UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July 16,~~October 8, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-16247

FLOWERS FOODS, INC.

(Exact name of registrant as specified in its charter)

Georgia

58-2582379

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1919 FLOWERS CIRCLE, THOMASVILLE, Georgia

(Address of principal executive offices)

31757

(Zip Code)

(229)-226-9110

(Registrant’s telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock,, $0.01 par value

FLO

NYSE

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 5,~~November 4, 2022, the registrant had ~~211,831,568~~211,133,114 shares of common stock, $0.01 par value per share, outstanding.

FLOWERS FOODS, INC.

INDEX


			PAGE NUMBER
PART I. Financial Information			4
	Item 1.	Financial Statements (Unaudited)	4
		Condensed Consolidated Balance Sheets as of ~~July 16,~~October 8, 2022 and January 1, 2022	4
		Condensed Consolidated Statements of Income for the Twelve and ~~Twenty-Eight~~Forty Weeks Ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021	5
		Condensed Consolidated Statements of Comprehensive Income for the Twelve and ~~Twenty-Eight~~Forty Weeks Ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Twelve and ~~Twenty-Eight~~Forty Weeks Ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021	7
		Condensed Consolidated Statements of Cash Flows for the ~~Twenty-Eight~~Forty Weeks Ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021	9
		Notes to Condensed Consolidated Financial Statements (unaudited)	10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3334
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4749
	Item 4.	Controls and Procedures	4850
PART II. Other Information			4951
	Item 1.	Legal Proceedings	4951
	Item 1A.	Risk Factors	4951
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5354
	Item 3.	Defaults Upon Senior Securities	5355
	Item 4.	Mine Safety Disclosures	5355
	Item 5.	Other Information	5355
	Item 6.	Exhibits	5456
Signatures			5557

Forward-Looking Statements

Statements contained in this filing and certain other written or oral statements made from time to time by Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our future financial condition and results of operations and the ultimate impact of the novel strain of coronavirus (“COVID-19”) on our business, results of operations and financial condition and are often identified by the use of words and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would,” “is likely to,” “is expected to” or “will continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are based upon assumptions we believe are reasonable.

Forward-looking statements are based on current information and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results, performance, liquidity, and achievements to differ materially from those projected are discussed in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and may include, but are not limited to:

•

unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) supply chain conditions and any related impact on energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with or increased costs related to our employees and third-party service providers; (vi) laws and regulations (including environmental and health-related issues); and (vii) accounting standards or tax rates in the markets in which we operate;

•

the ultimate impact of the COVID-19 pandemic and future responses and/or measures taken in response thereto, including, but not limited to, new and emerging variants of the virus and the efficacy and distribution of vaccines, which are highly uncertain and are difficult to predict;

•

the loss or financial instability of any significant customer(s), including as a result of product recalls or safety concerns related to our products;

•

changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward ~~more inexpensive~~less expensive store branded products;

•

the level of success we achieve in developing and introducing new products and entering new markets;

•

our ability to implement new technology and customer requirements as required;

•

our ability to operate existing, and any new, manufacturing lines according to schedule;

•

our ability to implement and achieve our environmental, social, and governance goals in accordance with regulatory requirements and expectations of stakeholders, suppliers, ~~regulations,~~ and customers;

•

our ability to execute our business strategies which may involve, among other things, (i) the ability to realize the intended benefits of planned or contemplated acquisitions, dispositions or joint ventures, (ii) the deployment of new systems (e.g., our enterprise resource planning ("ERP") system), distribution channels and technology, and (iii) an enhanced organizational structure;

•

consolidation within the baking industry and related industries;

•

changes in pricing, customer and consumer reaction to pricing actions (including decreased volumes), and the pricing environment among competitors within the industry;

•

our ability to adjust pricing to offset, or partially offset, inflationary pressure on the cost of our ~~products;~~products, including ingredient and packaging costs;

•

disruptions in our direct-store-delivery distribution model, including litigation or an adverse ruling by a court or regulatory or governmental body that could affect the independent contractor classifications of the independent distributor partners;

•

increasing legal complexity and legal proceedings that we are or may become subject to;

•

labor shortages and turnover or increases in employee and employee-related costs;

•

the credit, business, and legal risks associated with independent distributor partners and customers, which operate in the highly competitive retail food and foodservice industries;

•

any business disruptions due to political instability, pandemics, armed hostilities (including the ongoing conflict between Russia and Ukraine), incidents of terrorism, natural disasters, labor strikes or work stoppages, technological breakdowns,

product contamination, product recalls or safety concerns related to our products, or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events;

•

the failure of our information technology (“IT”) systems to perform adequately, including any interruptions, intrusions, cyber-attacks or security breaches of such systems or risks associated with the planned implementation of the upgrade of our ERP system; and

•

the potential impact of climate change on the company, including physical and transition risks, availability or restriction of resources, higher regulatory and compliance costs, reputational risks, and availability of capital on attractive terms.

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Refer to Part I, Item 1A., Risk Factors, of our Annual Report on Form 10-K for the year ended January 1, 2022 (the “Form 10-K”) and Part II, Item 1A., Risk Factors, of this Form 10-Q for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the SEC or in company press releases) on related subjects.

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this Form 10-Q are listed without the © , ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, trade names and copyrights.

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

(Unaudited)


	July 16, 2022			January 1, 2022			October 8, 2022			January 1, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	162,511		$	185,871		$	172,744		$	185,871
Accounts and notes receivable, net of allowances of $19,941 and $15,398, respectively		358,553			305,196
Accounts and notes receivable, net of allowances of $19,799 and $15,398, respectively								369,038			305,196
Inventories, net:
Raw materials		65,014			54,458			66,349			54,458
Packaging materials		30,822			24,580			31,565			24,580
Finished goods		69,960			55,942			69,021			55,942
Inventories, net		165,796			134,980			166,935			134,980
Spare parts and supplies		71,787			68,479			71,897			68,479
Other		68,439			51,592			54,802			51,592
Total current assets		827,086			746,118			835,416			746,118
Property, plant and equipment:
Property, plant and equipment		2,276,376			2,192,392			2,289,170			2,192,392
Less: accumulated depreciation		(1,446,845	)		(1,393,664	)		(1,451,024	)		(1,393,664	)
Property, plant and equipment, net		829,531			798,728			838,146			798,728
Financing lease right-of-use assets		2,565			3,476			2,172			3,476
Operating lease right-of-use assets		280,381			289,013			273,183			289,013
Notes receivable from independent distributor partners		144,689			154,310			141,835			154,310
Assets held for sale		14,248			11,369			14,189			11,369
Other assets		17,983			9,623			21,404			9,623
Goodwill		545,244			545,244			545,244			545,244
Other intangible assets, net		678,994			695,432			671,718			695,432
Total assets	$	3,340,721		$	3,253,313		$	3,343,307		$	3,253,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	—		$	—		$	—		$	—
Current maturities of financing leases		1,766			1,584			1,780			1,584
Current maturities of operating leases		47,631			46,390			47,118			46,390
Accounts payable		325,804			268,500			348,707			268,500
Other accrued liabilities		194,960			203,443			196,926			203,443
Total current liabilities		570,161			519,917			594,531			519,917

Noncurrent long-term debt		891,241			890,609			891,542			890,609
Noncurrent financing lease obligations		862			1,910			406			1,910
Noncurrent operating lease obligations		242,389			250,638			234,781			250,638
Total long-term debt and right-of-use lease liabilities		1,134,492			1,143,157			1,126,729			1,143,157
Other liabilities:
Postretirement/post-employment obligations		7,062			7,249			6,797			7,249
Deferred taxes		144,736			133,757			144,679			133,757
Other long-term liabilities		36,802			37,959			35,806			37,959
Total other long-term liabilities		188,600			178,965			187,282			178,965
Commitments and Contingencies
Stockholders’ equity:
Preferred stock — $100 stated par value, 200,000 authorized shares and NaN issued		—			—
Preferred stock — $.01 stated par value, 800,000 authorized shares and NaN issued		—			—
Preferred stock — $100 stated par value, 200,000 authorized shares and none issued								—			—
Preferred stock — $.01 stated par value, 800,000 authorized shares and none issued								—			—
Common stock — $.01 stated par value and $.001 current par value, 500,000,000 authorized shares and 228,729,585 shares issued		199			199			199			199
Treasury stock — 16,898,017 shares and 17,334,804 shares, respectively		(234,666	)		(232,304	)
Treasury stock — 17,596,471 shares and 17,334,804 shares, respectively								(252,625	)		(232,304	)
Capital in excess of par value		678,901			678,414			684,273			678,414
Retained earnings		1,008,200			962,378			1,002,123			962,378
Accumulated other comprehensive income		(5,166	)		2,587			795			2,587
Total stockholders’ equity		1,447,468			1,411,274			1,434,765			1,411,274
Total liabilities and stockholders’ equity	$	3,340,721		$	3,253,313		$	3,343,307		$	3,253,313

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)


	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended						For the Twelve Weeks Ended						For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			July 16, 2022			July 17, 2021			October 8, 2022			October 9, 2021			October 8, 2022			October 9, 2021
Sales	$	1,129,051		$	1,017,309		$	2,564,983		$	2,319,477		$	1,158,169		$	1,027,800		$	3,723,152		$	3,347,277
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		586,084			504,062			1,310,676			1,147,638			615,621			515,078			1,926,297			1,662,716
Selling, distribution and administrative expenses		438,350			407,707			993,302			909,680			447,363			426,575			1,440,665			1,336,255
Depreciation and amortization		32,922			31,619			76,345			73,005			32,899			31,680			109,244			104,685
Loss on inferior ingredients		—			—			—			122
Impairment of assets		—			—			990			—
Recovery on inferior ingredients														—			(950	)		—			(828	)
Plant closure costs and impairment of assets														6,835			—			7,825			—
Multi-employer pension plan withdrawal costs														—			3,300			—			3,300
Income from operations		71,695			73,921			183,670			189,032			55,451			52,117			239,121			241,149
Interest expense		6,579			6,556			15,437			18,237			6,801			6,670			22,239			24,907
Interest income		(5,075	)		(5,486	)		(11,832	)		(12,966	)		(5,459	)		(5,359	)		(17,292	)		(18,325	)
Loss on extinguishment of debt		—			—			—			16,149			—			—			—			16,149
Other components of net periodic pension and postretirement benefit plans credit		(178	)		(93	)		(416	)		(218	)		(178	)		(94	)		(594	)		(312	)
Income before income taxes		70,369			72,944			180,481			167,830			54,287			50,900			234,768			218,730
Income tax expense		16,689			16,586			41,212			39,817			13,759			12,048			54,971			51,865
Net income	$	53,680		$	56,358		$	139,269		$	128,013		$	40,528		$	38,852		$	179,797		$	166,865
Net income per common share:
Basic:
Net income per common share	$	0.25		$	0.27		$	0.66		$	0.60		$	0.19		$	0.18		$	0.85		$	0.79
Weighted average shares outstanding		212,186			211,932			212,079			211,908			212,016			211,921			212,060			211,912
Diluted:
Net income per common share	$	0.25		$	0.26		$	0.65		$	0.60		$	0.19		$	0.18		$	0.84		$	0.78
Weighted average shares outstanding		213,307			213,056			213,315			212,897			213,326			213,187			213,317			212,979
Cash dividends paid per common share	$	0.2200		$	0.2100		0.4300			0.4100			$	0.2200		$	0.2100		$	0.6500		$	0.6200

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)


	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended						For the Twelve Weeks Ended						For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			July 16, 2022			July 17, 2021			October 8, 2022			October 9, 2021			October 8, 2022			October 9, 2021
Net income	$	53,680		$	56,358		$	139,269		$	128,013		$	40,528		$	38,852		$	179,797		$	166,865
Other comprehensive income (loss), net of tax:
Pension and postretirement plans:
Amortization of prior service cost included in net income		(31	)		9			(72	)		22
Amortization of prior service (credit) cost included in net income														(32	)		9			(104	)		31
Amortization of actuarial loss included in net income		49			92			115			215			50			92			165			307
Pension and postretirement plans, net of tax		18			101			43			237			18			101			61			338
Derivative instruments:
Net change in fair value of derivatives		(16,417	)		(4,342	)		(5,197	)		403			7,851			(3,618	)		2,654			(3,215	)
Gain reclassified to net income		(1,630	)		(594	)		(2,599	)		(374	)		(1,908	)		(426	)		(4,507	)		(800	)
Derivative instruments, net of tax		(18,047	)		(4,936	)		(7,796	)		29			5,943			(4,044	)		(1,853	)		(4,015	)
Other comprehensive (loss) income, net of tax		(18,029	)		(4,835	)		(7,753	)		266
Other comprehensive income (loss), net of tax														5,961			(3,943	)		(1,792	)		(3,677	)
Comprehensive income	$	35,651		$	51,523		$	131,516		$	128,279		$	46,489		$	34,909		$	178,005		$	163,188

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)


	For the Twelve Weeks Ended July 16, 2022																						For the Twelve Weeks Ended October 8, 2022
	Common Stock				Capital in						Accumulated												Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock									Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total			Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at April 23, 2022		228,729,585	$	199	$	674,017		$	1,001,220		$	12,863			(16,687,180	)	$	(228,875	)	$	1,459,424
Balances at July 16, 2022																								228,729,585	$	199	$	678,901		$	1,008,200		$	(5,166	)		(16,898,017	)	$	(234,666	)	$	1,447,468
Net income									53,680												53,680										40,528												40,528
Derivative instruments, net of tax												(18,047	)								(18,047	)												5,943									5,943
Pension and postretirement plans, net of tax												18									18													18									18
Amortization of share-based compensation awards						5,558															5,558
Amortization of stock-based compensation awards																												5,485															5,485
Issuance of deferred compensation						(11	)								851			11			—							(12	)								852			12			—
Share repurchases															(260,088	)		(6,465	)		(6,465	)															(706,559	)		(18,072	)		(18,072	)
Issuance of deferred stock awards						(663	)								48,400			663			—							(101	)								7,253			101			—
Dividends paid on vested share-based payment awards									(40	)											(40	)
Dividends paid on vested stock-based payment awards																															—												—
Dividends paid — $0.2200 per common share									(46,660	)											(46,660	)									(46,605	)											(46,605	)
Balances at July 16, 2022		228,729,585	$	199	$	678,901		$	1,008,200		$	(5,166	)		(16,898,017	)	$	(234,666	)	$	1,447,468
Balances at October 8, 2022																								228,729,585	$	199	$	684,273		$	1,002,123		$	795			(17,596,471	)	$	(252,625	)	$	1,434,765


	For the Twenty-Eight Weeks Ended July 16, 2022																						For the Forty Weeks Ended October 8, 2022
	Common Stock				Capital in						Accumulated												Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock									Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total			Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at January 1, 2022		228,729,585	$	199	$	678,414		$	962,378		$	2,587			(17,334,804	)	$	(232,304	)	$	1,411,274			228,729,585	$	199	$	678,414		$	962,378		$	2,587			(17,334,804	)	$	(232,304	)	$	1,411,274
Net income									139,269												139,269										179,797												179,797
Derivative instruments, net of tax												(7,796	)								(7,796	)												(1,853	)								(1,853	)
Pension and postretirement plans, net of tax												43									43													61									61
Amortization of share-based compensation awards						14,639															14,639
Amortization of stock-based compensation awards																												20,124															20,124
Issuance of deferred compensation						(22	)								1,702			22			—							(34	)								2,554			34			—
Time-based restricted stock units issued (Note 15)						(2,860	)								213,436			2,860			—							(2,860	)								213,436			2,860			—
Performance-contingent restricted stock awards issued (Note 15)						(10,469	)								777,773			10,469										(10,469	)								777,773			10,469			—
Issuance of deferred stock awards						(801	)								58,434			801			—							(902	)								65,687			902			—
Stock repurchases															(614,558	)		(16,514	)		(16,514	)
Dividends paid on vested share-based payment awards									(2,260	)											(2,260	)
Dividends paid — $0.4300 per common share									(91,187	)											(91,187	)
Balances at July 16, 2022		228,729,585	$	199	$	678,901		$	1,008,200		$	(5,166	)		(16,898,017	)	$	(234,666	)	$	1,447,468
Share repurchases																																					(1,321,117	)		(34,586	)		(34,586	)
Dividends paid on vested stock-based payment awards																															(2,260	)											(2,260	)
Dividends paid — $0.6500 per common share																															(137,792	)											(137,792	)
Balances at October 8, 2022																								228,729,585	$	199	$	684,273		$	1,002,123		$	795			(17,596,471	)	$	(252,625	)	$	1,434,765

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)


	For the Twelve Weeks Ended July 17, 2021																						For the Twelve Weeks Ended October 9, 2021
	Common Stock				Capital in						Accumulated												Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock									Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total			Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at April 24, 2021		228,729,585	$	199	$	664,981		$	961,246		$	11,525			(17,029,750	)	$	(224,580	)	$	1,413,371
Balances at July 17, 2021																								228,729,585	$	199	$	669,051		$	973,065		$	6,690			(16,976,284	)	$	(223,875	)	$	1,425,130
Net income									56,358												56,358										38,852												38,852
Derivative instruments, net of tax												(4,936	)								(4,936	)												(4,044	)								(4,044	)
Pension and postretirement plans, net of tax												101									101													101									101
Amortization of share-based compensation awards						4,775															4,775
Amortization of stock-based compensation awards																												4,811															4,811
Issuance of deferred compensation						(147	)								11,166			147			—							(11	)								851			11			—
Issuance of deferred stock awards						(558	)								42,300			558			—
Dividends paid on vested share-based payment awards									(71	)											(71	)
Share repurchases																																					(360,222	)		(8,452	)		(8,452	)
Dividends paid — $0.2100 per common share									(44,468	)											(44,468	)									(44,468	)											(44,468	)
Balances at July 17, 2021		228,729,585	$	199	$	669,051		$	973,065		$	6,690			(16,976,284	)	$	(223,875	)	$	1,425,130
Balances at October 9, 2021																								228,729,585	$	199	$	673,851		$	967,449		$	2,747			(17,335,655	)	$	(232,316	)	$	1,411,930


	For the Twenty-Eight Weeks Ended July 17, 2021																					For the Forty Weeks Ended October 9, 2021
	Common Stock				Capital in						Accumulated											Common Stock				Capital in						Accumulated
	Number of				Excess						Other		Treasury Stock									Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)		Number of Shares			Cost			Total			Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at January 2, 2021		228,729,585	$	199	$	659,682		$	932,094		$	6,424		(17,126,261	)	$	(225,405	)	$	1,372,994			228,729,585	$	199	$	659,682		$	932,094		$	6,424			(17,126,261	)	$	(225,405	)	$	1,372,994
Net income									128,013											128,013										166,865												166,865
Derivative instruments, net of tax												29								29													(4,015	)								(4,015	)
Pension and postretirement plans, net of tax												237								237													338									338
Amortization of share-based compensation awards						11,957														11,957
Amortization of stock-based compensation awards																											16,768															16,768
Issuance of deferred compensation						(154	)							11,712			154			—							(165	)								12,563			165			—
Time-based restricted stock units issued (Note 16)						(1,798	)							136,652			1,798			—							(1,798	)								136,652			1,798			—
Issuance of deferred stock awards						(636	)							48,231			636			—							(636	)								48,231			636			—
Stock repurchases														(46,618	)		(1,058	)		(1,058	)
Dividends paid on vested share-based payment awards									(234	)										(234	)
Dividends paid — $0.4100 per common share									(86,808	)										(86,808	)
Balances at July 17, 2021		228,729,585	$	199	$	669,051		$	973,065		$	6,690		(16,976,284	)	$	(223,875	)	$	1,425,130
Share repurchases																																				(406,840	)		(9,510	)		(9,510	)
Dividends paid on vested stock-based payment awards																														(234	)											(234	)
Dividends paid — $0.6200 per common share																														(131,276	)											(131,276	)
Balances at October 9, 2021																							228,729,585	$	199	$	673,851		$	967,449		$	2,747			(17,335,655	)	$	(232,316	)	$	1,411,930

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	For the Twenty-Eight Weeks Ended						For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			October 8, 2022			October 9, 2021
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income	$	139,269		$	128,013		$	179,797		$	166,865
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on foreign currency exchange rates								8,371			—
Stock-based compensation		14,639			11,957			20,124			16,768
Gain reclassified from accumulated other comprehensive income to net income		(3,197	)		(602	)		(5,625	)		(1,055	)
Depreciation and amortization		76,345			73,005			109,244			104,685
Deferred income taxes		13,563			6,208			11,519			(1,294	)
Impairment of assets		990			—			3,897			—
Provision for inventory obsolescence		974			614			1,521			652
Allowances for accounts receivable		3,986			3,579			5,811			5,880
Pension and postretirement plans cost		339			486			485			694
Other		1,313			1,357			2,167			4,319
Qualified pension plan contributions								(1,000	)		—
Changes in operating assets and liabilities:
Accounts receivable, net		(59,721	)		(6,949	)		(71,882	)		(5,961	)
Inventories, net		(31,790	)		(2,228	)		(33,476	)		(8,200	)
Hedging activities, net		(10,508	)		1,135			2,654			(1,002	)
Accounts payable		61,198			39,814			78,351			36,917
Other assets and accrued liabilities		(23,567	)		(32,959	)		(20,424	)		(4,045	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		183,833			223,430			291,534			315,223
CASH FLOWS DISBURSED FOR INVESTING ACTIVITIES:
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(97,862	)		(58,270	)		(128,372	)		(86,723	)
Proceeds from sale of property, plant and equipment		1,575			2,411			3,335			2,525
Repurchase of independent distributor territories		(3,477	)		(2,816	)		(6,534	)		(3,549	)
Acquisition of trademarks		—			(10,200	)		—			(10,200	)
Cash paid at issuance of notes receivable		(5,720	)		(5,541	)		(9,645	)		(8,837	)
Principal payments from notes receivable		20,979			16,413			30,558			24,024
Investment in unconsolidated affiliate		(9,000	)		—			(9,000	)		—
Other investing activities		395			1,032			402			1,046
NET CASH DISBURSED FOR INVESTING ACTIVITIES		(93,110	)		(56,971	)		(119,256	)		(81,714	)
CASH FLOWS DISBURSED FOR FINANCING ACTIVITIES:
Dividends paid, including dividends on share-based payment awards		(93,447	)		(87,042	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid, including dividends on stock-based payment awards								(140,052	)		(131,510	)
Stock repurchases		(16,514	)		(1,058	)		(34,586	)		(9,510	)
Change in bank overdrafts		(3,135	)		(6,160	)		(817	)		(3,462	)
Proceeds from debt borrowings		—			497,570			330,000			497,570
Debt obligation payments		—			(579,428	)		(330,000	)		(579,428	)
Payments on financing leases		(864	)		(866	)		(1,306	)		(1,311	)
Payments for financing fees		(123	)		(4,681	)		(273	)		(5,811	)
NET CASH DISBURSED FOR FINANCING ACTIVITIES		(114,083	)		(181,665	)		(177,034	)		(233,462	)
Net decrease in cash and cash equivalents		(23,360	)		(15,206	)
Effect of exchange rates on cash								(8,371	)		—
Net (decrease) increase in cash and cash equivalents								(4,756	)		47
Cash and cash equivalents at beginning of period		185,871			307,476			185,871			307,476
Cash and cash equivalents at end of period	$	162,511		$	292,270		$	172,744		$	307,523

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

BASIS OF ACCOUNTING — The accompanying unaudited Condensed Consolidated Financial Statements of Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the unaudited Condensed Consolidated Financial Statements included herein contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the company’s financial position, results of operations and cash flows. The results of operations for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021 are not necessarily indicative of the results to be expected for a full fiscal year. The Condensed Consolidated Balance Sheet at January 1, 2022 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 1, 2022 (the “Form 10-K”).

