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Acquisitions | 4 Months Ended
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Apr. 20, 2013
Acquisitions | 4. ACQUISITIONS Sara Lee and Earthgrains acquisition of trademark licenses On February 23, 2013, the company completed its acquisition from BBU of (1) the perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California for a total cash payment of $50.0 million. In addition, we received a perpetual, exclusive, and royalty-free license to the Earthgrains brand for a broad range of fresh bakery products in the Oklahoma City, Oklahoma market area. The acquisition of the Oklahoma license was completed during fiscal 2012 for an immaterial cost. These acquisitions are included in our DSD segment. The following table summarizes the consideration transferred to acquire these licenses and the amounts of identified assets acquired and liabilities assumed based on the estimated fair value at the acquisition date (amounts in thousands and are preliminary):
Fair value of consideration transferred: |  |  |  |
Cash consideration transferred |  | $ | 49,950 |
Contingently refundable consideration (the “holdback”) |  |  | (7,600 | )
Total consideration, net |  | $ | 42,350 |
Recognized amounts of identifiable assets acquired and liabilities assumed: |  |  |  |
Property, plant, and equipment |  | $ | 6,476 |
Identifiable intangible asset — distribution rights |  |  | 27,822 |
Identifiable intangible asset — trademark |  |  | 79,500 |
Identifiable intangible asset — customer relationships |  |  | 12,000 |
Deferred income taxes, net |  |  | (32,128 | )
Net recognized amounts of identifiable assets acquired |  | $ | 93,670 |
Bargain purchase gain |  | $ | 51,320 |
The primary reason for this trademark acquisition was to expand the company’s footprint into the California markets. The trademark is a non-amortizable asset and the customer relationships are being amortized over 12 years. We believe the acquisition resulted in a bargain purchase because the U.S. Department of Justice (the “DOJ”) required BBU to divest these assets, which resulted in a more favorable price to us than would have normally resulted from an arms-length negotiation. The bargain purchase gain is recognized in the line item “Gain on acquisition”. The above purchase price allocation is preliminary. During negotiations with the divestiture trustee, a holdback provision (the “holdback”) was inserted into the executed agreement. The holdback is an amount of $10.0 million of the cash consideration transferred at closing that will remain in escrow until disbursed based on the possible occurrence of one of two triggering events. The purpose of the holdback is to encourage the company to increase production capacity serving the California market. The first triggering event relates to the co-pack arrangement and the second triggering event relates to the opening of the Stockton Bakery. We entered into a co-pack arrangement with BBU at the acquisition date under which BBU is required to supply the company with Sara Lee branded product for a period of up to 18 months ending August 17, 2014. If we terminate the co-pack agreement (“co-pack decision”) or reopen the Stockton Bakery (“bakery decision”) potential payments from the holdback amount will be made to us and are determined based on specified dates for those actions. The table below reflects the potential payments under each scenario (amounts in thousands):
|  | February 23, 2013 – November 20, 2013 |  |  | November 21, 2013 – February 18, 2014 |  |  | February 19, 2014 – May 19, 2014 |  |  | May 20, 2014 – August 17, 2014 |
Co-pack decision |  | $ | 10,000 |  |  | $ | 7,500 |  |  | $ | 5,000 |  |  | $ | — |
Bakery decision |  | $ | 10,000 |  |  | $ | 10,000 |  |  | $ | 7,500 |  |  | $ | 5,000 |
If we do not make the co-pack decision or the bakery decision by August 17, 2014, any remaining amount of the holdback will be distributed to BBU. The holdback fair value of $7.6 million represents our assessment of the probability that we will terminate the co-pack arrangement and/or open the Stockton bakery. This probability will be assessed at each reporting period and changes in the fair value of the holdback will be recorded through earnings in the period of change. The holdback amount is recorded in other assets on the condensed consolidated balance sheet. The sales included since acquisition during the sixteen weeks ended April 20, 2013 were $10.7 million. We incurred $1.3 million in acquisition-related costs during the first quarter of 2013 for the Sara Lee and Earthgrains asset purchase. These expenses are included in the selling, distribution and administrative line item in the company’s condensed consolidated statement of income. Subsequent to the acquisition we are developing distribution territories to sell to independent distributors who will serve California. The territory development will take part in several stages over the remainder of fiscal 2013. The distribution rights intangible asset was recharacterized to territories held for sale immediately subsequent to the acquisition as a result of our decision to develop and market these territories. The distributor routes caused the significant increase in the assets held for sale as reported