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FLOWERS FOODS INC - Quarter Report: 2010 October (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 9, 2010
OR
     
o   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)
     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 þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
           
  TITLE OF EACH CLASS     OUTSTANDING AT NOVEMBER 12, 2010  
 
Common Stock, $.01 par value with
Preferred Share Purchase Rights
    91,275,331  
 
 

 


 

FLOWERS FOODS, INC.
INDEX
         
    PAGE
    NUMBER
PART I. Financial Information
       
Item 1. Financial Statements (unaudited)
       
    4  
    5  
    6  
    7  
    8  
    23  
    33  
    34  
       
    34  
    35  
    35  
    35  
    36  
       
 EX-31.1
 EX-31.2
 EX-31.3
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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Forward-Looking Statements
Statements contained in this filing and certain other written or oral statements made from time to time by the company 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 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, and achievements to differ materially from those projected are discussed in this report 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) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with our employees, independent distributors and third party service providers; and (vi) laws and regulations (including environmental and health-related issues), accounting standards or tax rates in the markets in which we operate;
  the loss or financial instability of any significant customer(s);
  our ability to execute our business strategy, which may involve integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values;
  our ability to operate existing, and any new, manufacturing lines according to schedule;
  the level of success we achieve in developing and introducing new products and entering new markets;
  changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward more inexpensive store-branded products;
  our ability to implement new technology as required;
  the credit and business risks associated with our independent distributors and customers which operate in the highly competitive retail food and foodservice industries, including the amount of consolidation in these industries;
  changes in pricing, customer and consumer reaction to pricing actions, and the pricing environment among competitors within the industry;
  any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events; and
  regulation and legislation related to climate change that could affect our ability to procure our commodity needs or that necessitate additional unplanned capital expenditures.
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. Please refer to Part I, Item 1A., Risk Factors, of the company’s Form 10-K filed on March 3, 2010 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.

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FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
                 
    OCTOBER 9, 2010     JANUARY 2, 2010  
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 7,107     $ 18,948  
 
           
Accounts and notes receivable, net of allowances of $1,636 and $469, respectively
    177,143       178,708  
 
           
Inventories, net:
               
Raw materials
    20,468       20,952  
Packaging materials
    13,961       12,065  
Finished goods
    31,865       27,979  
 
           
 
    66,294       60,996  
 
           
Spare parts and supplies
    36,542       35,437  
 
           
Deferred taxes
    1,107       20,714  
 
           
Other
    42,959       24,152  
 
           
Total current assets
    331,152       338,955  
 
           
Property, Plant and Equipment, net of accumulated depreciation of $677,126 and $652,587, respectively
    599,106       602,576  
 
           
Notes Receivable
    91,888       94,457  
 
           
Assets Held for Sale — Distributor Routes
    10,457       6,535  
 
           
Other Assets
    5,612       4,157  
 
           
Goodwill
    200,153       201,682  
 
           
Other Intangible Assets, net
    98,428       103,080  
 
           
Total assets
  $ 1,336,796     $ 1,351,442  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Current maturities of long-term debt and capital leases
  $ 26,817     $ 25,763  
Accounts payable
    107,280       92,692  
Other accrued liabilities
    115,670       103,317  
 
           
Total current liabilities
    249,767       221,772  
 
           
Long-Term Debt and Capital Leases
    116,545       225,905  
 
           
Other Liabilities:
               
Post-retirement/post-employment obligations
    66,515       68,140  
Deferred taxes
    61,319       63,748  
Other
    44,948       43,851  
 
           
Total other liabilities
    172,782       175,739  
 
           
Commitments and Contingencies
               
Flowers Foods, Inc. Stockholders’ Equity:
               
Preferred stock — $100 par value, 100,000 authorized and none issued
           
Preferred stock — $.01 par value, 900,000 authorized and none issued
           
Common stock — $.01 par value, 500,000,000 authorized shares, 101,659,924 shares and 101,659,924 shares issued, respectively
    1,017       1,017  
Treasury stock — 10,386,436 shares and 10,200,387 shares, respectively
    (198,538 )     (189,250 )
Capital in excess of par value
    536,514       531,326  
Retained earnings
    490,435       437,524  
Accumulated other comprehensive loss
    (31,726 )     (64,672 )
 
           
Total Flowers Foods, Inc. stockholders’ equity
    797,702       715,945  
Noncontrolling interest
          12,081  
 
           
Total stockholders’ equity
    797,702       728,026  
 
           
Total liabilities and stockholders’ equity
  $ 1,336,796     $ 1,351,442  
 
           
(See Accompanying Notes to Condensed Consolidated Financial Statements)

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FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
Sales
  $ 597,894     $ 602,570     $ 2,000,636     $ 2,024,025  
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)
    316,141       322,245       1,049,492       1,085,046  
Selling, distribution and administrative expenses
    215,222       210,185       725,679       720,809  
Depreciation and amortization
    19,778       19,064       65,436       61,997  
Gain on acquisition
                      3,013  
 
                       
Income from operations
    46,753       51,076       160,029       159,186  
Interest expense
    (1,791 )     (2,858 )     (6,559 )     (9,258 )
Interest income
    2,918       2,956       9,773       9,995  
 
                       
Income before income taxes
    47,880       51,174       163,243       159,923  
Income tax expense
    16,714       18,150       57,634       57,969  
 
                       
Net income
    31,166       33,024       105,609       101,954  
Less: net income attributable to noncontrolling interest
          (1,098 )           (2,306 )
 
                       
Net income attributable to Flowers Foods, Inc.
  $ 31,166     $ 31,926     $ 105,609     $ 99,648  
 
                       
Net Income Per Common Share:
                               
Basic:
                               
Net income attributable to Flowers Foods, Inc. common shareholders
  $ 0.34     $ 0.35     $ 1.15     $ 1.08  
 
                       
Weighted average shares outstanding
    91,629       91,995       91,576       92,330  
 
                       
Diluted:
                               
Net income attributable to Flowers Foods, Inc. common shareholders
  $ 0.34     $ 0.34     $ 1.14     $ 1.07  
 
                       
Weighted average shares outstanding
    92,276       92,597       92,241       92,827  
 
                       
Cash dividends paid per common share
  $ 0.200     $ 0.175     $ 0.575     $ 0.50  
 
                       
(See Accompanying Notes to Condensed Consolidated Financial Statements)

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FLOWERS FOODS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Amounts in thousands except share data)(Unaudited)
                                                                                 
                            Capital                                  
            Common Stock     in             Accumulated                    
            Number of             Excess             Other     Treasury Stock              
    Comprehensive     Shares     Par     of Par     Retained     Comprehensive     Number of             Noncontrolling        
    Income     Issued     Value     Value     Earnings     Loss     Shares     Cost     interest     Total  
Balances at January 2, 2010
            101,659,924     $ 1,017     $ 531,326     $ 437,524     $ (64,672 )     (10,200,387 )   $ (189,250 )   $ 12,081     $ 728,026  
Deconsolidation of Variable Interest Entity (Note 8)
                                                                    (12,081 )     (12,081 )
Net income
  $ 105,609                               105,609                                       105,609  
Derivative transactions, net
    31,958                                       31,958                               31,958  
Amortization of prior service credit
    (82 )                                     (82 )                             (82 )
Reduction in minimum pension liability
    68                                       68                               68  
Amortization of actuarial loss
    1,002                                       1,002                               1,002  
 
                                                                             
Comprehensive income
  $ 138,555                                                                          
 
                                                                             
Exercise of stock options
                            (1,202 )                     472,637       8,811               7,609  
Deferred stock vesting
                            (631 )                     33,920       631                
Issuance of restricted stock award
                            (4,102 )                     220,640       4,102                
Amortization of share-based payment compensation
                            10,035                                               10,035  
Tax benefits related to share based payment awards
                            1,018                                               1,018  
Share-based payment forfeitures
                            70                       (3,775 )     (70 )              
Stock repurchases
                                                    (909,471 )     (22,762 )             (22,762 )
Dividends paid — $0.575 per common share
                                    (52,698 )                                     (52,698 )
 
                                                           
Balances at October 9, 2010
            101,659,924     $ 1,017     $ 536,514     $ 490,435     $ (31,726 )     (10,386,436 )   $ (198,538 )   $     $ 797,702  
 
                                                             
(See Accompanying Notes to Condensed Consolidated Financial Statements)

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FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
                 
    FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009  
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
               
Net income
  $ 105,609     $ 101,954  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Stock based compensation
    10,343       9,207  
Loss reclassified from accumulated other comprehensive income to net income
    22,589       44,707  
Depreciation and amortization
    65,436       61,997  
Gain on acquisition
          (3,013 )
Deferred income taxes
    (2,637 )     (3,675 )
Provision for inventory obsolescence
    967       652  
Allowances for accounts receivable
    1,093       2,614  
Pension and postretirement plans expense
    1,417       3,932  
Other
    (89 )     224  
Changes in assets and liabilities:
               
Accounts and notes receivable, net
    121       (359 )
Pension contributions
    (772 )     (450 )
Inventories, net
    (6,576 )     (8,655 )
Other assets
    20,807       (5,755 )
Accounts payable and other accrued liabilities
    10,499       (37,149 )
 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES
    228,807       166,231  
 
           
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
    (74,239 )     (47,276 )
Proceeds from sale of property, plant and equipment
    719       3,040  
Issuance of notes receivable
    (7,023 )     (8,350 )
Proceeds from notes receivable
    9,618       9,282  
Acquisitions, net of cash acquired
          (8,842 )
Deconsolidation of variable interest entity (See Note 8)
    (8,804 )      
Other
          (208 )
 
           
NET CASH DISBURSED FOR INVESTING ACTIVITIES
    (79,729 )     (52,354 )
 
           
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
               
Dividends paid
    (52,698 )     (46,157 )
Exercise of stock options
    7,609       2,560  
Income tax benefit related to stock awards
    974       1,386  
Stock repurchases
    (22,762 )     (27,625 )
Change in book overdraft
    1,236       (7,904 )
Proceeds from debt borrowings
    409,000       650,600  
Debt and capital lease obligation payments
    (504,278 )     (689,937 )
Other
          (670 )
 
           
NET CASH DISBURSED FOR FINANCING ACTIVITIES
    (160,919 )     (117,747 )
 
           
Net decrease in cash and cash equivalents
    (11,841 )     (3,870 )
Cash and cash equivalents at beginning of period
    18,948       19,964  
 
           
Cash and cash equivalents at end of period
  $ 7,107     $ 16,094  
 
           
(See Accompanying Notes to Condensed Consolidated Financial Statements)

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FLOWERS FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
     INTERIM FINANCIAL STATEMENTS — The accompanying unaudited condensed consolidated financial statements of Flowers Foods, Inc. (“the company”) have been prepared by the company’s management in accordance with generally accepted accounting principles 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. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the company’s financial position, the results of its operations and its cash flows. The results of operations for the twelve and forty week periods ended October 9, 2010 and October 10, 2009 are not necessarily indicative of the results to be expected for a full fiscal year. The balance sheet at January 2, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
     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 used in the preparation of its condensed consolidated financial statements: revenue recognition, derivative instruments, valuation of long-lived assets, goodwill and other intangibles, self-insurance reserves, income tax expense and accruals and pension obligations. These estimates are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
     REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2010 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 24, 2010 (sixteen weeks), second quarter ended July 17, 2010 (twelve weeks), third quarter ended October 9, 2010 (twelve weeks) and fourth quarter ending January 1, 2011 (twelve weeks).
     SEGMENTS — The company consists of two business segments: direct-store-delivery (“DSD”) and warehouse delivery. The DSD segment focuses on producing and marketing bakery products to U.S. customers in the Southeast, Mid-Atlantic, and Southwest, as well as, selected markets in California and Nevada. The warehouse delivery segment produces snack cakes for sale to retail, vending and co-pack customers nationwide as well as frozen bread, rolls and buns for sale to retail and foodservice customers primarily through warehouse distribution.
     SIGNIFICANT CUSTOMER — Following is the effect our largest customer, Wal-Mart/Sam’s Club, had on the company’s sales for the twelve and forty weeks ended October 9, 2010 and October 10, 2009. No other customer accounted for 10% or more of the company’s sales.
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
    (Percent of Sales)     (Percent of Sales)  
DSD
    18.1 %     17.8 %     18.4 %     18.1 %
Warehouse delivery
    4.2       3.0       3.5       2.9  
 