MACROECONOMIC FACTORS AND COVID-19 — We continue to monitor the impact of the inflationary economic environment, supply chain disruptions, and labor shortages, the conflict between Russia and Ukraine, and the COVID-19 pandemic on our business. Our results ~~for~~through the ~~first half~~third quarter of Fiscal 2022 have continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. We have experienced significant input cost inflation for commodities and transportation and, to a lesser extent, labor in the current year. We implemented ~~additional~~multiple price increases ~~at the beginning of Fiscal 2022 and midway through the second quarter of~~during Fiscal 2022 to mitigate these cost pressures.

In light of COVID-19, the company took actions to safeguard its capital position. As the pandemic impact has moderated, we continue to maintain higher levels of cash on hand compared to pre-pandemic levels, which we believe reduces financial risk and offers strategic optionality. In the first quarter of Fiscal 2021, we issued $500.0 million of 2.400% senior notes due 2031 (the “2031 notes”) and used the net proceeds to redeem in full the $400.0 million of 4.375% senior notes due 2022 (the “2022 notes”), extending the earliest maturity date of our non-revolving debt to 2026. Additionally, we repaid the outstanding balances on both the accounts receivable securitization facility (the “facility”) and the credit facility (the “credit facility”) with proceeds from the issuance of the 2031 notes and from cash flows from operations. As of ~~July 16,~~October 8, 2022, the company had available liquidity of $~~852.8~~864.3 million consisting of the available balances on its debt facilities and cash on hand.

INVESTMENT IN UNCONSOLIDATED AFFILIATE — In the second quarter of Fiscal 2022, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility. Base Culture's product offerings include better-for-you, gluten-free, and grain-free sliced breads and baked goods and are all-natural, 100% Paleo-certified, kosher-certified, dairy-free, soy-free, and non-GMO verified. The investment is being accounted for at cost, less any impairment, adjusted for changes resulting from observable price changes in orderly transactions involving the affiliate, as we do not control nor do we have the ability to significantly influence the affiliate, nor is there a readily determinable fair value. Should circumstances change where the fair value is known, a fair value adjustment may be necessary.

ESTIMATES — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting estimates affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, derivative financial instruments, valuation of long-lived assets, goodwill and other intangible assets, leases, self-insurance reserves, income tax expense and accruals, postretirement plans, stock-based compensation, and commitments and contingencies. These estimates are summarized in the Form 10-K.

REPORTING PERIODS — ~~The company operates on a 52-53 week~~Fiscal Year End. Our fiscal year ~~ending~~ends on the Saturday nearest December ~~31.~~ 31, resulting in a 53rd reporting week every five or six years. The last 53-week year was our Fiscal 2020. The next 53-week year will be Fiscal 2025. Our internal financial results and key performance indicators are reported on a weekly calendar basis to ensure the same numbers of Saturdays and Sundays in comparable months and to allow for a consistent four-week progression analysis. The company has elected the first quarter to report the extra four-week period. As such, our quarters are divided as follows:


Quarter		Number of Weeks
First Quarter		Sixteen
Second Quarter		Twelve
Third Quarter		Twelve
Fourth Quarter		Twelve (or Thirteen in fiscal years with an extra week)

Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.

Fiscal 2022 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 23, 2022 (sixteen weeks), second quarter ended July 16, 2022 (twelve weeks), third quarter ~~ending~~ended October 8, 2022 (twelve weeks) and fourth quarter ending December 31, 2022 (twelve weeks).

REPORTING SEGMENT — The company has one operating segment based on the nature of products the company sells, intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the chief executive officer (“CEO”), who is the chief operating decision maker, for the purpose of assessing performance and allocating resources.

SIGNIFICANT CUSTOMER — Below is the effect that our largest customer, Walmart/Sam’s Club, had on the company’s sales for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021. Walmart/Sam’s Club is the only customer to account for greater than 10% of the company’s sales.

For the Twelve Weeks Ended

For the Twenty-Eight Weeks Ended

July 16, 2022

July 17, 2021

July 16, 2022

July 17, 2021

(% of Sales)

(% of Sales)

Total

22.0

21.8

21.5

21.5

For the Twelve Weeks Ended

For the Forty Weeks Ended

October 8, 2022

October 9, 2021

October 8, 2022

October 9, 2021

(% of Sales)

Total

22.1

21.2

21.7

21.4

Walmart/Sam’s Club is our only customer with greater than 10% of outstanding trade receivables, representing ~~23.1~~25.2% and 19.8%, on a consolidated basis, as of ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, of our trade receivables.

BUSINESS PROCESS IMPROVEMENT COSTS — In the second half of Fiscal 2020, we launched initiatives to transform our business operations, which include upgrading our information system, as well as investments in e-commerce, autonomous planning, and our “bakery of the future” initiative. In the first quarter of Fiscal 2022, we launched the digital logistics and digital sales initiatives. These costs may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract. The expensed portion of the consulting costs related to the transformation strategy initiatives incurred was $~~11.7~~8.1 million and $~~20.7~~28.9 million for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, respectively. The expensed portion of the consulting costs related to the transformation strategy initiatives incurred was $~~13.2~~9.2 million and $~~18.2~~27.4 million for the twelve and ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021, respectively. These costs are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income.

~~LOSS~~RECOVERY ON INFERIOR INGREDIENTS — In the first quarter of Fiscal 2021, we incurred additional costs of $0.1 million associated with receiving inferior ingredients used in the production of certain gluten-free products in the fourth quarter of Fiscal 2020. In the third quarter of Fiscal 2021, we received reimbursements of approximately $1.0 million for these previously incurred costs.

PLANT CLOSURE COSTS AND IMPAIRMENT OF ASSETS — On July 19, 2022, the company announced the closure of the Holsum Bakery in Phoenix, Arizona. The bakery produced bread and bun products and ceased production on October 31, 2022. This closure is part of our strategy to optimize our sales portfolio and improve supply chain and manufacturing efficiency. The company recognized severance costs of $1.7 million, multi-employer pension plan withdrawal costs of $1.3 million, and asset impairment and equipment relocation charges for bakery equipment of $3.8 million in the third quarter of Fiscal 2022. See Note 16, Postretirement Plans, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the multi-employer pension plan withdrawal costs. During the first quarter of Fiscal 2022, the company decided to sell two warehouses acquired at the end of Fiscal 2021 and recorded an impairment charge of $1.0 million. The company completed the sale of the impaired warehouse at the end of the first quarter of Fiscal 2022.

ACQUISITION-RELATED COSTS – In the third quarter of Fiscal 2022, we incurred $11.6 million in costs from the pursuit of an acquisition that failed to materialize. Of this amount, $8.4 million related to realized foreign currency exchange losses. Although the majority of the target company's sales were made in the U.S., the target company's foreign domicile required us to convert funds from U.S. dollars to complete the transaction. Following that conversion, a significant strengthening of the U.S. dollar relative to the target company's currency resulted in the foreign currency exchange loss upon conversion back into U.S. dollars following the failure of the deal. These costs are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

The company did not adopt any accounting pronouncements during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022.

Accounting pronouncements not yet adopted

In September 2022, the FASB issued ASU No. 2022-04, "Liabilities - Supplier Finance Programs (Subtopic 405-50)". This ASU requires the buyer in a supplier finance program to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. The amendments in the ASU are effective for all entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. We do not expect the adoption of this guidance to have ~~reviewed other recently issued accounting pronouncements~~a material impact on our condensed consolidated financial statements and ~~concluded that either they are not applicable to our business or no material effect is expected upon future adoption.~~disclosures.

3. LEASES

The company’s leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation and IT equipment. The quantitative disclosures for our leases follow below.

The following table details lease modifications and renewals and lease terminations (amounts in thousands):


	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended				For the Twelve Weeks Ended				For the Forty Weeks Ended
	July 16, 2022		July 17, 2021		July 16, 2022		July 17, 2021		October 8, 2022		October 9, 2021		October 8, 2022		October 9, 2021
Lease modifications and renewals	$	4,839	$	3,377	$	18,654	$	37,702	$	3,353	$	6,965	$	22,007	$	44,667
Lease terminations	$	4,704	$	2,337	$	5,728	$	2,654	$	155	$	2,289	$	5,883	$	4,943

The lease modifications and renewals for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 include $11.2 million related to a 10 year extension for a warehouse lease that occurred during our first quarter of Fiscal 2022. For the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021, the lease modifications and renewals include $28.9 million related to a five year extension for a freezer storage lease executed during the first quarter of Fiscal 2021.

Lease costs incurred by lease type, and/or type of payment, and other supplemental quantitative disclosures as of and for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021 were as follows (amounts in thousands):


	For the Twelve Weeks Ended				��	For the Twenty-Eight Weeks Ended				For the Twelve Weeks Ended				For the Forty Weeks Ended
	July 16, 2022		July 17, 2021			July 16, 2022		July 17, 2021		October 8, 2022		October 9, 2021		October 8, 2022		October 9, 2021
Lease cost:
Amortization of right-of-use assets	$	393	$	409		$	917	$	951	$	394	$	408	$	1,311	$	1,359
Interest on lease liabilities		22		38			57		92		20		32		77		124
Operating lease cost		14,631		16,263			34,279		37,696		13,886		15,612		48,165		53,308
Short-term lease cost		675		550			1,373		1,501		748		654		2,121		2,155
Variable lease cost		8,223		6,066			17,861		12,952		7,517		6,425		25,378		19,377
Total lease cost	$	23,944	$	23,326		$	54,487	$	53,192	$	22,565	$	23,131	$	77,052	$	76,323


	For the Twenty-Eight Weeks Ended				For the Forty Weeks Ended
	July 16, 2022		July 17, 2021		October 8, 2022		October 9, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from financing leases	$	57	$	92	$	77	$	124
Operating cash flows from operating leases	$	32,101	$	35,710	$	46,982	$	52,389
Financing cash flows from financing leases	$	864	$	866	$	1,306	$	1,311
Right-of-use assets obtained in exchange for new financing lease liabilities	$	—	$	37	$	—	$	37
Right-of-use assets obtained in exchange for new operating lease liabilities	$	16,217	$	41,796	$	21,357	$	48,684


Weighted-average remaining lease term (years):
Financing leases			~~1.6~~1.3
Operating leases			~~8.2~~8.1
Weighted-average IBR (percentage):
Financing leases			3.5
Operating leases			3.8

Estimated undiscounted future lease payments under non-cancelable operating leases and financing leases, along with a reconciliation of the undiscounted cash flows to operating and financing lease liabilities, respectively, as of ~~July 16,~~October 8, 2022 (in thousands) were as follows:


	Operating lease liabilities			Financing lease liabilities			Operating lease liabilities			Financing lease liabilities
Remainder of 2022	$	25,445		$	768		$	10,644		$	307
2023		55,292			1,828			56,893			1,828
2024		49,191			100			50,932			100
2025		46,265			—			48,134			—
2026		31,775			—			32,940			—
2027 and thereafter		137,694			—			139,637			—
Total minimum lease payments		345,662			2,696			339,180			2,235
Less: amount of lease payments representing interest		(55,642	)		(68	)		(57,281	)		(49	)
Present value of future minimum lease payments		290,020			2,628			281,899			2,186
Less: current obligations under leases		(47,631	)		(1,766	)		(47,118	)		(1,780	)
Long-term lease obligations	$	242,389		$	862		$	234,781		$	406

4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (“AOCI”)

The company’s total comprehensive income presently consists of net income, adjustments for our derivative financial instruments accounted for as cash flow hedges, and various pension and other postretirement benefit related items.

During the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, reclassifications out of AOCI were as follows (amounts in thousands):


	Amount Reclassified from AOCI							Amount Reclassified from AOCI
	For the Twelve Weeks Ended						Affected Line Item in the Statement	For the Twelve Weeks Ended						Affected Line Item in the Statement
Details about AOCI Components (Note 2)	July 16, 2022			July 17, 2021			Where Net Income is Presented	October 8, 2022			October 9, 2021			Where Net Income is Presented
Derivative instruments:
Interest rate contracts	$	115		$	115		Interest expense	$	115		$	115		Interest expense
Commodity contracts		2,059			677		Cost of sales, Note 3		2,428			453		Cost of sales, Note 3
Total before tax		2,174			792		Total before tax		2,543			568		Total before tax
Tax expense		(544	)		(198	)	Income tax expense		(635	)		(142	)	Income tax expense
Total net of tax		1,630			594		Net of tax		1,908			426		Net of tax
Pension and postretirement plans:
Prior-service credits (costs)		41			(12	)	Note 1		41			(12	)	Note 1
Actuarial losses		(66	)		(123	)	Note 1		(66	)		(122	)	Note 1
Total before tax		(25	)		(135	)	Total before tax		(25	)		(134	)	Total before tax
Tax benefit		7			34		Income tax expense		7			33		Income tax expense
Total net of tax		(18	)		(101	)	Net of tax		(18	)		(101	)	Net of tax
Total reclassifications	$	1,612		$	493		Net of tax	$	1,890		$	325		Net of tax

Amount Reclassified from AOCI

For the Twenty-Eight Weeks Ended

Affected Line Item in the Statement
Details about AOCI Components (Note 2)

July 16, 2022

July 17, 2021

Where Net Income is Presented
Derivative instruments:

Interest rate contracts

$
268

$
(104
)

Interest expense
Commodity contracts

3,197

602

Cost of sales, Note 3
Total before tax

3,465

498

Total before tax
Tax expense

(866
)

(124
)

Income tax expense
Total net of tax

2,599

374

Net of tax
Pension and postretirement plans:

Prior-service credits (costs)

96

(29
)

Note 1
Actuarial losses

(154
)

(287
)

Note 1
Total before tax

(58
)

(316
)

Total before tax
Tax benefit

15

79

Income tax expense
Total net of tax

(43
)

(237
)

Net of tax
Total reclassifications

$
2,556

$
137

Net of tax


	Amount Reclassified from AOCI
	For the Forty Weeks Ended						Affected Line Item in the Statement
Details about AOCI Components (Note 2)	October 8, 2022			October 9, 2021			Where Net Income is Presented
Derivative instruments:
Interest rate contracts	$	383		$	11		Interest expense
Commodity contracts		5,625			1,055		Cost of sales, Note 3
Total before tax		6,008			1,066		Total before tax
Tax expense		(1,501	)		(266	)	Income tax expense
Total net of tax		4,507			800		Net of tax
Pension and postretirement plans:
Prior-service credits (costs)		137			(41	)	Note 1
Actuarial losses		(220	)		(409	)	Note 1
Total before tax		(83	)		(450	)	Total before tax
Tax benefit		22			112		Income tax expense
Total net of tax		(61	)		(338	)	Net of tax
Total reclassifications	$	4,446		$	462		Net of tax

Note 1: These items are included in the computation of net periodic pension cost and are reported in the other components of net periodic pension and postretirement benefits credit line item on the Condensed Consolidated Statements of Income. See Note 16, Postretirement Plans, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information.

Note 2: Amounts in parentheses indicate debits to determine net income.

Note 3: Amounts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):

Cash Flow
Hedge Items

Defined
Benefit Pension
Plan Items

Total

AOCI at January 1, 2022

$
6,043

$
(3,456
)

$
2,587

Other comprehensive loss before reclassifications

(5,197
)

—

(5,197
)
Reclassified to earnings from AOCI

(2,599
)

43

(2,556
)
AOCI at July 16, 2022

$
(1,753
)

$
(3,413
)

$
(5,166
)


	Cash Flow Hedge Items			Defined Benefit Pension Plan Items			Total
AOCI at January 1, 2022	$	6,043		$	(3,456	)	$	2,587
Other comprehensive loss before reclassifications		2,654			—			2,654
Reclassified to earnings from AOCI		(4,507	)		61			(4,446	)
AOCI at October 8, 2022	$	4,190		$	(3,395	)	$	795

During the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):


	Cash Flow Hedge Items			Defined Benefit Pension Plan Items			Total			Cash Flow Hedge Items			Defined Benefit Pension Plan Items			Total
AOCI at January 2, 2021	$	13,072		$	(6,648	)	$	6,424		$	13,072		$	(6,648	)	$	6,424
Other comprehensive income before reclassifications		403			—			403			(3,215	)		—			(3,215	)
Reclassified to earnings from AOCI		(374	)		237			(137	)		(800	)		338			(462	)
AOCI at July 17, 2021	$	13,101		$	(6,411	)	$	6,690
AOCI at October 9, 2021										$	9,057		$	(6,310	)	$	2,747

Amounts reclassified out of AOCI to net income that relate to commodity contracts are presented as an adjustment to reconcile net income to net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. The following table presents the net of tax amount reclassified from AOCI for our commodity contracts (amounts in thousands and positive value indicates credits to determine net income):


	For the Twenty-Eight Weeks Ended						For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			October 8, 2022			October 9, 2021
Gross gain reclassified from AOCI into net income	$	3,197		$	602		$	5,625		$	1,055
Tax expense		(799	)		(150	)		(1,406	)		(263	)
Net of tax	$	2,398		$	452		$	4,219		$	792

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The table below summarizes our goodwill and other intangible assets at ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, each of which is explained in additional detail below (amounts in thousands):


	July 16, 2022		January 1, 2022		October 8, 2022		January 1, 2022
Goodwill	$	545,244	$	545,244	$	545,244	$	545,244
Amortizable intangible assets, net		551,894		568,332		544,618		568,332
Indefinite-lived intangible assets		127,100		127,100		127,100		127,100
Total goodwill and other intangible assets	$	1,224,238	$	1,240,676	$	1,216,962	$	1,240,676

As of ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, the company had the following amounts related to amortizable intangible assets (amounts in thousands):


	July 16, 2022						January 1, 2022						October 8, 2022						January 1, 2022
Asset	Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value
Trademarks	$	477,115	$	86,006	$	391,109	$	477,115	$	78,124	$	398,991	$	477,115	$	89,385	$	387,730	$	477,115	$	78,124	$	398,991
Customer relationships		318,021		160,219		157,802		318,021		151,496		166,525		318,021		163,954		154,067		318,021		151,496		166,525
Non-compete agreements		5,154		5,096		58		5,154		5,074		80		5,154		5,105		49		5,154		5,074		80
Distributor relationships		4,123		3,546		577		4,123		3,398		725		4,123		3,609		514		4,123		3,398		725
Distributor routes held and used		3,191		843		2,348		2,548		537		2,011		3,249		991		2,258		2,548		537		2,011
Total	$	807,604	$	255,710	$	551,894	$	806,961	$	238,629	$	568,332	$	807,662	$	263,044	$	544,618	$	806,961	$	238,629	$	568,332

Aggregate amortization expense for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021 was as follows (amounts in thousands):

Amortization
Expense

For the twelve weeks ended July 16, 2022

$
7,332

For the twelve weeks ended July 17, 2021

$
7,079

For the twenty-eight weeks ended July 16, 2022

$
17,081

For the twenty-eight weeks ended July 17, 2021

$
16,322


	Amortization Expense
For the twelve weeks ended October 8, 2022	$	7,334
For the twelve weeks ended October 9, 2021	$	7,223
For the forty weeks ended October 8, 2022	$	24,415
For the forty weeks ended October 9, 2021	$	23,545

Estimated amortization of intangibles for each of the next five years is as follows (amounts in thousands):


	Amortization of Intangibles		Amortization of Intangibles
Remainder of 2022	$	14,552	$	7,248
2023	$	30,782	$	30,794
2024	$	30,087	$	30,098
2025	$	29,374	$	29,387
2026	$	27,291	$	27,302

~~The company acquired trademarks for $10.2~~ ~~million during the second quarter of Fiscal 2021. These trademarks are being amortized over their estimated useful life.~~

There were $127.1 million of indefinite-lived intangible trademark assets separately identified from goodwill at ~~July 16,~~October 8, 2022 and January 1, 2022. These trademarks are classified as indefinite-lived because we believe they are well established brands with a long history and well-defined markets. We believe these factors support an indefinite life. We perform an annual impairment analysis, or on an interim basis if the facts and circumstances change, to determine if the trademarks are realizing their expected economic benefits.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, and short-term debt approximates fair value because of the short-term maturity of the instruments. Notes receivable are entered into in connection with the purchase of independent distributors’ distribution rights by independent distributor partners (“IDPs”). These notes receivable are recorded in the Condensed Consolidated Balance Sheets at carrying value, which represents the closest approximation of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company financed approximately ~~3,600~~3,500 and 3,700 IDPs’ distribution rights as of ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, all with varied financial histories and credit risks. However, the current stated interest rates used to record the carrying values are appropriately reflective of our estimated interest rates which would be made to borrowers with similar credit ratings for the remaining maturities of the distributor notes receivable. The distribution rights are generally purchased by the IDP with a 5% down payment with the remainder financed for up to 10 years. The distributor notes receivable are collateralized by the IDPs’ distribution rights. The

company maintains a wholly-owned subsidiary to assist in financing the distribution rights purchase activities if requested by new IDPs, using the distribution rights and certain associated assets as collateral. These notes receivable earn interest at a fixed rate.

Interest income was primarily related to the IDPs’ notes receivable and was as follows (amounts in thousands):

Interest
Income

For the twelve weeks ended July 16, 2022

$
5,075

For the twelve weeks ended July 17, 2021

$
5,486

For the twenty-eight weeks ended July 16, 2022

$
11,832

For the twenty-eight weeks ended July 17, 2021

$
12,966


	Interest Income
For the twelve weeks ended October 8, 2022	$	5,459
For the twelve weeks ended October 9, 2021	$	5,359
For the forty weeks ended October 8, 2022	$	17,292
For the forty weeks ended October 9, 2021	$	18,325

At ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, the carrying value of the distributor notes receivable was as follows (amounts in thousands):


	July 16, 2022			January 1, 2022			October 8, 2022			January 1, 2022
Distributor notes receivable	$	171,403		$	183,403		$	168,700		$	183,403
Less: current portion of distributor notes receivable recorded in accounts and notes receivable, net		(26,714	)		(29,093	)		(26,865	)		(29,093	)
Long-term portion of distributor notes receivable	$	144,689		$	154,310		$	141,835		$	154,310

During the third quarter of Fiscal 2021, the company recorded a reserve of $1.9 million for the distributor notes receivable related to a legal settlement. The company commenced repurchasing the distribution rights during the second quarter of Fiscal 2022 and the reserve balance was $~~1.0~~0.5 million at ~~July 16,~~October 8, 2022. See Note 13, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information. Payments on these distributor notes receivable are collected by the company weekly in conjunction with the distributor settlement process.

