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Acquisitions | 12 Months Ended
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Jan. 03, 2015
Acquisitions |
Note 8. | Acquisitions
Modesto acquisition On July 27, 2013, the company completed the acquisition of certain assets related to a bun line in Modesto, California that serves the California market for a total cash payment of $10.3 million. This acquisition is included in our DSD Segment and the total goodwill recorded for this acquisition was $4.2 million. Acquired Hostess Bread Assets On July 19, 2013, the company completed its acquisition of Hostess’ Wonder, Nature’s Pride, Merita, Home Pride, and Butternut bread brands, 20 closed bakeries, and 36 depots (the “Acquired Hostess Bread Assets”) for a total cash payment of $355.3 million. The company had filed a complaint in July 2008 alleging that Hostess infringed upon Flowers Foods’ Nature’s Own trademark by using or intending to use the Nature’s Pride trademark. This lawsuit was settled at the closing of the Acquired Hostess Bread Assets acquisition and we recorded a $1.4 million gain during the third quarter of our fiscal 2013 to reflect our estimate of the settlement fair value, determined as the saved future legal expenses as a result of the settlement, at closing. The gain was recorded in selling, distribution and administrative expense in our Condensed Consolidated Statements of Income. We believe the acquisition of the Acquired Hostess Bread Assets strengthens the company’s position as the second-largest baker in the U.S. by adding brands and bakeries that are expected to enhance our ability to steadily expand the geographic reach of our fresh breads, buns, rolls and snack cakes into new markets. The Acquired Hostess Bread Assets are included in our DSD Segment. Late in the third quarter of fiscal 2013, we began to re-introduce the newly acquired brands into markets we currently serve through our DSD Segment and new markets as we expand into new regions of the country. The re-introduction of the brands continued throughout fiscal 2014 and will continue in fiscal 2015. During fiscal 2013, the company incurred $16.0 million of acquisition-related costs for the Acquired Hostess Bread Assets. There were no acquisition-related costs during fiscal 2014. A second proposed Hostess asset purchase agreement provided for the purchase of the Beefsteak brand for $30.0 million. This second agreement was topped by another bidder and the agreement terminated. In connection with this termination we received a break-up fee of $0.9 million during the first quarter of fiscal 2013. The acquisition-related costs for the Acquired Hostess Assets and the break-up fee related to the second proposed Hostess acquisition are recorded in the selling, distribution and administrative expense line item in our Condensed Consolidated Statements of Income. The following table summarizes the consideration paid for the Acquired Hostess Bread Assets and liabilities assumed based on the fair value at the acquisition date (amounts in thousands):
Fair value of consideration transferred: |  |  |  |
Cash consideration transferred |  | $ | 355,342 |
Recognized amounts of identifiable assets acquired and liabilities assumed: |  |  |  |
Property, plant, and equipment |  | $ | 153,990 |
Identifiable intangible asset — trademarks |  |  | 189,000 |
Financial assets |  |  | 5,153 |
Net recognized amounts of identifiable assets acquired |  | $ | 348,143 |
Gain on legal settlement |  |  | (1,400 | )
Net recognized amounts of identifiable assets acquired and gain on settlement |  | $ | 346,743 |
Goodwill |  | $ | 8,599 |
The goodwill is expected to be deductible for tax purposes and is included in our DSD Segment. Sales were $180.1 million during fiscal 2014 and $26.6 million during fiscal 2013, when the brands were reintroduced, for the brands acquired as part of the Acquired Hostess Bread Assets. The identified intangible assets in the table above were assigned indefinite lives and are discussed in Note 7, Goodwill and Other Intangible Assets. The table below presents the changes to goodwill from December 28, 2013 to January 3, 2015 for the Acquired Hostess Bread Assets (amounts in thousands):
Goodwill reported on December 28, 2013 for the Acquired Hostess Bread Assets |  | $ | 5,419 |
Changes in goodwill for spare parts and final fair value adjustments |  |  | (3,503 | )
Changes in goodwill for property, plant and equipment final fair value adjustments |  |  | 6,683 |
Net changes to goodwill |  | $ | 3,180 |
Final Acquired Hostess Bread Assets goodwill |  | $ | 8,599 |
Sara Lee California and Earthgrains acquisition of trademark licenses On February 23, 2013, the company completed its acquisition from BBU, Inc., a subsidiary of Grupo Bimbo (“BBU”), of (1) perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California and (2) a closed bakery in Stockton, California 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 immaterial consideration. The results of operations of these acquisitions are included in our DSD Segment. The following table summarizes the consideration paid to acquire these licenses and the amounts of identified assets acquired and liabilities assumed based on the fair value at the acquisition date (amounts in thousands):
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 |  |  | 25,790 |
Identifiable intangible asset — trademarks |  |  | 79,500 |