                       
Total
    22.3 %     20.8 %     21.9 %     21.0 %
 
                       
SIGNIFICANT ACCOUNTING POLICIES — The following discussion provides the significant changes to our significant accounting policies from those disclosed in our Form 10-K filed for the year ended January 2, 2010.
     Variable Interest Entities. In 2009, the Financial Accounting Standards Board (“FASB”) amended the consolidation principles associated with variable interest entities (“VIE”). The new accounting guidance caused a change in our accounting policy effective January 3, 2010. Generally, the new qualitative approach replaced the quantitative-based risks and rewards calculation for determining

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which enterprise, if any, has a controlling financial interest in the VIE. The qualitative approach is focused on identifying which company has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. As a result of applying this qualitative analysis, effective January 3, 2010, the company is no longer required to consolidate the VIE that delivers a significant portion of its fresh bakery products from the company’s production facilities to outlying distribution centers under a transportation agreement. The company has elected to prospectively deconsolidate the VIE. Please see Note 8, Variable Interest Entity, for additional disclosure.
2. COMPREHENSIVE INCOME (LOSS)
     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. Total comprehensive income attributable to Flowers Foods, Inc., determined as net income adjusted by other comprehensive income and net income attributable to noncontrolling interest, was $52.0 million and $138.6 million for the twelve and forty weeks ended October 9, 2010, respectively. Total comprehensive income attributable to Flowers Foods, Inc. was $26.2 million and $111.8 million for the twelve and forty weeks ended October 10, 2009, respectively.
     During the forty weeks ended October 9, 2010, changes to accumulated other comprehensive loss, net of income tax, were as follows (amounts in thousands):
         
Accumulated other comprehensive loss, January 2, 2010
  $ (64,672 )
Derivative transactions:
       
Net deferred gains (losses) on closed contracts, net of income tax of $(417)
    (667 )
Reclassified to earnings, net of income tax of $10,085
    16,110  
Effective portion of change in fair value of hedging instruments, net of income tax of $10,338
    16,515  
Amortization of actuarial loss, net of income tax of $628
    1,002  
Minimum pension liability, net of income tax of $42
    68  
Amortization of prior service credits, net of income tax of $(52)
    (82 )
 
     
Accumulated other comprehensive loss, October 9, 2010
  $ (31,726 )
 
     
3. ACQUISITIONS
     On October 17, 2009, the company acquired 100% of the outstanding shares of capital stock of Leo’s Foods, Inc. (“Leo’s”). Leo’s operates one tortilla facility in Ft. Worth, Texas and makes an extensive line of flour and corn tortillas and tortilla chips that are sold to foodservice and institutional customers nationwide. This acquisition is recorded in the company’s warehouse delivery segment and resulted in goodwill of $2.6 million, none of which is deductible for tax purposes.
     On May 15, 2009, the company acquired substantially all the assets of a bakery mix operation in Cedar Rapids, Iowa. Based on the purchase price allocation, the fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration paid. As a result, we recognized a gain of $3.0 million in the second quarter of fiscal 2009, which is included in the line item “Gain on acquisition” within income from operations in the condensed consolidated statement of income for the forty weeks ended October 10, 2009. We believe the gain on acquisition resulted from the seller’s strategic intent to exit a non-core business operation. This acquisition is recorded in the company’s warehouse delivery segment.
4. GOODWILL AND OTHER INTANGIBLES
     The changes in the carrying amount of goodwill for the forty weeks ended October 9, 2010, are as follows (amounts in thousands):
                         
    DSD     Warehouse delivery     Total  
Balance as of January 2, 2010
  $ 194,581     $ 7,101     $ 201,682  
Adjustment for deconsolidation of VIE (Note 8)
    (1,529 )           (1,529 )
 
                 
Balance as of October 9, 2010
  $ 193,052     $ 7,101     $ 200,153  
 
                 

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     As of October 9, 2010 and January 2, 2010, the company had the following amounts related to amortizable intangible assets (amounts in thousands):
                                                 
    October 9, 2010     January 2, 2010  
            Accumulated                     Accumulated        
Asset   Cost     Amortization     Net Value     Cost     Amortization     Net Value  
Trademarks
  $ 35,268     $ 4,331     $ 30,937     $ 35,268     $ 3,144     $ 32,124  
Customer relationships
    75,434       12,766       62,668       75,434       9,738       65,696  
Non-compete agreements
    1,874       1,343       531       1,874       1,309       565  
Distributor relationships
    2,600       373       2,227       2,600       240       2,360  
Supply agreement
    1,050       485       565       1,050       215       835  
 
                                   
Total
  $ 116,226     $ 19,298     $ 96,928     $ 116,226     $ 14,646     $ 101,580  
 
                                   
     There is an additional $1.5 million indefinite life intangible asset separately identified from goodwill.
     Net amortization expense for the twelve and forty weeks ended October 9, 2010 and October 10, 2009 were as follows (amounts in thousands):
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
Amortizable intangible assets expense
  $ 1,396     $ 1,404     $ 4,652     $ 4,509  
Amortizable intangible liabilities (income)
    (10 )     (10 )     (34 )     (34 )
 
                       
Total, net
  $ 1,386     $ 1,394     $ 4,618     $ 4,475  
 
                       
     Estimated net amortization of intangibles for the remainder of fiscal 2010 and the next four years is as follows (amounts in thousands):
         
    Amortization of
    Intangibles, net
Remainder of 2010
  $ 1,385  
2011
  $ 5,948  
2012
  $ 5,677  
2013
  $ 5,488  
2014
  $ 5,389  
5. 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 distributors’ territories by independent distributors. These notes receivable are recorded in the condensed consolidated balance sheet at carrying value which represents the closest approximation of fair value. In accordance with GAAP, 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. As a result, the appropriate interest rate that should be used to estimate the fair value of the distributor notes is the prevailing market rate at which similar loans would be made to distributors with similar credit ratings and for the same maturities. However, the company utilizes approximately 3,600 independent distributors all with varied financial histories and credit risks. Considering the diversity of credit risks among the independent distributors, the company has no method to accurately determine a market interest rate to apply to the notes. The territories are generally financed over ten years bearing an interest rate of 12% and the distributor notes are collateralized by the independent distributors’ territories.

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     Interest income for the distributor notes receivable was as follows (amounts in thousands):
         
    Interest Income
For the twelve weeks ended October 9, 2010
  $ 2,918  
For the twelve weeks ended October 10, 2009
  $ 2,956  
For the forty weeks ended October 9, 2010
  $ 9,773  
For the forty weeks ended October 10, 2009
  $ 9,996  
     At October 9, 2010 and January 2, 2010, respectively, the carrying value of the distributor notes was as follows (amounts in thousands):
                 
    October 9, 2010     January 2, 2010  
Distributor notes receivable
  $ 104,471     $ 107,067  
Current portion of distributor notes receivable recorded in accounts and notes receivable, net
    12,583       12,610  
 
           
Long-term portion of distributor notes receivable
  $ 91,888     $ 94,457  
 
           
     At October 9, 2010 and January 2, 2010, the company evaluated the collectibility of the distributor notes and determined that a reserve is not necessary. Payments on these distributor notes are collected by the company weekly in the distributor settlement process.
6. DERIVATIVE FINANCIAL INSTRUMENTS
     In the first fiscal quarter of fiscal 2008, the company began measuring the fair value of its derivative portfolio using the fair value as 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 in active markets
Level 2: Modeled fair value with model inputs that are all observable market values
Level 3: Modeled fair value with at least one model input that is not an observable market value
This change in measurement technique had no material impact on the reported value of our derivative portfolio.
COMMODITY PRICE 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, is also an important commodity input to production.
     As of October 9, 2010, the company’s hedge portfolio contained commodity derivatives with a net fair value of $24.5 million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):
                                 
    Level 1     Level 2     Level 3     Total  
Assets:
                               
Other current
  $ 23.0     $ 4.3     $     $ 27.3  
Other long-term
    0.4                   0.4  
 
                       
Total
    23.4       4.3             27.7  
 
                       
Liabilities:
                               
Other current
          (2.6 )           (2.6 )
Other long-term
          (0.6 )           (0.6 )
 
                       
Total
          (3.2 )           (3.2 )
 
                       
Net Fair Value
  $ 23.4     $ 1.1     $     $ 24.5  
 
                       
     The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2012. These instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss),

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and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. The company held no commodity derivatives at October 9, 2010 or January 2, 2010 that did not qualify for hedge accounting.
     As of October 9, 2010, the balance in accumulated other comprehensive loss related to commodity derivative transactions was $(25.1) million. Of this total, approximately $(2.2) million, $(13.1) million and $0.2 million were related to instruments expiring in 2010, 2011 and 2012, respectively, and $(10.0) million was related to deferred losses on cash flow hedge positions.
INTEREST RATE RISK
     The company entered interest rate swaps with initial notional amounts of $85.0 million and $65.0 million to fix the interest rate on the $150.0 million term loan entered into on August 1, 2008 to fund the acquisitions of ButterKrust and Holsum. The notional amounts match the scheduled quarterly principal payments on the $150.0 million term loan so that the remaining outstanding term loan balance at any reporting date is fully covered by the swap arrangements through the August 2013 maturity of the term loan. In addition, on October 27, 2008, the company entered an interest rate swap with a notional amount of $50.0 million to fix the interest rate through September 30, 2009 on $50.0 million of borrowings outstanding under the company’s unsecured credit facility.
     The interest rate swap agreements result in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amount. The interest rate differential to be paid or received will be recorded as interest expense. These swap transactions are designated as cash-flow hedges. Accordingly, the effective portion of changes in the fair value of the swaps is recorded each period in other comprehensive income. Any ineffective portions of changes in fair value are recorded to current period earnings in selling, marketing and administrative expenses.
     As of October 9, 2010, the fair value of the interest rate swaps was $(8.1) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):
                                 
    Level 1     Level 2     Level 3     Total  
Assets:
                               
Other current
  $     $     $     $  
Other long-term
                       
 
                       
Total
                       
 
                       
Liabilities:
                               
Other current
          (4.1 )           (4.1 )
Other long-term
          (4.0 )           (4.0 )
 
                       
Total
          (8.1 )           (8.1 )
 
                       
Net Fair Value
  $     $ (8.1 )   $     $ (8.1 )
 
                       
     During the twelve weeks ended October 9, 2010 and October 10, 2009, interest expense of $1.0 million and $1.3 million, respectively, was recognized due to periodic settlements of the swaps. During the forty weeks ended October 9, 2010 and October 10, 2009, interest expense of $3.6 million and $4.0 million, respectively, was recognized due to periodic settlements of the swaps.
     As of October 9, 2010, the balance in accumulated other comprehensive loss related to interest rate derivative transactions was $4.9 million. Of this total, approximately $0.6 million, $2.3 million, $1.6 million, and $0.4 million were related to instruments expiring in fiscal 2010 through 2013, respectively.
     The company has the following derivative instruments located on the condensed consolidated balance sheet, utilized for risk management purposes detailed above (amounts in thousands):
                                                 