The fair value of the company’s variable rate debt at ~~July 16,~~October 8, 2022 is presented below. The fair value of the company’s 2031 notes and 3.500% senior notes due 2026 (“2026 notes”), as discussed in Note 11, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q, are estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements and are considered a Level 2 valuation. The fair value of the 2031 notes and 2026 notes are presented in the table below (amounts in thousands, except level classification):


	Carrying Value		Fair Value		Level	Carrying Value		Fair Value		Level
2031 notes	$	493,657	$	414,260	2	$	493,826	$	386,428	2
2026 notes	$	397,584	$	385,316	2	$	397,716	$	368,802	2

For fair value disclosure information about our derivative assets and liabilities see Note 7, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

7. DERIVATIVE FINANCIAL INSTRUMENTS

The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1: Fair value based on unadjusted quoted prices for identical assets or liabilities at the measurement date

Level 2: Modeled fair value with model inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3: Modeled fair value with unobservable model inputs that are used to estimate the fair value of the asset or liability

Commodity Risk

The company enters into commodity derivatives designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, and diesel fuel are also important commodity inputs.

As of ~~July 16,~~October 8, 2022, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):


	Level 1			Level 2		Level 3		Total			Level 1			Level 2		Level 3		Total
Assets:
Other current	$	2,748		$	—	$	—	$	2,748		$	1,865		$	—	$	—	$	1,865
Other long-term		35			—		—		35			124			—		—		124
Total		2,783			—		—		2,783			1,989			—		—		1,989

Liabilities:
Other current		(8,483	)		—		—		(8,483	)		(119	)		—		—		(119	)
Other long-term		(572	)		—		—		(572	)		—			—		—		—
Total		(9,055	)		—		—		(9,055	)		(119	)		—		—		(119	)
Net Fair Value	$	(6,272	)	$	—	$	—	$	(6,272	)	$	1,870		$	—	$	—	$	1,870

As of January 1, 2022, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):


	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	3,955		$	—	$	—	$	3,955
Other long-term		—			—		—		—
Total		3,955			—		—		3,955

Liabilities:
Other current		(220	)		—		—		(220	)
Other long-term		—			—		—		—
Total		(220	)		—		—		(220	)
Net Fair Value	$	3,735		$	—	$	—	$	3,735

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix, or limit increases in, prices for a period extending into Fiscal ~~2023.~~2024. These instruments are designated as cash-flow hedges. The change in the fair value for these derivatives is reported in AOCI. All the company-held commodity derivatives at ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, qualified for hedge accounting.

Interest Rate Risk

During the first quarter of Fiscal 2021, the company entered into treasury locks to fix the interest rate for the 2031 notes issued on March 9, 2021. The derivative positions were closed when the debt was priced on March 2, 2021 with a cash settlement net receipt of $3.9 million that offset changes in the benchmark treasury rate between execution of the treasury rate locks and the debt pricing date. These rate locks were designated as a cash flow hedge and the deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the notes through the maturity date.

The company previously entered into treasury rate locks at the time we executed the 2026 notes. These rate locks were designated as a cash flow hedge and the fair value at termination was deferred in AOCI. The deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the related notes through the maturity date.

Derivative Assets and Liabilities

The company has the following derivative instruments located on the Condensed Consolidated Balance Sheets, which are utilized for the risk management purposes detailed above (amounts in thousands):


	Derivative Assets						Derivative Liabilities						Derivative Assets						Derivative Liabilities
	July 16, 2022			January 1, 2022			July 16, 2022			January 1, 2022			October 8, 2022			January 1, 2022			October 8, 2022			January 1, 2022
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Other current assets	$	2,748	Other current assets	$	3,955	Other accrued liabilities	$	8,483	Other accrued liabilities	$	220	Other current assets	$	1,865	Other current assets	$	3,955	Other accrued liabilities	$	119	Other accrued liabilities	$	220
Commodity contracts	Other assets		35	Other assets		—	Other long-term liabilities		572	Other long-term liabilities		—	Other assets		124	Other assets		—	Other long-term liabilities		—	Other long-term liabilities		—
Total		$	2,783		$	3,955		$	9,055		$	220		$	1,989		$	3,955		$	119		$	220

Derivative AOCI transactions

The company had the following derivative instruments for deferred gains and (losses) on closed contracts and the effective portion for changes in fair value recorded in AOCI (no amounts were excluded from the effectiveness test), all of which are utilized for the risk management purposes detailed above (amounts in thousands and net of tax):


	Amount of Loss							Amount of Gain				Amount of Gain or ( Loss)						Amount of Gain
	Recognized in AOCI on Derivatives							Reclassified from AOCI				Recognized in AOCI on Derivatives						Reclassified from AOCI
	(Effective Portion)						Location of Gain or (Loss)	into Income (Effective Portion)				(Effective Portion)					Location of Gain or (Loss)	into Income (Effective Portion)
Derivatives in Cash Flow	For the Twelve Weeks Ended						Reclassified from AOCI	For the Twelve Weeks Ended				For the Twelve Weeks Ended					Reclassified from AOCI	For the Twelve Weeks Ended
Hedge Relationships(1)	July 16, 2022			July 17, 2021			into Income (Effective Portion)(2)	July 16, 2022		July 17, 2021		October 8, 2022		October 9, 2021			into Income (Effective Portion)(2)	October 8, 2022		October 9, 2021
Interest rate contracts	$	—		$	—		Interest expense	$	86	$	86	$	—	$	—		Interest expense	$	86	$	86
Commodity contracts		(16,417	)		(4,342	)	Production costs(3)		1,544		508		7,851		(3,618	)	Production costs(3)		1,822		340
Total	$	(16,417	)	$	(4,342	)		$	1,630	$	594	$	7,851	$	(3,618	)		$	1,908	$	426


	Amount of Gain or (Loss)							Amount of Gain or (Loss)					Amount of Gain or (Loss)						Amount of Gain
	Recognized in AOCI on Derivatives							Reclassified from AOCI					Recognized in AOCI on Derivatives						Reclassified from AOCI
	(Effective Portion)						Location of Gain or (Loss)	into Income (Effective Portion)					(Effective Portion)					Location of Gain or (Loss)	into Income (Effective Portion)
Derivatives in Cash Flow	For the Twenty-Eight Weeks Ended						Reclassified from AOCI	For the Twenty-Eight Weeks Ended					For the Forty Weeks Ended					Reclassified from AOCI	For the Forty Weeks Ended
Hedge Relationships(1)	July 16, 2022			July 17, 2021			into Income (Effective Portion)(2)	July 16, 2022		July 17, 2021			October 8, 2022		October 9, 2021			into Income (Effective Portion)(2)	October 8, 2022		October 9, 2021
Interest rate contracts	$	—		$	2,927		Interest expense	$	201	$	(78	)	$	—	$	2,927		Interest expense	$	287	$	8
Commodity contracts		(5,197	)		(2,524	)	Production costs(3)		2,398		452			2,654		(6,142	)	Production costs(3)		4,220		792
Total	$	(5,197	)	$	403			$	2,599	$	374		$	2,654	$	(3,215	)		$	4,507	$	800

Amounts in parentheses indicate debits to determine net income.

Amounts in parentheses, if any, indicate credits to determine net income.

Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).

There was 0no hedging ineffectiveness, and 0no amounts were excluded from the ineffectiveness testing, during the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, respectively, related to the company’s commodity risk hedges.

At ~~July 16,~~October 8, 2022, the balance in AOCI related to commodity price risk and interest rate risk derivative transactions that closed or will expire over the following years are as follows (amounts in thousands and net of tax) (amounts in parenthesis indicate a debit balance):


	Commodity Price Risk Derivatives			Interest Rate Risk Derivatives		Totals			Commodity Price Risk Derivatives		Interest Rate Risk Derivatives		Totals
Closed contracts	$	89		$	2,863	$	2,952		$	12	$	2,776	$	2,788
Expiring in 2022		(3,323	)		—		(3,323	)		358		—		358
Expiring in 2023		(1,382	)		—		(1,382	)		1,040		—		1,040
Expiring in 2024										4		—		4
Total	$	(4,616	)	$	2,863	$	(1,753	)	$	1,414	$	2,776	$	4,190

Derivative Transactions Notional Amounts

As of ~~July 16,~~October 8, 2022, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):


	Notional Amount		Notional Amount
Wheat contracts	$	49,512	$	19,606
Soybean oil contracts		14,785		11,261
Natural gas contracts		3,446		6,491
Corn contracts		4,658		1,443
Total	$	72,401	$	38,801

The company’s derivative instruments contain no credit-risk related contingent features at ~~July 16,~~October 8, 2022. As of ~~July 16,~~October 8, 2022 and January 1, 2022, the company had $~~12.2~~7.5 million and $2.0 million, respectively, in other current assets representing collateral for hedged positions. ~~There were~~ As of October 8, 2022 and January 1, 2022, the company had $06.1 ~~amounts at July 16, 2022~~million and $3.4 million, ~~at January 1, 2022~~respectively, recorded in other accrued liabilities representing collateral due to counterparties for hedged positions.

8. OTHER CURRENT AND NON-CURRENT ASSETS

Other current assets consist of (amounts in thousands):


	July 16, 2022		January 1, 2022		October 8, 2022		January 1, 2022
Prepaid assets	$	3,757	$	3,219	$	3,826	$	3,219
Service contracts		20,122		19,884		16,332		19,884
Prepaid insurance		10,901		5,254		8,334		5,254
Prepaid marketing		5,705		4,103		2,377		4,103
Fair value of derivative instruments		2,748		3,955		1,865		3,955
Collateral to counterparties for derivative positions		12,249		2,039		7,535		2,039
Income taxes receivable		12,465		13,001		14,119		13,001
Other		492		137		414		137
Total	$	68,439	$	51,592	$	54,802	$	51,592

Other non-current assets consist of (amounts in thousands):


	July 16, 2022		January 1, 2022		October 8, 2022		January 1, 2022
Unamortized financing fees	$	1,378	$	1,574	$	1,435	$	1,574
Investments		2,667		3,145		2,503		3,145
Investment in unconsolidated affiliate		9,000		—		9,000		—
Deposits		2,926		2,202		2,274		2,202
Unamortized cloud computing arrangement costs		682		1,215		465		1,215
Noncurrent benefit asset		1,198		1,281
Noncurrent postretirement benefit plan asset						2,163		1,281
Noncurrent service contracts						3,344		—
Other		132		206		220		206
Total	$	17,983	$	9,623	$	21,404	$	9,623

9. OTHER ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES

Other accrued liabilities consist of (amounts in thousands):


	July 16, 2022		January 1, 2022		October 8, 2022		January 1, 2022
Employee compensation	$	29,375	$	25,505	$	30,399	$	25,505
Employee vacation		16,968		15,782		17,731		15,782
Employee bonus		24,197		33,413		29,418		33,413
Fair value of derivative instruments		8,483		220		119		220
Self-insurance reserves		30,542		29,828		28,958		29,828
Bank overdraft		14,026		17,161		16,344		17,161
Accrued interest		8,134		7,202		1,211		7,202
Accrued utilities		7,212		6,741		7,677		6,741
Accrued taxes		13,893		7,557		13,003		7,557
Deferred payroll taxes under the CARES Act		16,354		16,354		16,354		16,354
Accrued advertising		6,065		4,294		3,677		4,294
Accrued legal settlements		2,000		16,500		5,500		16,500
Accrued legal costs		2,598		1,746		4,644		1,746
Accrued short-term deferred income		4,031		4,040		3,983		4,040
Collateral from counterparties for derivative positions		—		3,377
Collateral due to counterparties for derivative positions						6,124		3,377
Acquisition consideration adjustment		3,400		3,400		3,400		3,400
Multi-employer pension plan withdrawal liability		—		2,100		1,297		2,100
Repurchase obligations of distribution rights		2,948		4,743		1,680		4,743
Other		4,734		3,480		5,407		3,480
Total	$	194,960	$	203,443	$	196,926	$	203,443

In connection with an acquisition completed in Fiscal 2012, the company agreed to make the sellers whole for certain taxes incurred by the sellers on the sale. There was recently a tax determination that the sellers owed additional ~~taxes. Unless there~~taxes, which we have appealed. If the appeal is ~~a successful appeal which overturns the determination,~~unsuccessful, the company estimates that it will owe the sellers approximately $3.4 million. The company recorded this cost in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income during the second quarter of Fiscal 2021.

The repurchase of distribution rights is part of a legal settlement which requires a phased repurchase of approximately 75 distribution rights. The company commenced repurchasing the distribution rights during the second quarter of Fiscal 2022. See Note 13, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on this settlement.

Other long-term liabilities consist of (amounts in thousands):


	July 16, 2022		January 1, 2022		October 8, 2022		January 1, 2022
Deferred income	$	13,053	$	15,676	$	12,077	$	15,676
Deferred compensation		22,248		20,188		22,864		20,188
Other deferred credits		541		720		463		720
Other		960		1,375		402		1,375
Total	$	36,802	$	37,959	$	35,806	$	37,959

10. ASSETS HELD FOR SALE

The company repurchases distribution rights from IDPs in circumstances when the company decides to exit a territory or, in some cases, when the IDP elects to terminate its relationship with the company. In most of the distributor agreements, if the company decides to exit a territory or stop using the independent distribution model in a territory, the company is contractually required to purchase the distribution rights from the IDP. In the event an IDP terminates its relationship with the company, the company, although not legally obligated, may repurchase and operate those distribution rights as a company-owned territory. The IDPs may also sell their distribution rights to another person or entity. Distribution rights purchased from IDPs and operated as company-owned territories are recorded on the Condensed Consolidated Balance Sheets in the line item assets held for sale while the company actively seeks another IDP to purchase the distribution rights for the territory. Distribution rights held for sale and operated by the company are sold to IDPs at fair market value pursuant to the terms of a distributor agreement. There are multiple versions of the distributor agreement in place at any given time and the terms of such distributor agreements vary.

1920

Additional assets recorded in assets held for sale are for property, plant and equipment. During the first quarter of Fiscal 2022, the company reclassified two warehouses acquired at the end of Fiscal 2021 as held for sale and recorded an impairment charge of $1.0 million. The company completed the sale of the impaired warehouse at the end of the first quarter of Fiscal 2022. The company received net proceeds of $1.2 million. During the third quarter of Fiscal 2022, the company reclassified a facility as held for sale and completed the sale of a bakery previously included in held for sale. The company received net proceeds of $1.6 million. The carrying values of assets held for sale are not amortized and are evaluated for impairment as required at the end of the reporting period. The table below presents the assets held for sale as of ~~July 16,~~October 8, 2022 and January 1, 2022, respectively (amounts in thousands):


	July 16, 2022		January 1, 2022		October 8, 2022		January 1, 2022
Distributor territories	$	5,691	$	5,147	$	6,395	$	5,147
Property, plant and equipment		8,557		6,222	$	7,794		6,222
Total assets held for sale	$	14,248	$	11,369	$	14,189	$	11,369

11. DEBT AND OTHER OBLIGATIONS

Long-term debt (net of issuance costs and debt discounts excluding line-of-credit arrangements) (leases are separately discussed in Note 3, Leases) consisted of the following at ~~July 16,~~October 8, 2022 and January 1, 2022, respectively (amounts in thousands):


	July 16, 2022		January 1, 2022		October 8, 2022		January 1, 2022
Unsecured credit facility	$	—	$	—	$	—	$	—
2031 notes		493,657		493,333		493,826		493,333
2026 notes		397,584		397,276		397,716		397,276
Accounts receivable securitization facility		—		—		—		—
		891,241		890,609		891,542		890,609
Less current maturities of long-term debt		—		—		—		—
Total long-term debt	$	891,241	$	890,609	$	891,542	$	890,609

Bank overdrafts occur when checks have been issued but have not been presented to the bank for payment. Certain of our banks allow us to delay funding of issued checks until the checks are presented for payment. The delay in funding results in a temporary source of financing from the bank. The activity related to bank overdrafts is shown as a financing activity in our Condensed Consolidated Statements of Cash Flows. Bank overdrafts are included in other accrued liabilities on our Condensed Consolidated Balance Sheets.

The company also had standby letters of credit (“LOCs”) outstanding of $8.4 million at ~~July 16,~~October 8, 2022 and January 1, 2022, which reduce the availability of funds under the credit facility. The outstanding LOCs are for the benefit of certain insurance companies and lessors. None of the outstanding LOCs are recorded as a liability on the Condensed Consolidated Balance Sheets.

2031 Notes, 2026 Notes, Accounts Receivable Securitization Facility, 2022 Notes, and Credit Facility

2031 Notes. On March 9, 2021, the company issued $500.0 million of senior notes. The company will pay semiannual interest on the 2031 notes on each March 15 and September 15 and the 2031 notes will mature on March 15, 2031. The notes bear interest at 2.400% per annum. On any date prior to December 15, 2030, the company may redeem some or all of the notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal and interest on the 2031 notes to be redeemed that would be due if such notes matured December 15, 2030 (exclusive of interest accrued to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a rate equal to the sum of the applicable treasury rate (as defined in the indenture governing the notes), plus 20 basis points, plus, in each case, accrued and unpaid interest. At any time on or after December 15, 2030, the company may redeem some or all of the 2031 notes at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and the related rating of the notes below investment grade), it is required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company has exercised its option to redeem the notes in whole. The 2031 notes are also subject to customary restrictive covenants for investment grade debt, including certain limitations on liens and sale and leaseback transactions.

The face value of the 2031 notes is $500.0 million. There was a debt discount of $2.4 million representing the difference between the net proceeds, after expenses, received upon issuance of debt and the amount repayable at its maturity. The company also accrued issuance costs of $4.8 million (including underwriting fees and other fees) on the 2031 notes. Debt issuance costs and the debt discount are being amortized to interest expense over the term of the 2031 notes. As of ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, the company was in compliance with all restrictive covenants under the indenture governing the 2031 notes.

2021

2026 Notes. On September 28, 2016, the company issued $400.0 million of senior notes. The company pays semiannual interest on the 2026 notes on each April 1 and October 1 and the 2026 notes will mature on October 1, 2026. The notes bear interest at 3.500% per annum. The 2026 notes are subject to interest rate adjustments if either Moody’s or S&P downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the 2026 notes. On any date prior to July 1, 2026, the company may redeem some or all of the notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal and interest on the 2026 notes to be redeemed that would be due if such notes matured July 1, 2026 (exclusive of interest accrued to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the indenture governing the notes), plus 30 basis points, plus in each case accrued and unpaid interest. At any time on or after July 1, 2026, the company may redeem some or all of the 2026 notes at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and the related rating of the notes below investment grade), it is required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the notes in whole. The 2026 notes are also subject to customary restrictive covenants for investment grade debt, including certain limitations on liens and sale and leaseback transactions.

The face value of the 2026 notes is $400.0 million. There was a debt discount of $2.1 million representing the difference between the net proceeds, after expenses, received upon issuance of debt and the amount repayable at its maturity. The company also paid issuance costs of $3.6 million (including underwriting fees and other fees) on the 2026 notes. Debt issuance costs and the debt discount are being amortized to interest expense over the term of the 2026 notes. As of ~~July 16,~~October 8, 2022, and January 1, 2022, respectively, the company was in compliance with all restrictive covenants under the indenture governing the 2026 notes.

Accounts Receivable Securitization Facility. On July 17, 2013, the company entered into the facility. The company has amended the facility ~~nine~~10 times since execution, most recently on September ~~23, 2021~~27, 2022 (the ~~“ninth~~“tenth amendment”). These ~~nine~~10 amendments include provisions that (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million, (ii) added a leverage pricing grid, (iii) added an additional bank to the lending group, (iv) made certain other conforming changes, (v) removed a bank from the lending group, and (vi) most recently, extended the term by one additional year to September 27, ~~2023~~2024 and ~~added provisions~~transitioned to ~~address~~SOFR from LIBOR ~~transition.~~as the benchmark rate. The amendment that added the additional bank was accounted for as an extinguishment of the debt. The remaining amendments were accounted for as modifications.

Under the facility, a wholly-owned, bankruptcy-remote subsidiary purchases, on an ongoing basis, substantially all trade receivables of the company’s subsidiaries. The subsidiary pledges the receivables as collateral for the obligations under the facility. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions of collections to the company. We include the subsidiary in our Condensed Consolidated Financial Statements. The facility contains certain customary representations and warranties, affirmative and negative covenants, and events of default. As of ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, the company was in compliance with all restrictive covenants under the facility.

~~At January 1, 2022, there were~~ 0 ~~amounts outstanding under~~The table below presents the ~~facility,~~borrowings and ~~there were~~ 0 ~~borrowings or~~ repayments under the facility during the ~~twenty-eight~~forty weeks ended ~~July 16, 2022.~~October 8, 2022:


	Amount (thousands)
Balance at January 1, 2022	$	—
Borrowings		100,000
Payments		(100,000	)
Balance at October 8, 2022	$	—

The table below presents the net amount available for working capital and general corporate purposes under the facility as of ~~July 16,~~October 8, 2022:


	Amount (thousands)		Amount (thousands)
Gross amount available	$	198,700	$	200,000
Outstanding		—		—
Available for withdrawal	$	198,700	$	200,000

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Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.

Optional principal repayments may be made at any time without premium or penalty. Interest is due ~~two~~18 days after our reporting periods end in arrears on the outstanding borrowings and is computed as ~~the cost of funds rate~~SOFR plus an applicable margin of 8595 basis points. An unused fee of 3540 basis points is applicable on the unused commitment at each reporting period. Financing costs paid at inception of the facility and at the time amendments are executed are being amortized over the life of the facility. The company incurred $0.2 million in financing costs during the third quarter of Fiscal ~~2021~~2022 for the ~~ninth~~tenth amendment. The balance of unamortized financing costs was $~~0.2~~0.3 million on ~~July 16,~~October 8, 2022 and $0.3 million on January 1, 2022, respectively, and is recorded in other assets on the Condensed Consolidated Balance Sheets.

2022 Notes. On April 3, 2012, the company issued $400.0 million of senior notes. Prior to the early redemption discussed below, the company paid semiannual interest on the 2022 notes on each April 1 and October 1 and the 2022 notes would have matured on April 1, 2022. The 2022 notes bore interest at 4.375% per annum.

