restated Articles of Incorporation of Flowers Foods, Inc. (Incorporated by reference to Flowers
Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). |
|
|
|
|
|
3.2
|
|
|
|
Amended and Restated Bylaws of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods
Current Report on Form 8-K dated June 7, 2006, File No. 1-16247). |
|
|
|
|
|
4.1
|
|
|
|
Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Flowers
Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). |
|
|
|
|
|
4.2
|
|
|
|
Rights Agreement between Flowers Foods, Inc. and First Union National Bank, as Rights Agent, dated
March 23, 2001 (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated
March 30, 2001, File No. 1-16247). |
|
|
|
|
|
4.3
|
|
|
|
Amendment No. 1, dated November 15, 2002, to Rights Agreement between Flowers Foods, Inc. and
Wachovia Bank, N.A. (as successor in interest to First Union National Bank), as rights agent,
dated March 23, 2001. (Incorporated by reference to Flowers Foods Registration Statement on Form
8-A, dated November 18, 2002, File No. 1-16247). |
|
|
|
|
|
10.1
|
|
|
|
Employee Benefits 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, File No. 1-16247). |
|
|
|
|
|
10.2
|
|
|
|
First Amendment to Employee Benefits Agreement by and between Flowers Industries, Inc. and Flowers
Foods, Inc., dated as of February 6, 2001 (Incorporated by reference to Flowers Foods
Registration Statement on Form 10, dated February 9, 2001, File No. 1-16247). |
|
|
|
|
|
10.3
|
|
|
|
Flowers Foods, Inc. Retirement Plan No. 1 (Incorporated by reference to Flowers Foods Annual
Report on Form 10-K, dated March 30, 2001, File No. 1-16247). |
|
|
|
|
|
10.4
|
|
|
|
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, File No. 1-16247). |
|
|
|
|
|
10.5
|
|
|
|
Debenture Tender Agreement, dated as of March 12, 2001, by and among Flowers Industries, Inc.,
Flowers Foods, Inc. and the Holders (Incorporated by reference to Flowers Foods Annual Report on
Form 10-K, dated March 30, 2001, File No. 1-16247). |
|
|
|
|
|
10.6
|
|
|
|
Employment Agreement, effective as of December 31, 2001, by and between Flowers Foods, Inc. and G.
Anthony Campbell. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated
March 27, 2002, File No. 1-16247). |
|
|
|
|
|
10.7
|
|
|
|
Flowers Foods, Inc. Stock Appreciation Rights Plan. (Incorporated by reference to Flowers Foods
Annual Report on Form 10-K, dated March 27, 2002, File No. 1-16247). |
32
|
|
|
|
|
Exhibit No. |
|
|
|
Name of Exhibit |
10.8
|
|
|
|
Flowers Foods, Inc. Annual Executive Bonus Plan. (Incorporated by reference to Flowers Foods
Annual Report on Form 10-K, dated March 27, 2002, File No. 1-16247). |
|
|
|
|
|
10.9
|
|
|
|
Flowers Foods, Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to Flowers
Foods Annual Report on Form 10-K, dated March 27, 2002, File No. 1-16247). |
|
|
|
|
|
10.10
|
|
|
|
Form of Indemnification Agreement, by and between Flowers Foods, Inc., certain executive officers
and the directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual
Report on Form 10-K, dated March 28, 2003, File No. 1-16247). |
|
|
|
|
|
10.11
|
|
|
|
Form of Separation Agreement, by and between Flowers Foods, Inc. and certain executive officers of
Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K dated
March 1, 2006, File No. 1-16247). |
|
|
|
|
|
10.12
|
|
|
|
Restricted Stock Agreement, dated as of January 4, 2004, by and between Flowers Foods, Inc. and
George E. Deese. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K dated
March 18, 2004, File No. 1-16247). |
|
|
|
|
|
10.13
|
|
|
|
Consulting Agreement by and between Flowers Foods, Inc. and Amos R. McMullian dated as of January
1, 2005. (Incorporated by reference to Flowers Foods Current Report on Form 8-K dated January 3,
2005, File No. 1-16247). |
|
|
|
|
|
10.14
|
|
|
|
Amended and Restated Credit Agreement, dated as of October 29, 2004, among Flowers Foods, Inc.,
the Lenders party thereto from time to time, Fleet National Bank, Harris Trust and Savings Bank
and Cooperative CentraleRaiffeisen-Boerenleen Bank, B.A., New York Branch, as co-documentation
agents, SunTrust Bank, as syndication agent and Deutsche Bank AG, New York Branch, as
administrative agent. (Incorporated by reference to Flowers Foods Current Report on Form 8-K
dated November 2, 2004, File No. 1-16247). |
|
|
|
|
|
10.15
|
|
|
|
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 on Form 10-Q dated November 17, 2005, File No. 1-16247). |
|
|
|
|
|
10.16
|
|
|
|
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 on Form
10-K dated March 1, 2006, File No. 1-16247). |
|
|
|
|
|
10.17
|
|
|
|
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 on Form 10-K dated
March 1, 2006, File No. 1-16247). |
|
|
|
|
|
10.18
|
|
|
|
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
Centrale Raiffeisen-Boerenleen Bank, B.A., Rabsbank International, New York Branch, as
co-documentation agents, Suntrust Bank, as syndication agent, and Deutsche Bank AG, New York
Branch, as administrative agent. (Incorporated by reference to Flowers Foods Current Report on
Form 8-K dated June 7, 2006, File No. 1-16247). |
|
|
|
|
|
21
|
|
|
|
Subsidiaries of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual Report on
Form 10-K dated March 1, 2006, File No. 1-16247). |
|
|
|
|
|
*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. |
|
|
|
|
|
*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, and Jimmy M. Woodward,
Chief Financial Officer, for the Quarter Ended July 15, 2006. |
33