Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C 20549

FORM 10-Q

For the transition period from _________________________  to _____________________________

Commission file number 1-16247

FLOWERS FOODS, INC.

1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA

31757

229/226-9110

N/A
(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

1

Table of Contents

FLOWERS FOODS, INC.
INDEX

2

Table of Contents

Table of Contents

(See Accompanying Notes to Condensed Consolidated Financial Statements)

4

Table of Contents

FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

(See Accompanying Notes to Condensed Consolidated Financial Statements)

5

Table of Contents

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 company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of October 5, 2002 and December 29, 2001, the results of operations for the twelve and forty week periods ended October 5, 2002 and October 6, 2001 and statement of cash flows for the forty week periods ended October 5, 2002 and October 6, 2001. The results of operations for the twelve and forty week periods ended October 5, 2002 and October 6, 2001 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001.

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, lower of cost or market for obsolete and unmarketable inventory, valuation of long-lived assets and goodwill and deferred tax asset valuation allowances. These policies are the same as those summarized in the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001, except as discussed in Note 4 below.

REPORTING PERIODS — The company’s quarterly reporting periods for fiscal 2002 are as follows: first quarter ended April 20, 2002 (sixteen weeks), second quarter ended July 13, 2002 (twelve weeks), third quarter ended October 5, 2002 (twelve weeks) and fourth quarter ending December 28, 2002 (twelve weeks).

RECLASSIFICATIONS — Certain reclassifications of prior period data have been made to conform with the current period reporting.

SIGNIFICANT CUSTOMER — During the forty weeks ended October 5, 2002, sales to the company’s largest customer were 10.6% of the consolidated company’s sales with 8.1% attributable to Flowers Bakeries and 2.5% attributable to Mrs. Smith’s Bakeries.

SEGMENTS – Effective July 14, 2002 (the first day of the third quarter of fiscal year 2002), the company’s two operating segments, Flowers Bakeries, LLC (“Flowers Bakeries”) and Mrs. Smith’s Bakeries, LLC (“Mrs. Smith’s Bakeries”), were restructured to form three operating segments. These segments are Flowers Bakeries, Mrs. Smith’s Bakeries and Flowers Snack, LLC (“Flowers Snack”). Flowers Snack consists of the snack business previously operated by Mrs. Smith’s Bakeries. As Mrs. Smith’s Bakeries and Flowers Snack historically shared certain administrative and division expenses, certain allocations and assumptions have been made in order to present historical comparative information for Mrs. Smith’s Bakeries and Flowers Snack as separate segments. In most instances, administrative and division expenses have been allocated between the two segments based on cases of product sold. In the opinion of management, the allocations have been made on a reasonable basis. Management believes that the amounts are reasonable estimations of the costs that would have been incurred had Mrs. Smith’s Bakeries and Flowers Snack performed these functions as separate divisions.

2. SPIN-OFF AND MERGER TRANSACTION

     On March 26, 2001, Flowers Industries, Inc. (“FII”) completed a transaction that resulted in the spin-off of Flowers Foods and the merger of FII with a wholly owned subsidiary of the Kellogg Company (“Kellogg”). In the transaction, FII transferred the stock of its two wholly-owned subsidiaries, Flowers Bakeries, Inc. and Mrs. Smith’s Bakeries, Inc. and all other assets and liabilities directly held by FII (except for its majority interest in Keebler Foods Company (“Keebler”) and certain debt, other liabilities and transaction costs) to Flowers Foods. FII distributed all of the outstanding shares of common stock of Flowers Foods to then existing FII shareholders such that FII shareholders received one share of Flowers Foods

6

Table of Contents

common stock for every five shares of FII they owned. FII, which consisted solely of its majority interest in Keebler and the aforementioned liabilities, was simultaneously merged with a wholly owned subsidiary of Kellogg. The cash purchase price paid by Kellogg, less the aforementioned liabilities and certain other transaction costs, resulted in net proceeds paid directly to FII shareholders of $1,241.6 million.

     In connection with the spin-off and merger transaction, various separation and other contractual payments under FII’s stock and incentive programs of $39.0 million were paid to executive and non-executive officers and employees. Of this amount, $5.7 million was accrued at March 26, 2001, and $5.3 million was amortized to earnings prior to March 26, 2001. Accordingly, in the first quarter of fiscal 2001, a charge of $28.0 million was recorded as an unusual charge to the company’s continuing operations, with a corresponding credit to capital in excess of par value, as a result of payments being settled from the proceeds of the spin-off and merger transaction.