On April 8, 2021, the company completed the early redemption of the 2022 notes with proceeds received from the issuance of the 2031 notes on March 9, 2021. We recognized a loss on extinguishment of debt of $16.1 million comprised of a make-whole cash payment of $15.4 million and the write-off of unamortized debt discount and debt issuance costs of $0.7 million.

Credit Facility. The company is party to an amended and restated credit agreement, dated as of October 24, 2003, with the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, the swingline lender and issuing lender (as amended, restated, modified or supplemented from time to time, the “amended and restated credit agreement”). The company has amended the amended and restated credit agreement seven times since execution, most recently on July 30, 2021 (the “seventh amendment”). Under the amended and restated credit agreement, our credit facility is a five-year, $500.0 million senior unsecured revolving loan facility with the following terms and conditions: (i) a maturity date of July 30, 2026; (ii) an applicable margin for revolving loans maintained as (1) base rate loans and swingline loans with a range of 0.00% to 0.525% and (2) Eurodollar loans with a range of 0.815% to 1.525%, in each case, based on the more favorable (to the company) of (x) the leverage ratio of the company and its subsidiaries and (y) the company’s debt rating; (iii) an applicable facility fee with a range of 0.06% to 0.225%, due quarterly on all commitments under the amended and restated credit agreement, based on the more favorable (to the company) of (x) the leverage ratio of the company and its subsidiaries and (y) the company’s debt rating; and (iv) a maximum leverage ratio covenant to permit the company, at its option, in connection with certain acquisitions and investments and subject to the terms and conditions provided in the amended and restated credit agreement, to increase the maximum ratio permitted thereunder on one or more occasions to 4.00 to 1.00 for a period of four consecutive fiscal quarters, including and/or immediately following the fiscal quarter in which such acquisitions or investments were completed (the “covenant holiday”), provided that each additional covenant holiday will not be available to the company until it has achieved and maintained a leverage ratio of at least 3.75 to 1.00 and has been complied with for at least two fiscal quarters. Additionally, the seventh amendment to the amended and restated credit agreement appointed Deutsche Bank Trust Company Americas as successor administrative agent to Deutsche Bank AG New York Branch and added provisions to address LIBOR transition.

In addition, the credit facility contains a provision that permits the company to request up to $200.0 million in additional revolving commitments, for a total of up to $700.0 million, subject to the satisfaction of certain conditions. Proceeds from the credit facility may be used for working capital and general corporate purposes, including capital expenditures, acquisition financing, refinancing of indebtedness, dividends and share repurchases. The credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the amended credit facility and can meet its presently foreseeable financial requirements. As of ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, the company was in compliance with all restrictive covenants under the credit facility.

Financing costs paid at inception of the credit facility and at the time amendments are executed are being amortized over the life of the credit facility. The company incurred $1.1 million in financing costs during the third quarter of Fiscal 2021 for the seventh amendment. There was an additional financing cost paid in the first quarter of Fiscal 2022 that was less than $0.1 million. The balance of unamortized financing costs was $~~1.2~~1.1 million and $1.3 million on ~~July 16,~~October 8, 2022 and January 1, 2022, respectively, and are recorded in other assets on the Condensed Consolidated Balance Sheets.

Amounts outstanding under the credit facility can vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions, which are part of the company’s overall risk management strategy as discussed in Note 7, Derivative Financial

Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

~~At January 1, 2022, there were~~ 0 ~~amounts outstanding under~~The table below presents the ~~credit facility,~~borrowings and ~~there were~~ 0 ~~borrowings or~~ repayments under the credit facility during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022.


	Amount (thousands)
Balance at January 1, 2022	$	—
Borrowings		230,000
Payments		(230,000	)
Balance at October 8, 2022	$	—

The table below presents the net amount available under the credit facility as of ~~July 16,~~October 8, 2022:


	Amount (thousands)
Gross amount available	$	500,000
Outstanding		—
Letters of credit		(8,400	)
Available for withdrawal	$	491,600

Aggregate maturities of debt outstanding as of ~~July 16,~~October 8, 2022 are as follows (excluding unamortized debt discount and issuance costs) (amounts in thousands):


Remainder of 2022	$	—
2023		—
2024		—
2025		—
2026		400,000
2027 and thereafter		500,000
Total	$	900,000

Debt discount and issuance costs are being amortized straight-line (which approximates the effective method) over the term of the underlying debt outstanding. The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at ~~July 16,~~October 8, 2022 (amounts in thousands):


			Debt Issuance Costs						Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value		Face Value		and Debt Discount		Net Carrying Value
2031 notes	$	500,000	$	6,343	$	493,657	$	500,000	$	6,174	$	493,826
2026 notes		400,000		2,416		397,584		400,000		2,284		397,716
Total	$	900,000	$	8,759	$	891,241	$	900,000	$	8,458	$	891,542

The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at January 1, 2022 (amounts in thousands):


			Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value
2031 notes	$	500,000	$	6,667	$	493,333
2026 notes		400,000		2,724		397,276
Total	$	900,000	$	9,391	$	890,609

12. VARIABLE INTEREST ENTITIES

Distribution rights agreement VIE analysis

The incorporated IDPs qualify as VIEs. The IDPs who are formed as sole proprietorships are excluded from the following VIE accounting analysis and discussion.

Incorporated IDPs acquire distribution rights and enter into a contract with the company to sell the company’s products in the IDPs’ defined geographic territory. The incorporated IDPs have the option to finance the acquisition of their distribution rights with the

company. They can also pay cash or obtain external financing at the time they acquire the distribution rights. The combination of the company’s loans to the incorporated IDPs and the ongoing distributor arrangements with the incorporated IDPs provide a level of funding to the equity owners of the various incorporated IDPs that would not otherwise be available. As of ~~July 16,~~October 8, 2022 and January 1, 2022, there was $~~150.0~~149.5 million and $159.5 million, respectively, in gross distribution rights notes receivable outstanding from incorporated IDPs.

The company is not considered to be the primary beneficiary of the VIEs because the company does not (i) have the ability to direct the significant activities of the VIEs that would affect their ability to operate their respective businesses and (ii) provide any implicit or explicit guarantees or other financial support to the VIEs, other than the financing described above, for specific return or performance benchmarks. The activities controlled by the incorporated IDPs that are deemed to most significantly impact the ultimate success of the incorporated IDP entities relate to those decisions inherent in operating the distribution business in the territory, including acquiring trucks and trailers, managing fuel costs, employee matters and other strategic decisions. In addition, we do not provide, nor do we intend to provide, financial or other support to the IDP. The IDPs are responsible for the operations of their respective territories.

The company’s maximum contractual exposure to loss for the incorporated IDP relates to the distributor rights note receivable for the portion of the territory the incorporated IDPs financed at the time they acquired the distribution rights. The incorporated IDPs remit payment on their distributor rights note receivable each week during the settlement process of their weekly activity. The company will operate a territory on behalf of an incorporated IDP in situations where the IDP has abandoned its distribution rights. Any remaining balance outstanding on the distribution rights notes receivable is relieved once the distribution rights have been sold on the IDPs behalf. The company’s collateral from the territory distribution rights mitigates the potential losses.

13. COMMITMENTS AND CONTINGENCIES

Self-insurance reserves and other commitments and contingencies

The company records self-insurance reserves as an other accrued liability on our Condensed Consolidated Balance Sheets. The reserves include an estimate of expected settlements on pending claims, defense costs and a provision for claims incurred but not reported. These estimates are based on the company’s assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and current cost trends. The amount of the company’s ultimate liability in respect of these matters may differ materially from these estimates.

In the event the company ceases to utilize the independent distributor model or exits a geographic market, the company is contractually required in some situations to purchase the distribution rights from the independent distributor. The company cannot reasonably estimate the potential cost until which time it becomes probable that a transaction will occur. The company expects to continue operating under this model and has concluded that the possibility of a loss is remote.

The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these laws and regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition, results of operations, cash flows or the competitive position of the company. The company believes it is currently in substantial compliance with all material environmental laws and regulations affecting the company and its properties.

Litigation

The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, including personal injury, commercial, contract, environmental, antitrust, product liability, health and safety and employment matters, which are being handled and defended in the ordinary course of business. At this time, the company is defending 2021 complaints filed by distributors alleging that such distributors were misclassified as independent contractors. ~~NaN~~Seven of these lawsuits seek class and/or collective action treatment. The remaining 14fourteen cases either allege individual claims or do not seek class or collective action treatment or, in cases in which class treatment was sought, the court denied class certification. The respective courts have ruled on plaintiffs’ motions for class certification in 3three of the pending cases, each of which is discussed below. Unless otherwise noted, a class

was conditionally certified under the FLSA in each of the cases described below, although the company has the ability to petition the court to decertify that class at a later date:


Case Name	Case No.	Venue	Date Filed	Status
Richard et al. v. Flowers Foods, Inc., Flowers Baking Co. of Lafayette, LLC, Flowers Baking Co. of Baton Rouge, LLC, Flowers Baking Co. of Tyler, LLC and Flowers Baking Co. of New Orleans, LLC	6:15-cv-02557	U.S. District Court Western District of Louisiana	10/21/2015	On April 9, 2021, the court decertified the FLSA collective action and denied plaintiffs' motion to certify under Federal Rule of Civil Procedure 23 a state law class of distributors who operated in the state of Louisiana.
Martins v. Flowers Foods, Inc., Flowers Baking Co. of Bradenton, LLC and Flowers Baking Co. of Villa Rica, LLC	8:16-cv-03145	U.S. District Court Middle District of Florida	11/8/2016
Ludlow et al. v. Flowers Foods, Inc., Flowers Bakeries, LLC and Flowers Finance, LLC	3:18-cv-01190	U.S. District Court Southern District of California	6/6/2018	On July 5, 2022, the Court granted plaintiffs’ motion under Federal Rule of Civil Procedure 23 to certify a California state law class comprising of distributors who worked within California from June 6, 2014 to present and were classified as independent contractors.

The company and/or its respective subsidiaries contests the allegations and are vigorously defending all of these lawsuits. Given the stage of the complaints and the claims and issues presented, except for lawsuits disclosed herein that have reached a settlement or agreement in principle, the company cannot reasonably estimate at this time the possible loss or range of loss that may arise from the unresolved lawsuits.

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Since the beginning of Fiscal 2021, the company has settled, and the appropriate court has approved, the following collective/class action lawsuits filed by distributors alleging that such distributors were misclassified as independent contractors:


Case Name	Case No.	Venue	Date Filed	Comments
Coronado v. Flowers Foods, Inc. and Flowers Baking Co. of El Paso, LLC	1:16-cv-00350	U.S. District Court District of New Mexico	4/27/2016	On June 7, 2022, the Court approved an agreement to settle this matter for $137,500, inclusive of attorneys’ fees, costs, damages and incentives for class members who are active distributors to enter into an amendment to their distributor agreements. The settlement was paid and the expense was recorded in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income during the second quarter of Fiscal 2022.
Noll v. Flowers Foods, Inc., Lepage Bakeries Park Street, LLC, and CK Sales Co., LLC	1:15-cv-00493	U.S. District Court District of Maine	12/3/2015	On April 26, 2022, the Court approved an agreement to settle this and two companion cases pending in the U.S. District Court for the District of Maine – Bowen et al. v. Flowers Foods, Inc. et al. (No. 1:20-cv-00411); and Aucoin et al. v. Flowers Foods, Inc. et al (No. 1:20-cv-00410) – for a payment of $16.5 million, comprised of $9.0 million in settlement funds and $7.5 million in attorneys’ fees. The settlement was paid during the second quarter of Fiscal 2022. The settlement also required a phased repurchase of approximately 75 distribution territories in Maine, which, once completed, the company will service its Maine market using company sales employees. The company estimates this cost to be $6.6 million (of which $4.7 million was originally included in other accrued liabilities and the remainder as a contra account to notes receivable). These amounts were recorded in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income during the third quarter of Fiscal 2021. The company remains committed to its IDP program.

See Note 11, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the company’s commitments.

2627

14. EARNINGS PER SHARE

The following is a reconciliation of net income and weighted average shares for calculating basic and diluted earnings per common share for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, respectively (amounts and shares in thousands, except per share data):


	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended				For the Twelve Weeks Ended				For the Forty Weeks Ended
	July 16, 2022		July 17, 2021		July 16, 2022		July 17, 2021		October 8, 2022		October 9, 2021		October 8, 2022		October 9, 2021
Net income	$	53,680	$	56,358	$	139,269	$	128,013	$	40,528	$	38,852	$	179,797	$	166,865
Basic Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		212,186		211,932		212,079		211,908		212,016		211,921		212,060		211,912
Basic earnings per common share	$	0.25	$	0.27	$	0.66	$	0.60	$	0.19	$	0.18	$	0.85	$	0.79
Diluted Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		212,186		211,932		212,079		211,908		212,016		211,921		212,060		211,912
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock		1,121		1,124		1,236		989		1,310		1,266		1,257		1,067
Diluted weighted average shares outstanding for common stock		213,307		213,056		213,315		212,897		213,326		213,187		213,317		212,979
Diluted earnings per common share	$	0.25	$	0.26	$	0.65	$	0.60	$	0.19	$	0.18	$	0.84	$	0.78

There were ~~328,790~~no anti-dilutive shares and 327,950 anti-dilutive shares during the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, ~~and~~ ~~362,220~~ ~~anti-dilutive shares during the twenty-eight weeks ended July 17, 2021.~~respectively. There were 0no anti-dilutive shares during the twelve and forty weeks ended ~~July 17,~~October 9, 2021.

15. STOCK-BASED COMPENSATION

On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”). The Omnibus Plan was approved by our shareholders on May 21, 2014. The Omnibus Plan authorizes the compensation committee of the Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other awards to provide our officers, key employees, and non-employee directors’ incentives and rewards for performance. Equity awards granted after May 21, 2014 are governed by the Omnibus Plan. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares.

The following is a summary of restricted stock and deferred stock outstanding under the Omnibus Plan described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below. The company typically grants awards at the beginning of its fiscal year. Information on grants to employees during Fiscal 2022 is discussed below.

Performance-Contingent Restricted Stock Awards

Performance-Contingent Total Shareholder Return Shares (“TSR Shares”)

Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of TSR Shares. The awards vest approximately three years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date the vesting conditions are satisfied. The total shareholder return (“TSR”) is the percent change in the company’s stock price over the measurement period plus the dividends paid to shareholders. The performance payout is calculated at the end of each of the last four quarters (averaged) in the measurement period. Once the TSR is determined for the company (“Company TSR”), it is compared to the TSR of our food company peers (“Peer Group TSR”). The Company TSR compared to the Peer Group TSR will determine the payout as set forth below:


Percentile	Payout as % of Target
90th		200	%
70th		150	%
50th		100	%
30th		50	%
Below 30th		0	%

For performance between the levels described above, the degree of vesting is interpolated on a linear basis.

The TSR shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of shares

based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the TSR shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) TSR from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ TSR. The inputs are based on historical capital market data.

The following performance-contingent TSR Shares have been granted during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 under the Omnibus Plan (amounts in thousands, except price data):


Grant Date	Shares Granted		Vesting Date	Fair Value per Share
1/2/2022		331	3/1/2025	$	31.97
4/24/2022		8	3/1/2025	$	27.38

Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”)

Certain key employees have been granted performance-contingent restricted stock under the Omnibus Plan in the form of ROIC Shares. The awards generally vest approximately three years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date, the vesting conditions are satisfied. Return on Invested Capital (“ROIC”) is calculated by dividing our profit, as defined, by the invested capital. Generally, the performance condition requires the company’s average ROIC to exceed its average weighted cost of capital (“WACC”) by between 1.75 to 4.75 percentage points (the “ROI Target”) over the three fiscal year performance period. If the lowest ROI Target is not met, the awards are forfeited. The ROIC Shares can be earned based on a range from 0% to 125% of target as defined below:

•

ROIC above WACC by less than 1.75 percentage points pays 0% of ROI Target;

•

ROIC above WACC by 1.75 percentage points pays 50% of ROI Target;

•

ROIC above WACC by 3.75 percentage points pays 100% of ROI Target; or

•

ROIC above WACC by 4.75 percentage points pays 125% of ROI Target.

For performance between the levels described above, the degree of vesting is interpolated on a linear basis.

The ROIC Shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of ROIC Shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC Shares will immediately vest at the target level. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the ROIC Shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. Since these awards have a performance condition feature, the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. The 2020 award is being expensed at our current estimated payout percentage of 125% of ROI Target, and the 2021 and 2022 awards are being expensed at 100%.

The following performance-contingent ROIC Shares have been granted under the Omnibus Plan during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 (amounts in thousands, except price data):


Grant Date	Shares Granted		Vesting Date	Fair Value per Share
1/2/2022		331	3/1/2025	$	27.47
4/24/2022		8	3/1/2025	$	27.38

2829

Performance-Contingent Restricted Stock

The table below presents the TSR modifier share adjustment (a 137% final payout), ROIC modifier share adjustment (a 125% final payout), accumulated dividends on vested shares, and the tax benefit/(expense) at vesting of the performance-contingent restricted stock awards (amounts in thousands, except per share data):


Award Granted		Fiscal Year Vested		TSR Modifier Increase Shares		ROIC Modifier Increase Shares		Dividends at Vesting		Tax Benefit		Fair Value at Vesting
	2019		2022		109,729		74,154	$	1,843	$	2,196	$	22,143

The company’s performance-contingent restricted stock activity for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 is presented below (amounts in thousands, except price data):


	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Nonvested shares at January 1, 2022		1,972		$	22.89		1,972		$	22.89
Granted		679		$	29.66		679		$	29.66
Grant increase for achieving the ROIC modifier		74		$	29.72		74		$	29.72
Grant increase for achieving the TSR modifier		110		$	29.72		110		$	29.72
Vested		(778	)	$	20.25		(778	)	$	20.25
Forfeited		(21	)	$	24.94		(25	)	$	25.04
Nonvested shares at July 16, 2022		2,036		$	25.91
Nonvested shares at October 8, 2022							2,032		$	25.91

As of ~~July 16,~~October 8, 2022, there was $~~29.2~~25.2 million of total unrecognized compensation cost related to non-vested restricted stock granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of ~~2.09~~1.92 years.

Time-Based Restricted Stock Units

Certain key employees have been granted time-based restricted stock units (“TBRSU Shares”). The executive officers of the company did not receive any TBRSU Shares. These awards vest on January 5th each year in equal installments over a three-year period which began in Fiscal 2020. Dividends earned on shares will be held by the company during the vesting period and paid in cash when the awards vest and shares are distributed.

The following TBRSU Shares have been granted under the Omnibus Plan during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 (amounts in thousands, except price data):


Grant Date	Shares Granted		Vesting Date	Fair Value per Share
1/2/2022		206	Equally over 3 years	$	27.47

The TBRSU Shares activity for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 is set forth below (amounts in thousands, except price data):


	TBRSU Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized Compensation Cost		TBRSU Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized Compensation Cost
Nonvested shares at January 1, 2022		492		$	21.87						492		$	21.87
Vested		(213	)	$	20.99						(213	)	$	20.99
Granted		206		$	27.47						206		$	27.47
Forfeitures		(10	)	$	24.14						(14	)	$	24.32
Nonvested shares at July 16, 2022		475		$	24.63		1.95	$	8,144
Nonvested shares at October 8, 2022											471		$	24.63		1.79	$	6,883

2930

The table below presents the accumulated dividends on vested shares and the tax benefit/(expense) at vesting of the time-based restricted stock units (amounts in thousands).


Award Granted		Fiscal Year Vested		Dividends at Vesting		Tax Benefit		Fair Value at Vesting
	2021		2022	$	159	$	106	$	2,262
	2020		2022	$	106	$	100	$	1,818
	2019		2022	$	67	$	161	$	1,870

Deferred Stock

Non-employee directors may convert their annual board retainers into deferred stock equal in value to 100% of the cash payments directors would otherwise receive and the vesting period is a one-year period to match the period that cash would have been received if no conversion existed. Accumulated dividends are paid upon delivery of the shares. During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, non-employee directors elected to receive, and were granted, an aggregate grant of 3,640 common shares for board retainer deferrals pursuant to the Omnibus Plan.

Non-employee directors also receive annual grants of deferred stock. This deferred stock vests one year from the grant date. The deferred stock will be distributed to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one-year vesting period. During the second quarter of Fiscal 2021, non-employee directors were granted 66,550 shares, of which 18,150 shares were deferred, for their annual grant pursuant to the Omnibus Plan that vested during the second quarter of Fiscal 2022. During the second quarter of Fiscal 2022, non-employee directors were granted 58,300 shares for their annual grant pursuant to the Omnibus Plan. Non-employee directors received ~~10,034~~16,260 shares of previously deferred annual grant awards during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022.

The deferred stock activity for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 is set forth below (amounts in thousands, except price data):


	Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized compensation cost		Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized compensation cost
Nonvested shares at January 1, 2022		67		$	24.00						67		$	24.00
Vested		(67	)	$	24.00						(67	)	$	24.00
Granted		62		$	27.37						62		$	27.37
Nonvested shares at July 16, 2022		62		$	27.37		0.85	$	1,415
Nonvested shares at October 8, 2022											62		$	27.37		0.62	$	1,026

Stock-Based Payments Compensation Expense Summary

The following table summarizes the company’s stock-based compensation expense for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, respectively (amounts in thousands):


	For the Twelve Weeks Ended				For the Twelve Weeks Ended
	July 16, 2022		July 17, 2021		October 8, 2022		October 9, 2021
Performance-contingent restricted stock awards	$	3,946	$	3,334	$	3,917	$	3,287
TBRSU Shares		1,214		1,088		1,179		1,146
Deferred and restricted stock		398		353		389		378
Total stock-based compensation	$	5,558	$	4,775	$	5,485	$	4,811

	For the Twenty-Eight Weeks Ended				For the Forty Weeks Ended
	July 16, 2022		July 17, 2021		October 8, 2022		October 9, 2021
Performance-contingent restricted stock awards	$	10,861	$	8,623	$	14,778	$	11,910
TBRSU Shares		2,861		2,555		4,040		3,701
Deferred and restricted stock		917		779		1,306		1,157
Total stock-based compensation	$	14,639	$	11,957	$	20,124	$	16,768

3031

16. POSTRETIREMENT PLANS

The following summarizes the company’s Condensed Consolidated Balance Sheets related pension and other postretirement benefit plan accounts at ~~July 16,~~October 8, 2022 compared to accounts at January 1, 2022 (amounts in thousands):


	July 16, 2022			January 1, 2022			October 8, 2022			January 1, 2022
Noncurrent benefit asset	$	1,198		$	1,281		$	2,163		$	1,281
Current benefit liability	$	804		$	804		$	804		$	804
Noncurrent benefit liability	$	7,062		$	7,249		$	6,797		$	7,249
AOCI, net of tax	$	(3,413	)	$	(3,456	)	$	(3,395	)	$	(3,456	)

Defined Benefit Plans and Nonqualified Plan

The company sponsors two pension plans, the Flowers Foods, Inc. Retirement Plan No. 2, and the Tasty Baking Company Supplemental Executive Retirement Plan (“Tasty SERP”). The Tasty SERP is frozen and has only retirees and beneficiaries remaining in the plan.

