-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SP2Fu7IKaXJuBu/27tbcZSRCVHFVo6vTMDj2Q0CTJozC143o2z2xLxa0nAha1CZv pnPRT6moryF9vupmb0AnMA== 0000950144-99-013561.txt : 19991124 0000950144-99-013561.hdr.sgml : 19991124 ACCESSION NUMBER: 0000950144-99-013561 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991009 FILED AS OF DATE: 19991123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOWERS INDUSTRIES INC /GA CENTRAL INDEX KEY: 0000826227 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 580244940 STATE OF INCORPORATION: GA FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09787 FILM NUMBER: 99762678 BUSINESS ADDRESS: STREET 1: 1919 FLOWERS CIRCLE STREET 2: P O BOX 1338 CITY: THOMASVILLE STATE: GA ZIP: 31799 BUSINESS PHONE: 9122269110 MAIL ADDRESS: STREET 1: 1919 FLOWERS CIRCLE STREET 2: P O BOX 1338 CITY: THOMASVILLE STATE: GA ZIP: 31799 FORMER COMPANY: FORMER CONFORMED NAME: FLOWERS INDUSTRIES OF GEORGIA INC DATE OF NAME CHANGE: 19871220 10-Q 1 FLOWERS INDUSTRIES, INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D C 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 9, 1999 OR [ ] 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 1-9787 ---------- FLOWERS INDUSTRIES, INC. ------------------------ (Exact name of registrant as specified in its charter) GEORGIA 58-0244940 ------- ---------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA ----------------------------------------- (Address of principal executive offices) 31757 ------- (Zip Code) 912/226-9110 ------------ (Registrant's 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 [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 12, 1999 ------------------- -------------------------------- Common Stock, $.625 Par Value 100,307,939
2 FLOWERS INDUSTRIES, INC. INDEX
PAGE NUMBER ----------- PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet October 9, 1999 and January 2, 1999 3 Consolidated Statement of Income Twelve and Forty Weeks Ended October 9, 1999 and October 10, 1998 5 Consolidated Statement of Cash Flows Forty Weeks Ended October 9, 1999 and October 10, 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. Other Information Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 24
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET (Amounts in Thousands, Except Share Data)
OCTOBER 9, 1999 JANUARY 2, 1999 --------------- --------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 22,995 $ 56,965 Accounts and notes receivable, net 194,776 268,084 Inventories, net 294,788 297,593 Deferred income taxes 81,522 76,327 Other 110,317 84,276 ----------- ----------- 704,398 783,245 ----------- ----------- Property, Plant and Equipment: Land 48,481 49,874 Buildings 330,875 339,342 Machinery and equipment 800,215 816,495 Furniture, fixtures and transportation equipment 127,544 116,219 Construction in progress 255,896 96,288 ----------- ----------- 1,563,011 1,418,218 Less: accumulated depreciation (495,809) (430,516) ----------- ----------- 1,067,202 987,702 ----------- ----------- Other Assets 91,667 86,510 ----------- ----------- Cost in Excess of Net Tangible Assets, net 982,312 1,003,443 ----------- ----------- $ 2,845,579 $ 2,860,900 =========== ===========
(See Accompanying Notes to Consolidated Financial Statements) 3 4 FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET (CONT.) (Amounts in Thousands, Except Share Data)
OCTOBER 9, 1999 JANUARY 2, 1999 --------------- --------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Commercial paper $ 64,661 $ 74,870 Current maturities of long-term debt 44,365 120,479 Accounts payable 219,454 227,749 Facility closing costs and severance 29,755 23,670 Other accrued liabilities 356,185 314,270 ----------- ----------- 714,420 761,038 ----------- ----------- Long-Term Debt 1,115,982 1,038,998 ----------- ----------- Other Liabilities: Deferred income taxes 166,378 182,244 Postretirement/postemployment obligations 63,591 63,754 Facility closing costs and severance 38,397 41,331 Other 62,415 52,915 ----------- ----------- 330,781 340,244 ----------- ----------- Minority Interest 162,750 147,659 ----------- ----------- Stockholders' Equity: Common stock par value $.625, authorized 350,000,000 shares, issued 100,854,353 and 100,202,414 shares, respectively 63,034 62,627 Capital in excess of par value 283,799 274,255 Retained earnings 212,252 262,531 Common stock in treasury, 558,914 and 381,366 shares, respectively (10,517) (6,762) Stock compensation related adjustments (26,922) (19,690) ----------- ----------- 521,646 572,961 ----------- ----------- $ 2,845,579 $ 2,860,900 =========== ===========
(See Accompanying Notes to Consolidated Financial Statements) 4 5 FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME (Amounts in Thousands, Except Per Share Data) (Unaudited)
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED ----------------------------- ------------------------------- OCTOBER 9, OCTOBER 10, OCTOBER 9, OCTOBER 10, 1999 1998 1999 1998 --------- ------------ ----------- ----------- Sales $ 983,236 $ 862,784 $ 3,230,712 $ 2,776,242 Materials, supplies, labor and other production costs 489,323 382,206 1,541,195 1,243,548 Selling, marketing and administrative expenses 428,292 368,207 1,424,091 1,240,378 Depreciation and amortization 33,981 29,252 107,240 92,986 Non-recurring charge -- 2,453 69,208 2,453 --------- --------- ----------- ----------- Income from operations 31,640 80,666 88,978 196,877 --------- --------- ----------- ----------- Interest expense 18,618 15,819 63,736 49,926 Interest (income) (268) (1,688) (1,331) (3,302) --------- --------- ----------- ----------- Interest expense, net 18,350 14,131 62,405 46,624 --------- --------- ----------- ----------- Income before income taxes, minority interest, cumulative effect of a change in accounting principle and extraordinary loss 13,290 66,535 26,573 150,253 Income tax 7,990 27,945 19,102 63,106 --------- --------- ----------- ----------- Income before minority interest, cumulative effect of a change in accounting principle and extraordinary loss 5,300 38,590 7,471 87,147 Minority interest (14,403) (13,035) (19,473) (28,097) --------- --------- ----------- ----------- Income (loss) before cumulative effect of a change in accounting principle and extraordinary loss (9,103) 25,555 (12,002) 59,050 Cumulative effect of a change in accounting principle, net of tax benefit -- -- -- (3,131) Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest -- (938) -- (938) --------- --------- ----------- ----------- Net income (loss) $ (9,103) $ 24,617 $ (12,002) $ 54,981 ========= ========= =========== =========== Net Income (Loss) Per Common Share: Basic: Income (loss) before cumulative effect of a change in accounting principle and extraordinary loss $ (0.09) $ 0.26 $ (0.12) $ 0.62 Cumulative effect of a change in accounting principle, net of tax benefit -- -- -- (0.04) Early extinguishment of debt, net of tax benefit and minority interest -- (0.01) -- (0.01) --------- --------- ----------- ----------- Net income (loss) per share $ (0.09) $ 0.25 $ (0.12) $ 0.57 ========= ========= =========== =========== Weighted average shares outstanding 100,274 99,794 100,060 95,460 ========= ========= =========== =========== Diluted: Income (loss) before cumulative effect of a change in accounting principle and extraordinary loss $ (0.09) $ 0.26 $ (0.12) $ 0.62 Cumulative effect of a change in accounting principle, net of tax benefit -- -- -- (0.04) Early extinguishment of debt, net of tax benefit and minority interest -- (0.01) -- (0.01) --------- --------- ----------- ----------- Net income (loss) per share $ (0.09) $ 0.25 $ (0.12) $ 0.57 ========= ========= =========== =========== Weighted average shares outstanding 100,522 100,203 100,388 95,907 ========= ========= =========== =========== Cash Dividends Paid Per Common Share $ 0.1300 $ 0.1200 $ 0.3825 $ 0.3525 ========= ========= =========== ===========
(See Accompanying Notes to Consolidated Financial Statements) 5 6 FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) (Unaudited)