    Derivative Assets     Derivative Liabilities  
    October 9, 2010     January 2, 2010     October 9, 2010     January 2, 2010  
Derivatives designated as   Balance           Balance           Balance           Balance      
hedging   Sheet   Fair     Sheet   Fair     Sheet   Fair     Sheet   Fair  
instruments   location   Value     location   Value     location   Value     location   Value  
Interest rate contracts
    $       $     Other current liabilities   $ 4,085     Other current liabilities   $ 4,271  
Interest rate contracts
                  Other long term liabilities     4,017     Other long term liabilities     2,459  
Commodity contracts
  Other current assets     27,274     Other current assets     2,501     Other current liabilities     2,627     Other current liabilities     6,143  
Commodity contracts
  Other long term assets     393     Other long term assets         Other long term liabilities     535     Other long term liabilities     78  
 
                                       
Total
      $ 27,667         $ 2,501         $ 11,264         $ 12,951  
 
                                       

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     The company has the following derivative instruments located on the condensed consolidated statements of income, utilized for risk management purposes detailed above (amounts in thousands and net of tax):
                                     
    Amount of Gain or (Loss)         Amount of Gain or (Loss) Reclassified  
    Recognized in OCI on     Location of Gain or (Loss)   from Accumulated OCI into Income  
Derivatives in   Derivative (Effective Portion)     Reclassified from AOCI into   (Effective Portion)  
Cash Flow Hedge   For the twelve weeks ended     Income   For the twelve weeks ended  
Relationships   October 9, 2010     October 10, 2009     (Effective Portion)   October 9, 2010     October 10, 2009  
Interest rate contracts
  $ 852     $ (1,061 )   Interest expense   $ (619 )   $ (817 )
Commodity contracts
              Selling, distribution and administrative           (325 )
Commodity contracts
    (18,672 )     (13,113 )   Production costs(1)     (2,027 )     (6,878 )
 
                           
Total
  $ (17,820 )   $ (14,174 )       $ (2,646 )   $ (8,020 )
 
                           
 
    Amount of Gain or (Loss)         Amount of Gain or (Loss) Reclassified  
    Recognized in OCI on     Location of Gain or (Loss)   from Accumulated OCI into Income  
Derivatives in   Derivative (Effective Portion)     Reclassified from AOCI into   (Effective Portion)  
Cash Flow Hedge   For the forty weeks ended     Income   For the forty weeks ended  
Relationships   October 9, 2010     October 10, 2009     (Effective Portion)   October 9, 2010     October 10, 2009  
Interest rate contracts
  $ 3,061     $ (1,248 )   Interest expense   $ (2,218 )   $ (2,462 )
Commodity contracts
              Selling, distribution and administrative           (1,200 )
Commodity contracts
    (18,909 )     (18,050 )   Production costs(1)     (13,892 )     (26,295 )
 
                           
Total
  $ (15,848 )   $ (19,298 )       $ (16,110 )   $ (29,957 )
 
                           
 
1.   Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).
                     
        Amount of Gain or (Loss)  
        Recognized in Income on  
        Derivative (Ineffective Portion  
    Location of Gain or (Loss) Recognized   and Amount Excluded from  
    in Income on Derivative (Ineffective   Effectiveness Testing)(net of tax)  
Derivatives in Cash   Portion and Amount Excluded from   For the forty weeks ended  
Flow Hedge Relationships   Effectiveness Testing)   October 9, 2010     October 10, 2009  
Interest rate contracts
  Selling, distribution and administrative expenses   $     $  
Commodity contracts
  Selling, distribution and administrative expenses           (617 )
 
               
Total
      $     $ (617 )
 
               
     As of October 9, 2010, the company had the following outstanding financial contracts that were entered to hedge commodity and interest rate risk:
         
    Notional amount  
Derivative in Cash Flow Hedge Relationship   (millions)  
Interest rate contracts
  $ 120.0  
Wheat contracts
    139.2  
Soybean oil contracts
    14.8  
Natural gas contracts
    14.2  
 
     
Total
  $ 288.2  
 
     
     The interest rate contracts have multiple settlements to match the amortization of the term loan. The notional amount of $120.0 million represents the current settlement notional amount. Note 7, Debt and Other Obligations, below provides details on the term loan. The company’s derivative instruments contain no credit-risk-related contingent features at October 9, 2010.

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7. DEBT AND OTHER OBLIGATIONS
     Long-term debt and capital leases consisted of the following at October 9, 2010 and January 2, 2010 (amounts in thousands):
                 
    OCTOBER 9, 2010     JANUARY 2, 2010  
Unsecured credit facility
  $ 9,500     $ 89,000  
Unsecured term loan
    120,000       131,250  
Capital lease obligations
    11,376       26,555  
Other notes payable
    2,486       4,863  
 
           
 
    143,362       251,668  
Less current maturities
    26,817       25,763  
 
           
Total long-term debt and capital leases
  $ 116,545     $ 225,905  
 
           
     On August 1, 2008, the company entered into a Credit Agreement (“term loan”) with various lending parties for the purpose of completing acquisitions. The term loan provides for an amortizing $150.0 million of borrowings through the maturity date of August 4, 2013. Principal payments are due quarterly under the term loan beginning on December 31, 2008 at an annual amortization of 10% of the principal balance for the first two years, 15% during the third year, 20% during the fourth year, and 45% during the fifth year. The term loan 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 term loan and can meet presently foreseeable financial requirements. As of October 9, 2010 and January 2, 2010, the company was in compliance with all restrictive financial covenants under the term loan.
     Interest is due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for Eurodollar loans and is based on the company’s leverage ratio. The company paid financing costs of $0.8 million in connection with the term loan, which is being amortized over the life of the term loan.
     The company has a five-year, $250.0 million unsecured revolving loan facility (the “credit facility”) expiring October 5, 2012. Proceeds from the credit facility may be used for working capital and general corporate purposes, including acquisition financing, refinancing of indebtedness 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 credit facility and can meet presently foreseeable financial requirements. As of October 9, 2010 and January 2, 2010, the company was in compliance with all restrictive financial covenants under its credit facility.
     Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as rates offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 0.30% for base rate loans and from 0.40% to 1.275% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.35% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. Financing costs of $0.9 million were deferred and are being amortized over the term of the credit facility.
     Book overdrafts occur when checks have been issued but have not been presented to the bank for payment. These bank accounts 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 book overdrafts is shown as a financing activity in our condensed consolidated statements of cash flows. Book overdrafts are included in other current liabilities on our condensed consolidated balance sheets. As of October 9, 2010 and January 2, 2010, the book overdraft balance was $12.3 million and $11.1 million, respectively.

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8. VARIABLE INTEREST ENTITY
     The company maintains a transportation agreement with an entity that transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualifies as a VIE. Under previous accounting guidance, we consolidated the VIE in our condensed consolidated financial statements from the first quarter of 2004 through the fourth quarter of 2009 because during that time the company was considered to be the primary beneficiary. Under the revised principles, which became effective January 3, 2010, we have determined that the company is no longer the primary beneficiary and we deconsolidated the VIE in our financial statements. The VIE does not affect the line item Net income attributable to Flowers Foods, Inc. since the company has no interest in any net earnings or losses of the VIE through equity participation. The VIE has collateral that is sufficient to meet its capital lease and other debt obligations and the owner of the VIE personally guarantees the obligations of the VIE. The VIE’s creditors have no recourse against the general credit of the company.
     The company has no exposure to gains or losses of the VIE in reporting its net income. In addition, the company does not have explicit or implied power over any of the significant activities to operate the VIE. The primary beneficiary of the VIE realizes the economic benefits and losses incurred and has the power to direct most of the significant activities. The VIE is permitted to pass along increases in their costs, with company approval, at a capped increase of 2% per year. The company and the VIE also agree on a rebate paid or credited to the company depending on the profitability of the VIE in the preceding year. We do not guarantee the VIE’s specific returns or performance benchmarks. In addition, if a manufacturing facility closes or there is a loss of market share causing the VIE to have to move their equipment the company will make an effort to move the equipment to another manufacturing facility. If the company is unable to do so, we will reimburse the VIE for any losses incurred in the disposal of the equipment and will pay the cost to transfer the equipment. The company’s maximum loss exposure for the truck disposals is the difference in the estimated fair value of the trucks from the book value.
     As part of the deconsolidation of the VIE, the company concluded that certain of the trucks and trailers the VIE uses for distributing our products from the manufacturing facilities to the distribution centers qualify as right to use leases. The amount for property, plant and equipment and capital lease obligations was $11.9 million at January 3, 2010. As of October 9, 2010, there was $10.4 million in net property, plant and equipment and capital lease obligations associated with the right to use leases.
     Following is the effect of the VIE during the twelve and forty weeks ended October 10, 2009:
                                 
    TWELVE WEEKS ENDED   FORTY WEEKS ENDED
    OCTOBER 10, 2009   OCTOBER 10, 2009
            % OF           % OF
    VIE   TOTAL   VIE   TOTAL
    (Dollars in thousands)                        
Assets as of respective period ends
  $ 33,715       2.5 %   $ 33,715       2.5 %
Sales
  $ 3,851       0.6 %   $ 8,466       0.4 %
Income before income taxes
  $ 1,098       2.1 %   $ 2,306       1.4 %
     The assets consisted primarily of $22.9 million of transportation equipment on October 10, 2009 recorded as capital lease obligations.
9. LITIGATION
     The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.
     On July 23, 2008, a wholly-owned subsidiary of the company filed a lawsuit against Hostess Brands, Inc. (“Hostess”) (formerly Interstate Bakeries Corporation) in the United States District Court for the Northern District of Georgia. The complaint alleges that Hostess is infringing upon Flowers’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. Flowers asserts that Hostess’ sale or intended sale of baked goods under the Nature’s Pride trademark is likely to cause confusion with, and likely to

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dilute the distinctiveness of, the Nature’s Own mark and constitutes unfair competition and deceptive trade practices. Flowers is seeking actual damages, an accounting of Hostess’ profits from its sales of Nature’s Pride products, and injunctive relief. Flowers sought summary judgment for its claims, which was denied by the court. Unless our motion for reconsideration is granted and changes that ruling, we expect this case to proceed to trial in 2011.
     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 regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition or the competitive position of the company. The company is currently in substantial compliance with all material environmental regulations affecting the company and its properties.
10. EARNINGS PER SHARE
     The following is a reconciliation of net income attributable to Flowers Foods, Inc. and weighted average shares for calculating basic and diluted earnings per common share for the twelve and forty weeks ended October 9, 2010 and October 10, 2009 (amounts in thousands, except per share data):
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
Net income attributable to Flowers Foods, Inc.
  $ 31,166     $ 31,926     $ 105,609     $ 99,648  
 
                       
Dividends on restricted shares not expected to vest*
                       
 
                       
Net income attributable to common and participating shareholders
  $ 31,166     $ 31,926     $ 105,609     $ 99,648  
 
                       
Basic Earnings Per Common Share:
                               
Weighted average shares outstanding for common stock
    91,426       91,581       91,348       91,917  
Weighted average shares outstanding for participating securities
    203       414       228       413  
 
                       
Basic weighted average shares outstanding per common share
    91,629       91,995       91,576       92,330  
 
                       
Basic earnings per common share attributable to Flowers Foods, Inc. common shareholders
  $ 0.34     $ 0.35     $ 1.15     $ 1.08  
 
                       
Diluted Earnings Per Common Share:
                               
Basic weighted average shares outstanding per common share
    91,629       91,995       91,576       92,330  
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock
    647       602       665       497  
 
                       
Diluted weighted average shares outstanding per common share
    92,276       92,597       92,241       92,827  
 
                       
Diluted earnings per common share attributable to Flowers Foods, Inc. common shareholders
  $ 0.34     $ 0.34     $ 1.14     $ 1.07  
 