The company used a measurement date of December 31, 2021 for the defined benefit and postretirement benefit plans described below.

During the third quarter of Fiscal 2022, the company made a voluntary contribution of $1.0 million to Plan No. 2. There were 0no contributions made by the company to any plan during the ~~twenty-eight~~forty weeks ended ~~July 16, 2022 and July 17,~~October 9, 2021.

The net periodic pension cost for the company’s plans include the following components (amounts in thousands):


	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended						For the Twelve Weeks Ended						For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			July 16, 2022			July 17, 2021			October 8, 2022			October 9, 2021			October 8, 2022			October 9, 2021
Service cost	$	274		$	224		$	640		$	523		$	274		$	224		$	914		$	747
Interest cost		204			175			476			408			204			176			680			584
Expected return on plan assets		(432	)		(431	)		(1,009	)		(1,006	)		(432	)		(431	)		(1,441	)		(1,437	)
Amortization of prior service cost		13			13			30			31			13			13			43			44
Amortization of net loss		107			171			249			400			107			171			356			571
Total net periodic pension cost	$	166		$	152		$	386		$	356		$	166		$	153		$	552		$	509

The components of net periodic benefit cost other than the service cost are included in the other components of net periodic pension and postretirement benefit plans credit line item on our Condensed Consolidated Statements of Income.

Postretirement Benefit Plan

The company provides certain medical and life insurance benefits for eligible retired employees covered under the active medical plans. The plan incorporates an up-front deductible, coinsurance payments and retiree contributions at various premium levels. Eligibility and maximum period of coverage is based on age and length of service.

The net periodic postretirement expense for the company includes the following components (amounts in thousands):


	For the Twelve Weeks Ended						For the Twenty-Eight Weeks Ended						For the Twelve Weeks Ended						For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			July 16, 2022			July 17, 2021			October 8, 2022			October 9, 2021			October 8, 2022			October 9, 2021
Service cost	$	49		$	78		$	115		$	181		$	50		$	78		$	165		$	259
Interest cost		26			28			60			64			25			27			85			91
Amortization of prior service credit		(54	)		(1	)		(126	)		(2	)		(54	)		(1	)		(180	)		(3	)
Amortization of net gain		(41	)		(48	)		(96	)		(113	)		(41	)		(49	)		(137	)		(162	)
Total net periodic postretirement (credit) cost	$	(20	)	$	57		$	(47	)	$	130		$	(20	)	$	55		$	(67	)	$	185

The components of net periodic postretirement benefits cost other than the service cost are included in the other components of net periodic pension and postretirement benefit plans credit line item on our Condensed Consolidated Statements of Income.

3132

401(k) Retirement Savings Plan

The Flowers Foods, Inc. 401(k) Retirement Savings Plan covers substantially all the company’s employees who have completed certain service requirements. The total cost and employer contributions were as follows (amounts in thousands):

For the Twelve Weeks Ended

For the Twenty-Eight Weeks Ended

July 16, 2022

July 17, 2021

July 16, 2022

July 17, 2021

Total cost and employer contributions

$
6,747

$
6,219

$
16,153

$
15,355


	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 8, 2022		October 9, 2021		October 8, 2022		October 9, 2021
Total cost and employer contributions	$	6,511	$	6,300	$	22,664	$	21,655

Multi-employer Pension Plan

On July 19, 2022, the company announced the closure of the Holsum Bakery in Phoenix, Arizona. The bakery produced bread and bun products and ceased production on October 31, 2022. As a result, the union participants of the IAM National Pension Fund (the “IAM Fund”) at the Phoenix bakery will withdraw from the IAM Fund. The company recorded a liability of $1.3 million for the withdrawal from the IAM Fund. While this is our best estimate of the ultimate cost of the withdrawal from this plan, additional withdrawal liability may be incurred based on the final IAM Fund assessment or in the event of a mass withdrawal, as defined by statute, occurring anytime within the next three years.

On September 22, 2021, the union participants of the Retail, Wholesale and Department Store Union Fund (the “RWDSU Fund”) at our Birmingham, Alabama plant voted to withdraw from the RWDSU Fund in the most recent collective bargaining agreement. The withdrawal became effective, and the union participants were eligible to participate in the 401(k) plan, on December 1, 2021. During the twelve weeks ended October 9, 2021, the company recorded a liability of $2.1 million related to the withdrawal from the RWDSU Fund. The withdrawal liability was computed as the net present value of 20 years of monthly payments derived from the company’s share of unfunded vested benefits. While this is our best estimate of the ultimate cost of the withdrawal from the RWDSU Fund, additional withdrawal liability may be incurred based on the final RWDSU Fund assessment or in the event of a mass withdrawal, as defined by statute, occurring anytime within the next three years following our complete withdrawal. Additionally, the company recorded a liability of $1.2 million related to transition payments, including related tax payments, for the benefit of union participants as part of the collective bargaining agreement. The withdrawal liability charge and the transition payments are recorded in the multi-employer pension plan withdrawal costs line item on our Condensed Consolidated Statements of Income. We made the transition payments in December of Fiscal 2021 and the withdrawal liability payment in the first quarter of Fiscal 2022.

17. INCOME TAXES

The company’s effective tax rate for the twelve weeks ended ~~July 16,~~October 8, 2022 was ~~23.7~~25.3% compared to ~~22.7~~23.7% for the twelve weeks ended ~~July 17,~~October 9, 2021. The increase in the rate was primarily due to larger favorable discrete items related to tax credits in the prior year quarter. During the twelve weeks ended ~~July 16,~~October 8, 2022, the primary differences in the effective rate and the statutory rate were state income taxes, ~~including~~which includes the recognition of a discrete benefit related to state ~~credits~~tax credits.

The company’s effective tax rate for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 was ~~22.8~~23.4% compared to 23.7% for the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021. The decrease in the rate was primarily due to favorable windfalls on stock-based compensation recorded discretely in the current year. During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, the primary differences in the effective rate and the statutory rate were state income taxes including the recognition of discrete state credits and windfalls on stock-based compensation.

During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, the company’s activity with respect to its uncertain tax positions and related interest expense accrual was not significant to the Condensed Consolidated Financial Statements. As of ~~July 16,~~October 8, 2022, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.

18. SUBSEQUENT EVENTS

The company has evaluated subsequent events since ~~July 16,~~October 8, 2022, the date of these financial statements. We believe there were no material events or transactions discovered during this evaluation that require recognition or disclosure in the financial ~~statements other than the item discussed below.~~

On July 19, 2022, the company announced the Holsum Bakery in Phoenix, Arizona will cease production on October 31, 2022. The closure costs cannot be estimated at this time. We anticipate recording closure costs during our third quarter of Fiscal 2022.statements.

3233

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the company as of and for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 should be read in conjunction with the Form 10-K and Part II., Item 1A., Risk Factors, of this Form 10-Q.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is segregated into four sections, including:

•

Executive overview — provides a summary of our business, operating performance and cash flows, and strategic initiatives.

•

Critical accounting estimates — describes the accounting areas where management makes critical estimates to report our financial condition and results of operations. There have been no changes to this section from the Form 10-K.

•

Results of operations — an analysis of the company’s consolidated results of operations for the two comparative periods presented in our Condensed Consolidated Financial Statements.

•

Liquidity and capital resources — an analysis of cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

Matters Affecting Comparability

~~Detailed~~Comparative results from quarter to quarter are impacted by the company's fiscal reporting calendar. Internal financial results and key performance indicators are reported on a weekly basis to ensure the same number of Saturdays and Sundays in comparable months to allow for consistent four-week progression analysis. This results in our first quarter consisting of sixteen weeks while the remaining three quarters have twelve weeks (except in cases where there is an extra week every five or six years). Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.

Additionally, detailed below are expense items affecting comparability that will provide ~~additional~~greater context while reading this discussion:


	For the Twelve Weeks Ended				For the Twenty-Eight Weeks Ended				Footnote	For the Twelve Weeks Ended					For the Forty Weeks Ended					Footnote
	July 16, 2022		July 17, 2021		July 16, 2022		July 17, 2021		Disclosure	October 8, 2022		October 9, 2021			October 8, 2022		October 9, 2021			Disclosure
	(Amounts in thousands)				(Amounts in thousands)					(Amounts in thousands)					(Amounts in thousands)
Business process improvement consulting costs	$	11,658	$	13,205	$	20,722	$	18,163	Note 1	$	8,144	$	9,233		$	28,866	$	27,396		Note 1
Impairment of assets		—		—		990		—	Note 10
Plant closure costs and impairment of assets											6,835		—			7,825		—		Note 1
Severance and lease termination costs		1,717		—		1,717		—			—		—			1,717		—
Legal settlements		2,000		—		2,000		—	Note 13
Loss on inferior ingredients		—		—		—		122	Note 1
Legal settlements and related costs											5,500		23,089			7,500		23,089		Note 13
Recovery on inferior ingredients											—		(950	)		—		(828	)	Note 1
Acquisition-related costs											11,582		—			11,582		—		Note 1
Acquisition consideration adjustment		—		3,400		—		3,400	Note 9		—		—			—		3,400		Note 9
Multi-employer pension plan withdrawal costs											—		3,300			—		3,300		Note 16
Loss on extinguishment of debt		—		—		—		16,149	Note 11		—		—			—		16,149		Note 11
	$	15,375	$	16,605	$	25,429	$	37,834		$	32,061	$	34,672		$	57,490	$	72,506

•

Business process improvement consulting costs related to the transformation strategy initiatives — In the second half of Fiscal 2020, we launched initiatives to transform our business operations, which include upgrading our information system, as well as investments in e-commerce, autonomous planning, and our "bakery of the future" initiative. In the first quarter of Fiscal 2022, we launched the digital logistics and digital sales initiatives. These initiatives are further discussed in the “Transformation Strategy Initiatives” section below. The expensed portion of costs incurred related to these initiatives was ~~$11.7~~$8.1 million and ~~$20.7~~$28.9 million during the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, respectively. We recognized ~~$13.2~~$9.2 million and ~~$18.2~~$27.4 million during the prior year ~~second~~third quarter and year to date periods, respectively. These costs are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income. We currently expect consulting costs (a portion of which may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract) related to the upgrade of our ERP system to be approximately ~~$85.0~~$70.0 million to ~~$95.0~~$80.0 million for Fiscal 2022.

•

~~Impairment~~Plant closure costs and impairment of assets –On July 19, 2022, the company announced the closure of the Holsum Bakery in Phoenix, Arizona. The bakery produced bread and bun products and ceased production on October 31, 2022. This closure is part of our strategy to optimize our sales portfolio and improve supply chain and manufacturing efficiency. The company recognized severance costs of $1.7 million, multi-employer pension plan withdrawal costs of $1.3 million, and asset impairment and equipment relocation charges for bakery equipment of $3.8 million in the third quarter of Fiscal 2022. As a result of the manufacturing line closures, the union participants of the IAM National Pension Fund (the "IAM Fund") at the Phoenix, Arizona bakery will withdraw from the IAM Fund. While this is our best estimate of the ultimate cost of the withdrawal from this plan, additional withdrawal liability may be incurred based on the final IAM Fund assessment or in the event of a mass withdrawal, as defined by statute, occurring anytime within the next three years. During the first quarter of Fiscal 2022, the company decided to sell two warehouses acquired at the end of Fiscal 2021 and recorded an impairment charge of $1.0 million. The company completed the sale of the impaired warehouse at the end of the first quarter of Fiscal 2022.

•

Severance and lease termination costs - In the second quarter of Fiscal 2022, the company committed to a plan to outsource its aviation services and recorded severance and lease termination charges totaling $1.7 million which are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income. The lease termination costs were paid in the second quarter of Fiscal 2022 and the severance payments are anticipated to be paid by the end of Fiscal 2022.

•

Legal ~~settlement~~ –settlements and related costs During the second and third quarters of Fiscal 2022, we reached agreements to settle certain distributor-related litigation in the aggregate amount of $7.5 million, inclusive of attorney fees. We paid the settlement accrued for in the second quarter of Fiscal 2022 in the third quarter of Fiscal 2022. In the third quarter of Fiscal 2021, we reached an agreement to settle certain distributor-related litigation for a settlement payment, inclusive of plaintiffs’ attorney fees, of ~~$2.0~~$16.5 million. ~~This amount is~~The payment was made in the second quarter of Fiscal 2022. The settlement also required a phased repurchase of approximately 75 distribution rights and the company estimated this cost to be approximately $6.6 million. The company commenced repurchasing the distribution rights during the second quarter of Fiscal 2022 and these repurchases are ongoing. All of these amounts are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income.

•

~~Loss~~Recovery on inferior ingredients – In the first quarter of Fiscal 2021, we incurred additional costs of $0.1 million related to receiving inferior ingredients used in the production of certain of our gluten-free products. In the third quarter of Fiscal 2021, we received reimbursements of approximately $1.0 million for these previously incurred costs.

•

Acquisition-related costs In the third quarter of Fiscal 2022, we incurred $11.6 million in costs from the pursuit of an acquisition that failed to materialize. Of this amount, $8.4 million related to realized foreign currency exchange losses. Although the majority of the target company's sales were made in the U.S., the target company's foreign domicile required us to convert funds from U.S. dollars to complete the transaction. Following that conversion, a significant strengthening of the U.S. dollar relative to the target company's currency resulted in the foreign currency exchange loss upon conversion back into U.S. dollars following the failure of the deal.

•

Acquisition consideration adjustment –In connection with an acquisition completed in Fiscal 2012, the company agreed to make the sellers whole for certain taxes incurred by the sellers on the sale. In the second quarter of Fiscal 2021, there was a tax determination that the sellers owed additional ~~taxes. Unless there~~taxes, which we have appealed. If the appeal is ~~a successful appeal which overturns the determination,~~unsuccessful, the company estimates that it will owe the sellers approximately $3.4 million, and the company recorded this cost in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income in the second quarter of Fiscal 2021.

•

Multi-employer pension plan withdrawal costs On September 22, 2021, the union participants of the Retail, Wholesale and Department Store Union Fund (the “RWDSU Fund”) at our Birmingham, Alabama plant voted to withdraw from the RWDSU Fund in the most recent collective bargaining agreement. The union participants became eligible to participate in the Flowers Foods, Inc. 401(k) Retirement Savings Plan, beginning on December 1, 2021. This resulted in the recognition of a pension plan withdrawal liability of $3.3 million (including transition payments) in our Condensed Consolidated Statements of Income. We made the transition payments in December of Fiscal 2021 and the withdrawal liability payment in the first quarter of Fiscal 2022.

•

Loss on extinguishment of debt – On April 8, 2021, we completed the early redemption of the company’s $400.0 million of 4.375% senior notes due 2022 (the “2022 notes”) with proceeds received from the issuance of the company’s $500.0 million of 2.400% senior notes due 2031 (the “2031 notes”) on March 9, 2021. We recognized a loss on extinguishment of debt of $16.1 million comprised of a make-whole cash payment of $15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling $0.7 million.

Executive Overview

Business

Flowers is the second-largest producer and marketer of packaged bakery foods in the United States (“U.S.”). Our principal products include breads, buns, rolls, snack cakes, and tortillas and are sold under a variety of brand names, including Nature’s Own, Dave's Killer Bread ("DKB"), Wonder, Canyon Bakehouse, Tastykake, and Mrs. Freshley’s. Our brands are among the best known in the U.S. baking industry. Many of our brands have a major presence in the product categories in which they compete. We manage our business as one operating segment.

Flowers’ strategic priorities include developing our team, focusing on our brands, prioritizing our margins, and proactively seeking smart, disciplined acquisitions in the grain-based foods category. We believe executing on our strategic priorities will drive future growth and margin expansion and deliver meaningful shareholder value over time allowing us to achieve our long-term financial targets of 1% to 2% sales growth, 4% to 6% EBITDA growth, and 7% to 9% EPS growth.

Highlights

•

Nature’s Own is the best-selling loaf bread in the U.S., DKB is the #1 selling organic brand in the U.S., and Canyon Bakehouse is the #1 selling gluten-free bread brand in the U.S. (Source: IRI Total US MultiOutlet+C-Store 12 Weeks Ending ~~7/17/~~10/9/22)

•

Our retail sales comprised ~~78.9%~~78.8% of total sales for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 ~~which was unchanged~~ as compared to 79.0% for the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021.

•

WeAs of November 10, 2022, we operate 4645 bakeries, which produce fresh and frozen breads and rolls, as well as snack cakes and tortillas.

•

We utilize a direct-store-delivery distribution model for fresh bakery foods, whereby product is sold primarily by a network of independent distributor partners to retail and foodservice customers with access to more than 85% of the U.S. population.

•

We offer nationwide distribution of certain fresh snack cakes and frozen breads and rolls via contract carriers.

We are continuing to focus on optimization initiatives in our procurement, distribution, operations, and administrative functions and the company is ~~targeting~~projecting savings in the range of ~~$25~~$20 million to ~~$35~~$30 million from these activities in Fiscal 2022. Additionally, we transitioned into the build phase of our multi-year ERP upgrade project and we continue to implement our digital strategy initiatives as discussed further in the “Transformation Strategy Initiatives” section below.

Impact of the Inflationary Economic Environment, Other Macroeconomic Factors, and COVID-19 on Our Business

We continue to monitor the impact of the inflationary economic environment, supply chain disruptions, ~~and~~ labor shortages, the conflict between Russia and Ukraine, and the COVID-19 pandemic on our business. Our results ~~for~~through the ~~first half~~third quarter of Fiscal 2022 have continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. Remote and hybrid-work arrangements spurred by the pandemic have endured ~~into~~in Fiscal 2022 resulting in greater at-home food consumption than in pre-pandemic periods. We have experienced significant input cost inflation for commodities and transportation, and, to a lesser

extent, for labor in the current year period which has partially offset ~~this benefit.~~the more optimized sales mix. We expect ~~this trend will~~these inflationary pressures to continue throughout the remainder of Fiscal 2022. To mitigate ~~these~~the ongoing cost pressures, we have implemented ~~additional~~multiple price increases ~~at the beginning of Fiscal 2022 and midway through the second quarter of~~in Fiscal 2022.

Additionally, in the latter half of the first quarter and into the second quarter of Fiscal 2022, we experienced heightened supply chain disruptions which impacted our ability to procure adequate quantities of certain raw materials and particularly packaging items, ~~particularly packaging,~~ resulting in lower production volumes. Although we were able to mitigate these packaging shortages earlier than originally anticipated, our ~~second quarter~~ operating results were negatively impacted. These and other supply chain disruptions could continue to negatively impact production volumes due to uncertainty in the global and U.S. supply chain. ~~While we are not directly impacted by~~Although the conflict between Russia and Ukraine has not impacted us directly, we are closely monitoring ~~the effect it is having, and we anticipate will continue to have,~~its effects on the broader economy, including on the availability and price of ~~commodities.~~commodities used in or for the production of our products. Disruptions in our operations, related to factors including, but not limited to, the procurement of raw materials and packaging items, transport of our products, and available workforce, have negatively impacted, and could continue to negatively impact, our operations, results of operations, cash flows, and liquidity.

Labor shortages and turnover at some of our bakeries in Fiscal 2021 and during the ~~first half of Fiscal~~forty weeks ended October 8, 2022 hampered production levels. These and other factors, including, but not limited to, high employment rates and additional government regulations, may continue to adversely affect labor availability and labor costs. These challenges may negatively affect our ability to operate our production lines efficiently or run at full capacity which could lead to increased labor costs, including additional overtime to meet demand and higher wage rates to attract and retain workers. An overall labor shortage, lack of skilled labor, or increased turnover could have a material adverse impact on the company’s operations, results of operations, liquidity, or cash flows.

Our operations may continue to experience disruption due to the continued uncertainty caused by the pandemic, including but not limited to additional variants of the COVID-19 virus, new geographic hotspots, changes in the number of COVID-19 cases, the rate of vaccination within the U.S. population, ~~and~~ the efficacy, or lack thereof, of the vaccines, changes in the global and U.S. economic environment, supply chain disruptions and labor shortages, and changes in pandemic safety policies. Our main focus throughout the pandemic has been and continues to be the health and safety of our team members and independent distributor partners. We continue to follow the pandemic guidance of the U.S. Centers for Disease Control and Prevention (CDC).

We believe we have sufficient liquidity to satisfy our cash needs and we continue to execute on our strategic priorities, including our transformation strategy initiatives, as further discussed in the “Liquidity and Capital Resources” sections below.

Summary of Operating Results, Cash Flows and Financial Condition

Sales increased ~~11.0%~~12.7% for the twelve weeks ended ~~July 16,~~October 8, 2022 compared to the same quarter in the prior year due to price/mix contributing ~~14.4%~~17.8%, partially offset by volume declines of ~~3.4%~~5.1%. Inflation-driven pricing actions were partially offset by ~~unit losses and, to a lesser extent, a reversion in sales mix. Production constraints from supply chain disruptions as well as targeted~~net volume losses. Targeted sales rationalization contributed to the softer volumes.

Sales increased ~~10.6%~~11.2% for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 compared to the same period in the prior year primarily due to inflation-driven pricing ~~actions and, to a much lesser extent, positive shifts in sales mix which together contributed 13.9% to the total increase.~~actions. This increase was partially offset by volume declines of ~~3.3%~~3.8%. ~~Production~~Targeted sales rationalization and production constraints from supply chain disruptions ~~as well as targeted sales rationalization~~ contributed to the lower volumes. ~~Our~~For the forty weeks ended October 8, 2022, our leading brands, Nature's Own, DKB, and Canyon Bakehouse, continued to perform well ~~in the first half of Fiscal 2022~~ as these brands all experienced double-digit sales growth from positive price/~~mix and volume growth, although volumes were partially offset by the impact of supply chain disruptions.~~mix.

Income from operations for the twelve weeks ended ~~July 16,~~October 8, 2022 was ~~$71.7~~$55.5 million compared to ~~$73.9~~$52.1 million in the prior year quarter. ~~Significantly~~Price increases and decreases in legal settlement and consulting costs drove the increase. These items were partially offset by significantly higher input and transportation costs, higher distributor distribution fees, lower production volumes, and the ~~legal settlement were mostly offset by pricing increases, decreased consulting~~current year acquisition-related costs ~~reduced marketing investments,~~ and ~~the prior year acquisition consideration adjustment.~~plant closure costs.