FOR THE 40 WEEKS ENDED --------------------------------- OCTOBER 9, 1999 OCTOBER 10, 1998 --------------- ---------------- Cash flows provided by operating activities: Net income (loss) $ (12,002) $ 54,981 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest 19,473 28,097 Depreciation and amortization 107,240 92,986 Non-recurring charge 46,071 2,453 Deferred income taxes (21,274) 1,690 Cumulative effect of a change in accounting principle -- 3,131 Loss due to early extinguishment of debt -- 938 Other 8,941 (1,483) Changes in assets and liabilities, net of acquisitions: Accounts and notes receivable, net (63,063) (58,544) Inventories, net 2,745 (69,274) Other assets (33,471) (14,196) Accounts payable and other accrued liabilities 56,296 33,767 Income taxes payable -- (6,696) Facility closing costs and severance 3,116 8,937 --------- --------- Net cash provided by operating activities 114,072 76,787 --------- --------- Cash flows disbursed for investing activities: Purchase of property, plant and equipment (195,608) (81,367) Acquisition of majority interest in Keebler -- (285,203) Acquisition of President International, Inc. by Keebler -- (444,818) Acquisition of other businesses (7,939) (30,206) Other -- 949 --------- --------- Net cash disbursed for investing activities (203,547) (840,645) --------- --------- Cash flows from financing activities: Common stock offering proceeds, net of underwriters' discount and offering cost -- 187,930 Dividends paid (38,278) (33,875) Treasury stock purchases (21,683) (5,597) Stock compensation and warrants exercised 4,888 20,353 Proceeds from receivables securitization 125,000 -- Debentures proceeds -- 199,417 Debentures issuance costs -- (1,750) Increase (decrease) in commercial paper (10,209) 42,808 Net debt repayments (4,215) 385,215 --------- --------- Net cash provided by financing activities 55,503 794,501 --------- --------- Net increase (decrease) in cash and cash equivalents (33,972) 30,643 Cash and cash equivalents at beginning of period 56,965 3,866 --------- --------- Cash and cash equivalents at end of period $ 22,993 $ 34,509 ========= ========= Schedule of noncash investing and financing activities: Stock compensation transactions $ -- $ 9,345 ========= ========= Stock issued for acquisition $ -- $ 40,000 ========= ========= Note payable issued for purchase of equipment $ -- $ -- ========= =========
(See Accompanying Notes to Consolidated Financial Statements) 6 7 FLOWERS INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Definitions. As used in this filing, unless the context otherwise indicates: (i) "FII" means Flowers Industries, Inc., the publicly traded holding company, which owns all of the outstanding common stock of Flowers Bakeries, Inc. ("Flowers Bakeries") and Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a majority of the outstanding common stock of Keebler Foods Company; (ii) "Keebler" means Keebler Foods Company and its consolidated subsidiaries; (iii) "Flowers" means FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs. Smith's Bakeries, and their respective subsidiaries, excluding Keebler; and (iv) the "Company" means Flowers and its consolidated, majority-owned subsidiary, Keebler, collectively. Interim Financial Statements. The accompanying unaudited consolidated financial statements of 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 under 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 consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of October 9, 1999 and January 2, 1999, the results of operations for the twelve and forty week periods ended October 9, 1999 and October 10, 1998 and statement of cash flows for the forty weeks ended October 9, 1999 and October 10, 1998. The results of operations for the twelve and forty week periods ended October 9, 1999 and October 10, 1998, 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/A for the fiscal year ended January 2, 1999. Reporting Periods. The Company's quarterly reporting periods for fiscal 1999 are as follows: first quarter ended April 24, 1999 (sixteen weeks), second quarter ended July 17, 1999 (twelve weeks), third quarter ended October 9, 1999 (twelve weeks) and fourth quarter ending January 1, 2000 (twelve weeks). Reclassifications. Certain reclassifications of prior period information have been made to conform with the current period presentation. 2. INVENTORIES
OCTOBER 9, 1999 JANUARY 2, 1999 --------------- --------------- (Amounts in Thousands) Inventories, Net: Raw materials $ 66,196 $ 54,739 Packaging materials 33,620 27,056 Finished goods 190,840 207,620 Other 4,132 8,178 -------- -------- $294,788 $297,593 ======== ========
7 8 NOTES (CONTINUED) 3. NET INCOME PER COMMON SHARE Basic net income per share is computed by dividing net income by weighted average common shares outstanding for the period. Diluted net income per share is computed by dividing net income by weighted average common and common equivalent shares outstanding for the period. Common stock equivalents consist of the incremental shares associated with the Company's stock option plans, as determined under the treasury stock method. The following table reconciles the numerator and denominator used in the computation of basic and diluted net income (loss) per share (amounts in thousands):
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED ----------------------------- ------------------------------ OCTOBER 9, OCTOBER 10, OCTOBER 9, OCTOBER 10, 1999 1998 1999 1998 ---------- ----------- ----------- ----------- Numerator: Income (loss) before cumulative effect of a change in accounting principle and extraordinary loss ($ 9,103) $ 25,555 ($ 12,002) $ 59,050 Cumulative effect of a change in accounting principle net of tax benefit -- -- -- (3,131) Extraordinary loss due to early extinguishment of debt, net of tax benefit and minority interest -- (938) -- (938) --------- --------- --------- -------- Net income (loss) ($ 9,103) $ 24,617 ($ 12,002) $ 54,981 ========= ========= ========= ======== Denominator: Basic weighted average shares 100,274 99,794 100,060 95,460 Effect of dilutive securities Stock options 248 409 328 447 --------- --------- --------- -------- Diluted weighted average shares 100,522 100,203 100,388 95,907 ========= ========= ========= ========
4. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into forward purchase commitments and derivative financial instruments in order to manage its exposure to commodity price and interest rate risk, and does not use them for trading purposes. As of October 9, 1999, the Company had entered into various arrangements that allow the Company to engage in commodity price and interest rate agreements based on fixed and floating commodity prices and interest rates, respectively. The Company's primary raw materials are flour, sugar, shortening, fruits and dairy products. Amounts payable or receivable under the commodity agreements which qualify as hedges are recognized as deferred gains or losses when the positions are closed, and are charged or credited to cost of sales as the related raw materials are used in production. For the twelve weeks ended October 9, 1999 and October 10, 1998, losses of $6.3 million and $1.4 million were recorded, respectively. For the forty weeks ended October 9, 1999 and October 10, 1998, losses of $12.9 million and $6.0 million were recorded, respectively. The losses were partially offset by opposite movements in the cost of the underlying hedged item. Gains and losses on agreements which do not qualify as hedges are marked to market and recognized immediately as other income or expense; as these agreements are closed, any gains or losses are also recognized as other income or expense. For the twelve weeks ended October 9, 1999 and October 10, 1998, losses of $3.8 million and $0 million were recorded, respectively. Losses of $5.3 million and $.6 million were recorded for the forty weeks ended October 9, 1999 and October 10, 1998, respectively. At October 9, 1999, the Company had approximately $83.1 million of commitments outstanding related to commodity derivative financial instruments. 8 9 NOTES (CONTINUED) Keebler uses interest rate swap agreements to effectively convert certain fixed rate debt to a floating rate instrument and certain floating rate debt to a fixed instrument. Amounts payable or receivable under the agreements, calculated as the difference between the fixed and floating rates multiplied by the notional amount, is recorded as an adjustment to interest expense, in accordance with hedge accounting. At October 9, 1999, the notional amount of interest rate swap agreements outstanding at Keebler was $509.8 million. 5. NON-RECURRING CHARGES AND PURCHASE ACCOUNTING RESERVES As part of the continuing process of integrating President International, Inc. ("President") into Keebler's operations, on May 14, 1999, Keebler announced the decision to close its Sayreville, New Jersey, production facility due to excess capacity within its 18-plant production network. As a result, a pre-tax non-recurring charge of $69.2 million was recorded in the second quarter ended July 17, 1999. The non-recurring charge included approximately $23.1 million of severance and other exit costs related to the Sayreville facility. The remaining $46.1 million was noncash asset impairment charges related to writing down the Sayreville property, plant and equipment, as well as equipment at other locations, to net realizable value, less cost to sell, and a reduction of goodwill acquired in the acquisition of Sunshine Biscuits, Inc. in June 1996. Of the total $69.2 million charge, approximately $68.6 million was recorded as plant and facility closing costs and severance, with the remaining $0.6 million recorded as other liabilities and accruals. Approximately 650 employees will be terminated as a result of the Sayreville closure, of which approximately 600 employees are represented by unions. As of October 9, 1999, approximately 590 employees under union contract and approximately 40 employees not under union contract had been terminated and approximately $9.2 million had been spent related to severance and other exit costs from the Sayreville facility closing. The exit activities are expected to be substantially complete by the end of fiscal 1999. Activity with respect to the non-recurring charges recorded in the fourth quarter of fiscal 1998, and the second quarter of fiscal 1999, as discussed above, as well as, purchase accounting reserves recorded in prior years is as follows (amounts in thousands): Non-Recurring Charges