                       
 
*   The company expects all restricted share awards outstanding at October 9, 2010 and October 10, 2009 to vest.
     Stock options to purchase 1,129,817 shares and 1,841,417 shares of common stock were not included in the computation of diluted earnings per share for the twelve weeks ended October 9, 2010 and October 10, 2009, respectively, because their effect would have been anti-dilutive. Stock options to purchase 2,119,163 shares and 1,841,417 shares of common stock were not included in the computation of diluted earnings per share for the forty weeks ended October 9, 2010 and October 10, 2009, respectively, because their effect would have been anti-dilutive.
11. STOCK BASED COMPENSATION
     Our 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009, (“EPIP”) authorizes the compensation committee of the Board of Directors to make awards of options to purchase our common stock, restricted stock,

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performance stock and units and deferred stock. Our officers, key employees and non-employee directors (whose grants are generally approved by the full Board of Directors) are eligible to receive awards under the EPIP. The aggregate number of shares that may be issued or transferred under the EPIP is 18,625,000 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. The following is a summary of stock options, restricted stock, and deferred stock outstanding under the EPIP. Information relating to the company’s stock appreciation rights which are not issued under the EPIP is also disclosed below.
Stock Options
     The following non-qualified stock options (“NQSOs”) have been granted under the EPIP with service period remaining. The Black-Scholes option-pricing model was used to estimate the grant date fair value (amounts in thousands, except price data and as indicated):
                         
Grant date   2/9/2010   2/9/2009   2/4/2008
Shares granted
    1,136       993       850  
Exercise price
    25.01       23.84       24.75  
Vesting date
    2/9/2013       2/9/2012       2/4/2011  
Fair value per share ($)
    5.54       5.87       5.80  
Dividend yield (%)(1)
    3.00       2.20       1.90  
Expected volatility (%)(2)
    30.60       31.80       27.30  
Risk-free interest rate (%)(3)
    2.35       2.00       2.79  
Expected option life (years)(4)
    5.00       5.00       5.00  
Outstanding at October 9, 2010
    1,130       989       844  
 
1.   Dividend yield — estimated yield based on the historical dividend payment for the four most recent dividend payments prior to the grant date.
 
2.   Expected volatility — based on historical volatility over the expected term using daily stock prices.
 
3.   Risk-free interest rate — United States Treasury Constant Maturity rates as of the grant date over the expected term.
 
4.   Expected option life — The 2008, 2009, and 2010 grant assumptions are based on the simplified formula determined in accordance with Staff Accounting Bulletin No. 110. The company does not have sufficient historical exercise behavior data to reasonably estimate the expected option life.
     The stock option activity for the forty weeks ended October 9, 2010 pursuant to the EPIP is set forth below (amounts in thousands, except price data):
                                 
            Weighted     Weighted Average        
            Average     Remaining     Aggregate  
    Options     Exercise Price     Contractual Term     Intrinsic Value  
Outstanding at January 2, 2010
    3,734     $ 20.34                  
Granted
    1,136     $ 25.01                  
Exercised
    (473 )   $ 16.10                  
Forfeited
    (13 )   $ 24.58                  
 
                           
Outstanding at October 9, 2010
    4,384     $ 21.99       4.57     $ 15,169  
 
                       
Exercisable at October 9, 2010
    1,420     $ 16.66       2.77     $ 12,488  
 
                       
     As of October 9, 2010, there was $6.7 million of total unrecognized compensation expense related to outstanding stock options. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.7 years.

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     The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for the forty weeks ended October 9, 2010 and October 10, 2009 were as follows (amounts in thousands):
                 
    OCTOBER 9, 2010   OCTOBER 10, 2009
Cash received from option exercises
  $ 7,609     $ 2,560  
Cash tax windfall, net
  $ 777     $ 910  
Intrinsic value of stock options exercised
  $ 4,311     $ 2,933  
     Generally, if the employee dies, becomes disabled or retires, the nonqualified stock options immediately vest and must be exercised within two years. In addition, nonqualified stock options will vest if the company undergoes a change in control.
Performance-Contingent Restricted Stock
     Certain key employees have been granted performance-contingent restricted stock. The 2009 and 2010 awards generally vest two years from the date of grant and the 2009 award requires the “return on invested capital” to exceed the weighted average “cost of capital” by 2.5% (the “ROI Target”) over the two fiscal years immediately preceding the vesting date. The 2010 award requires the ROI target to be 3.75% over the two fiscal years immediately preceding the vesting date. If the ROI Target is not met the awards are forfeited. Furthermore, each grant of performance-contingent restricted stock will be adjusted as set forth below:
    If the ROI Target is satisfied, then the performance-contingent restricted stock grant may be adjusted based on the company’s total return to shareholders (“Company TSR”) percent rank as compared to the total return to shareholders of the S&P Packaged Food & Meat Index (“S&P TSR”) in the manner set forth below:
    If the Company TSR rank is equal to the 50th percentile of the S&P TSR, then no adjustment;
 
    If the Company TSR rank is less than the 50th percentile of the S&P TSR, the grant shall be reduced by 1.3% for each percentile below the 50th percentile that the Company TSR is less than the 50th percentile of S&P TSR, but in no event shall such reduction exceed 20%; or
 
    If the Company TSR rank is greater than the 50th percentile of the S&P TSR, the grant shall be increased by 1.3% for each percentile above the 50th percentile that Company TSR is greater than the 50th percentile of S&P TSR, but in no event shall such increase exceed 20%.
     In connection with the vesting of 209,950 shares of restricted stock granted in February 2008, during the forty weeks ended October 9, 2010, an additional 41,990 common shares were issued in the aggregate to these certain key employees because the company exceeded the S&P TSR by the maximum amount.
     The performance-contingent restricted stock generally vests immediately if the grantee dies or becomes disabled. However, at retirement the grantee will receive a pro-rata number of shares through the grantee’s retirement date at the normal vesting date. In addition, the performance-contingent restricted stock will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to dividend and voting rights on the restricted shares for the 2009 grant. The 2010 grant does not include the right to receive dividends until vesting. Dividends declared and paid during the vesting period will accrue and will be paid at vesting. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine 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) total stockholder return 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’ total stockholder return. The inputs are based on historical capital market data.

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     The following restricted stock awards have been granted under the EPIP since fiscal 2007 (amounts in thousands, except price data):
                         
Grant date   2/9/2010   2/9/2009   2/4/2008
Shares granted
    179       204       210  
Vesting date
    2/9/2012       2/9/2011       2/4/2010  
Fair value per share
  $ 26.38     $ 24.96     $ 27.03  
     A summary of the status of the company’s nonvested shares as of October 9, 2010, and changes during the forty weeks ended October 9, 2010, is presented below (amounts in thousands, except price data):
                 
            Weighted  
            Average  
            Grant Date  
    Shares     Fair Value  
Nonvested at January 2, 2010
    414     $ 26.01  
Granted*
    221     $ 21.36  
Vested*
    (252 )   $ 22.53  
Forfeited
    (4 )   $ 25.92  
 
             
Nonvested at October 9, 2010
    379     $ 25.62  
 
           
 
*   Includes 41,990 additional shares for the 2008 grant that exceeded the S&P TSR by the maximum amount as discussed above.
     As of October 9, 2010, there was $4.0 million of total unrecognized compensation cost related to nonvested restricted stock granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 0.8 years. The total fair value of shares vested during the forty weeks ended October 9, 2010 was $6.1 million which includes the incremental shares issued when the 2008 award exceeded the S&P TSR maximum amount discussed above.
Stock Appreciation Rights
     Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chairman fees into rights. These rights vest after one year and can be exercised over nine years. The company records compensation expense for these rights at a measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model.
     The fair value of the rights at October 9, 2010 ranged from $8.95 to $21.55. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 9, 2010: dividend yield 3.0%; expected volatility 30.0%; risk-free interest rate 1.14% and expected life of 0.45 years to 2.85 years. During the twelve weeks ended October 9, 2010 and October 10, 2009 the company recorded expense of $0.2 million and $0.4 million, respectively, related to these rights. During the forty weeks ended October 9, 2010 and October 10, 2009 the company recorded expense of $0.3 million and $0.2 million, respectively, related to these rights.
     The rights activity for the forty weeks ended October 9, 2010 is set forth below (amounts in thousands except price data):
                                 
                    Weighted        
            Weighted     Average     Aggregate  
            Average     Remaining     Current  
            Grant Date     Contractual     Intrinsic  
    Rights     Fair Value     Term     Value  
Outstanding at January 2, 2010
    231     $ 11.14                  
Rights exercised
                           
Rights forfeited
                           
 
                             
Outstanding at October 9, 2010
    231     $ 11.14       3.15     $ 3,326  
 
                       

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Deferred Stock
     Pursuant to the EPIP, the company allows non-employee directors to convert their retainers into deferred stock. The deferred stock has a minimum two year vesting period and will be distributed to the individual at a time designated by the individual at the date of conversion. During the first quarter of fiscal 2010 an aggregate of 17,960 shares were converted. The company records compensation expense for this deferred stock over the two-year minimum vesting period based on the closing price of the company’s common stock on the date of conversion. During the first and second quarter of fiscal 2010 a total of 5,540 shares were exercised for non-employee retainer conversions granted in 2008.
     Pursuant to the EPIP non-employee directors also receive annual grants of deferred stock. This deferred stock vests over one year from the grant date. During the second quarter of fiscal 2010, non-employee directors were granted an aggregate of 44,220 shares of deferred stock. There was an additional grant of 1,860 shares during the first quarter of fiscal 2010 based on a pro-rated share amount for a new director whose term began on January 1, 2010. 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 minimum vesting period. During the first and second quarter of fiscal 2010 a total of 28,380 shares were exercised for deferred shares issued under the fiscal 2009 grant.
     The deferred stock activity for the forty weeks ended October 9, 2010 is set forth below (amounts in thousands, except price data):
                                 
            Weighted     Weighted Average        
            Average     Remaining     Aggregate  
    Shares     Grant Price     Contractual Term (Years)     Intrinsic Value  
Outstanding at January 2, 2010
    130     $ 21.90                  
Deferred stock issued
    64     $ 23.11                  
Deferred stock exercised
    (34 )   $ 20.57                  
 
                           
Outstanding at October 9, 2010
    160     $ 22.66       0.36     $ 4,072  
 
                       
     The following table summarizes the company’s stock based compensation expense (income) for the twelve and forty week periods ended October 9, 2010 and October 10, 2009, respectively (amounts in thousands):
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
Stock options
  $ 1,447     $ 1,205     $ 5,401     $ 3,866  
Performance-contingent restricted stock
    955       1,243       3,624       4,117  
Stock appreciation rights
    200       407       308       173  
Deferred stock
    258       311       1,010       1,051  
 
                       
Total stock based compensation
  $ 2,860     $ 3,166     $ 10,343     $ 9,207  
 
                       
12. POST-RETIREMENT PLANS
     The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at October 9, 2010 as compared to accounts at January 2, 2010 (amounts in thousands):
                 
    AS OF
    OCTOBER 9,   JANUARY 2,
    2010   2010
Noncurrent benefit asset
  $     $  
Current benefit liability
  $ 841     $ 841  
Noncurrent benefit liability
  $ 66,515     $ 68,140  
Accumulated other comprehensive loss
  $ 51,821     $ 52,808  
Defined Benefit Plans
     The company has trusteed, noncontributory defined benefit pension plans covering certain employees. The benefits are based on years of service and the employees’ career earnings. The plans are funded at amounts deductible for income tax purposes but not less than the minimum funding required by the Employee Retirement Income Security Act of 1974 (“ERISA”). As of October 9, 2010, the assets of the plans included certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities, private and public real estate partnerships, other diversifying investments (e.g. absolute return strategy funds and hedged equity funds) and annuity contracts. Effective January 1, 2006, the company