Identifiable intangible asset — customer relationships |  |  | 12,000 |
Deferred income taxes, net |  |  | (31,345 | )
Net recognized amounts of identifiable assets acquired |  | $ | 92,421 |
Bargain purchase gain |  | $ | 50,071 |
The primary reason for this acquisition was to expand the company’s footprint into the California markets. The trademarks are non-amortizable assets and the customer relationships are being amortized over 21 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 may have resulted from an arms-length negotiation. The bargain purchase gain is recognized in the line item “Gain on Acquisition”. During the third quarter of fiscal 2013 we recorded a measurement period adjustment related to the distribution rights. The fair value of the distribution rights was reduced by $2.0 million as additional information became available. This reduction decreased the amount of the bargain purchase gain by $1.2 million, which is net of deferred taxes of $0.8 million. The measurement period adjustment was recorded as a revision to our first quarter 2013 Condensed Consolidated Balance Sheet and the Condensed Consolidated Statements of Income. The asset purchase agreement included a holdback provision (the “holdback”) in the amount of $10.0 million of the cash consideration paid at closing that remained in escrow until disbursed based on the possible occurrence of one of two triggering events. The purpose of the holdback was to encourage the company to increase production capacity serving the California market. The first triggering event related to the co-pack arrangement and the second triggering event related to the possible opening of the acquired Stockton Bakery. We entered into a co-pack arrangement with BBU at the acquisition date under which BBU was required to supply the company with Sara Lee branded product in California and Earthgrains branded product for a period of up to 18 months ending August 17, 2014. If we terminated the co-pack agreement (“co-pack decision”) or reopened the Stockton Bakery (“bakery decision”) potential payments from the holdback would be made to us. The amount of such payments was determined based on the company making the co-pack decision and/or the bakery decision by certain specified dates. The total amount available under the holdback was capped at $10.0 million. The table below reflects the potential payments to us 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 did not make the co-pack decision by May 19, 2014 or did not make the bakery decision by August 17, 2014, any remaining amount of the holdback would be distributed to BBU. The holdback fair value of $7.6 million represented our assessment, at the time of acquisition for inclusion into the purchase price allocation, of the probability that we would terminate the co-pack arrangement and/or open the Stockton bakery. This probability was assessed at each reporting period and changes in the fair value of the holdback were recorded through earnings in the period of change. There were no changes as a result of the probability assessment in the second or third quarter of fiscal 2013. We initially notified BBU of our intent to terminate the co-pack agreement during the fourth quarter of fiscal 2013 and, upon completion of these notifications, we received $7.5 million during the first quarter of fiscal 2014. This holdback amount was recorded as a current receivable at December 28, 2013 on the Consolidated Balance Sheet. As a result of our initial notification, during the fourth quarter of fiscal 2013, we recorded a $0.1 million reduction to the fair value of the holdback (recorded in selling, distribution and administrative expense). The final delivery date under the supply agreement was February 14, 2014. Sales from the Sara Lee California and Earthgrains acquisitions during fiscal 2013 were $79.7 million. We incurred $1.5 million in acquisition-related costs during fiscal 2013. These expenses were included in the selling, distribution and administrative line item in the company’s Consolidated Statement of Income for the fifty-two weeks ended December 28, 2013. Since the acquisition date, we developed distribution territories to sell to independent distributors who serve California. The territory development took place in several phases in fiscal 2013. Amounts received upon sale of these new distributor territories are shown in our Consolidated Statement of Cash Flows as an investing activity. 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 $318.6 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 3,267,972 shares of Flowers common stock. 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 Segment. The aggregate purchase price was $382.2 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 fair value at the acquisition date (amounts in thousands):
Fair value of consideration transferred: |  |  |  |
Cash |  | $ | 318,605 |
Deferred payment obligations |  |  | 17,663 |
Flowers Foods, Inc. common stock |  |  | 45,887 |
Total fair value of consideration transferred |  | $ | 382,155 |
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 |  |  | 16,098 |
Identifiable intangible assets |  |  | 256,400 |
Deferred income taxes, net |  |  | (1,137 | )
Financial liabilities |  |  | (17,076 | )
Net recognized amounts of identifiable assets acquired |  | $ | 330,450 |
Goodwill |  | $ | 51,705 |