BALANCE AT PROVISION/ NONCASH BALANCE AT 1/2/99 ADJUSTMENTS REDUCTIONS SPENDING 10/9/99 ---------- ----------- ---------- -------- ---------- Provision - Fiscal 1998 Severance costs $ 1,538 $ (207)(1) $ -- $ (1,331) $ -- Other exit costs: Guard service 591 -- -- (204) 387 Utilities 261 -- -- (239) 22 Property taxes 563 -- -- (152) 411 Other 4,560 -- -- (1,748) 2,812 -------- -------- -------- -------- ------- $ 7,513 $ (207) $ -- $ (3,674) $ 3,632 -------- -------- -------- -------- ------- Provision - Fiscal 1999 Fixed asset impairments $ -- $ 37,824 $(37,824) $ -- $ -- Goodwill impairments -- 7,600 (7,600) -- -- Noncancelable lease obligations and building maintenance costs -- 4,570 -- -- 4,570 Severance costs -- 15,564 -- (8,666) 6,898 Other exit costs -- 3,650 -- (555) 3,095 -------- -------- -------- -------- ------- $ -- $ 69,208 $(45,424) $ (9,221) $14,563 -------- -------- -------- -------- ------- Total $ 7,513 $ 69,001 $(45,424) $(12,895) $18,195 ======== ======== ======== ======== =======
(1) Reflects an adjustment to the Company's estimate of severance cost which was recorded as income in the third quarter of 1999. 9 10 NOTES (CONTINUED) Purchase Accounting Reserves:
BALANCE AT PROVISION/ BALANCE AT 1/2/99 ADJUSTMENTS SPENDING 10/9/99 ---------- ----------- -------- ---------- Mrs. Smith's Inc. Noncancelable lease obligations and building maintenance costs $25,799 $ -- $ (3,126) $22,673 Severance costs 1,347 -- (1,347) -- Other 3,761 -- (498) 3,263 ------- ------- -------- ------- $30,907 $ -- $ (4,971) $25,936 ------- ------- -------- ------- Keebler Foods Company Noncancelable lease obligations and building maintenance costs $11,484 $ 751 $ (2,015) $10,220 Severance costs 49 25 (50) 24 Other 24 -- (14) 10 ------- ------- -------- ------- $11,557 $ 776 $ (2,079) $10,254 ------- ------- -------- ------- Sunshine Biscuits, Inc. Noncancelable lease obligations and building maintenance costs $ 2,227 $ -- $ (204) $ 2,023 Severance costs 86 -- (17) 69 ------- ------- -------- ------- $ 2,313 $ -- $ (221) $ 2,092 ------- ------- -------- ------- President International, Inc. Noncancelable lease obligations and building maintenance costs $ 5,670 $ -- $ (46) $ 5,624 Severance costs 6,594 -- (555) 6,039 Other 447 -- (101) 346 ------- ------- -------- ------- $12,711 $ -- $ (702) $12,009 ------- ------- -------- ------- TOTAL $57,488 $ 776 $ (7,973) $50,291 ======= ======= ======== =======
Spending for facility closing and severance costs related to exit plans established in the Keebler, Sunshine, Mrs. Smith's and President acquisitions and the non-recurring charges is expected to be substantially complete as of the end of fiscal 1999, except for noncancelable lease payments and building maintenance costs that will continue through fiscal 2006. 6. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131 -- "Disclosures about Segments of an Enterprise and Related Information" in fiscal 1998. This statement established new standards for the manner in which companies report operating segment information, as well as disclosures about products and services and major customers. As required by SFAS 131, the Company has restated the prior periods for comparability. The Company has three reportable segments: Flowers Bakeries, Mrs. Smith's Bakeries and Keebler. Flowers Bakeries produces fresh and frozen breads and rolls, Mrs. Smith's Bakeries produces fresh and frozen baked desserts, snacks, breads and rolls, and Keebler produces a full line of cookies and crackers. The segments are managed as strategic business units due to their distinct production processes and marketing strategies. 10 11 NOTES (CONTINUED) The Company evaluates each segment's performance based on income from operations (income or loss before interest and income taxes, excluding FII's and other unallocated expenses and non-recurring charges). Information regarding the operations in these reportable segments is as follows (amounts in thousands):
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED ----------------------------------- ----------------------------------- OCTOBER 9, 1999 OCTOBER 10, 1998 OCTOBER 9, 1999 OCTOBER 10, 1998 ---------------- ---------------- --------------- ---------------- SALES: Flowers Bakeries $ 227,245 $ 221,795 $ 753,813 $ 733,623 Mrs. Smith's Bakeries 158,451 156,350 479,995 474,318 Keebler 615,844 499,897 2,055,724 1,626,685 FII (3,773) 0 (5,273) (550) Elimination (1) (14,531) (15,258) (53,547) (57,834) --------- ----------- ----------- ----------- $ 983,236 $ 862,784 $ 3,230,712 $ 2,776,242 ========= =========== =========== =========== DEPRECIATION AND AMORTIZATION: Flowers Bakeries $ 7,726 $ 7,989 $ 24,866 $ 26,731 Mrs. Smith's Bakeries 4,908 4,747 14,129 14,588 Keebler 19,480 14,934 62,651 46,483 FII 1,867 1,582 5,594 5,184 --------- ----------- ----------- ----------- $ 33,981 $ 29,252 $ 107,240 $ 92,986 ========= =========== =========== =========== INCOME (LOSS) FROM OPERATIONS: Flowers Bakeries $ 13,958 $ 15,987 $ 53,237 $ 53,584 Mrs. Smith's Bakeries (33,558) 16,102 (50,706) 35,990 Keebler 62,960 57,251 182,337 127,107 FII (11,720) (6,221) (26,682) (17,351) Non-recurring charge 0 (2,453) (69,208) (2,453) --------- ----------- ----------- ----------- $ 31,640 $ 80,666 $ 88,978 $ 196,877 ========= =========== =========== ===========
(1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at standard costs. 7. RECEIVABLES SECURITIZATION On January 29, 1999, Keebler entered into a Receivables Purchase Agreement (the "Agreement") to replace $75.0 million of debt held under a Bridge facility, allowing funds to be borrowed at a lower cost to Keebler. The accounting for this Agreement is governed by SFAS No. 125 -- "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the guidelines of SFAS 125, a special-purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler. All transactions occurring under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. As of October 9, 1999, a net $125.0 million of accounts receivable had been sold at fair value, which is the maximum amount available under the Agreement. 11 12 NOTES (CONTINUED) 8. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new rules for accounting for derivative instruments and hedging activities. The statement requires all derivatives be recognized as either assets or liabilities in the balance sheet and the instruments be measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This standard is effective for the Company's fiscal year 2001. The Company is currently assessing the effects SFAS 133 will have on its financial position and results of operations. 9. SUBSEQUENT EVENT As part of a system-wide operations analysis that began in September 1998 when Keebler purchased President International, Inc., Keebler announced the closing of its Lake Bluff, Illinois bakery on November 12, 1999. The closing of the facility, expected to take place in January of 2000, will eliminate approximately 190 employees and should save approximately $4.2 million on an annualized basis. The costs associated with the closure were recognized as part of the purchase accounting reserves established upon the initial acquisition of President International, Inc. in September 1998. 12 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Matters Affecting Analysis: The Company enters into commodity future 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 and volatility in its raw material and packaging prices. In the third quarter ended October 9, 1999, the Company recorded a negative mark-to-market adjustment of $3.8 million related to these activities. The charge is recorded as an FII expense and does not affect the results of operations on a segment basis at Flowers Bakeries, Mrs. Smith's Bakeries or Keebler. Hurricanes and severe flooding in North Carolina and Florida in the third quarter of 1999 had adverse effects on the operations of Flowers Bakeries. Although production facilities were not damaged, several production facilities were temporarily idled and distribution was disrupted. This resulted in lost sales and increased logistics costs. Mrs. Smith's Bakeries is in the process of completing a major capital project involving 25 new or relocated and upgraded production lines at seven of Mrs. Smith's Bakeries' 11 operating facilities. This project is behind schedule due to delays in the receipt and installation of production equipment, the programming of production control software and the hiring and training of production employees. These delays have created less-than-anticipated production levels, a reduction in Mrs. Smith's Bakeries' original sales forecast, significant overruns in start-up costs, and large increases in promotional, administrative, and logistics costs. This realignment had a negative