3. COMPREHENSIVE INCOME

     The company has other comprehensive income resulting from its accounting for derivative financial instruments (see Note 7). Total comprehensive income (loss), determined as net income (loss) adjusted by other comprehensive income (loss), was $19.9 million and $(13.4) million for the forty weeks ended October 5, 2002 and October 6, 2001, respectively.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

     The company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) on December 30, 2001 (the first day of fiscal 2002). This standard provides accounting and disclosure guidance for acquired intangibles. Under this standard, goodwill and “indefinite-lived” intangibles are no longer amortized, but are tested at least annually for impairment. If the asset is determined to be impaired, an impairment loss would be recognized to reduce carrying value to fair value. Transitional impairment tests of goodwill and non-amortized intangibles are also performed upon adoption of SFAS No. 142, with any recognized impairment loss reported as the cumulative effect of an accounting change at the date of adoption.

     SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. The company has completed step one of the transitional impairment test as required. The results of the test performed in step one indicate an impairment of goodwill related to the Mrs. Smith’s division. Step two of the transitional impairment test is currently in process. The second step of the impairment test, which measures the amount of the impairment loss (measured as of the beginning of the fiscal year), if any, must be completed by the end of the company’s 2002 fiscal year. The company anticipates a goodwill impairment charge of $20 to $30 million to be recorded as of December 30, 2001 (the first day of fiscal 2002) as a cumulative effect of a change in accounting principle by the end of fiscal 2002. Further, management expects the adoption of SFAS 142 to reduce the company’s amortization expense for goodwill and other intangibles by approximately $4.0 million annually ($2.5 million, net of tax), beginning on December 30, 2001. Through the end of the third quarter of fiscal 2002, the company has reduced its amortization expense by $2.9 million as a result of the adoption of SFAS 142.

     Intangible assets deemed to have an indefinite life were tested for impairment using a one-step process that compares the fair value of the asset to the carrying amount of the asset as of the date of adoption (the beginning of this fiscal year). Pursuant to the requirements of SFAS 142, this transitional impairment test was completed during the first quarter of fiscal 2002 and no impairment losses were required to be recognized.

7

Table of Contents

     The following table sets forth the information for goodwill and other intangible assets:

     Of the $79.6 million of goodwill at October 5, 2002, $53.4 million, $25.3 million and $0.9 million is recorded at Flowers Bakeries, Mrs. Smith’s Bakeries and Flowers Snack, respectively.

     During the first quarter of fiscal 2002, Mrs. Smith’s Bakeries recorded a $1.2 million adjustment to reduce certain exit cost liabilities with offsetting entries of $0.7 million and $0.5 million, to goodwill and deferred taxes, respectively. These liabilities and the related goodwill and deferred taxes were recorded in fiscal 1996 as a result of the purchase of Mrs. Smith’s Bakeries and the subsequent closure of its Pottstown, Pennsylvania production facility. This adjustment is the result of more accurate information regarding medical and worker’s compensation expenses.

     The provisions of SFAS No. 142 are adopted prospectively and prior-period financial statements are not restated. Comparative earnings information for prior periods is presented in the following tables:

8

Table of Contents

5. RECLASSIFICATION OF COUPON AND SLOTTING COSTS

     Effective December 30, 2001 (the first day of fiscal 2002), the company has applied the consensus reached by the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) in Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” EITF Issue No. 01-9 codifies and reconciles the Task Force consensuses on all or specific aspects of EITF Issues No. 00-14, “Accounting for Certain Sales Incentives,” No. 00-22, “Accounting for ‘Points’ and Certain Other Time-Based or Volume-Based Sales Incentives Offers, and Offers for Free Products or Services to be Delivered in the Future,” and No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products” and identifies other related interpretive issues. The company adopted the provisions of EITF Issue No. 00-22 on December 31, 2000. EITF Issue No. 01-9 requires certain selling expenses incurred by the company, not previously reclassified (primarily coupon and slotting costs), to be classified as reductions of sales. The adoption of the remaining items included in EITF Issue No. 01-9 (EITF 00-14 and EITF 00-25) resulted in the company reducing both sales and selling, marketing and administrative expenses by an aggregate of approximately $0.6 and $4.1 million for the twelve and forty weeks, respectively, ended October 5, 2002. Prior year aggregate amounts of zero and $1.6 million, respectively, for the twelve and forty weeks ended October 6, 2001 have also been reclassified to reflect this change. These reclassifications have no impact on net income.

6. NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement will be effective for the company beginning in the first quarter of fiscal 2003. Management does not expect the adoption of this statement to have a material impact on the company’s results of operations or financial position.

     In October 2001, the FASB issued SFAS No. 144 (“SFAS 144”), “Accounting for Impairment or Disposal of Long-lived Assets,” which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. SFAS 144 clarifies and revises existing guidance on accounting for impairment of plant, property, and equipment, amortizable intangibles and other long-lived assets not specifically addressed in other accounting literature. SFAS 144 also broadens the presentation of discontinued operations to include a component of an entity rather than only a segment of a business. The company adopted this statement on December 30, 2001 (the first day of fiscal 2002) on a prospective basis.

     In April 2002, the FASB issued SFAS No. 145 (“SFAS 145”), “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002.” This statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 will be effective for fiscal 2003, which begins on December 29, 2002. Management does not expect the adoption of this statement to have a material impact on the company's results of operations.

     In July 2002, the FASB issued SFAS No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 supersedes EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring),” which recognizes certain exit

9

Table of Contents

costs when management commits to a plan and requires liabilities associated with exit and disposal activities to be expensed as incurred. SFAS 146 will be effective for exit or disposal activities of the company that are initiated on or after December 29, 2002 (the first day of fiscal 2003).

7. DERIVATIVE FINANCIAL INSTRUMENTS

     The company enters into commodity derivatives, designated as cash flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sugar, shortening, fruits and dairy products, along with pulp and paper, aluminum and petroleum-based packaging products. The company also enters into interest rate derivatives to hedge exposure to changes in interest rates.

     During the forty weeks ended October 5, 2002, changes to accumulated other comprehensive loss, net of tax, resulting from hedging activities were as follows:

     Of the $1.0 million in accumulated other comprehensive loss, approximately $(0.5) million, $2.1 million and $(0.4) million were related to instruments expiring in fiscal 2002, 2003 and 2004, respectively, and $(0.2) million was related to deferred gains and losses on cash flow hedge positions.

     As of October 5, 2002, the company’s hedge portfolio contained commodity derivatives with a fair value of $3.8 million which is primarily recorded in other current assets and other long term assets. 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 2004. Under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), instruments with a fair value of $3.8 million on October 5, 2002 are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income, and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. An immaterial amount of commodity derivatives at October 5, 2002 is related to hedge instruments that do not qualify for hedge accounting under SFAS 133. For these instruments, changes in fair value are recorded each period in selling, marketing and administrative expense. During the forty weeks ended October 5, 2002, $0.4 million in income was recorded to current earnings due to changes in fair value of these instruments.

     In April 2001, the company entered into an interest rate swap transaction with a notional amount of $150.0 million, expiring on December 31, 2003, in order to effectively convert a designated portion of its borrowings under its credit agreement dated March 26, 2001 to a fixed-rate instrument. The interest rate swap agreement results in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts. The interest rate differential to be paid or received is accrued as interest rates change and is recorded as interest expense. Under SFAS 133, this swap transaction is designated as a cash-flow hedge. Accordingly, the effective portion of the change in the fair value of the swap transaction is recorded each period in other comprehensive income. The ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. The fair value of the interest rate swap on October 5, 2002 was a liability of $(5.7) million which is recorded in other accrued liabilities and other long term liabilities. During the forty weeks ended October 5, 2002, $4.8 million of additional interest expense was recognized due to periodic settlements of the swap. There was no ineffectiveness recorded to current earnings related to the interest rate swap.