Income from operations for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 was ~~$183.7~~$239.1 million compared to ~~$189.0~~$241.1 million in the prior year period. ~~Considerable input and transportation cost increases combined with lower production volumes resulted in the decline year over year.~~ Sales increases from positive pricing actions ~~combined with reduced marketing investments~~ and ~~the prior~~decreases in legal settlement costs were more than offset by considerable input and transportation cost increases, increased distributor distribution fees, and lower production volumes year ~~acquisition consideration adjustment partially offset the decrease.~~over year.

Net income for the twelve weeks ended ~~July 16,~~October 8, 2022 was ~~$53.7~~$40.5 million compared to ~~$56.4~~$38.9 million in the prior year period. The ~~decrease~~increase resulted primarily from ~~lower~~greater income from operations, ~~detailed~~as described above, ~~and~~partially offset by a higher effective tax rate in the current year quarter.

Net income for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 was ~~$139.3~~$179.8 million compared to ~~$128.0~~$166.9 million in the prior year period. The increase resulted primarily from the loss on extinguishment of debt in the prior year ~~period and a lower effective tax rate in the current year period, partially offset by lower income from operations as discussed above.~~period.

During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, we generated net cash flows from operations of ~~$183.8~~$291.5 million and invested ~~$97.9~~$128.4 million in capital expenditures and made a $9.0 million ~~in a~~ cost-method investment in Base Culture, as further discussed below. Additionally, we made stock repurchases of $34.6 million and paid ~~$93.4~~$140.1 million in dividends to our shareholders. During the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021, we generated net cash flows from operations of ~~$223.4~~$315.2 million, invested ~~$58.3~~$86.7 million in capital expenditures, paid ~~$87.0~~$131.5 million in dividends to our shareholders and decreased our total indebtedness by $81.9 million. On March 9, 2021, we issued the 2031 notes and used the net proceeds from the offering to complete the early redemption of our outstanding 2022 notes and for other debt repayments. At ~~July 16,~~October 8, 2022, all of our outstanding debt obligations ~~were~~had fixed ~~rate debt.~~interest rates.

Late in the first quarter of Fiscal 2022, we increased production capacity for our organic products by adding a production line at our Henderson, Nevada bakery. We anticipate this added capacity will allow us to better serve the West Coast market. In the third quarter of Fiscal 2022, we announced the closure of the Holsum Bakery in Phoenix, Arizona, as discussed above.

During the second quarter of Fiscal 2022, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility. Base Culture's product offerings include better-for-you, gluten-free, and grain-free sliced breads and baked goods and are all-natural, 100% Paleo-certified, kosher-certified, dairy-free, soy-free, and non-GMO verified.

On July 19, 2022, subsequent to the second quarter of Fiscal 2022, the company announced plans to close the Holsum Bakery in Phoenix, Arizona. The bakery currently produces bread and bun products, and production is anticipated to cease on October 31, 2022. This closure is part of our strategy to optimize our sales portfolio and improve supply chain and manufacturing efficiency. The company anticipates recording closure costs, including severance charges and property, plant, and equipment and spare parts impairments, among others, during the third quarter of Fiscal 2022. These amounts cannot be estimated at this time.

Transformation Strategy Initiatives

In the second half of Fiscal 2020, we launched initiatives to transform our business operations. The primary goals of these initiatives are: (1) enable a more agile business model, empowering the organization by fundamentally redesigning core business processes; (2) embed digital capabilities and transform the way we engage with our consumers, customers and employees; and (3) modernize and simplify our application and technology infrastructure landscape, inclusive of the upgrade of our ERP system. We completed the initial planning and road mapping phase of the ERP upgrade at the end of Fiscal 2020 and transitioned into the design phase in early Fiscal 2021 and the build phase at the beginning of Fiscal 2022.

Digital Strategy Initiatives

Our digital strategy initiatives include investments in digital domains of e-commerce, autonomous planning, bakery of the future, digital logistics, and digital sales. In e-commerce, we strive to become a category and market share leader, engage with the consumer through digital platforms and marketplaces, and support our retail partners’ omnichannel strategies. The autonomous planning domain encompasses predictive ordering, cost-to-serve modeling, integrated business planning, and supply and demand forecasting, among other areas. Bakery of the future involves transforming our current manufacturing processes and operational visibility to apply industry-leading digital manufacturing tools, such as real-time performance management and visibility, automation of repetitive processes, standardization of processes and procedures, and sensor-based quality monitoring tools to improve consistency and quality. Digital logistics includes real-time operational visibility, improving our routing efficiency, and automating the freight bill pay audit process. Finally, digital sales will focus on improving our sales execution through ~~retail execution performance~~improved visibility to in-store activities, streamlined reporting, and improved collaboration tools across our sales ecosystem.

~~Combined, these~~These digital domains are expected to improve data visibility and efficiencies while automating many of our processes. When fully implemented, we expect this work will further our brand efforts, bring us ever closer to the consumer, increase operational efficiencies, and deliver higher-quality, real-time insights, which will in turn enable more predictive business decision-making. We transitioned into the implementation phase for the e-commerce, autonomous planning, and bakery of the future domains and selected two bakeries for the pilot program for bakery of the future and autonomous planning in Fiscal 2021. To date, we have rolled out these programs to more than ~~ten~~twelve bakeries and will continue to invest in these new ways of working.

ERP Upgrade

This initiative includes upgrading our information system platform and is expected to improve data management and efficiencies while automating many of our processes. During the first quarter of Fiscal 2021, we engaged a leading, global consulting firm to assist us in planning and implementing the upgrade of our ERP platform and serve as the system integrator for the project. We transitioned into the build phase of the project in the beginning of Fiscal 2022.

We expect ~~this initiative will~~the transformation strategy initiatives to require significant capital investment and expense over the next several years. We currently anticipate the upgrade of our ERP system will cost approximately $275 million (of which approximately 40% is anticipated to be capitalized) and anticipate the upgrade to be completed in 2026. As of October 8, 2022, we have incurred costs related to the project of approximately $125 million. Costs related to the digital initiatives are more fluid and cannot be estimated.

CRITICAL ACCOUNTING POLICIES:

Our financial statements are prepared in accordance with GAAP. These principles are numerous and complex. Our significant accounting policies are summarized in the Form 10-K. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Refer to the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K.

RESULTS OF OPERATIONS:

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve and ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, respectively, are set forth in the tables below (dollars in thousands):


	For the Twelve Weeks Ended																		For the Twelve Weeks Ended
							Percentage of Sales						Increase (Decrease)												Percentage of Sales						Increase (Decrease)
	July 16, 2022			July 17, 2021			July 16, 2022			July 17, 2021			Dollars			%			October 8, 2022			October 9, 2021			October 8, 2022			October 9, 2021			Dollars			%
Sales	$	1,129,051		$	1,017,309			100.0			100.0		$	111,742			11.0		$	1,158,169		$	1,027,800			100.0			100.0		$	130,369			12.7
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		586,084			504,062			51.9			49.5			82,022			16.3			615,621			515,078			53.2			50.1			100,543			19.5
Selling, distribution and administrative expenses		438,350			407,707			38.8			40.1			30,643			7.5			447,363			426,575			38.6			41.5			20,788			4.9
Plant closure costs and impairment of assets																				6,835			—			0.6			—			6,835		NM
Recovery on inferior ingredients																				—			(950	)		—			(0.1	)		950		NM
Multi-employer pension plan withdrawal costs																				—			3,300			—			0.3			(3,300	)	NM
Depreciation and amortization		32,922			31,619			2.9			3.1			1,303			4.1			32,899			31,680			2.8			3.1			1,219			3.8
Income from operations		71,695			73,921			6.4			7.3			(2,226	)		(3.0	)		55,451			52,117			4.8			5.1			3,334			6.4
Other components of net periodic pension and postretirement benefit plans credit		(178	)		(93	)		(0.0	)		(0.0	)		(85	)	NM				(178	)		(94	)		(0.0	)		(0.0	)		(84	)	NM
Interest expense, net		1,504			1,070			0.1			0.1			434			40.6			1,342			1,311			0.1			0.1			31			2.4
Income before income taxes		70,369			72,944			6.2			7.2			(2,575	)		(3.5	)		54,287			50,900			4.7			5.0			3,387			6.7
Income tax expense		16,689			16,586			1.5			1.6		103				0.6			13,759			12,048			1.2			1.2		1711				14.2
Net income	$	53,680		$	56,358			4.8			5.5		$	(2,678	)		(4.8	)	$	40,528		$	38,852			3.5			3.8		$	1,676			4.3
Comprehensive income	$	35,651		$	51,523			3.2			5.1		$	(15,872	)		(30.8	)	$	46,489		$	34,909			4.0			3.4		$	11,580			33.2

For the Twenty-Eight Weeks Ended

Percentage of Sales

Increase (Decrease)

July 16, 2022

July 17, 2021

July 16, 2022

July 17, 2021

Dollars

%

Sales

$
2,564,983

$
2,319,477

100.0

100.0

$
245,506

10.6

Materials, supplies, labor and other production costs
   (exclusive of depreciation and amortization shown
   separately below)

1,310,676

1,147,638

51.1

49.5

163,038

14.2

Selling, distribution and administrative expenses

993,302

909,680

38.7

39.2

83,622

9.2

Loss on inferior ingredients

—

122

—

0.0

(122
)

NM

Impairment of assets

990

—

0.0

—

990

NM

Depreciation and amortization

76,345

73,005

3.0

3.1

3,340

4.6

Income from operations

183,670

189,032

7.2

8.1

(5,362
)

(2.8
)
Other components of net periodic pension and
   postretirement benefit plans credit

(416
)

(218
)

(0.0
)

(0.0
)

(198
)

NM

Interest expense, net

3,605

5,271

0.1

0.2

(1,666
)

(31.6
)
Loss on extinguishment of debt

—

16,149

—

0.7

(16,149
)

NM

Income before income taxes

180,481

167,830

7.0

7.2

12,651

7.5

Income tax expense

41,212

39,817

1.6

1.7

1,395

3.5

Net income

$
139,269

$
128,013

5.4

5.5

$
11,256

8.8

Comprehensive income

$
131,516

$
128,279

5.1

5.5

$
3,237

2.5


	For the Forty Weeks Ended
							Percentage of Sales						Increase (Decrease)
	October 8, 2022			October 9, 2021			October 8, 2022			October 9, 2021			Dollars			%
Sales	$	3,723,152		$	3,347,277			100.0			100.0		$	375,875			11.2
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		1,926,297			1,662,716			51.7			49.7			263,581			15.9
Selling, distribution and administrative expenses		1,440,665			1,336,255			38.7			39.9			104,410			7.8
Plant closure costs and impairment of assets		7,825			—			0.2			—			7,825		NM
Recovery on inferior ingredients		—			(828	)		—			(0.0	)		828		NM
Multi-employer pension plan withdrawal costs		—			3,300			—			0.1			(3,300	)	NM
Depreciation and amortization		109,244			104,685			2.9			3.1			4,559			4.4
Income from operations		239,121			241,149			6.4			7.2			(2,028	)		(0.8	)
Other components of net periodic pension and postretirement benefit plans credit		(594	)		(312	)		(0.0	)		(0.0	)		(282	)	NM
Interest expense, net		4,947			6,582			0.1			0.2			(1,635	)		(24.8	)
Loss on extinguishment of debt		—			16,149			—			0.5			(16,149	)	NM
Income before income taxes		234,768			218,730			6.3			6.5			16,038			7.3
Income tax expense		54,971			51,865			1.5			1.5			3,106			6.0
Net income	$	179,797		$	166,865			4.8			5.0		$	12,932			7.7
Comprehensive income	$	178,005		$	163,188			4.8			4.9		$	14,817			9.1

NM - the computation is not meaningful.

Percentages may not add due to rounding.

3739

TWELVE WEEKS ENDED ~~JULY 16,~~OCTOBER 8, 2022 COMPARED TO TWELVE WEEKS ENDED ~~JULY 17,~~OCTOBER 9, 2021

Sales (dollars in thousands)


	For the Twelve Weeks Ended												For the Twelve Weeks Ended
					Percentage of Sales				Increase (Decrease)								Percentage of Sales				Increase (Decrease)
	July 16, 2022		July 17, 2021		July 16, 2022		July 17, 2021		Dollars		%		October 8, 2022		October 9, 2021		October 8, 2022		October 9, 2021		Dollars		%
Branded retail	$	735,898	$	674,489		65.2		66.3	$	61,409		9.1	$	748,401	$	688,995		64.6		67.0	$	59,406		8.6
Store branded retail		157,215		131,045		13.9		12.9		26,170		20.0		163,937		124,639		14.2		12.1		39,298		31.5
Non-retail and other		235,938		211,775		20.9		20.8		24,163		11.4		245,831		214,166		21.2		20.9		31,665		14.8
Total	$	1,129,051	$	1,017,309		100.0		100.0	$	111,742		11.0	$	1,158,169	$	1,027,800		100.0		100.0	$	130,369		12.7

(The table above presents certain sales by category that have been reclassified from amounts previously reported to conform to the current period presentation.)

The change in sales was generally attributable to the following:


Percentage Point Change in Sales Attributed to:
Pricing/mix	~~14.4~~17.8
Volume	(~~3.4~~5.1	)
Total percentage change in sales	~~11.0~~12.7

Sales increased significantly quarter over quarter due to positive pricing actions implemented in the ~~current year quarter~~latter half of Fiscal 2021 and during the first three quarters of Fiscal 2022 to mitigate considerable cost ~~inflation. These gains~~inflation, partially offset by volume losses. Year over year sales comparisons for store branded and non-retail and other sales benefitted from price increases that took place primarily in the current year, whereas branded retail sales were lapping prior year price increases. Volume decreases in branded retail and non-retail and other sales were partially offset by volume ~~declines and to a lesser extent reversions~~growth in ~~sales mix from branded retail to~~ store branded retail ~~sales. Declines in branded retail products and non-retail items drove most of the volume decrease.~~products. We ~~continue~~continued to execute on our portfolio strategy ~~to shift~~of shifting more of our sales to higher margin, value-added branded retail ~~products and this~~products. This shift, combined with supply chain disruptions and labor shortages, contributed to the ~~lower unit volumes.~~volume decreases. The promotional environment has remained relatively stable in the ~~second~~third quarter of Fiscal 2022 as compared to the same quarter in the prior year, however, this trend may not continue in future periods.

Branded retail sales increased ~~9.1%~~8.6% quarter over quarter due to favorable price/mix resulting from ~~price increases~~inflation-driven pricing actions and improved promotional efficiency, partially offset by volume ~~declines and sales mix reversion to store branded retail sales.~~declines. The largest volume declines ~~were~~occurred in branded cake, branded traditional loaf breads, and branded buns and rolls. Branded cake volumes declined due to targeted sales rationalization and the impact of supply chain disruptions and labor shortages during the current year quarter. Sales of our leading brands, Nature's Own, DKB, and Canyon Bakehouse, continued to perform well benefiting from inflation-driven price increases, however, ~~volumes were negatively impacted by~~inflationary impacts on consumer spending and, to a lesser extent, supply chain ~~disruptions. Branded cake volumes were lower due to targeted sales rationalization and the impact of supply chain disruptions and labor shortages during the current year quarter.~~constraints, pressured volumes.

Store branded retail sales were significantly higher quarter over quarter due to price increases ~~we have~~ implemented to mitigate inflationary ~~pressures. Volumes were relatively flat as positive~~pressures and volume growth resulting from ~~sales mix shifts~~trade down from branded retail ~~sales was offset by~~to store branded retail products, net of targeted sales ~~rationalization and packaging shortages.~~rationalization. Sales of our store branded retail products had ~~previously~~ been declining prior to the pandemic and we experienced an acceleration of this trend during the last two fiscal years. This trend ~~reversed~~started to reverse in the second quarter of Fiscal 2022 and continued to expand in the third quarter of Fiscal 2022 partly due to the inflation-driven price increases ~~as well as~~and, to a much lesser extent, consumers shifting from branded retail to store branded retail products. However, store branded retail sales continue to comprise a smaller portion of our total sales mix as compared to pre-pandemic levels.

Non-retail sales ~~benefitted~~increased quarter over quarter from positive price/mix due to inflation-driven pricing actions, partially offset by volume declines. ~~Unit declines in fast food and co-manufactured items~~Foodservice drove most of the volume decrease. Targeted sales rationalization, ~~as well as~~including exiting certain low margin business, and production constraints from supply chain disruptions contributed to the lower volumes.

3840

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)


	For the Twelve Weeks Ended				Increase			For the Twelve Weeks Ended				Increase
Line Item Component	July 16, 2022 % of Sales		July 17, 2021 % of Sales		(Decrease) as a % of Sales			October 8, 2022 % of Sales		October 9, 2021 % of Sales		(Decrease) as a % of Sales
Ingredients and packaging		31.8		27.6		4.2			32.9		28.1		4.8
Workforce-related costs		13.8		14.8		(1.0	)		13.5		14.9		(1.4	)
Other		6.3		7.1		(0.8	)		6.8		7.1		(0.3	)
Total		51.9		49.5		2.4			53.2		50.1		3.1

Materials, supplies, labor and other production costs as a percent of sales rose ~~significantly~~sharply quarter over quarter due to considerable input cost ~~inflation. Ingredient~~inflation, partially mitigated by inflation-driven pricing actions. In the current year quarter, ingredient and packaging costs continued ~~rising throughout~~to be impacted by the ~~second quarter of Fiscal 2022~~decades-high inflationary environment and these cost increases outpaced the sales price increases. ~~We anticipate~~Additionally, reduced outside purchases of product (sales with no associated ingredient costs) and ~~packaging costs to remain volatile for the remainder of Fiscal 2022. Sharp~~sharp increases in egg prices as a result of the avian influenza outbreak earlier this year ~~also~~ contributed to the higher ingredient and packaging costs. We anticipate ingredient and packaging costs to remain volatile and ~~we expect~~ egg prices to remain a headwind infor the ~~second half~~remainder of Fiscal 2022. Increased finished goods inventories, which were impacted by cost inflation, also drove ingredient and packaging costs higher as a percent of sales. The decrease in the Other line item reflects the impact of timing differences of the sell-through of product inventories. Although workforce-related costs did not increase at the same rate as the sales price increases, the competitive labor market ~~continues~~combined with lower production volumes continued to impact our operations and we expect this trend to continue. InLower employee fringe costs also contributed to the ~~beginning~~decrease in workforce-related costs as a percent of sales. The decrease in the ~~second quarter~~Other line item mostly reflects lower outside purchases of Fiscal 2022, we experienced heightened supply chain disruptions which impacted our ability to procure adequate quantities of certain raw materials and packaging items contributing to lower production volumes. As the quarter progressed, we mitigated those disruptions and were able to adequately source these items.product, partially offset by reduced manufacturing efficiencies. We expect similar challenges could occur as a result of uncertainty in the global and U.S. supply chain.

~~Ingredients~~Prices of ingredients and packaging materials ~~periodically experience price fluctuations~~fluctuate and we continually monitor these markets. Ingredient and packaging costs are currently experiencing significant volatility and are expected to remain volatile for the remainder of Fiscal 2022. The cost of these inputs has fluctuated widely, and may continue to so, due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

Selling, Distribution and Administrative Expenses (as a percent of sales)


	For the Twelve Weeks Ended				Increase			For the Twelve Weeks Ended				Increase
Line Item Component	July 16, 2022 % of Sales		July 17, 2021 % of Sales		(Decrease) as a % of Sales			October 8, 2022 % of Sales		October 9, 2021 % of Sales		(Decrease) as a % of Sales
Workforce-related costs		10.8		11.1		(0.3	)		10.3		11.1		(0.8	)
Distributor distribution fees		14.6		14.9		(0.3	)		14.5		14.9		(0.4	)
Other		13.4		14.1		(0.7	)		13.8		15.5		(1.7	)
Total		38.8		40.1		(1.3	)		38.6		41.5		(2.9	)

Price increases ~~in the current year quarter~~ in excess of wage inflation and lower employee fringe benefit costs in the current year quarter resulted in lower workforce-related costs as a percent of sales. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through ~~IDPs and a shift in sales mix.~~IDPs. The decrease in the Other line item reflects the $17.6 million reduction in legal settlement and related costs and reduced ~~marketing investments, decreased~~ consulting costs, ~~including~~net of the ~~$1.5~~$11.6 million ~~decrease in business process improvement consulting~~acquisition-related costs associated with ongoing transformation strategy initiatives, and the prior year acquisition consideration adjustment of $3.4 million. This decrease was partially offset by increased transportation costs, partly due to sharp increases in fuel costs, and the legal settlement in the current year ~~quarter.~~period. Transportation cost increases were mostly offset by sales price increases. See the “Matters Affecting Comparability” section above for a discussion of the project-related consulting costs, ~~the prior year acquisition consideration adjustment,~~legal settlements and related costs, and the ~~legal settlement.~~current year acquisition-related costs.

39Plant Closure Costs and Impairment of Assets, Recovery on Inferior Ingredients, and Multi-Employer Pension Plan Withdrawal Costs

Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased as a percent of sales due to price increases implemented during Fiscal 2022, but increased in dollars mainly due to assets we have placed in service and increased depreciation related to twenty-seven leased warehouses purchased at the end of Fiscal 2021, two of which were moved to held for sale in the first quarter of Fiscal 2022.

Income from Operations

Income from operations decreased as a percent of sales for the twelve weeks ended ~~July 16,~~October 8, 2022 compared to the twelve weeks ended ~~July 17,~~October 9, 2021 mostly due to substantial input ~~and transportation~~ cost inflation, partially offset by inflation-driven sales price increases and lower ~~workforce-related costs,~~selling, distribution, and administrative expenses as ~~discussed above.~~a percent of sales.

Net Interest Expense

Net interest expense ~~decreased~~was relatively consistent with the prior year quarter as a percent of sales ~~but increased~~and in ~~dollars quarter over quarter primarily due to lower interest income in the current year quarter.~~dollars.

Income Tax Expense

The effective tax rate for the twelve weeks ended ~~July 16,~~October 8, 2022 was ~~23.7%~~25.3% compared to ~~22.7%~~23.7% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to larger net favorable discrete items related to tax credits in the prior year quarter. For both periods presented, the primary differences in the effective rate and the statutory rate were state income taxes ~~including~~which includes the recognition of a discrete benefit related to state tax credits.

Comprehensive Income

The ~~decrease~~increase in comprehensive income quarter over quarter resulted primarily from changes in the fair value of derivatives and ~~lower~~higher net income period over period.