impact on margins in the third quarter of 1999, and is expected to continue to have negative implications into the fourth quarter. Following a review of Mrs. Smith's Bakeries' business operations after the end of the Company's second quarter of fiscal 1999, the Company determined to recognize higher reserves than previously estimated for customer deductions previously believed to be collectible and trade promotions. The Company also revised estimates of the recoverable amount of certain out-of-code, damaged or discontinued inventory at Mrs. Smith's Bakeries. The conclusions reached by the Company relative to the ultimate realization of certain accounts receivable are based upon recent trends associated with Mrs. Smith's Bakeries' complex promotional and discount programs. During the second quarter of fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey, production facility due to excess capacity within Keebler's 18-plant production network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million, or $.25 per share after-tax and minority interest. The charge includes $46.1 million of non-cash asset impairments and $23.1 million of severance and other exit costs related to the Sayreville facility. As a direct result of this plan, asset impairments were recorded to write-down the closed facility to net realizable value, less cost to sell, based on management's estimate of fair value. Also, as part of this plan, asset impairments were recorded to write-off certain other machinery and equipment currently held by Keebler and to reduce goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996, neither of which provides any future economic benefit. The intent is to dispose of or scrap such machinery and equipment by the end of fiscal 1999. Severance costs provide for the reduction of approximately 650 employees, and, as of October 9, 1999, approximately 630 employees had been severed. Ongoing costs, including, but not limited to, guard service, utilities, property taxes and preparing the facility for sale, primarily represent the other exit costs with spending related to such costs continuing for thirty-six months or until the facility is disposed of, whichever occurs earlier. Liquidity and Capital Resources: Net cash provided by operating activities for the forty weeks ended October 9, 1999 was $114.1 million. Negative net cash flow of $12.0 million resulted from a net loss for the forty weeks. Adding back to the net loss the noncash portion of the non-recurring charge at Keebler discussed above and the timing of payments of other accrued liabilities had a positive impact on cash flows. An increase in trade accounts receivable and other assets negatively impacted cash flows. Net cash disbursed for investing activities for the forty weeks ended October 9, 1999 of $203.5 million primarily consisted of capital expenditures of $56.5 million at Flowers Bakeries, $59.4 million at Mrs. Smith's Bakeries and $68.6 13 14 million at Keebler. The capital expenditures were made principally to update and enhance production and distribution facilities, as well as management information systems. For the forty weeks ended October 9, 1999, net cash of $55.5 million was provided by financing activities. This was primarily attributable to proceeds of $125.0 million from the sale of certain accounts receivable at Keebler under the Receivables Purchase Agreement entered into on January 29, 1999 by Keebler. This increase was partially offset by the payment of dividends by FII and the purchase of treasury stock and debt payments by Keebler. At October 9, 1999, cash and cash equivalents were $23.0 million. Long-term debt was $1,116.0 million and current maturities of long-term debt were $109.0 million at October 9, 1999. Included in these amounts is debt of $472.8 million attributable to Keebler; however, Flowers has not guaranteed such indebtedness and it is to be repaid solely from the cash flows of Keebler. During the third quarter of 1999, FII amended the $500.0 million Syndicated Loan Facility and the $100.0 million Commercial Paper Agreement. The amendments provided for increased loan borrowing margins and facility fees based on the Company's credit rating and added and amended certain financial covenants. Additionally, the $100.0 million Commercial Paper program will terminate in January of 2000 at which time any balance remaining will be repaid with funds drawn from the Company's existing line of credit. The Company believes that, in light of its current cash position, its cash flow from operating activities and its credit arrangements, it can adequately meet presently foreseeable financial requirements. Since September 1996, the Company has been a party to a Distributor Note Purchase, Loan Commitment and Servicing Agreement which is subject to the same financial covenants as the Syndicated Loan Facility. This agreement provides third party credit facilities for the independent distributors serving Flowers Bakeries. The Company receives payments from the independent distributors and remits such amounts, net of certain loan servicing fees, to the financial institution. Additionally the agreement requires amounts to be placed in escrow by the Company upon the occurrence of certain events as defined in the agreement. No events have occurred as of October 9, 1999 that would require such funding by the Company. The Company was in compliance with all covenants in its loan facilities as of the end of the third quarter of 1999. For the forty weeks ended October 9, 1999, dividends paid per share increased 8.5% to $.3825 from $.3525 paid for the comparable period in the prior year. Dividends are declared at the discretion of the Board of Directors based on an assessment of the Company's financial position and other considerations. FII owns a majority of the outstanding stock of Keebler and therefore is consolidating Keebler for financial reporting purposes. FII is limited in its ability to access the cash flows of Keebler to support its other operations due to the fact that Keebler is not wholly owned by FII. 14 15 Results of Operations: Results of operations, expressed as a percentage of sales, for the twelve and forty weeks ended October 9, 1999 and October 10, 1998 are set forth below:
FOR THE 12 WEEKS ENDED FOR THE 40 WEEKS ENDED --------------------------- -------------------------- OCTOBER 9, OCTOBER 10, OCTOBER 9, OCTOBER 10, 1999 1998 1999 1998 ---------- ----------- ---------- ----------- Sales 100.00% 100.00% 100.00% 100.00% Gross Margin 50.23 55.70 52.30 55.21 Selling, marketing and administrative expenses 43.56 42.68 44.08 44.68 Depreciation and amortization 3.46 3.39 3.32 3.35 Non-recurring charge -- .28 2.14 .09 Interest expense, net 1.87 1.64 1.93 1.68 Income before income taxes, minority interest cumulative effect of a change in accounting principle and extraordinary loss 1.35 7.71 0.82 5.41 Income taxes 0.81 3.24 0.59 2.27 Net income (loss) (.93)% 2.85% (0.37)% 1.98%
Twelve Weeks Ended October 9, 1999 Compared to Twelve Weeks Ended October 10, 1998 Sales. For the twelve weeks ended October 9, 1999, sales were $983.2 million, or 14.0% higher than sales for the comparable period in the prior year, which were $862.8 million. Sales at Flowers Bakeries for the third quarter of fiscal 1999 were $227.2 million, an increase of 2.4% over sales of $221.8 million reported a year ago. The sales increase at Flowers Bakeries can be attributed to increases of 4.3% and 6.0% in branded and foodservice sales, respectively, slightly offset by a decrease of 6.2% in private label sales. Sales at Mrs. Smith's Bakeries for the third quarter of fiscal 1999, after excluding inter-segment sales, increased 2.0% to $143.9 million from $141.1 million reported a year ago. This increase was primarily driven by an 11.5% increase in foodservice and bakery deli sales partially offset by reductions of 1.5% in frozen retail and 9.2% in non-branded retail and co-pack sales of fresh snack products. The reduction of sales in the frozen retail sector is attributable to production difficulties, as discussed above, resulting in product shortages. Sales at Keebler for the third quarter of fiscal 1999 increased 23.2% to $615.8 million from $500.0 million reported a year ago. This increase is primarily the result of gains in the core Keebler branded product line, new product introductions, integration of the President International, Inc. ("President") business acquired in September of fiscal 1998 and continued improvements in the direct-to-store delivery system. Gross Margin. Gross margin for the third quarter of fiscal 1999 was $493.9 million, or 2.8% higher than gross margin reported a year ago of $480.6 million. As a percentage of sales, gross margin was 50.2% for the third quarter of fiscal 1999, compared to 55.7% for the third quarter of fiscal 1998. Flowers Bakeries' gross margin as a percentage of sales of 53.7% for the third quarter of fiscal 1999 was essentially the same as the 53.8% in the third quarter of fiscal 1998. Mrs. Smith's Bakeries' gross margin for the third quarter of fiscal 1999 was 10.6% of sales compared to 42.4% reported a year ago. This decrease is primarily the result of delays associated with a massive production realignment project consisting of the installation and start-up of 25 new or relocated and upgraded production lines. Mrs. Smith's Bakeries experienced start-up costs and unabsorbed overhead associated with this project in the third quarter of fiscal 1999. Management expects gross margins as a percent of sales to improve in the fourth quarter but will continue to be depressed from prior year levels. Increased sales of lower margin items during the third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998 also contributed to the decrease. Gross margin at Keebler declined slightly to 58.7% of sales during the third quarter of fiscal 1999 from 60.4% during the same period a year ago. This decrease was due primarily to the inclusion of President, whose products carry a higher cost structure, partially offset by increased productivity and efficiencies at Keebler's production facilities, cost reduction programs and lower ingredient and packaging costs. 