Approximately $18.4 million of the cash consideration was for a tax adjustment paid to the Equityholders at the closing of the acquisition in connection with certain incremental tax liabilities incurred by those Equityholders due to the joint election made by the parties under Section 338(h)(10) of the Internal Revenue Code. Total goodwill increased $0.9 million since the end of fiscal 2012, consisting of an increase of $0.3 million for the final working capital adjustment payment, a decrease of $1.0 million for a tax adjustment (recorded in financial liabilities in the table above), an increase of $0.1 million for assets held for sale, and an increase of $1.5 million for accrued liabilities (recorded in financial liabilities in the table above). The payment for the working capital adjustment was $0.2 million and was made during our second quarter of fiscal 2013. Lepage contributed revenues of $80.7 million and income from operations of $12.4 million for fiscal 2012. The deferred payment obligations represent 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 ($17.7 million) and the gross payments ($20.0 million) of $2.3 million was recorded as a reduction to the liability and is being amortized to interest expense over eight years. We issued 3,267,972 shares of Flowers common stock with a fair value of $45.9 million to certain equityholders of Lepage. 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 $13.65. The table below outlines the determination of fair value and provides the assumptions used in the calculation:
Restriction lapse fiscal 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) |  | $ | 13.65 |  |  | $ | 13.65 |  |  | $ | 13.65 |  |  | $ | 13.65 |  |  | $ | 13.65 |  |  |  |  |
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 |
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 more effectively market the Nature’s Own and Tastykake brands in the Northeast. The primary reasons for the acquisition were to expand the company’s footprint into the northeastern United States 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 $51.7 million is allocated to the DSD Segment. Approximately $11.9 million of goodwill is deductible for income tax purposes over fifteen years. 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. Acquisition pro formas The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Lepage and of the Acquired Hostess Bread Assets occurred at the beginning of fiscal 2012. Unaudited pro forma consolidated results of operations for the Sara Lee California and Earthgrains asset acquisitions are not included because the company determined that they are immaterial. Hostess filed for bankruptcy and ceased operations in November 2012 (the “Hostess Shutdown”). As a result, there were no sales related to the Acquired Hostess Assets for fiscal 2013 because of the Hostess Shutdown and there is no data to include in the pro forma presentation below. The acquisitions’ results from operations were included in our Consolidated Statements of Income during fiscal 2014 and, as a result, no pro forma data is presented (amounts in thousands, except per share data):
|  | Fiscal 2013 |  |  | Fiscal 2012 |
|  | 52 weeks |  |  | 52 weeks |
Sales: |  |  |  |  |  |  |  |
As reported |  | $ | 3,732,616 |  |  | $ | 3,031,124 |
Pro forma |  | $ | 3,732,616 |  |  | $ | 3,887,498 |
Net income: |  |  |  |  |  |  |  |
As reported |  | $ | 230,894 |  |  | $ | 136,121 |
Pro forma |  | $ | 227,076 |  |  | $ | 128,464 |
Basic net income per common share: |  |  |  |  |  |  |  |
As reported |  | $ | 1.11 |  |  | $ | 0.66 |
Pro forma |  | $ | 1.09 |  |  | $ | 0.62 |
Diluted net income per common share: |  |  |  |  |  |  |  |
As reported |  | $ | 1.09 |  |  | $ | 0.66 |
Pro forma |  | $ | 1.07 |  |  | $ | 0.61 |
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 acquisitions with either the credit facility or the senior notes. Lepage’s revenue recognition policy was consistent with ours and adjustments are not required. 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 1 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1383-128463 Reference 2: 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=35744584&loc=d3e6996-128479 Reference 3: 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=39739317&loc=d3e4922-128472 Reference 4: 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=39739317&loc=d3e4934-128472 Reference 5: 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=39739317&loc=d3e4926-128472 Reference 6: 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=35744584&loc=d3e7000-128479 Reference 7: 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=25497992&loc=d3e1392-128463 Reference 8: 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=25497992&loc=d3e1486-128463 Reference 9: 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=35744584&loc=d3e6927-128479 Reference 10: 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=25497992&loc=d3e1497-128463 Reference 11: 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=25497992&loc=d3e1490-128463 Reference 12: 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=35744584&loc=d3e7008-128479 Reference 13: 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=39739317&loc=d3e4845-128472 Reference 14: 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=25497992&loc=d3e1500-128463 Reference 15: 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=25497992&loc=d3e1524-128463 + Details
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