on the condensed consolidated balance sheet. Lepage Acquisition On July 21, 2012, we completed the acquisition of Lepage Bakeries, Inc. (“Lepage”) in two separate but concurrent transactions. Pursuant to the Acquisition Agreement dated May 31, 2012 (the “Acquisition Agreement”), by and among Flowers, Lobsterco I, LLC, a Maine single-member limited liability company and direct wholly owned subsidiary of Flowers (“Lobsterco I”), Lepage, RAL, Inc., a Maine corporation (“RAL”), Bakeast Company, a Maine general partnership (“Bakeast Partnership”), Bakeast Holdings, Inc., a Delaware corporation (“Bakeast Holdings,” and collectively with Lepage, RAL and Bakeast Partnership, the “Acquired Entities”), and the equityholders of the Acquired Entities named in the Acquisition Agreement (collectively, the “Equityholders”), Lobsterco I purchased from the Equityholders all of the issued and outstanding shares of the Acquired Entities in exchange for approximately $318.4 million in cash and $17.7 million in deferred obligations, which is the fair value of gross payments of $20.0 million. Pursuant to the Agreement and Plan of Merger dated May 31, 2012 (the “Merger Agreement”), by and among Flowers, Lobsterco II, LLC, a Maine single-member limited liability company and direct wholly owned subsidiary of Flowers (“Lobsterco II”), Aarow Leasing, Inc., a Maine corporation (“Aarow”), The Everest Company, Incorporated, a Maine corporation (“Everest,” and together with Aarow, the “Acquired Companies”), and certain equityholders of Lepage, the Acquired Companies merged with and into Lobsterco II (the “Merger”) and all of the issued and outstanding shares of common stock of the Acquired Companies were exchanged for 2,178,648 shares of Flowers common stock. Lepage operates three bakeries, two in Lewiston, Maine, and one in Brattleboro, Vermont. Lepage serves customers in the New England and New York markets with fresh bakery products sold under the Country Kitchen and Barowsky’s brands. This acquisition provides a DSD platform to accelerate penetration of Nature’s Own and Tastykake brands in the Northeast. The Lepage acquisition has been accounted for as a business combination. The results of Lepage’s operations are included in the company’s consolidated financial statements beginning on July 21, 2012 and are included in the company’s DSD operating segment. The preliminary aggregate purchase price was $381.9 million as described in the table below. We incurred $7.1 million in acquisition-related costs during fiscal 2012 for Lepage. These expenses are included in the selling, distribution and administrative line item in the company’s consolidated statement of income for the fifty-two weeks ending on December 29, 2012. The following table summarizes the consideration transferred to acquire Lepage and the amounts of identified assets acquired and liabilities assumed based on the estimated fair value at the acquisition date (amounts in thousands):
Fair value of consideration transferred: |  |  |  |
Cash |  | $ | 300,000 |
Cash paid for preliminary tax adjustment |  |  | 18,426 |
Net working capital adjustment estimate |  |  | 121 |
Deferred payment obligations |  |  | 17,663 |
Flowers Foods, Inc. common stock |  |  | 45,887 |
Total fair value of consideration transferred |  | $ | 382,097 |
Recognized amounts of identifiable assets acquired and liabilities assumed: |  |  |  |
Financial assets |  | $ | 11,658 |
Inventories |  |  | 4,537 |
Property, plant, and equipment |  |  | 59,970 |
Assets held for sale — Distributor routes |  |  | 16,161 |
Identifiable intangible assets estimate |  |  | 256,400 |
Deferred income taxes, net |  |  | (1,137 | )
Financial liabilities |  |  | (15,698 | )
Net recognized amounts of identifiable assets acquired |  | $ | 331,891 |
Goodwill |  | $ | 50,206 |
The $18.4 million cash payment for the preliminary tax adjustment is the amount paid to the Lepage equityholders at the closing of the acquisition in connection with certain incremental tax liabilities incurred by those equityholders at the joint election under Section 338(h)(10) of the Internal Revenue Code. There is an additional $2.1 million preliminary tax adjustment (recorded in the financial liabilities figure in the table above) that the company will pay for entity level state taxes. Goodwill increased $0.3 million during the sixteen weeks ended April 20, 2013 for a working capital adjustment. The $17.7 million obligation for the deferred payments represents the fair value of the fixed payments of $1,250,000 beginning on the first business day of each of the sixteen calendar quarters following the fourth anniversary of the closing of the acquisition (total of $20.0 million in gross payments). The first payment will be made by Flowers on October 1, 2016 and the final payment will be made on July 1, 2020. The difference between the fair value and the gross payments of $2.3 million is recorded as a reduction to the liability and is being amortized to interest expense over eight years. We issued 2,178,648 shares of Flowers common stock to certain equityholders of Lepage with a fair value of $45.9 million. The number of shares issued was calculated by dividing $50.0 million by the average closing price of Flowers common stock for the twenty consecutive trading day period ending five trading days prior to the closing. The shares issued to the equityholders were separated into five categories with each category having a different holding period requirement. As a result, each holding period had a fair value assignment based on an implied fair value which was determined using the Black-Scholes call option formula for an option expiring on each restriction lapse date. The estimated exercise price is equal to the stock price on the last trading day before the closing on July 21, 2012 of $20.48. The table below outlines the determination of fair value and provides the assumptions used in the calculation:
Restriction lapse year |  | 2012 |  |  | 2013 |  |  | 2014 |  |  | 2015 |  |  | 2016 |  |  | Total |
Value of Flowers shares issued (thousands) |  | $ | 25,000 |  |  | $ | 10,000 |  |  | $ | 5,000 |  |  | $ | 5,000 |  |  | $ | 5,000 |  |  | $ | 50,000 |
Implied fair value of restricted shares (thousands) |  | $ | 23,626 |  |  | $ | 9,154 |  |  | $ | 4,447 |  |  | $ | 4,363 |  |  | $ | 4,297 |  |  | $ | 45,887 |
Exercise price (per share) |  | $ | 20.48 |  |  | $ | 20.48 |  |  | $ | 20.48 |  |  | $ | 20.48 |  |  | $ | 20.48 |  |  |  |  |
Expected term (yrs) |  |  | 0.37 |  |  |  | 1.00 |  |  |  | 2.00 |  |  |  | 3.00 |  |  |  | 4.00 |  |  |  |  |
Volatility (%) |  |  | 25.0 | % |  |  | 25.0 | % |  |  | 25.0 | % |  |  | 25.0 | % |  |  | 25.0 | % |  |  |  |
Risk-free rate (%) |  |  | 0.1 | % |  |  | 0.2 | % |  |  | 0.2 | % |  |  | 0.3 | % |  |  | 0.4 | % |  |  |  |
Dividend yield (%) |  |  | 3.0 | % |  |  | 3.0 | % |  |  | 3.0 | % |  |  | 3.0 | % |  |  | 3.0 | % |  |  |  |
The following table presents the intangible assets subject to amortization (amounts in thousands, except amortization periods):
|  | Amount |  |  | Weighted average amortization years |
Customer relationships |  | $ | 69,000 |  |  |  | 25.0 |
Non-compete agreements |  |  | 2,400 |  |  |  | 4.0 |
|  | $ | 71,400 |  |  |  | 24.3 |
The primary reasons for the acquisition are to expand the company’s footprint into the northeastern United States, to distribute Country Kitchen and Barowsky’s products throughout our distribution network and to distribute Nature’s Own and Tastykake products throughout the Lepage territories. In addition to the amortizable intangible assets, there is an additional $185.0 million in indefinite-lived trademark intangible assets. Goodwill of $50.2 million is allocated to the DSD segment. Approximately $10.2 million of goodwill is deductible for income tax purposes. The fair value of trade receivables is $7.4 million. The gross amount of the receivable is $7.5 million of which $0.1 million is determined to be uncollectible. We did not acquire any other class of receivables as a result of the acquisition. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Lepage occurred at the beginning of fiscal 2012 (amounts in thousands, except per share data). Unaudited pro forma consolidated results of operations for the Sara Lee and Earthgrains asset acquisitions are not included because the company determined that it is immaterial.
|  | For the Sixteen Weeks Ended April 21, 2012 |
Sales: |  |  |  |
As reported |  | $ | 898,206 |
Pro forma |  | $ | 948,382 |
Net income: |  |  |  |
As reported |  | $ | 37,943 |
Pro forma |  | $ | 38,438 |
Basic net income per common share: |  |  |  |
As reported |  | $ | 0.28 |
Pro forma |  | $ | 0.28 |
Diluted net income per common share: |  |  |  |
As reported |  | $ | 0.28 |
Pro forma |  | $ | 0.28 |
These amounts have been calculated after applying the company’s accounting policies and adjusting the results to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and amortizable intangible assets had been applied. In addition, pro forma adjustments have been made for the interest incurred for financing the acquisition with our credit facility. Taxes have also been adjusted for the effect of the items discussed. These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1392-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4845-128472 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4926-128472 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1490-128463 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e6927-128479 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e7008-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e7000-128479 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1524-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1383-128463 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1486-128463 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1500-128463 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Paragraph 67-73 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4934-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Paragraph F4 -Subparagraph e -Appendix F Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1497-128463 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4922-128472 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Emerging Issues Task Force (EITF) -Number 88-16 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141 -Paragraph 51, 52 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e6996-128479 + Details
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