15 16 Selling, Marketing and Administrative Expenses. During the third quarter of fiscal 1999, selling, marketing and administrative expenses were $428.3 million, or 43.6% of sales as compared to $368.2 million, or 42.7% of sales reported a year ago. Selling, marketing and administrative expenses increased at Flowers Bakeries primarily due to increased distribution costs as a result of severe weather in North Carolina and Florida. Selling, marketing and administrative expenses at Mrs. Smith's Bakeries were 30.5% of sales in the third quarter of fiscal 1999 as compared to 28.6% of sales in the comparable quarter of 1998. These costs were higher as a percent of sales due primarily to increased distribution costs associated with Mrs. Smith's Bakeries' production realignment and advertising and promotional expenses which were committed to the retail market based on higher expected sales. Management believes that these costs will continue to be higher as a percent of sales in the fourth quarter and will return to more traditional levels as the new year begins. Due to the production realignment at Mrs. Smith's Bakeries discussed above, production was lower than anticipated which resulted in lower sales volumes during this seasonally high sales period. Selling, marketing and administrative expenses at Keebler were $279.3 million and 45.4% of sales for the third quarter of 1999 as compared to $232.2 million and 46.4% of sales in the third quarter of 1998. This reduction of expenses as a percent of sales is primarily attributable to savings gained on reduced distribution costs and synergies existing from the integration of President. Depreciation and Amortization. Depreciation and amortization expense was $34.0 million for the third quarter of fiscal 1999, an increase of 16.2% over the same period a year ago. This increase is due primarily to increased goodwill amortization and depreciation relating to the purchase of President by Keebler and increased depreciation associated with capital improvements, partially offset by the benefit of reduced depreciation of approximately $2.6 million resulting from asset impairments recorded as part of the non-recurring charges in fiscal 1998 and fiscal 1999. Interest Expense. For the third quarter of fiscal 1999, net interest expense was $18.4 million, an increase of 29.9% over the corresponding period in the prior year, which was $14.1 million. This increase is due primarily to interest on borrowings incurred to finance the acquisition of President by Keebler and on borrowings to partially fund capital improvement projects at Flowers. Income Before Income Taxes. Income before income taxes was $13.3 million for the third quarter of fiscal 1999, a decrease of 80.0% compared to income of $66.5 million reported for the same period a year ago. This decrease is primarily the result of the increased costs associated with the production realignment project and increased selling expenses at Mrs. Smith's Bakeries, all of which is discussed above. Income Taxes. For the third quarter of fiscal 1999, income taxes were $8.0 million, compared to $27.9 million reported for the comparable period in the prior year. Income tax expense for the quarter and year-to-date is effected by (1) the interaction of the effective rate on Keebler's profits and the effective rate on the overall net loss before income taxes excluding Keebler and (2) the second quarter effect of the non-deductible goodwill in the Keebler charge. The overall effective rate for the year is expected to be approximately 45%. Net Income (Loss). Net loss for the third quarter of fiscal 1999 was $9.1 million, a decrease of 137.0% as compared to $24.6 million net income reported a year ago. This decrease is due to the items discussed above. Forty Weeks Ended October 9, 1999 Compared to Forty Weeks Ended October 10, 1998 Sales. For the forty weeks ended October 9, 1999, sales were $3,231.0 million, or 16.4% higher than sales for the same period a year ago, which were $2,776.2 million. Sales at Flowers Bakeries for the forty weeks of fiscal 1999 were $753.8 million, an increase of 2.8% over sales of $733.6 million reported a year ago. The sales increase at Flowers Bakeries can be attributed to increases of 2.5% and 9.6% in branded and foodservice sales, respectively, slightly offset by a decrease of 8.5% in private label sales. Sales at Mrs. Smith's Bakeries after excluding inter-segment sales for the forty weeks of fiscal 1999 were $426.4 million, an increase of 2.4% over sales of $416.5 million reported in the same period last year. Bakery deli and foodservice sales were up 6.9% and frozen retail sales were up 12.6%; however sales of non-branded and co-pack snack products experienced a decrease of 10.0%. Sales at Keebler for the forty weeks of fiscal 1999 increased 26.4% to $2,055.7 million from $1,626.7 million reported a year ago. This increase is primarily due to gains in the core Keebler branded product line, new product introductions and the acquisition of President. 16 17 Gross Margin. Gross margin for the forty weeks of fiscal 1999 was $1,689.5 million or 10.2% higher than gross margin reported a year ago, which was $1,532.7 million. As a percentage of sales, gross margin was 52.3% for the forty weeks of fiscal 1999, compared to 55.2% for the forty weeks of fiscal 1998. Flowers Bakeries' gross margin improved to 53.7% of sales for the forty weeks of fiscal 1999, compared to 53.3% of sales for the comparable period in the prior year. Product mix, pricing and production efficiencies primarily contributed to the increase. Mrs. Smith's Bakeries' gross margin for the forty weeks of fiscal 1999 was 26.0% of sales compared to 41.3% reported a year ago. This decrease is primarily the result of delays associated with the massive production realignment project discussed in the twelve week analysis above, the increased inventory reserve and increased sales of lower margin items during the forty weeks of fiscal 1999 as compared to the forty weeks of fiscal 1998. Gross margin at Keebler declined to 57.4% of sales during the forty weeks of fiscal 1999 from 59.7% during the same period a year ago. This decrease was due primarily to the inclusion of President, whose products carry a higher cost structure, partially offset by increased productivity and efficiencies at Keebler's production facilities, cost reduction programs and lower ingredient and packaging costs. Selling, Marketing, and Administrative Expenses. During the forty weeks of fiscal 1999, selling, marketing and administrative expenses were $1,424.1 million, or 44.1% of sales as compared to $1,240.4 million, or 44.7% of sales reported a year ago. Selling, marketing and administrative expenses increased at Flowers Bakeries primarily due to increased distribution costs and spending for its management information systems implementation. Mrs. Smith's Bakeries' selling, marketing, and administrative expenses increased during the forty weeks of fiscal 1999 as compared to the same period a year ago as a result of the production realignment issues discussed in the twelve week analysis. Keebler's selling, marketing, and administrative expenses, as a percentage of sales, decreased during the forty weeks of fiscal 1999 as compared to the forty weeks of fiscal 1998 primarily due to savings gained on reduced distribution costs and synergies achieved in the integration of President. Depreciation and Amortization. Depreciation and amortization expense was $107.2 million for the forty weeks of fiscal 1999, an increase of 15.3% over the same period a year ago, which was $93.0 million. This increase is due primarily to increased goodwill amortization and depreciation relating to the purchase of President by Keebler and increased depreciation associated with capital improvements, partially offset by the benefit of reduced depreciation of approximately $6.4 million resulting from asset impairments recorded as part of the non-recurring charges in fiscal 1998 and fiscal 1999. Non-Recurring Charge. See discussion under the heading "Matters Affecting