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curtailed the defined benefit plan that covered the majority of its workforce. Benefits under this plan were frozen, and no future benefits will accrue under this plan. The company continues to maintain a plan that covers a small number of union employees. During the forty weeks ended October 9, 2010 the company contributed $0.8 million to company pension plans.
     The net periodic pension cost (income) for the company’s plans include the following components (amounts in thousands):
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
Service cost
  $ 89     $ 72     $ 298     $ 240  
Interest cost
    4,308       4,309       14,359       14,359  
Expected return on plan assets
    (4,769 )     (4,370 )     (15,895 )     (14,565 )
Amortization of net loss
    503       629       1,675       2,098  
 
                       
Total net periodic benefit cost
  $ 131     $ 640     $ 437     $ 2,132  
 
                       
     The company also has several smaller defined benefit plans associated with recent acquisitions that will be merged into the Flowers Foods defined benefit plans after receipt of final determination letters. The benefits under these plans were frozen with no future benefit accruals.
Post-retirement Benefit Plan
     The company provides certain medical and life insurance benefits for eligible retired employees. The medical plan covers eligible retirees 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 benefit cost for the company includes the following components (amounts in thousands):
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
Service cost
  $ 146     $ 198     $ 486     $ 662  
Interest cost
    202       257       673       856  
Amortization of prior service (credit) cost
    (40 )     77       (134 )     256  
Amortization of net (gain) loss
    (14 )     8       (45 )     26  
 
                       
Total net periodic benefit cost
  $ 294     $ 540     $ 980     $ 1,800  
 
                       
401(k) Retirement Savings Plan
     The Flowers Foods 401(k) Retirement Savings Plan (“the Plan”) covers substantially all of the company’s employees who have completed certain service requirements. The cost and contributions for those employees who also participate in the defined benefit pension plan is 25% of the first $400 contributed by the employee. Prior to January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan was 2% of compensation and 50% of the employees’ contributions, up to 6% of compensation. Effective January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan increased to 3% of compensation and 50% of the employees’ contributions, up to 6% of compensation. During the twelve weeks ended October 9, 2010 and October 10, 2009, the total cost and contributions were $4.0 million and $3.3 million, respectively. During the forty weeks ended October 9, 2010 and October 10, 2009, the total cost and contributions were $13.4 million and $12.0 million, respectively.
     The company also has several smaller 401(k) Plans associated with recent acquisitions that will be merged into the Flowers Foods 401(k) Retirement Savings Plan after receipt of final determination letters.
13. INCOME TAXES
     The company’s effective tax rate for the twelve and forty weeks ended October 9, 2010 was 34.9% and 35.3% respectively. This rate is lower than the fiscal 2009 annual effective tax rate of 35.6% which included the benefit of favorable discrete items and the non-taxable earnings of the previously consolidated variable interest entity. The company’s current effective rate is favorably impacted by the increase in the Section 199 production activities deduction. The difference in the effective rate and the statutory rate is primarily due to state income taxes, and the Section 199 qualifying production activities deduction.

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     During the twelve and forty weeks ended October 9, 2010, the company’s activity with respect to its uncertain tax positions and the related interest expense accrual was immaterial. At this time, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.
14. SEGMENT REPORTING
     The DSD segment produces fresh and frozen packaged bread and rolls and the warehouse delivery segment produces frozen bread and rolls and fresh and frozen snack products. The company evaluates each segment’s performance based on income or loss before interest and income taxes, excluding unallocated expenses and charges which the company’s management deems to be an overall corporate cost or a cost not reflective of the segments’ core operating businesses. Information regarding the operations in these reportable segments is as follows (amounts in thousands):
                                 
    FOR THE TWELVE WEEKS ENDED     FOR THE FORTY WEEKS ENDED  
    OCTOBER 9, 2010     OCTOBER 10, 2009     OCTOBER 9, 2010     OCTOBER 10, 2009  
SALES:
                               
DSD
  $ 482,639     $ 495,224     $ 1,631,956     $ 1,682,510  
Warehouse delivery
    146,633       139,220       475,168       446,663  
Eliminations: Sales from warehouse delivery to DSD
    (25,016 )     (24,994 )     (86,902 )     (86,732 )
Sales from DSD to warehouse delivery
    (6,362 )     (6,880 )     (19,586 )     (18,416 )
 
                       
 
  $ 597,894     $ 602,570     $ 2,000,636     $ 2,024,025  
 
                       
DEPRECIATION AND AMORTIZATION:
                               
DSD
  $ 15,314     $ 15,189     $ 50,879     $ 49,678  
Warehouse delivery
    4,421       3,738       14,490       12,045  
Unallocated
    43       137       67       274  
 
                       
 
  $ 19,778     $ 19,064     $ 65,436     $ 61,997  
 
                       
INCOME FROM OPERATIONS:
                               
DSD
  $ 42,245     $ 46,789     $ 150,715     $ 149,412  
Warehouse delivery
    12,216       12,858       37,590       39,190  
Unallocated
    (7,708 )     (8,571 )     (28,276 )     (29,416 )
 
                       
 
  $ 46,753     $ 51,076     $ 160,029     $ 159,186  
 
                       
NET INTEREST INCOME
  $ 1,127     $ 98     $ 3,214     $ 737  
 
                       
INCOME BEFORE INCOME TAXES
  $ 47,880     $ 51,174     $ 163,243     $ 159,923  
 
                       
     Sales by product category in each reportable segment are as follows (amounts in thousands):
                                                 
    For the twelve weeks ended October 9, 2010     For the twelve weeks ended October 10, 2009  
    DSD     Warehouse delivery     Total     DSD     Warehouse delivery     Total  
Branded Retail
  $ 282,539     $ 23,636     $ 306,175     $ 280,034     $ 33,818     $ 313,852  
Store Branded Retail
    75,853       30,467       106,320       80,033       13,071       93,104  
Non-retail and Other
    117,885       67,514       185,399       128,277       67,337       195,614  
 
                                   
Total
  $ 476,277     $ 121,617     $ 597,894     $ 488,344     $ 114,226     $ 602,570  
 
                                   
 
    For the forty weeks ended October 9, 2010     For the forty weeks ended October 10, 2009  
    DSD     Warehouse delivery     Total     DSD     Warehouse delivery     Total  
Branded Retail
  $ 952,409     $ 89,289     $ 1,041,698     $ 946,415     $ 105,221     $ 1,051,636  
Store Branded Retail
    256,871       77,659       334,530       279,633       45,083       324,716  
Non-retail and Other
    403,090       221,318       624,408       438,046       209,627       647,673  
 
                                   
Total
  $ 1,612,370     $ 388,266     $ 2,000,636     $ 1,664,094     $ 359,931     $ 2,024,025  
 
                                   
15. SUBSEQUENT EVENTS
     The company has evaluated subsequent events since October 9, 2010, the date of these financial statements. There were no events or transactions discovered during this evaluation that require recognition or disclosure in the financial statements.

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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 forty week periods ended October 9, 2010 should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
OVERVIEW:
     Flowers Foods is one of the nation’s leading producers and marketers of packaged bakery foods for retail and foodservice customers. The company produces breads, buns, rolls, tortillas, snack cakes and pastries that are distributed fresh to U.S. customers in the Southeast, Mid-Atlantic, and Southwest as well as select markets in California and Nevada and frozen to customers nationwide. Our businesses are organized into two reportable segments: direct-store-delivery (“DSD”) and warehouse delivery. The DSD segment focuses on the production and marketing of bakery products to U.S. customers in the Southeast, Mid-Atlantic, and Southwest as well as select markets in California and Nevada. The warehouse delivery segment produces snack cakes for sale to co-pack, retail and vending customers nationwide as well as frozen bread, rolls, buns and tortillas for sale to retail and foodservice customers nationwide primarily through warehouse distribution.
     We aim to achieve consistent and sustainable growth in sales and earnings by focusing on improvement in the operating results of our existing businesses and, after detailed analysis, acquiring businesses and properties that add value to the company. We believe this consistent and sustainable growth will build value for our shareholders.
     Sales are principally affected by pricing, quality, branded recognition, new product introductions and product line extensions, marketing and service. The company manages these factors to achieve a sales mix favoring its higher-margin branded products, while using store branded products to absorb overhead costs and maximize use of production capacity. Throughout 2010, our sales have been negatively impacted by the competitive landscape and higher promotional activity within the baking industry. Sales for the quarter ended October 9, 2010 decreased 0.8% from the quarter ended October 10, 2009. This decrease was primarily due to negative pricing and mix shifts of 2.4% and the effect of the variable interest entity (“VIE”) deconsolidation, which negatively impacted sales by 0.6%. Acquisitions contributed 0.8% and volume increased 1.4%, partially offsetting these decreases. For the forty weeks ended October 9, 2010 sales decreased 1.2% from the same period of fiscal 2009. The decrease was primarily due to negative pricing and mix shifts of 2.7% and the effect of the VIE deconsolidation which negatively impacted sales 0.4%. These decreases were partially offset by acquisition sales and volume increases of 1.2% and 0.7%, respectively.
     Commodities, such as our baking ingredients, periodically experience price fluctuations, and, for that reason, we continually monitor the market for these commodities. The cost of these inputs may fluctuate widely due to government policy and regulation, weather conditions, domestic and international demand or other unforeseen circumstances. We enter into forward purchase agreements and derivative financial instruments to reduce the impact of such volatility in raw materials prices. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.
     For the twelve weeks ended October 9, 2010, diluted net income per share was $0.34 as compared to $0.34 per share for the twelve weeks ended October 10, 2009. For the twelve weeks ended October 9, 2010, net income attributable to Flowers Foods, Inc. was $31.2 million, a 2.4% decrease from the $31.9 million reported for the twelve weeks ended October 10, 2009.
     For the forty weeks ended October 9, 2010, diluted net income per share was $1.14 as compared to $1.07 per share for the forty weeks ended October 10, 2009, a 6.5% increase. For the forty weeks ended October 9, 2010, net income attributable to Flowers Foods, Inc. was $105.6 million, a 6.0% increase over $99.6 million reported for the forty weeks ended October 10, 2009.
CRITICAL ACCOUNTING POLICIES:
     Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). These principles are numerous and complex. Our significant accounting policies are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010. 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. Please see our Form 10-K for the fiscal year ended January

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2, 2010, 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. The following discussion provides the significant changes to our critical accounting policies from those disclosed in our Form 10-K filed for the year ended January 2, 2010.
     Variable Interest Entities. In 2009, the Financial Accounting Standards Board (“FASB”) amended the consolidation principles associated with VIE. The new accounting principles resulted in a change in our accounting policy effective January 3, 2010. The new qualitative approach, generally, replaced the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in the VIE. The qualitative approach is focused on identifying which company has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. As a result of this qualitative analysis, the company is no longer required to consolidate the VIE that delivers a significant portion of its fresh bakery products from the company’s production facilities to outlying distribution centers under a transportation agreement. The company has elected to prospectively deconsolidate the VIE. Please see Note 8, Variable Interest Entity, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional disclosure.
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 week periods ended October 9, 2010 and October 10, 2009, are set forth below (dollars in thousands):
                                                 
    For the twelve weeks ended  
                    Percentage of Sales     Increase (Decrease)  
    October 9, 2010     October 10, 2009     October 9, 2010     October 10, 2009     Dollars     %  
Sales
                                               
DSD
  $ 476,277     $ 488,344       79.7       81.0     $ (12,067 )     (2.5 )
Warehouse delivery
    121,617       114,226       20.3       19.0       7,391       6.5  
 
                                     
Total
  $ 597,894     $ 602,570       100.0       100.0     $ (4,676 )     (0.8 )
 
                                     
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)
                                               