10

Table of Contents

8. DEBT

     Long-term debt consisted of the following at October 5, 2002 and December 29, 2001 (amounts in thousands):

     In fiscal 2001, the company purchased certain fixed assets that were previously leased under operating leases. In addition, on March 26, 2001, the company purchased the notes receivable (“distributor notes”) from its independent distributors that had been previously owned by a third party financial institution and serviced by the company or a wholly owned subsidiary of the company. On March 26, 2001, the company completed a tender offer for the $200 million aggregate principal amount of 7.15% Debentures due 2028 (the “debentures”) and repurchased substantially all the debentures at a discount. Accordingly, in the first quarter of fiscal 2001, the company recorded an extraordinary gain of approximately $5.0 million, net of tax, related to the early extinguishment of these debentures.

     The purchases of the fixed assets, distributor notes and debentures were financed primarily from the proceeds of a credit agreement entered into by the company on March 26, 2001. At inception, the credit agreement provided for total borrowings of up to $380 million, consisting of Term Loan A of $100 million, Term Loan B of $150 million and a revolving loan facility of $130 million. Loans under the credit agreement are collateralized by substantially all of the assets of the company, excluding real property.

     The credit agreement includes certain restrictions, which, among other things, require maintenance of financial covenants, restrict encumbrance of assets and creation of indebtedness and limit capital expenditures, repurchases of common shares and dividends. Restrictive financial covenants include such ratios as a consolidated interest coverage ratio, a consolidated fixed charge coverage ratio and a maximum total leverage ratio. Capital expenditures cannot exceed $50.0 million in fiscal 2002. In fiscal 2002 and beyond, dividends cannot exceed $5.0 million, unless certain conditions are met. At October 5, 2002, the company was in compliance with these restrictive financial covenants.

9. FACILITY CLOSING COSTS AND SEVERANCE

     Effective July, 14, 2002 (the first day of the third quarter of fiscal 2002), the company’s two operating segments, Flowers Bakeries and Mrs. Smith’s Bakeries, were restructured to form three operating segments. These segments are Flowers Bakeries, Mrs. Smith’s Bakeries and Flowers Snack. Flowers Snack consists of the snack business previously operated by Mrs. Smith’s Bakeries. The three operating segments intend to share certain administrative services. During the second quarter of fiscal 2002, in connection with the restructuring, the company eliminated approximately 70 positions and recorded a charge of $1.3 million. This charge consisted of $1.0 million in severance and $0.3 million in legal and other contract termination fees.

     During the first quarter of fiscal 2002, Mrs. Smith’s Bakeries recorded a $1.2 million adjustment to reduce certain exit cost liabilities recorded in fiscal 1996 as a result of the purchase of Mrs. Smith’s Bakeries and subsequent closure of its Pottstown, Pennsylvania production facility. This adjustment is a result of more accurate information regarding medical and worker’s compensation expenses.

11

Table of Contents

     The company has continuing obligations in connection with certain plant closings completed in the current and prior years. Activity with respect to these obligations is as follows (amounts in thousands):

10. LITIGATION

     On March 25, 2002, in Trans American Brokerage, Inc. vs. Mrs. Smith’s Bakeries, Inc., an arbitration brought before the American Arbitration Association, an arbitrator found against Mrs. Smith’s Bakeries and issued an interim award for damages. In the dispute, the claimant alleged breach of a sales brokerage agreement by Mrs. Smith’s Bakeries and sought lost profits as well as attorneys’ fees and costs. As a result of the award, the company recorded a $10.0 million charge ($6.2 million after tax) to its results for the fiscal year ended December 29, 2001 as required by generally accepted accounting principles. The charge represents the company’s estimate of the total costs (including attorney’s fees and expenses) which it could incur in connection with this dispute. The provisions of this award also provide for the accrual of post-petition interest until such award is settled or paid. During the forty weeks ended October 5, 2002, the company recorded $0.6 million in interest expense related to this award.

     On April 23, 2002, the company filed a Motion for Reconsideration on the issue of damages. That Motion was denied, and a Final Award was entered on June 11, 2002. On June 26, 2002, the company filed a Motion to Vacate the Final Award in the United States District Court for the Eastern District of Pennsylvania. On July 17, 2002, Trans American Brokerage, Inc. filed a Petition to Confirm Arbitration Award and Enforce Judgment in the same Court. Both the Motion to Vacate and the Petition have been fully briefed, and the parties are waiting for a decision from the Court.

12

Table of Contents

NOTE 11. EARNINGS PER SHARE

The following table calculates basic earnings per common share and diluted earnings per common share at October 5, 2002 and October 6, 2001.