Analysis" above. Interest Expense. For the forty weeks of fiscal 1999, net interest expense was $62.4 million, an increase of 33.9% over the corresponding period in the prior year, which was $46.6 million. This increase is due primarily to interest on borrowings incurred to finance the acquisition of President by Keebler and on borrowings to partially fund capital improvement projects at Flowers and an acquisition at Flowers Bakeries. Income Before Income Taxes. Income before income taxes was $26.6 million for the forty weeks of fiscal 1999, a decrease of 82.3% compared to income of $150.3 million reported for the same period a year ago. This decrease is primarily the result of the non-recurring charge at Keebler, increased costs associated with the production realignment project and increased selling expenses at Mrs. Smith's Bakeries, all of which are discussed in the twelve week analysis above. The cost increases were somewhat offset by increased earnings as a result of the President acquisition by Keebler. Income Taxes. For the forty weeks of fiscal 1999, income taxes were $19.1 million, or 71.9% of pre-tax income as compared to $63.1 million or 41.9% for the comparable period in the prior year. Income tax expense for the quarter and year-to-date is effected by (1) the interaction of the effective rate on Keebler's profits and the effective rate on the overall net loss before income taxes excluding Keebler and (2) the second quarter effect of the non-deductible goodwill in the Keebler charge. The overall effective rate for the year is expected to be approximately 45%. Net Income (Loss). Net loss for the forty weeks of fiscal 1999 was $12.0 million, a decrease of 121.8% as compared to the $55.0 million of net income reported a year ago. This decrease is due primarily to the items discussed above, partially offset by a negative cumulative effect of a change in accounting principal of $3.1 million recorded in the first quarter of fiscal 1998. This cumulative effect was recorded as a result of the Company's early adoption of Statement of Position 17 18 98-5 -- "Reporting on the Costs of Start-up Activities". An extraordinary charge due to early extinguishment of debt at Keebler in the third quarter of fiscal 1998 of $.9 million, net of tax and minority interest, also was a factor. Year 2000 Conversion: The Company utilizes a number of computer software programs and operating systems throughout its organization, including applications used in order processing, shipping and receiving, accounts payable and receivable processing, financial reporting and in various other administrative functions. The Company recognizes the need to make every effort to ensure that its operations will not be adversely impacted by applications and processing issues related to the upcoming calendar year 2000 (the "Year 2000 Issue"). The Year 2000 Issue is the result of computer programs that have been written to recognize two-digit, rather than four-digit, date codes to define the applicable year. To the extent that the Company's software applications contain source codes that are unable to appropriately interpret a code using "00" as the upcoming year 2000 rather than 1900, the Company could experience system failures or miscalculations that could disrupt operations and cause a temporary inability to process transactions, send and process invoices or engage in similar normal business activities. Based on its ongoing assessment of its systems, the Company has modified or replaced significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with these modifications to its existing software and certain conversions to new software, the Year 2000 Issue will not present significant operational problems for its computer systems. In addition, the Company's systems and operations are dependent, in part, on interaction with systems operated or provided by vendors, customers or other third parties, and the Company has surveyed those parties about their progress in identifying and addressing problems that their computer systems may face in connection with the Year 2000 Issue. The Company believes that it has little or no exposure for contingencies related to the Year 2000 Issue for the products it has sold. The Company's plan to resolve the Year 2000 Issue (the "Plan") identifies exposure with respect to the Company's three operating segments, Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, in three different areas: information technology, operating equipment with embedded chips or software and third-party vendors. In addition, the Plan involves the following four phases for each of the potential exposure items: assessment, remediation, testing and implementation. The discussion set forth below will present a current assessment of these areas for each of the Company's operating segments. Flowers Bakeries With respect to information technology, Flowers Bakeries has completed the remediation, testing and implementation phases for its critical systems. A second Hand Held Computer (HHC) upload/download test (using critical Y2K dates such as YearEnd rollover) was conducted to validate the implementation of Version 4010. Version 4010 is considered to be the Y2K compliant version of the software utilized on the HHC which plays a key role in Flowers Bakeries' current exchange of information with customers. All critical computer hardware items previously identified in inventory and assessed by an independent consultant have been tested, remediated or replaced by Y2K compliant equipment. The testing, remediation and replacement by plant engineers of operating equipment with embedded chips or software is 100% complete. The assessment of third-party vendors or customers and their exposure to the Year 2000 Issue is complete for systems that directly interface with Flowers Bakeries. To date, Flowers Bakeries is not aware of any external agent with a Year 2000 Issue that would materially impact its results of operations, liquidity or capital resources. However, Flowers Bakeries has no means of ensuring that external agents will be Year 2000 compliant. The inability of external agents to complete their Year 2000 resolution processing in a timely fashion could materially impact Flowers Bakeries. As Flowers Bakeries produces and distributes fresh baked products daily, detailed contingency plans are being finalized and put in place in an effort to ensue Flowers Bakeries is prepared to handle possible interruptions to production and distribution, which would be the most reasonable likely worst case scenario. 18 19 Flowers Bakeries has engaged a consulting firm to audit Y2K progress. The firm has completed its final review with no new recommendations other than to complete implementation of Y2K plans developed by Flowers Bakeries, which has been accomplished. As a backup strategy, Flowers Bakeries has developed several overlapping methods to ensure that any possible Year 2000 contingencies will be addressed quickly and decisively. A plant backup strategy will be in effect should the need arise. In emergency situations such as Year 2000, hurricane evacuations, power outages and major breakdowns, Flowers Bakeries currently uses a plan based on using primary and secondary plants to satisfy sales orders. Flowers Bakeries operational regions (based on logistics, customer base, manufacturing facilities) have been designated as "primary" and "secondary" for the purpose of providing a backup mechanism. Corporate and Regional War Rooms will be activated in early December to monitor Year End activities (i.e., plant, branch and distribution operational status, utilities, communications, transportation and raw materials availability). A year-end schedule will be put into effect, which includes hand held computers, distribution system testing and plant checks before and immediately following the arrival of the new year to ensure that Flowers Bakeries capabilities are intact. Flowers Bakeries contingency planning efforts address customers, suppliers and Flowers Bakeries employees. A third-party payroll vendor will process a special payroll (i.e., a pre-Year 2000 run) to ensure employees will be paid in the unlikely event our internal payroll processing fails. Secondary raw material suppliers have been established should a primary supplier be unable to deliver. Additionally, suppliers are establishing two bulk raw material storage sites as another level of reinsuring that Flowers Bakeries' manufacturing plants can produce and deliver product. Plants will enter the new year with all on-site storage areas stocked at full capacity. Major customers have been personally contacted to make sure they are aware of Flowers Bakeries' Year 2000 preparations. The information presented above sets forth the principle steps Flowers Bakeries has taken to address Year 2000 issues. Flowers Bakeries does not expect compliance with Year 2000 issues or the most reasonable likely worst case scenario and related contingency plans to have a material impact on its business, results of operations or financial condition. Mrs. Smith's Bakeries With respect to information technology, Mrs. Smith's