DSD (1)
  $ 228,445     $ 241,305       48.0       49.4     $ (12,860 )     (5.3 )
Warehouse delivery(1)
    87,696       80,940       72.1       70.9       6,756       8.3  
 
                                         
Total
  $ 316,141     $ 322,245       52.9       53.5     $ (6,104 )     (1.9 )
 
                                         
Selling, distribution and administrative expenses
                                               
DSD(1)
  $ 190,273     $ 185,061       40.0       37.9     $ 5,212       2.8  
Warehouse delivery(1)
    17,284       16,690       14.2       14.6       594       3.6  
Corporate(2)
    7,665       8,434                   (769 )     (9.1 )
 
                                         
Total
  $ 215,222     $ 210,185       36.0       34.9     $ 5,037       2.4  
 
                                         
Depreciation and amortization
                                               
DSD(1)
  $ 15,314     $ 15,189       3.2       3.1     $ 125       0.8  
Warehouse delivery(1)
    4,421       3,738       3.6       3.3       683       18.3  
Corporate(2)
    43       137                   (94 )   NM  
 
                                         
Total
  $ 19,778     $ 19,064       3.3       3.2     $ 714       3.7  
 
                                         
Income from operations
                                               
DSD(1)
  $ 42,245     $ 46,789       8.9       9.6     $ (4,544 )     (9.7 )
Warehouse delivery(1)
    12,216       12,858       10.0       11.3       (642 )     (5.0 )
Corporate(2)
    (7,708 )     (8,571 )                 863       10.1  
 
                                         
Total
  $ 46,753     $ 51,076       7.8       8.5     $ (4,323 )     (8.5 )
 
                                         
Interest income, net
  $ 1,127     $ 98       0.2       0.0     $ 1,029     NM  
Income taxes
  $ 16,714     $ 18,150       2.8       3.0     $ (1,436 )     (7.9 )
Net income
  $ 31,166     $ 33,024       5.2       5.5     $ (1,858 )     (5.6 )
Net income attributable to noncontrolling interest
  $     $ (1,098 )           (0.2 )   $ 1,098        
 
                                         
Net income attributable to Flowers Foods, Inc.
  $ 31,166     $ 31,926       5.2       5.3     $ (760 )     (2.4 )
 
                                         
 
1.   As a percentage of revenue within the reporting segment.
 
2.   The corporate segment has no revenues.

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     Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the forty week periods ended October 9, 2010 and October 10, 2009, are set forth below (dollars in thousands):
                                                 
    For the forty weeks ended  
                    Percentage of Sales     Increase (Decrease)  
    October 9, 2010     October 10, 2009     October 9, 2010     October 10, 2009     Dollars     %  
Sales
                                               
DSD
  $ 1,612,370     $ 1,664,094       80.6       82.2     $ (51,724 )     (3.1 )
Warehouse delivery
    388,266       359,931       19.4       17.8       28,335       7.9  
 
                                     
Total
  $ 2,000,636     $ 2,024,025       100.0       100.0     $ (23,389 )     (1.2 )
 
                                     
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)
                                               
DSD (1)
  $ 771,887     $ 829,954       47.9       49.9     $ (58,067 )     (7.0 )
Warehouse delivery(1)
    277,605       255,092       71.5       70.9       22,513       8.8  
 
                                         
Total
  $ 1,049,492     $ 1,085,046       52.5       53.6     $ (35,554 )     (3.3 )
 
                                         
Selling, distribution and administrative expenses
                                               
DSD(1)
  $ 638,889     $ 635,050       39.6       38.2     $ 3,839       0.6  
Warehouse delivery(1)
    58,581       56,617       15.1       15.7       1,964       3.5  
Corporate(2)
    28,209       29,142                   (933 )     (3.2 )
 
                                         
Total
  $ 725,679     $ 720,809       36.3       35.6     $ 4,870       0.7  
 
                                         
Depreciation and amortization
                                               
DSD(1)
  $ 50,879     $ 49,678       3.2       3.0     $ 1,201       2.4  
Warehouse delivery(1)
    14,490       12,045       3.7       3.3       2,445       20.3  
Corporate(2)
    67       274                   (207 ) NM  
 
                                         
Total
  $ 65,436     $ 61,997       3.3       3.1     $ 3,439       5.5  
 
                                         
Gain on acquisition
                                               
DSD(1)
  $     $                 $        
Warehouse delivery (1)
          3,013             0.8       3,013        
Corporate (2)
                                   
 
                                         
Total
  $     $ 3,013             0.1     $ 3,013        
 
                                         
Income from operations
                                               
DSD(1)
  $ 150,715     $ 149,412       9.3       9.0     $ 1,303       0.9  
Warehouse delivery(1)
    37,590       39,190       9.7       10.9       (1,600 )     (4.1 )
Corporate(2)
    (28,276 )     (29,416 )                 1,140       3.9  
 
                                         
Total
  $ 160,029     $ 159,186       8.0       7.9     $ 843       0.5  
 
                                         
Interest income, net
  $ 3,214     $ 737       0.2       0.0     $ 2,477   NM  
Income taxes
  $ 57,634     $ 57,969       2.9       2.9     $ (335 )     (0.6 )
Net income
  $ 105,609     $ 101,954       5.3       5.0     $ 3,655       3.6  
Net income attributable to noncontrolling interest
  $     $ (2,306 )           (0.1 )   $ 2,306        
 
                                         
Net income attributable to Flowers Foods, Inc.
  $ 105,609     $ 99,648       5.3       4.9     $ 5,961       6.0  
 
                                         
 
1.   As a percentage of revenue within the reporting segment.
 
2.   The corporate segment has no revenues.

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CONSOLIDATED AND SEGMENT RESULTS
TWELVE WEEKS ENDED OCTOBER 9, 2010 COMPARED TO TWELVE WEEKS ENDED OCTOBER 10, 2009
     Consolidated Sales.
                                         
    For the Twelve Weeks Ended     For the Twelve Weeks Ended        
    October 9, 2010     October 10, 2009     % Increase  
Sales category   $     %     $     %     (Decrease)  
    (Amounts in             (Amounts in                  
    thousands)             thousands)                  
Branded Retail
  $ 306,175       51.2 %   $ 313,852       52.1 %     (2.4 )%
Store Branded Retail
    106,320       17.8       93,104       15.5       14.2 %
Non-retail and Other
    185,399       31.0       195,614       32.4       (5.2 )%
 
                               
Total
  $ 597,894       100.0 %   $ 602,570       100.0 %     (0.8 )%
 
                               
     The 0.8% decrease in sales was attributable to the following for all sales categories:
         
    Favorable
Percentage Point Change in Sales Attributed to:   (Unfavorable)
Pricing/Mix
    (2.4 )%
Volume
    1.4 %
VIE deconsolidation
    (0.6 )%
Acquisitions
    0.8 %
 
       
Total Percentage Change in Sales
    (0.8 )%
 
       
Sales category discussion
     Branded retail sales declined primarily due to volume decreases. Volume declines in branded multi-pak cake and branded white bread were partially offset by increases in branded soft variety and branded sandwich rounds. The increase in store branded retail was largely due to volume increases in store branded cake as some of the companies’ customers introduced store branded cake programs earlier in this fiscal year. The decrease in non-retail and other sales was due to the deconsolidation of the VIE and declines in food service and contract manufacturing, partially offset by the 2009 acquisition contribution.
     Direct-Store-Delivery Sales.
                                         
    For the Twelve Weeks Ended     For the Twelve Weeks Ended        
    October 9, 2010     October 10, 2009        
Sales Category   $     %     $     %     % (Decrease)  
    (Amounts in             (Amounts in                  
    thousands)             thousands)                  
Branded Retail
  $ 282,539       59.3 %   $ 280,034       57.3 %     0.9 %
Store Branded Retail
    75,853       15.9       80,033       16.4       (5.2 )%
Non-retail and Other
    117,885       24.8       128,277       26.3       (8.1 )%
 
                               
Total
  $ 476,277       100.0 %   $ 488,344       100.0 %     (2.5 )%
 
                               
     The 2.5% decrease in sales was attributable to the following for all sales categories:
         
    Favorable
Percentage Point Change in Sales Attributed to:   (Unfavorable)
Pricing/Mix
    (3.4 )%
Volume
    1.7 %
VIE deconsolidation
    (0.8 )%
 
       
Total Percentage Change in Sales
    (2.5 )%
 
       

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Sales category discussion
     Branded retail sales increased due to volume increases, partially offset by price/mix declines. Increases in branded soft variety and branded sandwich rounds were partially offset by decreases in branded white bread and breakfast bread. Store branded retail declined primarily due to decreases in pricing/mix. Non-retail and other declined primarily due to the deconsolidation of the VIE and pricing/mix decreases.
     Warehouse Delivery Sales.
                                         
    For the Twelve Weeks Ended     For the Twelve Weeks Ended        
    October 9, 2010     October 10, 2009     % Increase  
Sales Category   $     %     $     %     (Decrease)  
    (Amounts in             (Amounts in                  
    thousands)             thousands)                  
Branded Retail
  $ 23,636       19.4 %   $ 33,818       29.6 %     (30.1 )%
Store Branded Retail
    30,467       25.1       13,071       11.4       133.1 %
Non-retail and Other
    67,514       55.5       67,337       59.0       0.3 %
 
                               
Total
  $ 121,617       100.0 %   $ 114,226       100.0 %     6.5 %
 
                               
     The 6.5% increase in sales was attributable to the following for all sales categories:
         
    Favorable
Percentage Point Change in Sales Attributed to:   (Unfavorable)
Pricing/Mix
    2.2 %
Volume
    0.2 %
Acquisition
    4.1 %
 
       
Total Percentage Change in Sales
    6.5 %
 
       
Sales category discussion
     The decrease in branded retail sales was primarily the result of lower branded multi-pak cake volume as a result of store branded cake programs introduced earlier in the year by some of the company’s customers, which resulted in the increase in store branded retail sales. The increase in non-retail and other sales, which include contract production and vending, was primarily due to an acquisition. The acquisition was cycled at the end of the third quarter of fiscal 2010.
     Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately). The decrease as a percent of sales was primarily due to significant decreases in ingredient costs, partially offset by lower sales and higher packaging and workforce-related costs as a percent of sales. In addition, an acquisition during the fourth quarter of fiscal 2009 has higher costs as a percent of sales. Start-up costs for new production lines at several of our manufacturing facilities also contributed to the increase in workforce-related costs.
     The DSD segment decrease as a percent of sales was primarily the result of decreases in ingredient costs. These were partially offset by sales declines and higher workforce-related and packaging costs as a percent of sales.
     The warehouse delivery segment increase as a percent of sales was primarily the result of higher workforce-related costs, as well as, higher packaging and ingredient costs as a percent of sales. Ingredient costs were the result of higher cocoa and sugar costs, partially offset by lower flour costs as a percent of sales. Start-up costs for new production lines at several of our manufacturing facilities also contributed to the increases in workforce-related costs.
     Selling, Distribution and Administrative Expenses. The increase as a percent of sales was due to lower sales and higher workforce-related and distribution costs as a percent of sales. These were partially offset by lower costs from the acquisition as a percent of sales.
     The DSD segment’s selling, distribution and administrative expenses increased as a percent of sales primarily due to lower sales and higher workforce-related, distribution and rent expenses as a percent of sales.