~~TWENTY-EIGHT~~FORTY WEEKS ENDED ~~JULY 16,~~OCTOBER 8, 2022 COMPARED TO ~~TWENTY-EIGHT~~FORTY WEEKS ENDED ~~JULY 17,~~OCTOBER 9, 2021

Sales (dollars in thousands)


	Twenty-Eight Weeks Ended												Forty Weeks Ended
					Percentage of Sales				Increase (Decrease)								Percentage of Sales				Increase (Decrease)
	July 16, 2022		July 17, 2021		July 16, 2022		July 17, 2021		Dollars		%		October 8, 2022		October 9, 2021		October 8, 2022		October 9, 2021		Dollars		%
Branded retail	$	1,692,052	$	1,536,229		66.0		66.2	$	155,823		10.1	$	2,440,500	$	2,225,224		65.5		66.5	$	215,276		9.7
Store branded retail		330,819		293,522		12.9		12.7		37,297		12.7		494,749		418,161		13.3		12.5		76,588		18.3
Non-retail and other		542,112		489,726		21.1		21.1		52,386		10.7		787,903		703,892		21.2		21.0		84,011		11.9
Total	$	2,564,983	$	2,319,477		100.0		100.0	$	245,506		10.6	$	3,723,152	$	3,347,277		100.0		100.0	$	375,875		11.2

(The table above presents certain sales by category that have been reclassified from amounts previously reported to conform to the current period presentation.)

The change in sales was generally attributable to the following:


Percentage Point Change in Sales Attributed to:
Pricing/mix	~~13.9~~15.0
Volume	(~~3.3~~3.8	)
Total percentage change in sales	~~10.6~~11.2

Sales increased significantly year over year mainly due to ~~positive~~inflation-driven pricing actions implemented to mitigate ~~cost inflation. Volume declines, most notably in branded cake products, branded traditional loaf breads, store branded retail products, and fast food items,~~rising operating costs, partially offset ~~the~~by volume declines across all three sales ~~increase.~~categories. We continue to execute on our portfolio strategy to shift more of our sales to higher margin, value-added branded retail products and this shift, combined with supply chain disruptions and labor shortages, contributed to the lower ~~unit~~ volumes. The promotional environment has remained relatively stable in the first ~~half~~three quarters of Fiscal 2022 as compared to the same period in the prior year, however, this trend may not continue in future periods.

Branded retail sales increased ~~considerably~~ year over year due to favorable price/mix resulting from price increases and improved promotional efficiency, partially offset by volume declines, most notably in branded cake items and branded traditional loaf bread products. Branded cake volumes were negatively impacted by targeted sales rationalization, supply chain disruptions, and labor shortages during the current year period. Sales of our leading brands, Nature's Own, DKB, and Canyon Bakehouse, all experienced double-digit sales growth driven by inflation-driven price increases and, to a much lesser extent, volume growth, although volumes were pressured by the impact of supply chain disruptions. ~~Consumers continued~~

Store branded retail sales increased considerably year over year due to ~~express a preference for the more-differentiated products offered by these brands. Branded cake volumes were negatively impacted by~~price increases implemented to mitigate inflationary pressures. Volumes declined slightly due to targeted sales rationalization and supply chain disruptions, ~~and labor shortages during the current year.~~

~~Store branded retail sales were higher year over year due to price increases we have implemented to mitigate inflationary pressures,~~ partially offset by ~~volume declines, partly due~~the impact of consumers shifting more of their purchases from branded retail products to ~~targeted sales rationalization. The largest volume declines were in~~ store branded ~~breads, buns, and rolls.~~products, particularly in white loaf breads.

Non-retail sales ~~benefitted~~increased year over year from positive price/mix due to inflation-driven pricing actions, partially offset by volume declines. ~~Unit~~Volume declines in foodservice, fast food, and co-manufactured items drove the ~~volume~~ decrease and were partially offset by volume increases in vending ~~units.~~products. Targeted sales rationalization as well as production constraints from supply chain disruptions contributed to the lower volumes.

We anticipate our Fiscal 2022 sales will be higher than Fiscal 2021 sales due to pricing actions ~~we have~~ taken at the beginning of the first quarter of Fiscal 2022 and additional price increases implemented ~~midway~~ through the second ~~quarter~~and third quarters of Fiscal 2022.

Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately; as a percent of sales)


	For the Twenty-Eight Weeks Ended				Increase			For the Forty Weeks Ended				Increase
Line item component	July 16, 2022 % of sales		July 17, 2021 % of sales		(Decrease) as a % of sales			October 8, 2022 % of sales		October 9, 2021 % of sales		(Decrease) as a % of sales
Ingredients and packaging		30.9		27.6		3.3			31.6		27.7		3.9
Workforce-related costs		13.9		14.8		(0.9	)		13.7		14.8		(1.1	)
Other		6.3		7.1		(0.8	)		6.4		7.2		(0.8	)
Total		51.1		49.5		1.6			51.7		49.7		2.0

Materials, supplies, labor and other production costs as a percent of sales ~~rose~~increased significantly year over year due to considerable input cost inflation. ~~We experienced considerable price inflation in~~In Fiscal 2022, ~~for~~inflation impacted all ingredient and packaging items, and most significantly for flour costs, which outpaced the sales price increases. Additionally, increases in finished goods inventory period over period resulted in higher ingredient and packaging costs. We anticipate input costs to remain volatile for the remainder of Fiscal 2022. ~~The Other line item reflects the impact of timing differences of the sell-through of product inventories.~~ Although workforce-related costs did not increase at the same rate as the sales price increases, the competitive labor market continues to impact our operations and we expect this trend to continue. The Other line item reflects the impact of timing differences of the sell-through of product inventories and reduced outside purchases of product, net of reduced manufacturing efficiencies and lower production volumes. Similar to workforce-related costs, other costs did not increase at the same rate as the sales price increases. In the latter half of the first quarter of Fiscal 2022, we experienced heightened supply chain disruptions which impacted our ability to procure adequate quantities of certain raw materials and packaging items contributing to lower production volumes. We effectively navigated these challenges faster than originally anticipated, although with more costly inputs, partially mitigating the negative impact to our operating results. We expect these challenges to continue as a result of uncertainty in the global and U.S. supply chain.

~~Ingredients~~Prices of ingredients and packaging materials ~~periodically experience price fluctuations~~fluctuate and we continually monitor these markets. Ingredient and packaging costs are currently experiencing significant volatility and are expected to remain volatile for the remainder of Fiscal 2022. The cost of these inputs has fluctuated widely during the current year, and may continue to so, due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

Selling, Distribution and Administrative Expenses (as a percent of sales)

For the Twenty-Eight Weeks Ended

Increase

Line item component

July 16, 2022
% of sales

July 17, 2021
% of sales

(Decrease) as a
% of sales

Workforce-related costs

11.0

11.4

(0.4
)
Distributor distribution fees

14.7

15.0

(0.3
)
Other

13.0

12.8

0.2

Total

38.7

39.2

(0.5
)


	For the Forty Weeks Ended				Increase
Line item component	October 8, 2022 % of sales		October 9, 2021 % of sales		(Decrease) as a % of sales
Workforce-related costs		10.8		11.3		(0.5	)
Distributor distribution fees		14.7		15.0		(0.3	)
Other		13.2		13.6		(0.4	)
Total		38.7		39.9		(1.2	)

Price increases we have implemented and lower employee fringe benefit costs in the current year period more than offset wage inflation rates ~~and employee fringe benefit costs were lower in the current year~~ resulting in lower workforce-related costs as a percent of sales. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through ~~IDPs and a shift in sales mix.~~IDPs. However, this decrease was more than offset by the rise in transportation costs which is reflected in the Other line item. The ~~increase~~decrease in the Other line item reflects ~~higher transportation~~the $15.6 million decrease in legal settlements and related costs, ~~and the legal settlement in the current year period, partially offset by reduced marketing investments and~~ the $3.4 million prior year acquisition consideration ~~adjustment.~~adjustment, and reduced marketing

investments period over period. Partially offsetting these items were $11.6 million of acquisition-related costs incurred in the current year period and higher transportation costs. See the “Matters Affecting Comparability” section above for a discussion of ~~the~~ legal ~~settlement~~settlements and related costs, the prior year acquisition consideration ~~adjustment.~~adjustment, and acquisition-related costs.

~~Loss~~Plant Closure Costs and Impairment of Assets, Recovery on Inferior Ingredients, and ~~Impairment of Assets~~Multi-Employer Pension Plan Withdrawal Costs

Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased ~~slightly~~ as a percent of sales due to price increases ~~we have~~ implemented during the ~~first half of Fiscal~~forty weeks ended October 8, 2022, but increased in dollars mainly due to assets placed in service and increased depreciation related to twenty-seven leased warehouses purchased at the end of Fiscal 2021, two of which were moved to held for sale in the first quarter of Fiscal 2022.

Income from Operations

Income from operations decreased as a percent of sales for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 compared to the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021 mostly due to substantial input ~~and transportation~~ cost inflation, partially offset by sales increases and lower ~~workforce-related costs~~selling, distribution, and ~~decreased marketing investments,~~administrative expenses as a percent of sales, as discussed above.

Net Interest Expense

Net interest expense (exclusive of the portion related to the loss on extinguishment of debt in the prior year period discussed below) decreased in dollars and as a percent of sales year over year due to lower average amounts outstanding under our borrowing arrangements and the lower interest rate on the 2031 notes as compared to the 2022 notes which were redeemed in the first quarter of Fiscal 2021. Lower interest income year over year partially offset the decrease in net interest expense.

Loss on Extinguishment of Debt

In the first quarter of Fiscal 2021, we completed the redemption of the outstanding 2022 notes and incurred a loss of $16.1 million due to the make-whole provision of $15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling $0.7 million as further discussed in the “Matters Affecting Comparability” section above.

Income Tax Expense

The effective tax rate for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 was ~~22.8%~~23.4% compared to 23.7% in the prior year period. The decrease in the rate was primarily due to favorable windfalls on stock-based compensation recorded discretely in the current year period. For the current year period, the primary differences in the effective rate and the statutory rate were state income taxes including the recognition of discrete tax credits and windfalls on stock-based compensation. The primary differences in the effective rate and statutory rate for the prior year period were state income taxes including the recognition of discrete tax credits.

Comprehensive Income

The increase in comprehensive income year over year resulted primarily from increased net income ~~net of~~and changes in the fair value of derivatives.

LIQUIDITY AND CAPITAL RESOURCES:

Strategy and Update on Impact of the Inflationary Economic Environment, Other Macroeconomic Factors, and COVID-19 on Our Business

We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. Furthermore, we strive to maintain a conservative financial position as we believe it allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, and obligated debt repayments. We believe we currently have access to available funds and financing sources to meet our short and long-term capital requirements. The company’s strategy for use of its excess cash flows includes:

•

implementing our strategic priorities, including our transformation strategy initiatives;

•

paying dividends to our shareholders;

•

maintaining a conservative financial position;

•

making strategic acquisitions; and

•

repurchasing shares of our common stock.

Although there has been no material adverse impact on the company’s results of operations, liquidity or cash flows for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, volatility in global and U.S. economic environments, including as a result of, among other things, the inflationary economic environment, supply chain disruptions, labor shortages, the conflict between Russia and Ukraine, and the COVID-19 pandemic on our business, could significantly impact our ability to generate future cash flows and we continue to evaluate these various potential business risks. Those potential risks include the possibility of future economic downturns that could result in a significant shift away from our branded retail products to store branded products, supply chain disruptions that have impacted, and could continue to impact, the procurement of raw materials and packaging items, the workforce available to us, and our ability to implement additional pricing actions to offset rising ~~inflation, among other risks.~~inflation.

In light of the potential risks detailed above, ~~associated with the current inflationary economic environment and the ongoing pandemic,~~ the company has taken actions to safeguard its capital position. We continue to maintain higher levels of cash on hand compared to pre-pandemic levels and in the first quarter of Fiscal 2021 issued the 2031 notes and used the net proceeds from the offering to redeem in full the outstanding 2022 notes, extending the earliest maturity date of our non-revolving debt to 2026. Additionally, we repaid the outstanding balances on both the accounts receivable securitization facility (the “facility”) and the credit facility (the “credit facility”) with proceeds from the issuance of the 2031 notes and from cash flows from operations. The macroeconomic-related factors ~~including the ongoing COVID-19 pandemic,~~discussed above remain fluid and the future impact on the company’s business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including amounts available on our debt facilities, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds. We believe ~~the fundamentals of the company remain strong and~~ that we have sufficient liquidity on hand to continue business operations during the pandemic and the volatile global and U.S. economic environments. The company had total available liquidity of ~~$852.8~~$864.3 million as of ~~July 16,~~October 8, 2022, consisting of cash on hand and the available balances under the credit facility and the facility.

On July 19, 2022, subsequent to the end of the second quarter of Fiscal 2022, the company announced plans to close its Phoenix, Arizona bakery which produces bread and bun products in order to optimize its supply chain and improve manufacturing efficiency. Production is anticipated to cease on October 31, 2022 and the company anticipates recognizing severance charges and property, plant, and equipment and spare parts impairments related to the closure during the third quarter of Fiscal 2022.

~~On May 26, 2022, our Board of Directors increased the company's share repurchase authorization by 20.0 million shares.~~

Liquidity Discussion for the ~~Twenty-Eight~~Forty Weeks Ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021

Cash and cash equivalents were ~~$162.5~~$172.7 million at ~~July 16,~~October 8, 2022 and $185.9 million at January 1, 2022, significantly higher than historical pre-pandemic levels. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands):

For the Twenty-Eight Weeks Ended

Cash Flow Component

July 16, 2022

July 17, 2021

Change

Cash provided by operating activities

$
183,833

$
223,430

$
(39,597
)
Cash disbursed for investing activities

(93,110
)

(56,971
)

(36,139
)
Cash disbursed for financing activities

(114,083
)

(181,665
)

67,582

Total change in cash

$
(23,360
)

$
(15,206
)

$
(8,154
)


	For the Forty Weeks Ended
Cash Flow Component	October 8, 2022			October 9, 2021			Change
Cash provided by operating activities	$	291,534		$	315,223		$	(23,689	)
Cash disbursed for investing activities		(119,256	)		(81,714	)		(37,542	)
Cash disbursed for financing activities		(177,034	)		(233,462	)		56,428
Effect of exchange rates on cash		(8,371	)		—			(8,371	)
Total change in cash	$	(13,127	)	$	47		$	(13,174	)

Cash Flows Provided by Operating Activities. Net cash provided by operating activities consisted of the following items for non-cash adjustments to net income (amounts in thousands):


	For the Twenty-Eight Weeks Ended									For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			Change			October 8, 2022			October 9, 2021			Change
Depreciation and amortization	$	76,345		$	73,005		$	3,340		$	109,244		$	104,685		$	4,559
Loss on foreign currency exchange rates											8,371			—			8,371
Impairment of assets		990			—			990			3,897			—			3,897
Gain reclassified from accumulated other comprehensive income to net income		(3,197	)		(602	)		(2,595	)		(5,625	)		(1,055	)		(4,570	)
Allowances for accounts receivable		3,986			3,579			407			5,811			5,880			(69	)
Stock-based compensation		14,639			11,957			2,682			20,124			16,768			3,356
Deferred income taxes		13,563			6,208			7,355			11,519			(1,294	)		12,813
Other non-cash items		2,626			2,457			169			4,173			5,665			(1,492	)
Net non-cash adjustment to net income	$	108,952		$	96,604		$	12,348		$	157,514		$	130,649		$	26,865

•

Refer to the ~~Impairment~~Acquisition-related costs and Plant closure and impairment of assets discussion in the “Matters Affecting Comparability” section above for additional information regarding ~~this item.~~these items.

•

For the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, deferred income tax activity was composed of changes in temporary differences year over year, including the impact of the vesting of stock equity awards and legal settlement payments. For the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021, deferred income taxes changed due to changes in temporary differences.

•

Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs (including $0.7 million related to the write-off of unamortized costs upon the early redemption of the 2022 notes in the first quarter of Fiscal 2021) and gains or losses on the sale of assets.

Net changes in working capital consisted of the following items (amounts in thousands):


	For the Twenty-Eight Weeks Ended									For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			Change			October 8, 2022			October 9, 2021			Change
Changes in accounts receivable, net	$	(59,721	)	$	(6,949	)	$	(52,772	)	$	(71,882	)	$	(5,961	)	$	(65,921	)
Changes in inventories, net		(31,790	)		(2,228	)		(29,562	)		(33,476	)		(8,200	)		(25,276	)
Changes in hedging activities, net		(10,508	)		1,135			(11,643	)		2,654			(1,002	)		3,656
Changes in other assets and accrued liabilities, net		(23,567	)		(32,959	)		9,392			(20,424	)		(4,045	)		(16,379	)
Changes in accounts payable, net		61,198			39,814			21,384			78,351			36,917			41,434
Net changes in working capital	$	(64,388	)	$	(1,187	)	$	(63,201	)
Qualified pension plan contributions											(1,000	)		—			(1,000	)
Net changes in working capital and pension plan contributions										$	(45,777	)	$	17,709		$	(63,486	)

•

Changes in accounts receivable, inventories, and accounts payable were mainly attributable to significant price increases and cost inflation inthrough the ~~first half~~third quarter of Fiscal 2022.

•

Hedging activities change due to market movements that affect the fair value and the associated required collateral of positions and the timing and recognition of deferred gains or losses. These changes will continue to occur, though the degree and financial impact cannot be currently estimated, as part of our hedging program.

•

The change in other assets primarily resulted from changes in prepaid assets in each respective period. Changes in employee compensation accruals and legal settlement accruals primarily resulted in the change in other accrued liabilities. During the first quarter of Fiscal 2022 and Fiscal 2021, we paid $43.8 million and $64.6 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plans. An additional $1.8 million and $0.4 million was paid during the first quarter of Fiscal 2022 and Fiscal 2021, respectively, for our share of employment taxes on the vesting of employee restricted stock awards in each respective year. During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, the company accrued a$7.5 million and paid $2.0 million of legal ~~settlement~~settlements that occurred in the current year period and paid a $16.5 million legal settlement that had been accrued for in a prior period. During the ~~twenty-eight~~forty weeks ended ~~July 17,~~October 9, 2021, we paid $8.7 million of legal settlements, all of which had been accrued for in prior periods. As of ~~July 16,~~October 8, 2022, the remaining balance of the employer share of Social Security tax deferred under the CARES Act was $16.4 million which is due to be paid by December 31, 2022.

44•

The company made a voluntary defined benefit pension plan contribution of $1.0 million to Plan No. 2 in the third quarter of Fiscal 2022.

Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, respectively (amounts in thousands):


	For the Twenty-Eight Weeks Ended									For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			Change			October 8, 2022			October 9, 2021			Change
Purchases of property, plant, and equipment	$	(97,862	)	$	(58,270	)	$	(39,592	)	$	(128,372	)	$	(86,723	)	$	(41,649	)
Principal payments from notes receivable, net of repurchases of independent distributor territories		11,782			8,056			3,726			14,379			11,638			2,741
Proceeds from sale of property, plant and equipment		1,575			2,411			(836	)		3,335			2,525			810
Acquisition of trademarks		—			(10,200	)		10,200			—			(10,200	)		10,200
Investment in unconsolidated affiliate		(9,000	)		—			(9,000	)		(9,000	)		—			(9,000	)
Other		395			1,032			(637	)		402			1,046			(644	)
Net cash disbursed for investing activities	$	(93,110	)	$	(56,971	)	$	(36,139	)	$	(119,256	)	$	(81,714	)	$	(37,542	)

•

We currently anticipate capital expenditures of $150.0 million to $160.0 million for Fiscal 2022 (inclusive of expenditures for the ERP upgrade of $60.0 million to $70.0 million).

•

As discussed in the Executive Overview section above, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility.

Cash Flows Disbursed for Financing Activities. The table below presents net cash disbursed for financing activities for the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, respectively (amounts in thousands):


	For the Twenty-Eight Weeks Ended									For the Forty Weeks Ended
	July 16, 2022			July 17, 2021			Change			October 8, 2022			October 9, 2021			Change
Dividends paid	$	(93,447	)	$	(87,042	)	$	(6,405	)	$	(140,052	)	$	(131,510	)	$	(8,542	)
Payment of financing fees		(123	)		(4,681	)		4,558			(273	)		(5,811	)		5,538
Stock repurchases		(16,514	)		(1,058	)		(15,456	)		(34,586	)		(9,510	)		(25,076	)
Change in bank overdrafts		(3,135	)		(6,160	)		3,025			(817	)		(3,462	)		2,645
Net change in debt obligations		—			(81,858	)		81,858			—			(81,858	)		81,858
Payments on financing leases		(864	)		(866	)		2			(1,306	)		(1,311	)		5
Net cash disbursed for financing activities	$	(114,083	)	$	(181,665	)	$	67,582		$	(177,034	)	$	(233,462	)	$	56,428

•

Our Board of Directors declared the following quarterly dividends during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 (amounts in thousands, except per share data):


Date Declared	Record Date	Payment Date	Dividend per Common Share		Dividends Paid		Record Date	Payment Date	Dividend per Common Share		Dividends Paid
August 19, 2022							September 2, 2022	September 16, 2022	$	0.2200	$	46,605
May 26, 2022	June 9, 2022	June 23, 2022	$	0.2200	$	46,660	June 9, 2022	June 23, 2022	$	0.2200	$	46,660
February 18, 2022	March 4, 2022	March 18, 2022	$	0.2100	$	44,527	March 4, 2022	March 18, 2022	$	0.2100	$	44,527

Additionally, we paid dividends of $2.3 million at the time of vesting of certain restricted stock awards, director stock awards, and at issuance of deferred compensation shares. The increase in dividends paid resulted from an increase in the dividend rate compared to the prior year. While there are no requirements to increase our dividend rate, we have shown a recent historical trend to do so. We anticipate funding future dividend payments from cash flows from operations.

•

WeDuring the forty weeks ended October 8, 2022, we paid additional financing costs associated with the Fiscal 2021 amendment of the credit facility during the first quarter of Fiscal 2022, ~~and~~as well as financing costs for the amendment of the facility in the third quarter of Fiscal 2022. In the prior year period, we paid financing costs associated with the issuance of the 2031 notes in the first quarter of Fiscal 2021 and for the amendments of the facility and credit facility in the third quarter of Fiscal 2021.

•

Stock repurchase decisions are made based on our stock price, our belief of relative value, and our cash projections at any given time. During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022 and ~~July 17,~~October 9, 2021, we repurchased ~~614,558~~1,321,117 and ~~46,618~~406,840 shares of our common stock for ~~$16.5~~$34.6 million and ~~$1.1~~$9.5 million, respectively, under a share repurchase plan approved by our Board of Directors. A portion of these shares were acquired to satisfy employees’ tax withholding and payment obligations in connection with the vesting of restricted stock awards, which are repurchased by the company based on the fair market value on the vesting date.

•

See the discussion below under the “Capital Structure” section regarding changes in debt obligations.

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Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at ~~July 16,~~October 8, 2022 and January 1, 2022, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 3, Leases, and Note 11, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.