Bakeries has completed its assessment of this risk area. This assessment indicated that Mrs. Smith's Bakeries' significant information technology systems would not be affected. Mrs. Smith's Bakeries has recently completed a four-year SAP Enterprise-Wide Information Technology System Installation Project. This system is Year 2000 compliant and is responsible for running over 90% of the company's business processes. Mrs. Smith's Bakeries has completed similar "end to end" testing of its SAP environment, as discussed above for Flowers Bakeries' AS400 environment, and confirmed compliance. Mrs. Smith's Bakeries has also engaged a consultant (the "Consultant") to inventory, assess and assist with remediation of all its critical computer hardware. The inventory has been completed and non-compliant systems have either been remediated or replaced. The assessment of the operating equipment with embedded chips or software has been completed. Testing of this equipment is more difficult than the testing of information technology systems. Mrs. Smith's Bakeries has completed testing and evaluation of remediation work completed on its existing operating equipment, but additional testing and evaluation of operating equipment will be ongoing as changes are made and new equipment is added to its operations. This process will continue through year end. The assessment of third-party vendors or customers and their exposure to the Year 2000 Issue has been completed for both systems that directly interface with Mrs. Smith's Bakeries and for all other material exposure. Mrs. Smith's Bakeries completed surveying all third parties in January 1999. Mrs. Smith's Bakeries has completed remediation efforts on its systems and is 95% complete with the testing and implementation phases of its third-party vendors or customers' system interfaces. Mrs. Smith's Bakeries is continually assessing its third-party vendors or customers and expects to complete the testing and implementation phases for systems interface work by year end. Mrs. Smith's Bakeries has queried its significant suppliers that do not share information systems with Mrs. Smith's Bakeries (external agents). To date, Mrs. Smith's Bakeries is not aware of any external agent with a Year 2000 Issue that would materially impact its results of operations, liquidity or capital resources. However, Mrs. Smith's Bakeries has no means of ensuring that external agents will be Year 2000 compliant. The inability of external agents to complete their Year 2000 resolution processing in a timely fashion could materially impact Mrs. Smith's Bakeries. The effect of noncompliance by external agents is not determinable by Mrs. Smith's Bakeries. As Mrs. Smith's Bakeries produces and distributes fresh and frozen baked 19 20 products, detailed contingency plans are being put in place in an effort to ensure Mrs. Smith's Bakeries is prepared to handle possible interruptions to production and distribution, which would be the most reasonable likely worst case scenario. The plans have been completed and will be reviewed on an ongoing basis through the end of the year. Based on the progress made to date in assessing its Year 2000 issues and its compliance with Year 2000 issues related to primary business information systems, Mrs. Smith's Bakeries does not foresee significant risks associated with its Year 2000 compliance at this time. However, Mrs. Smith's Bakeries has developed comprehensive contingency plans and will continually review these plans through the end of the year to address potential critical Year 2000 issues. The plan includes performing a complete backup of all computer systems (i.e., operational, financial and human resources) on December 31, 1999. In addition, facility checks will be performed at each administrative, production, distribution and shipping locations on January 1, 2000 to determine if utilities and equipment are functioning properly. In the event of a power failure at a specific location or order entry difficulties, manual sales orders will be completed and sent to another Mrs. Smith's Bakeries facility for processing into SAP. Mrs. Smith's Bakeries has also identified a sister location for each of our facilities, which will allow it to shift production and/or distribution capabilities in the event of failures at specific sites. In addition, since Mrs. Smith's Bakeries does not rely on any one supplier, second source suppliers and vendors are in place in the event that a supplier is unable to meet our material requirements. Finally, Mrs. Smith's Bakeries has established a plan with our third-party payroll processing company for payroll processing in the event that we are completely unable to perform the processing internally. The information presented above sets forth the principle steps Mrs. Smith's Bakeries has taken to address Year 2000 issues. Mrs. Smith's Bakeries does not expect compliance with Year 2000 issues or the most reasonable likely worst case scenario and related contingency plans to have a material impact on its business, results of operations or financial condition. Keebler Keebler has completed a comprehensive review of its computer systems and non-information technology systems to identify potential Year 2000 issues. As Keebler has implemented the SAP R/3 Enterprise Wide Information Systems and Manugistics software, both of which were developed/purchased as Year 2000 compliant, management does not anticipate that the impact of Year 2000 issues on its business will be material. In order to assess Year 2000 readiness, Keebler conducted a complete simulation of the SAP production environment during the second quarter of fiscal 1999 which incorporated the December 29, 1999 through January 4, 2000 and February 28, 2000 through March 2, 2000 timeframes. The overall success of the full production simulation is further indication that the risk factors for problems in the year 2000 are minimal for the SAP environment. Additionally, secondary information systems, which are not material to Keebler's ability to forecast, manufacture or deliver product, have been reviewed and Year 2000 issues identified. Currently, Keebler is in the process of correcting or upgrading these systems and intends to be Year 2000 compliant on all critical systems by December 1999. Keebler has submitted a comprehensive questionnaire to its material vendors and suppliers in an effort to verify that they will be Year 2000 compliant and to identify any problem areas with these groups. Although the results of the questionnaire indicated that material vendors and suppliers intend to be Year 2000 compliant before the end of fiscal 1999, they were not able to provide any assurances. Keebler has developed a contingency plan to address potential Year 2000 failures caused by a third party. While there is no assurance that third parties will convert their systems in a timely manner and that they will be compatible with Keebler's systems, management believes these risks will be minimized due to the procedures related to third parties discussed above and the development of a contingency plan. Keebler completed a comprehensive review of President's computer systems and non-information technology systems to identify potential Year 2000 issues for this subsidiary. Many of the Year 2000 risks at President have been mitigated through the implementation of the SAP R/3 Enterprise Wide Information Systems and Manugistics software at the President facilities. Based on the progress made to date in assessing its Year 2000 issues and its compliance with Year 2000 issues related to primary business information systems, Keebler does not foresee significant risks associated with its Year 2000 compliance at this time. However, Keebler has developed a comprehensive contingency plan to address potential critical Year 2000 issues. The plan includes performing a complete backup of all of our computer systems (i.e. operational, financial and human resources) on December 31, 1999. In addition, facility checks will be performed at each of our corporate, manufacturing, distribution and shipping locations on January 1, 2000 to determine if utilities and equipment 20 21 are functioning properly. In the event of a power failure at a specific location or order entry difficulties with our hand-held personal computers, manual sales orders will be completed and sent to another Keebler facility for processing into SAP. We have also identified a sister location for each of our facilities, which will allow us to shift production and/or distribution capabilities in the event of failures at specific sites. In addition, since Keebler does not rely on any one supplier, second source suppliers and vendors are in place in the event that a supplier is unable to meet our material requirements. Finally, we have established a plan with our third-party payroll processing company for payroll processing in the event that we are completely unable to perform, the processing internally. The information presented above sets forth the principle steps Keebler has taken to address Year 2000 issues. Keebler does not expect compliance with Year 2000 