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     The warehouse delivery segment’s selling, distribution and administrative expenses decreased as a percent of sales primarily due to lower advertising costs as a percent of sales.
     Depreciation and Amortization. Depreciation and amortization increased primarily due to increased depreciation expense related to assets placed in service subsequent to the third quarter of fiscal 2009 and the 2009 acquisition.
     The DSD segment’s depreciation and amortization expense increase was due to assets placed in service subsequent to the third quarter of fiscal 2009. The warehouse delivery segment’s depreciation and amortization expense increase was due to the acquisitions.
     Income from Operations. The decrease in the DSD segment income from operations was primarily attributable to lower sales and higher workforce-related costs, partially offset by lower ingredient costs. The decrease in the warehouse delivery segment income from operations was primarily a result of higher workforce-related costs. The decrease in unallocated corporate expenses was primarily due to lower pension and postretirement plan costs.
     Net Interest Income. The increase was related to lower interest expense due to lower debt outstanding under the credit facility and the term loan used for acquisitions during fiscal 2008. The credit facility and term loan had outstanding borrowings of $84.6 million and $135.0 million, respectively, at October 10, 2009 and $9.5 million and $120.0 million, respectively at October 9, 2010.
     Income Taxes. The effective tax rate for the third quarter of fiscal 2010 was 34.9% compared to 35.5% in the third quarter of the prior year. The decrease in the rate is due mainly to the increase in the Section 199 qualifying production activities deduction in the current quarter compared to the prior year quarter. The difference in the effective rate and the statutory rate is primarily due to state income taxes, and the Section 199 qualifying production activities deduction.
     Net Income Attributable to Noncontrolling Interest. The company maintains a transportation agreement with an entity that transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualified as a VIE for reporting periods prior to January 3, 2010 under previous accounting guidance and all the earnings of the VIE were eliminated through noncontrolling interest because the company did not have an equity ownership interest in the VIE. In 2009, the FASB amended the consolidation principles associated with VIE accounting by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in the VIE with a qualitative approach. The qualitative approach is focused on identifying which company has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. As a result of this qualitative analysis, the company is no longer required to consolidate the VIE beginning on January 3, 2010 at adoption. Please see Note 8, Variable Interest Entity, of this Form 10-Q for additional disclosure.
FORTY WEEKS ENDED OCTOBER 9, 2010 COMPARED TO FORTY WEEKS ENDED OCTOBER 10, 2009
     Consolidated Sales.
                                         
    For the Forty Weeks Ended     For the Forty Weeks Ended        
    October 9, 2010     October 10, 2009        
Sales category   $     %     $     %     % (Decrease)  
    (Amounts in             (Amounts in                  
    thousands)             thousands)                  
Branded Retail
  $ 1,041,698       52.1 %   $ 1,051,636       52.0 %     (0.9 )%
Store Branded Retail
    334,530       16.7       324,716       16.0       3.0 %
Non-retail and Other
    624,408       31.2       647,673       32.0       (3.6 )%
 
                               
Total
  $ 2,000,636       100.0 %   $ 2,024,025       100.0 %     (1.2 )%
 
                               

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     The 1.2% decrease in sales was attributable to the following for all sales categories:
         
    Favorable
Percentage Point Change in Sales Attributed to:   (Unfavorable)
Pricing/Mix
    (2.7 )%
Volume
    0.7 %
VIE deconsolidation
    (0.4 )%
Acquisitions
    1.2 %
 
       
Total Percentage Change in Sales
    (1.2 )%
 
       
Sales category discussion
     Branded retail sales declined due to pricing/mix and volume decreases. Declines in branded multi-pak cake and branded white bread were partially offset by increases in branded soft variety and branded sandwich rounds introduced early in this fiscal year. Competitive pricing and heavy promotional activity continued to impact the category. The increase in store branded retail was primarily due to volume increases in store branded cake as some of the company’s customers introduced store branded cake programs earlier in this fiscal year. Decreases in store branded white bread and store branded variety bread partially offset the increase. The decrease in non-retail and other sales was due to declines in food service and the deconsolidation of the VIE, partially offset by contributions from the 2009 acquisitions.
     Direct-Store-Delivery Sales.
                                         
    For the Forty Weeks Ended     For the Forty Weeks Ended        
    October 9, 2010     October 10, 2009     % Increase  
Sales category   $     %     $     %     (Decrease)  
    (Amounts in             (Amounts in                  
    thousands)             thousands)                  
Branded Retail
  $ 952,409       59.1 %   $ 946,415       56.9 %     0.6 %
Store Branded Retail
    256,871       15.9       279,633       16.8       (8.1 )%
Non-retail and Other
    403,090       25.0       438,046       26.3       (8.0 )%
 
                               
Total
  $ 1,612,370       100.0 %   $ 1,664,094       100.0 %     (3.1 )%
 
                               
     The 3.1% decrease in sales was attributable to the following for all sales categories:
         
    Favorable
Percentage Point Change in Sales Attributed to:   (Unfavorable)
Pricing/Mix
    (3.1 )%
Volume
    0.5 %
VIE deconsolidation
    (0.5 )%
 
       
Total Percentage Change in Sales
    (3.1 )%
 
       
Sales category discussion
     Branded retail sales increased due to volume increases, partially offset by price/mix declines. Increases in branded soft variety and branded sandwich rounds were partially offset by decreases in branded white bread. Competitive pricing and heavy promotional activity continued to impact the category. Store branded retail declined due to decreases in pricing/mix, and to a lesser extent, volume declines. Non-retail and other declined primarily due to the deconsolidation of the VIE, pricing/mix decreases and, to a lesser extent, volume decreases.
     Warehouse Delivery Sales.
                                         
    For the Forty Weeks Ended     For the Forty Weeks Ended        
    October 9, 2010     October 10, 2009%     Increase  
Sales category   $     %     $     %     (Decrease)  
    (Amounts in             (Amounts in                  
    thousands)             thousands)                  
Branded Retail
  $ 89,289       23.0 %   $ 105,221       29.2 %     (15.1 )%
Store Branded Retail
    77,659       20.0       45,083       12.5       72.3 %
Non-retail and Other
    221,318       57.0       209,627       58.3       5.6 %
 
                               
Total
  $ 388,266       100.0 %   $ 359,931       100.0 %     7.9 %
 
                               

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     The 7.9% increase in sales was attributable to the following for all sales categories:
         
    Favorable
Percentage Point Change in Sales Attributed to:   (Unfavorable)
Pricing/Mix
    (0.3 )%
Volume
    1.1 %
Acquisition
    7.1 %
 
       
Total Percentage Change in Sales
    7.9 %
 
       
Sales category discussion
     The decrease in branded retail sales was primarily the result of lower multi-pak cake volume as a result of store branded cake programs introduced earlier in the year by some of the company’s customers, which resulted in the increase in store branded retail sales. The increase in non-retail and other sales, which include contract production and vending, was due primarily to the acquisitions. The acquisitions were cycled at the end of the third quarter of fiscal 2010.
     Materials, Supplies, Labor and Other Production Costs (exclusive of depreciation and amortization shown separately). The decrease as a percent of sales was primarily due to significant decreases in ingredient costs. These were partially offset by sales declines and higher workforce-related costs as a percent of sales and higher costs as a percent of sales for the companies acquired in 2009.
     The DSD segment decrease as a percent of sales was primarily a result of significant decreases in ingredient costs. These were partially offset by sales declines and higher workforce-related costs as a percent of sales.
     The warehouse delivery segment increase as a percent of sales was primarily as a result of higher workforce-related and ingredients costs as a percent of sales. The higher ingredient costs are partially due to the acquisitions.
     Selling, Distribution and Administrative Expenses. The increase as a percent of sales was due to lower sales and higher workforce- related, distribution, and advertising costs as a percent of sales, partially offset by lower costs for the companies acquired in 2009.
     The DSD segment’s selling, distribution and administrative expenses increased as a percent of sales primarily due to lower sales and higher workforce-related, advertising and distribution expenses as a percent of sales.
     The warehouse delivery segment’s selling, distribution and administrative expenses decreased as a percent of sales primarily due to lower distribution costs as a percent of sales.
     Gain on Acquisition. On May 15, 2009, the company acquired substantially all the assets of a bakery mix operation in Cedar Rapids, Iowa. Based on the purchase price allocation, the fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration paid. As a result, we recognized a gain of $3.0 million, which is included in the line item “Gain on acquisition” to derive income from operations in the condensed consolidated statement of income for the forty weeks ended October 10, 2009. The gain on acquisition resulted due to the seller’s strategic intent to exit a non-core business operation. This acquisition is recorded in the warehouse delivery segment.
     Depreciation and Amortization. Depreciation and amortization increased primarily due to assets placed into service after the third quarter of fiscal 2009 and, to a lesser extent, the acquisitions.
     The DSD segment’s depreciation and amortization expense increased primarily due to assets placed into service subsequent to the third quarter of fiscal 2009. The warehouse delivery segment’s depreciation and amortization expense increased primarily as a result of the 2009 acquisitions.
     Income from Operations. The increase in the DSD segment income from operations was attributable to significantly lower ingredient costs, partially offset by sales declines. The decrease in the warehouse delivery segment income from operations was primarily a result of the gain on acquisition recorded in 2009 discussed above. The decrease in unallocated corporate expenses was primarily due to lower pension and postretirement plan costs.

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     Net Interest Income. The increase was related to lower interest expense due to lower debt outstanding under the credit facility and term loan used for the acquisitions during fiscal 2008.
     Income Taxes. The effective tax rate for the forty weeks ended October 9, 2010 was 35.3% compared to 36.2% for the forty weeks ended October 10, 2009. The decrease in the rate is due mainly to the increase in the Section 199 qualifying production activities deduction in the current period compared to the prior year period. The difference in the effective rate and the statutory rate is primarily due to state income taxes, and the Section 199 qualifying production activities deduction.
     Net Income Attributable to Noncontrolling Interest. The company maintains a transportation agreement with an entity that transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualified as a VIE for reporting periods prior to January 3, 2010 under previous accounting guidance and all the earnings of the VIE were eliminated through noncontrolling interest because the company did not have an equity ownership interest in the VIE. In 2009, the FASB amended the consolidation principles associated with VIE accounting by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in the VIE with a qualitative approach. The qualitative approach is focused on identifying which company has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. As a result of this qualitative analysis, the company is no longer required to consolidate the VIE beginning on January 3, 2010 at adoption. Please see Note 8, Variable Interest Entity, of this Form 10-Q for additional disclosure.
LIQUIDITY AND CAPITAL RESOURCES:
     Liquidity represents our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments as well as our ability to obtain appropriate financing and convert into cash those assets that are no longer required to meet existing strategic and financing objectives. Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving long-range business objectives. Currently, the company’s liquidity needs arise primarily from working capital requirements and capital expenditures. The company’s strategy for use of its cash flow also includes paying dividends to shareholders, making acquisitions, growing internally and repurchasing shares of its common stock when appropriate. The company has generated the cash flow necessary for these purposes primarily from operations during fiscal 2009 and currently in fiscal 2010. Additional liquidity is available from our credit facility, discussed below, for working capital and general corporate purposes.
Cash Flows
     Flowers Foods’ cash and cash equivalents decreased to $7.1 million at October 9, 2010 from $18.9 million at January 2, 2010. The decrease resulted from $228.8 million provided by operating activities, offset by $79.7 million and $160.9 million disbursed for investing activities and financing activities, respectively. Included in cash and cash equivalents at January 2, 2010 was $8.8 million related to the company’s VIE which was not available for use by the company. The company deconsolidated the VIE on January 3, 2010 as discussed in Note 8, Variable Interest Entity, of this Form 10-Q.
     Cash Flows Provided by Operating Activities. Net cash of $228.8 million provided by operating activities during the forty weeks ended October 9, 2010 consisted primarily of $105.6 million in net income, adjusted for the following non-cash items (amounts in thousands):
         
Depreciation and amortization
  $ 65,436  
Non cash effect of derivative activity
    22,589  
Stock-based compensation
    10,343  
Deferred income taxes
    (2,637 )
Provision for inventory obsolescence
    967  
Allowances for accounts receivable
    1,093  
Pension and postretirement plans expense
    1,417  
Other
    (89 )
 