	Balance at						Fixed or	Final	Balance at						Fixed or	Final
	July 16, 2022			January 1, 2022			Variable Rate	Maturity	October 8, 2022			January 1, 2022			Variable Rate	Maturity
Long-term debt and right-of-use lease obligations	(Amounts in thousands)								(Amounts in thousands)
2031 notes	$	493,657		$	493,333		Fixed Rate	2031	$	493,826		$	493,333		Fixed Rate	2031
2026 notes		397,584			397,276		Fixed Rate	2026		397,716			397,276		Fixed Rate	2026
Credit facility		—			—		Variable Rate	2026		—			—		Variable Rate	2026
Accounts receivable securitization facility		—			—		Variable Rate	2023		—			—		Variable Rate	2024
Right-of-use lease obligations		292,648			300,522			2036		284,085			300,522			2036
		1,183,889			1,191,131					1,175,627			1,191,131
Less: Current maturities of long-term debt and right- of-use lease obligations		(49,397	)		(47,974	)				(48,898	)		(47,974	)
Long-term debt and right-of-use lease obligations	$	1,134,492		$	1,143,157				$	1,126,729		$	1,143,157

Total stockholders' equity
Total stockholders' equity	$	1,447,468		$	1,411,274				$	1,434,765		$	1,411,274

On March 9, 2021, the company issued $500.0 million of senior notes with a maturity date of March 15, 2031. The company pays semiannual interest on the 2031 notes on each March 15 and September 15 and the notes bear interest at 2.400% per annum. The net proceeds received of $494.3 million (before expenses and net of debt discount at issuance of $2.4 million and underwriting discount of $3.3 million) from the issuance of the 2031 notes were used for the early redemption of the outstanding 2022 notes and repayments on the facility and the credit facility. The early redemption of the 2022 notes resulted in cash payments of $415.4 million (inclusive of a make-whole amount of $15.4 million) which is classified as a financing cash outflow in the Condensed Consolidated Statement of Cash Flows. We recognized a loss on extinguishment of debt of $16.1 million comprised of the make-whole cash payment of $15.4 million and non-cash charges of $0.7 million for the write-off of unamortized debt discount and debt issuance costs.

The facility and credit facility are generally used for short-term liquidity needs. ~~As discussed above,~~During the third quarter of Fiscal 2022, we amended the facility ~~was repaid with proceeds from~~to, among other things, extend the ~~issuance~~ maturity date to September 27, 2024. See Note 11, Debt and Other Obligations, of ~~the 2031 notes and cash flows from operations and there have been no borrowings under the facility since that time. As~~Notes to Condensed Consolidated Financial Statements of ~~July 16, 2022, there was no balance outstanding under the credit facility and there were no borrowings or repayments during the twelve and twenty-eight weeks ended July 16, 2022.~~this Form 10-Q for additional information.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to closely monitor our liquidity in light of the continued economic uncertainty in the U.S. and throughout the world due to, among other things, the impact of the inflationary economic environment, supply chain disruptions, ~~and~~ labor shortages, the conflict between Russia and Ukraine, and the ~~ongoing~~ COVID-19 pandemic on our business. There is no current portion payable over the next year for our debt obligations. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.

The following table details the amounts available under the facility and credit facility and the highest and lowest balances outstanding under these arrangements during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022:


	Amount Available		For the Twenty-Eight Weeks Ended July 16, 2022				Amount Available		For the Forty Weeks Ended October 8, 2022
	for Withdrawal at		Highest		Lowest		for Withdrawal at		Highest		Lowest
Facility	July 16, 2022		Balance		Balance		October 8, 2022		Balance		Balance
	(Amounts in thousands)						(Amounts in thousands)
Accounts receivable securitization facility	$	198,700	$	—	$	—	$	200,000	$	100,000	$	—
Credit facility (1)		491,600		—		—		491,600		200,000		—
	$	690,300					$	691,600

(1)

Amount excludes a provision in the credit facility agreement which allows the company to request an additional $200.0 million in additional revolving commitments.

derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 7, Derivative Financial

Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, the company ~~did not make any~~made $230.0 million in revolving borrowings orand $230.0 million in payments on revolving ~~borrowings.~~borrowings under the credit facility in anticipation of the closing of an acquisition that failed to materialize. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

The facility and the credit facility are variable rate debt. In periods of rising interest rates, the cost of using the facility and the credit facility will become more expensive and increase our interest expense. Therefore, any borrowings under these facilities provide us the greatest direct exposure to rising rates. In addition, ifas interest rates ~~do increase,~~have increased, it will make the cost of funds more expensive.

Restrictive financial covenants for our borrowings can include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the debt agreements and can meet presently foreseeable financial requirements. As of ~~July 16,~~October 8, 2022, the company was in compliance with all restrictive covenants under our debt agreements.

The company has debt exposure to LIBOR under certain of its agreements, but ~~its~~the agreements contain LIBOR successor rate provisions to cover the discontinuance of LIBOR. The company's successor provisions as currently drafted would result in the adoption of the Secured Overnight Financing Rate (SOFR) if then determinable.

At ~~July 16,~~October 8, 2022, the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Under our share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, ~~614,558~~1,321,117 shares, at a cost of ~~$16.5~~$34.6 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through ~~July 16,~~October 8, 2022, ~~69.4~~70.1 million shares, at a cost of ~~$669.4~~$687.5 million, have been repurchased.

Accounting Pronouncements Recently Adopted and Not Yet Adopted

See Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding recently adopted accounting pronouncements and accounting pronouncements not yet adopted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forward, futures, swap and option contracts to hedge existing or future exposure to changes in interest rates and commodity prices. The company does not enter into these derivative financial instruments for trading or speculative purposes. If actual market conditions are less favorable than those anticipated, raw material prices could increase significantly, adversely affecting the margins from the sale of our products.

Commodity Price Risk

The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of ~~July 16,~~October 8, 2022, the company’s hedge portfolio contained commodity derivatives with a fair value ~~(liability)~~ of ~~($6.3)~~$1.9 million, based on quoted market prices. Of this amount, approximately ~~($4.4)~~$0.5 million relates to instruments that will be utilized in Fiscal 2022 and ~~($1.9)~~$1.4 million in Fiscal 2023.

A sensitivity analysis has been prepared to quantify the company’s potential exposure to commodity price risk with respect to the derivative portfolio. Based on the company’s derivative portfolio as of ~~July 16,~~October 8, 2022, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by ~~$6.6~~$4.1 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.

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ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to ensure that material information relating to the company, which is required to be timely disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to management in a timely fashion and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the CEO and the CFO and CAO concluded that the company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the company files or submits to the SEC under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the fiscal quarter ended ~~July 16,~~October 8, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

4850

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of all material pending legal proceedings, see Note 13, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

ITEM 1A. RISK FACTORS

The information presented below supplements the risk factors set forth in the Form 10-K. In addition to the risk factors set forth below, refer to Part I, Item 1A., Risk Factors, in the Form 10-K for information regarding other factors that could affect the company’s results of operations, financial condition and liquidity. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse ultimate impact on our business, financial condition, or results of operations.

Operational Risks

The extent to which the outbreak of the novel strain of coronavirus ("COVID-19") and measures taken in response thereto, including additional variants of the virus and the efficacy and distribution of vaccines, impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict.

COVID-19 has spread throughout the world, including the U.S., and has resulted in governmental and other regulatory authorities throughout the U.S. implementing numerous measures to try to contain the virus and any variants of the virus. These measures have impacted and may further impact the consumer, our workforce and operations, as well as the workforce, operations and financial prospects of our customers, vendors and suppliers. There is considerable uncertainty regarding such measures and potential future measures. The spread of COVID-19 caused us to modify our business practices and we may take further actions as may be required by governmental and other regulatory authorities or as we determine are in the best interests of our employees, customers, vendors and suppliers. We can provide no assurance that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to governmental authorities.

COVID-19 has had, and may continue to have, a widespread and broad-reaching effect on the economy and our business. Some of the impacts our business has experienced, is experiencing or may experience as a result of COVID-19 include, but are not limited to, the following:

•

We experienced a favorable shift in sales mix to our branded retail products as compared to pre-pandemic periods due to the change in consumer buying patterns as a result of COVID-19, which positively impacted our business operations, including our sales, operating income and cash flows;

•

Consumer fears about contracting the disease have altered preferences and spending habits, including significant increases in purchases of fresh and frozen breads during the pendency of quarantines, shelter-in-place orders and other shutdowns; and these trends have moderated in recent periods, which could negatively affect our performance in future periods as compared to prior periods if consumers were to purchase fewer products from us;

•

We have experienced, and may experience in the future, temporary facility closures or partial shutdowns in response to government mandates in certain jurisdictions in which we operate and in response to positive diagnoses for COVID-19 in certain facilities for the safety of our employees;

•

Our distribution networks, including our DSD distribution system and our warehouse delivery system, where we manage our inventory, or the operations of our logistics and other service providers may be disrupted, temporarily closed or experience worker shortages;

•

Disruptions to our suppliers that supply our ingredients, packaging, and other materials necessary to produce, distribute, and sell our products may affect the ability of our suppliers to fulfill their obligations to us and may cause disruptions to our operations; and

•

We also implemented a work from home policy for many of our corporate employees, which may negatively impact productivity and cause other disruptions to our business.

4951

The extent to which the spread of COVID-19 impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak and additional variants, its severity, the actions to contain the virus or treat its impact, including the distribution and efficacy of vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of COVID-19's global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. Any of these events could exacerbate the other risks and uncertainties described herein, or in other reports filed with the SEC from time to time, and could materially adversely affect our business, results of operations and financial condition.

The costs of maintaining and enhancing the value and awareness of our brands are increasing, which could have an adverse impact on our revenues and profitability.

We rely on the success of our well-recognized brand names and we intend to maintain our strong brand recognition by continuing to devote resources to advertising, marketing and other brand building efforts. Brand value could diminish significantly due to several factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products (whether or not valid), our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers. The growing use of social and digital media platforms by consumers and third parties increases the speed and extent that information or misinformation and opinions can be shared. Brand recognition and loyalty can be impacted by the effectiveness of our advertising campaigns, marketing programs and sponsorships, as well as our use of social media. In addition, failure to comply with local or other laws and regulations could also hurt our reputation. Our marketing investments may not prove successful in maintaining or increasing our market share. If we are not able to successfully maintain our brand recognition or were to suffer damage to our reputation or loss of consumer confidence in our products for any of these reasons, our revenues and profitability could be adversely affected.

We may be adversely impacted by the failure to successfully realize the expected benefits of acquisitions, divestitures or joint ventures.

From time to time, we undertake acquisitions, divestitures, joint ventures and co-investments. The success of any acquisition, divestiture or joint venture depends on our ability to identify opportunities that help us meet our strategic objectives, consummate a transaction on favorable contractual terms, and achieve expected returns and other financial benefits.

Acquisitions, including future acquisitions, require us to efficiently integrate the acquired business or businesses, which involves a significant degree of difficulty, including the following:

•

integrating the operations and business cultures of the acquired businesses while carrying on the ongoing operations of the businesses we operated prior to the acquisitions;

•

managing a significantly larger company than before consummation of the acquisitions;

•

the possibility of faulty assumptions underlying our expectations regarding the prospects of the acquired businesses;

•

coordinating a greater number of diverse businesses and businesses located in a greater number of geographic locations;

•

attracting and retaining the necessary personnel associated with the acquisitions;

•

creating uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters; and

•

expectations about the performance of acquired trademarks and brands and the fair value of such trademarks and brands.

Divestitures have operational risks that may include impairment charges. Divestitures also present unique financial and operational risks, including diverting management attention from the existing core business, separating personnel and financial data and other systems, and adversely affecting existing business relationships with suppliers and customers.

We may co-invest in the future with third parties through partnership, joint ventures, or other entities, acquiring non-controlling interests in or sharing responsibility for management. In this event, we would not be in a position to exercise sole decision-making authority regarding the joint venture and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that our joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions, or block or delay necessary decisions. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.

5052

In situations where acquisitions, divestitures or joint ventures are not successfully implemented or completed, or the expected benefits of such acquisitions or divestitures are not otherwise realized, the company’s business, results of operations or financial condition could be negatively impacted.

Technology Risks

We may be adversely impacted if our IT systems fail to perform adequately, including with respect to cybersecurity issues.

The efficient operation of our business depends on our IT systems. We rely on our IT systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our IT systems (including those provided to us by third-parties) to perform as we anticipate could disrupt our business and could result in billing, collecting and ordering errors, processing inefficiencies, and the loss of sales and customers, causing our business, results of operations or financial condition to suffer.

In addition, our IT systems (including those provided to us by third parties) may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, security breaches or intrusions (including theft of customer, consumer or other confidential data), and viruses. Cyber-attacks and other cyber incidents are occurring more frequently in the United States and are becoming more sophisticated with a wide range of expertise and motives. Such cyber-attacks and cyber incidents can take many forms, including extortion, denial of service, or social engineering through phishing or malware emails. In addition, the risk of cyber-attacks has increased in connection with the military conflict between Russia and Ukraine and the resulting geopolitical conflict. In light of those and other geopolitical events, nation-state actors or their supporters may launch retaliatory cyber-attacks, and may attempt to cause supply chain and other third-party service provider disruptions, or take other geopolitically motivated retaliatory actions that may disrupt our business operations, result in data compromise, or both. These circumstances increase the likelihood of cyber-attacks and/or security breaches.

We may incur significant costs in protecting or remediating cyber-attacks or other cyber incidents. If we are unable to prevent physical and electronic break-ins, cyber-attacks and other information security breaches, we may suffer financial and reputational damage, be subject to litigation or incur remediation costs or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, suppliers or employees.

Industry Risks

Increases in costs and/or shortages of raw materials, fuels and utilities could adversely impact our profitability.

Raw materials, such as flour, sweeteners, shortening, yeast, and water, which are used in our bakery products, are subject to price fluctuations. The cost of these inputs may fluctuate widely due to foreign and domestic government policies and regulations, inflation, weather conditions, domestic and international demand, availability due to supply chain conditions, or other unforeseen circumstances. The global economy has been negatively impacted by the military conflict between Russia and Ukraine. The Russia-Ukraine conflict is fast-moving and uncertain. Global grain markets have exhibited increased volatility as sanctions have been imposed on Russia by the United States, the United Kingdom, the European Union, and others in response to Russia’s invasion of Ukraine. While we do not expect our operations to be directly impacted by the conflict at this time, changes in global grain and commodity flows could impact the markets in which we operate, which may in turn negatively impact our business, results of operations, supply chain and financial condition. Any substantial change in the prices or availability of raw materials may have an adverse impact on our profitability. We enter into forward purchase agreements and other derivative financial instruments from time to time to manage the impact of such volatility in raw materials prices; however, these strategies may not be adequate to overcome increases in market prices or availability. Our failure to enter into hedging or fixed price arrangements or any decrease in the availability or increase in the cost of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

In addition, we are dependent upon natural gas or propane for firing ovens. The independent distributors and third-party transportation companies are dependent upon gasoline and diesel for their vehicles. The cost of these fuels may fluctuate widely due to economic and political conditions, government policy and regulation, war or other conflicts (including the current situation in Ukraine), or other unforeseen circumstances. Substantial future increases in prices for, or shortages of, these fuels could have a material adverse effect on our profitability, financial condition or results of operations. There can be no assurance that we can cover these potential cost increases through future pricing actions. Also, as a result of these pricing actions, consumers could purchase less or move from purchasing higher-margin products to lower-margin products.

Inflation may adversely affect us by increasing our costs of production, materials, and labor. In an inflationary environment, such as the current economic environment, depending on the market conditions of the baking industry and the ~~expected~~ raising of interest ~~rate~~rates by the United States Federal Reserve, we may be unable to raise the prices of our products enough to keep up with the rate of inflation, which would reduce our profit margins, and continued inflationary pressures could impact our business, financial condition, and results of operations.

5153

We rely on several large customers for a significant portion of sales and the loss of one of our large customers or their decision to give higher priority to other brands could adversely affect our business, financial condition or results of operations.

We have several large customers that account for a significant portion of sales, and the loss of one of our large customers could adversely affect our financial condition and results of operations. Our top ten customers accounted for 53.7% of sales during Fiscal 2021 and ~~54.4%~~54.5% of sales during the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022. Our largest customer, Walmart/Sam’s Club, accounted for 21.2% and ~~21.5%~~21.7% of sales, respectively, during these periods. These customers do not typically enter long-term sales contracts, and instead make purchase decisions based on a combination of price, product quality, consumer demand, and customer service performance. At any time, there is a risk that our customers will give higher priority to their own products or to the products of our competitors, resulting in less shelf space for our products. Additionally, our customers may face financial or other difficulties that may impact their operations and their purchases from us. Disputes with significant suppliers could also adversely affect our ability to supply products to our customers. If our sales to one or more of these customers are reduced, this reduction may adversely affect our business, financial condition or results of operations.

Legal and Regulatory Risks

Government regulation, including labeling or warning requirements, could adversely impact our results of operations and financial condition.

As a producer and marketer of food items, our production processes, product quality, packaging, labeling, storage, and distribution, and the safety of food products and the health and safety of our employees, are subject to regulation by various federal, state and local government entities and agencies. In addition, the marketing and labeling of food products has come under increased scrutiny in recent years, and the food industry has been subject to an increasing number of legal proceedings and claims relating to alleged false or deceptive marketing and labeling under federal, state or local laws or regulations. Uncertainty regarding labeling standards has led to customer confusions and legal challenges. The imposition or proposed imposition of additional product labeling or warning requirements could reduce overall consumption of our products, lead to negative publicity (whether based in scientific fact or not) or leave consumers with the perception (whether or not valid) that our products do not meet their health and wellness needs. Such factors could adversely affect our sales and results of operations.

In addition, our operations are subject to extensive and increasingly stringent regulations administered by the Environmental Protection Agency related to the discharge of materials into the environment and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences, including civil and administrative penalties and negative publicity. Changes in applicable laws or regulations or evolving interpretations thereof, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, may result in increased compliance costs, capital expenditures, and other financial obligations for us, which could affect our profitability or impede the production or distribution of our products, and affect our sales.

Compliance with federal, state and local laws and regulations is costly and time consuming. Failure to comply with, or violations of, applicable laws and the regulatory requirements of one or more of these entities and agencies could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, any of which could result in increased operating costs and adversely affect our results of operations and financial condition. Legal proceedings or claims related to our marketing could damage our reputation and/or adversely affect our business or financial results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Previously, our Board of Directors had approved a plan that authorized share repurchases of up to 74.6 million shares. On May 26, 2022, the Board of Directors increased the company's share repurchase authorization by 20.0 million shares. Under the share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions or under an accelerated share repurchase program at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors.

During the twelve weeks ended ~~July 16,~~October 8, 2022, ~~260,088~~706,559 shares, at a cost of ~~$6.5~~$18.1 million, of the company’s common stock were repurchased under the share repurchase plan. During the ~~twenty-eight~~forty weeks ended ~~July 16,~~October 8, 2022, ~~614,558~~1,321,117 shares, at a cost of ~~$16.5~~$34.6 million, of the company's common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through ~~July 16,~~October 8, 2022, ~~69.4~~70.1 million shares, at a cost of ~~$669.4~~$687.5 million, have been repurchased. The company currently has ~~25.1~~ 24.4

million shares remaining available for repurchase under the share repurchase plan. The table below sets forth the common stock repurchased by the company during the twelve weeks ended ~~July 16,~~October 8, 2022 (amounts in thousands, except share price data):

Period

Total Number
of Shares
Purchased

Weighted
Average Price
Per Share

Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs

Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plans or
Programs
April 24, 2022 — May 21, 2022

—

—

—

5,394

May 22, 2022 — June 18, 2022

256

$
24.86

256

25,138

^
June 19, 2022 — July 16, 2022

4

24.50

4

25,134

Total

260

$
24.86

260

^ ~~The Board of Directors increased the company's share repurchase authorization by 20.0 million shares on May 26, 2022.~~


Period	Total Number of Shares Purchased		Weighted Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 17, 2022 — August 13, 2022		—	$	—		—		25,134
August 14, 2022 — September 10, 2022		—		—		—		25,134
September 11, 2022 — October 8, 2022		707	$	25.58		707		24,427
Total		707	$	25.58		707

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

5355

ITEM 6. EXHIBITS

The following documents are filed as exhibits hereto:


Exhibit
No			Name of Exhibit
3.1		—	Amended and Restated Articles of Incorporation of Flowers Foods, Inc., as amended through May 21, 2020 (Incorporated by reference to Exhibit 3.1 to Flowers Foods’ Current Report on Form 8-K, dated May 28, 2020, File No. 1-16247).
3.2		—	Amended and Restated Bylaws of Flowers Foods, Inc., as amended through May 21, 2020 (Incorporated by reference to Exhibit 3.2 to Flowers Foods’ Current Report on Form 8-K, dated May 28, 2020, File No. 1-16247).
10.1	*	—	Tenth Amendment to Receivables Loan, Security and Servicing Agreement, dated as of September 27, 2022, among Flowers Finance II, LLC, Flowers Foods, Inc., Nieuw Amsterdam Receivables Corporation B.V., Coӧperatieve Rabobank U.A. (f/k/a Coӧperatieve Centrale Raiffeisen-Boerenleenbank B.A.), as facility agent for the Nieuw Amsterdam Lender Group and as a committed lender, Regions Bank, as facility agent for the Regions Bank Lender Group and as a committed lender, and Coӧperatieve Rabobank U.A., New York Branch (f/k/a Coӧperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch), as administrative agent.
31.1	*	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	*	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by A. Ryals McMullian, President and Chief Executive Officer, and R. Steve Kinsey, Chief Financial Officer and Chief Accounting Officer, for the quarter ended ~~July 16,~~October 8, 2022.
101.INS	*	—	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	*	—	Inline XBRL Taxonomy Extension Schema Linkbase.
101.CAL	*	—	Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	*	—	Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB	*	—	Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE	*	—	Inline XBRL Taxonomy Extension Presentation Linkbase.
104		—	The cover page from Flowers Foods' Quarterly Report on Form 10-Q for the quarter ended ~~July 16,~~October 8, 2022 has been formatted in Inline XBRL.

* Filed herewith

5456

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	FLOWERS FOODS, INC.

	By:		/s/ A. RYALS MCMULLIAN
	Name:		A. Ryals McMullian
	Title:		President and Chief Executive Officer


	By:		/s/ R. STEVE KINSEY
	Name:		R. Steve Kinsey
	Title:		Chief Financial Officer and Chief Accounting Officer

Date: ~~August 11,~~November 10, 2022

5557


	Amortization Expense
For the twelve weeks ended July 16, 2022	$	7,332
For the twelve weeks ended July 17, 2021	$	7,079
For the twenty-eight weeks ended July 16, 2022	$	17,081
For the twenty-eight weeks ended July 17, 2021	$	16,322


	Interest Income
For the twelve weeks ended July 16, 2022	$	5,075
For the twelve weeks ended July 17, 2021	$	5,486
For the twenty-eight weeks ended July 16, 2022	$	11,832
For the twenty-eight weeks ended July 17, 2021	$	12,966