issues or the most reasonable likely worst case scenario and related contingency plan to have a material impact on its business, results of operations or financial condition. Summary The Company is utilizing both internal and external resources to reprogram, or replace, and test its software for Year 2000 modifications. The total cost of the plan is estimated at $5 to $6 million and is being funded through operating cash flow and expensed as incurred. To date, the Company has expended approximately $4.7 million related to the assessment of, and remediation efforts on, its Year 2000 modification projects, the development of the plan for the purchase of new systems and system modifications. The costs of the plan and the time frame in which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. Specific factors that might result in additional costs or time delays include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Based upon the Company's current estimates, the Company does not anticipate that the cost of compliance with the Year 2000 Issue will be material to its business, financial condition or results of operations; however, there can be no assurance that the Company's systems, or those of its vendors, customers or other third parties, will be made Year 2000 compliant in a timely manner or that the impact of the failure to achieve such compliance will not have a material adverse effect on the Company's business, financial condition or results of operations. Based on the progress the Company has made in addressing its Year 2000 issues and the Company's compliance with the Year 2000 Issue on its primary business information systems, the Company does not foresee significant risks associated with its Year 2000 compliance on such systems at this time. However, contingency plans have been developed by Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, as discussed above. The discussion of the Company's efforts and management's expectations relating to Year 2000 compliance are forward-looking statements. Readers are cautioned that forward-looking statements contained herein should be read in conjunction with the Company's disclosures under the heading "Forward-Looking Statements" set forth below. Forward-Looking Statements: Certain statements made herein are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor provisions of that Act. Such forward-looking statements include, without limitation, the future availability and prices of raw materials, the availability of capital on acceptable terms, the competitive conditions in the baked foods industry, potential regulatory obligations, the Company's strategies and other statements contained herein that are not historical facts. Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, changes in general economic and business conditions (including the baked foods markets), the Company's ability to recover its raw material costs in the pricing of its products, the availability of capital on acceptable terms, actions of competitors, the impact of any Year 2000 disruptions, the extent to which the Company is able to develop new products and markets for its products, the time required for such development, the level of demand for such products, timing in having newly installed production lines at Mrs. Smith's Bakeries fully operative, changes in the Company's business strategies and other factors discussed herein. 21 22 Item 3. Quantitative And Qualitative Disclosures About Market Risk: In the normal course of business, the Company is exposed to commodity price and interest rate risks, primarily related to the purchase of raw materials and packaging supplies and changes in interest rates. The Company manages its exposure to these risks through the use of various financial instruments, none of which are entered into for trading purposes. The Company has established policies and procedures governing the use of financial instruments, specifically as it relates to the type and volume of financial instruments entered into. Financial instruments can only be used to hedge an economic exposure, and speculation is prohibited. The Company's accounting policy related to financial instruments is further described in Note 4 of Notes to Consolidated Financial Statements. Commodity Price Risk The Company enters into commodity future 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. A sensitivity analysis has been prepared to estimate the Company's exposure to commodity price risk. Based on the Company's derivative portfolio as of October 9, 1999, a hypothetical ten percent adverse change in commodity prices under normal market conditions could potentially have a $18.6 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 loss in fair value of the portfolio would be substantially offset by reductions in raw material and packaging prices. Interest Rate Risk The Company manages its exposure to interest rate risk primarily through the use of a combination of fixed to floating rate debt, as well as interest rate swap agreements, in order to reduce overall interest costs. Keebler has entered into interest rate swap agreements on both its fixed and floating rate debt. A sensitivity analysis was prepared as of January 2, 1999 to estimate the Company's exposure to interest rate risk. As interest rates have not fluctuated materially from year end and the composition of the Company's debt has not materially changed since year end, the sensitivity analysis as of January 2, 1999 remains a valid estimate. The analysis disregards changes in the exposures inherent in the underlying hedged item; however, the Company expects that any loss in fair value of the interest rate swap agreements would be substantially offset by increases in the fair value of those hedged items. 22 23 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION - Information regarding each of the Company's segments' operations for each quarter of fiscal 1998 is as follows (amounts in thousands):
For the 16 Weeks For the 52 Ended For the 12 Weeks Ended Weeks Ended ------------ ------------------------------------------------- ----------- April 25, July 18, October 10, January 2, January 2, 1998 1998 1998 1999 1999 ------------ --------- ---------- ----------- ----------- Sales: Flowers Bakeries $ 285,958 $ 225,870 $ 221,795 $ 216,247 $ 949,870 Mrs. Smith's Bakeries 180,877 137,091 156,350 198,503 672,821 Keebler 636,746 490,042 499,897 599,795 2,226,480 FII (550) -- -- 893 343 Eliminations(1) (25,997) (16,579) (15,258) (15,219) (73,053) ----------- --------- ----------- ----------- ----------- $ 1,077,034 $ 836,424 $ 862,784 $ 1,000,219 $ 3,776,461 =========== ========= =========== =========== =========== Depreciation and Amortization: Flowers Bakeries $ 10,527 $ 8,215 $ 7,989 $ 6,756 $ 33,487 Mrs. Smith's Bakeries 5,405 4,436 4,747 4,088 18,676 Keebler 16,236 15,313 14,934 22,642 69,125 FII 2,028 1,574 1,582 2,293 7,477 ----------- --------- ----------- ----------- ----------- $ 34,196 $ 29,538 $ 29,252 $ 35,779 $ 128,765 =========== ========= =========== =========== =========== Income from Operations: Flowers Bakeries 19,995 $ 17,602 $ 15,987 $ 22,195 $ 75,779 Mrs. Smith's Bakeries 10,056 9,832 16,102 9,865 45,855 Keebler 31,676 38,180 57,251 72,784 199,891 FII (5,750) (5,380) (6,221) (3,472) (20,823) Non-recurring charge(2) -- -- (2,453) (65,860) (68,313) ----------- --------- ----------- ----------- ----------- $ 55,977 $ 60,234 $ 80,666 $ 35,512 $ 232,389 =========== ========= =========== =========== ===========
(1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at standard costs. (2) Represents asset impairments at Keebler of $2.5 million in the third quarter of fiscal 1998 and a non-recurring charge for asset impairments and restructuring costs in the fourth quarter of fiscal 1998 of $32.2 million, $32.3 million and $1.4 million for Flowers Bakeries, Mrs. Smith's Bakeries and Keebler, respectively. 23 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 -- Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K --- The Company filed a report on Form 8-K on October 5, 1999 relating to a press release by the Company regarding its third quarter fiscal 1999 earnings. 24 25 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 INDUSTRIES, INC. /s/ AMOS R. MCMULLIAN ---------------------------------- By: Amos R. McMullian Chairman of the Board /s/ JIMMY M. WOODWARD ----------------------------------- By: Jimmy M. Woodward Vice President and Chief Administrative Officer Chief Accounting Officer Date: November 23, 1999 25 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FLOWERS INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE FORTY WEEKS ENDED OCTOBER 9, 1999 AND THE FLOWERS INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AT OCTOBER 9, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 10-MOS JAN-01-2000 JAN-03-1999 OCT-09-1999 22,995 0 210,118 15,342 294,788 704,398 1,563,011 495,809 2,845,579 714,420 0 0 0 63,034 458,612 2,845,579 3,230,712 3,230,712 1,541,195 3,141,734 0 0 62,405 26,573 19,102 (12,002) 0 0 0 (12,002) (.12) (.12)
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