     
Total
  $ 99,119  
 
     

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     Cash provided by working capital and other activities was $24.1 million. As of October 9, 2010, the company had $4.2 million recorded in other current liabilities representing collateral for hedged positions. As of January 2, 2010, the company had $7.0 million recorded in other current assets representing collateral for hedged positions.
     Cash Flows Disbursed for Investing Activities. Net cash disbursed for investing activities during the forty weeks ended October 9, 2010 of $79.7 million consisted primarily of capital expenditures of $74.2 million. Capital expenditures in the DSD segment and the warehouse delivery segment were $49.8 million and $20.7 million, respectively. The company estimates capital expenditures of approximately $95.0 million to $100.0 million during fiscal 2010. The company also leases certain production machinery and equipment through various operating leases.
     Cash Flows Disbursed for Financing Activities. Net cash disbursed for financing activities of $160.9 million during the forty weeks ended October 9, 2010 consisted primarily of dividends paid of $52.7 million, stock repurchases of $22.8 million, and net debt repayments of $95.3 million, partially offset by proceeds of $7.6 million from the exercise of stock options and the related share-based payments income tax benefit of $1.0 million.
Credit Facility and Term Loan
     Credit Facility. The company has a five-year, $250.0 million unsecured revolving loan facility (the “credit facility”) that expires October 5, 2012. Proceeds from the credit facility may be used for working capital and general corporate purposes, including acquisition financing, refinancing of indebtedness 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 credit facility and can meet presently foreseeable financial requirements. As of October 9, 2010 and January 2, 2010, the company was in compliance with all restrictive financial covenants under its credit facility.
     Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.00% to 0.30% for base rate loans and from 0.40% to 1.275% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.35% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. There were $9.5 million and $89.0 million in outstanding borrowings under the credit facility at October 9, 2010 and January 2, 2010, respectively.
     Amounts outstanding under the credit facility vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 6, Derivative Financial Instruments, of this Form 10-Q. For the forty weeks ended October 9, 2010, the company borrowed $409.0 million in revolving borrowings under the credit facility and repaid $488.5 million in revolving borrowings. On October 9, 2010, the company had $235.7 million available under the credit facility for working capital and general corporate purposes.
     Term Loan. On August 1, 2008, the company entered into a credit agreement (“term loan”) with various lending parties for the purpose of completing acquisitions. The term loan provides for an amortizing $150.0 million of borrowings through the maturity date of August 4, 2013. Principal payments are due quarterly under the term loan beginning on December 31, 2008 at an annual amortization of 10% of the principal balance for each of the first two years, 15% during the third year, 20% during the fourth year, and 45% during the fifth year. The term loan 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 term loan and can meet presently foreseeable financial requirements. As of October 9, 2010 and January 2, 2010, the company was in compliance with all restrictive financial covenants under the term loan. As of October 9, 2010 and January 2, 2010, the amounts outstanding under the term loan were $120.0 million and $131.3 million, respectively.
     Interest is due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for

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Eurodollar loans and is based on the company’s leverage ratio. The company paid financing costs of $0.8 million in connection with the term loan, which is being amortized over the life of the term loan.
     Currently, the company’s credit ratings by Fitch Ratings, Moody’s, and Standard & Poor’s are BBB, Baa2, and BBB-, respectively. Changes in the company’s credit ratings do not trigger a change in the company’s available borrowings or costs under the credit facility or term loan, but could affect future credit availability.
Uses of Cash
     On February 16, 2010, the Board of Directors declared a dividend of $0.175 per share on the company’s common stock that was paid on March 16, 2010 to shareholders of record on March 2, 2010. This dividend payment was $16.0 million. On June 4, 2010, the Board of Directors declared a dividend of $0.20 per share on the company’s common stock that was paid on July 2, 2010 to shareholders of record on June 18, 2010. This dividend payment was $18.3 million. On August 24, 2010, the Board of Directors declared a dividend of $0.20 per share on the company’s common stock that was paid on September 21, 2010 to shareholders of record on September 7, 2010. This dividend payment was $18.4 million.
     Our Board of Directors has approved a plan that authorizes share repurchases of up to 30.0 million shares of the company’s common stock. Under the 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 purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the first quarter of fiscal 2010, 87,271 shares, at a cost of $2.1 million of the company’s common stock were purchased under the plan. No repurchases were made by the company during the second quarter of fiscal 2010. During the third quarter of fiscal 2010, 822,200 shares, at a cost of $20.6 million of the company’s common stock were purchased under the plan. From the inception of the plan through October 9, 2010, 23.6 million shares, at a cost of $387.8 million, have been purchased.
     During the first quarter of fiscal 2010, the company paid $16.2 million in performance-based cash awards under the company’s bonus plan.
     During fiscal 2010, the company paid $0.8 million as contributions to company sponsored pension plans. It is expected an additional $0.1 million will be contributed in the fourth quarter of fiscal 2010; however, the company may decide to make additional discretionary contributions.
     In addition, during the first quarter of fiscal 2011, the company may be required to make a contingent consideration payment of up to $5.0 million for an acquisition that occurred during fiscal 2008 if the company’s stock price does not trade over a target price for ten consecutive trading days during the two year period that began on February 11, 2009. Any potential contingent payment made will affect the company’s equity and not goodwill.
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 October 9, 2010, the company’s hedge portfolio contained commodity derivatives with a net fair value of $24.5 million. Of this net fair value, $23.4 million is based on quoted market prices and $1.1 million is based on models and other valuation methods. Approximately $3.6 million, $21.2 million and $(0.3) million of this net fair value relates to instruments that will be utilized in fiscal 2010, 2011 and 2012, respectively.

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     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 October 9, 2010, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the net fair value of the derivative portfolio by $19.2 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in the net fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.
INTEREST RATE RISK
     The company has interest rate swaps with initial notional amounts of $85.0 million, and $65.0 million, respectively, to fix the interest rate on the $150.0 million term loan entered into on August 1, 2008 to fund the acquisitions of ButterKrust and Holsum. As of October 9, 2010, the net fair value of these interest rate swaps was $(8.1) million. All of this net fair value is based on valuation models and $(1.0) million, $(3.9) million, $(2.6) million and $(0.6) million of this net fair value is related to instruments expiring in 2010 through 2013, respectively.
     A sensitivity analysis has been prepared to quantify the company’s potential exposure to interest rate risk with respect to the interest rate swaps. As of October 9, 2010, a hypothetical ten percent increase (decrease) in interest rates would increase (decrease) the net fair value of the interest rate swap by $0.1 million. The analysis disregards changes in the exposures inherent in the underlying debt; however, the company expects that any increase (decrease) in payments under the interest rate swap would be substantially offset by increases (decreases) in interest expense.
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 is 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 Securities Exchange Act of 1934, as amended (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. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed as of the end of the period covered by this quarterly report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”). Based upon that evaluation, our CEO, CFO and CAO have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
     There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended October 9, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.
     On July 23, 2008, a wholly-owned subsidiary of the company filed a lawsuit against Hostess in the United States District Court for the Northern District of Georgia. The complaint alleges that Hostess is infringing upon Flowers’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. Flowers asserts that Hostess’ sale or intended sale of baked goods under the Nature’s Pride trademark is likely to cause confusion with, and likely to dilute the distinctiveness of, the Nature’s Own mark and constitutes unfair competition and deceptive trade practices. Flowers is seeking actual damages, an accounting of Hostess’ profits from its sales of

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Nature’s Pride products, and injunctive relief. Flowers sought summary judgment for its claims, which was denied by the court. Unless our motion for reconsideration is granted and changes that ruling, we expect this case to proceed to trial in 2011.
     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 regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition or the competitive position of the company. The company is currently in substantial compliance with all material environmental regulations affecting the company and its properties.
ITEM 1A. RISK FACTORS
     Please refer to Part I, Item 1A., Risk Factors, in the company’s Form 10-K for the year ended January 2, 2010 for information regarding factors that could affect the company’s results of operations, financial condition and liquidity. There have been no changes to our risk factors during the first three quarters of fiscal 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     Our Board of Directors has approved a plan that authorizes share repurchases of up to 30.0 million shares of the company’s common stock. Under the 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 purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. The following chart sets forth the amounts of our common stock purchased by the company during the third quarter of fiscal 2010 under the stock repurchase plan.
                                 
                    Total Number of   Maximum Number
                    Shares Purchased   of Shares that
            Weighted   as Part of   May Yet Be
    Total Number   Average Price   Publicly Announced   Purchased Under the
Period   of Shares Purchased   Per Share   Plan or Programs   Plan or Programs
    (Amounts in thousands, except price data)
July 18, 2010 — August 14, 2010
        $             7,262  
August 15, 2010 — September 11, 2010
    130     $ 25.72       130       7,132  
September 12, 2010 — October 9, 2010
    692     $ 25.00       692       6,440  
 
                               
Total
    822     $ 25.11       822          
 
                               
ITEM 6. EXHIBITS
     Exhibits filed as part of this report are listed in the Exhibit Index attached hereto.

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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:
Name:
  /s/ GEORGE E. DEESE
 
George E. Deese
   
 
  Title:   Chairman of the Board and    
 
      Chief Executive Officer    
 
           
 
  By:
Name:
  /s/ R. STEVE KINSEY
 
R. Steve Kinsey
   
 
  Title:   Executive Vice President and    
 
      Chief Financial Officer    
 
           
 
  By:
Name:
  /s/ KARYL H. LAUDER
 
Karyl H. Lauder
   
 
  Title:   Senior Vice President and    
 
      Chief Accounting Officer    
Date: November 18, 2010

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EXHIBIT INDEX
         
Exhibit        
No       Name of Exhibit
2.1
    Distribution Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc., dated as of October 26, 2000 (Incorporated by reference to Flowers Foods’ Registration Statement on Form 10, dated December 1, 2000, File No. 1-16247).
 
       
2.2
    Amendment No. 1 to Distribution Agreement, dated as of March 12, 2001, between Flowers Industries, Inc. and Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247).
 
       
3.1
    Restated Articles of Incorporation of Flowers Foods, Inc. as amended May 30, 2008 (Incorporated by reference to Flowers Foods’ Quarterly Report on Form 10-Q dated June 4, 2009, File No. 1-16247).
 
       
3.2
    Amended and Restated Bylaws of Flowers Foods, Inc. as amended and restated on November 14, 2008 (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated November 18, 2008, File No. 1-16247).
 
       
4.1
    Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247).
 
       
4.2
    Rights Agreement between Flowers Foods, Inc. and First Union National Bank, as Rights Agent, dated March 23, 2001 (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247).
 
       
4.3
    Amendment No. 1, dated November 15, 2002, to Rights Agreement between Flowers Foods, Inc. and Wachovia Bank, N.A. (as successor in interest to First Union National Bank), as rights agent, dated March 23, 2001. (Incorporated by reference to Flowers Foods’ Registration Statement on Form 8-A, dated November 18, 2002, File No. 1-16247).
 
       
10.1
    Flowers Foods, Inc. Retirement Plan No. 1 as amended and restated effective March 26, 2001 (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247).
 
       
10.2
    Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (Incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, File No. 1-16247).
 
       
10.3
    Flowers Foods, Inc. Stock Appreciation Rights Plan. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 29, 2002, File No. 1-16247).
 
       
10.4
    Flowers Foods, Inc. Annual Executive Bonus Plan. (Incorporated by reference to Flowers Foods’ Proxy Statement on Schedule 14A, dated April 24, 2009, File No. 1-16247).
 
       
10.5
    Flowers Foods, Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 29, 2002, File No. 1-16247).
 
       
10.6
    Form of Indemnification Agreement, by and between Flowers Foods, Inc., certain executive officers and the directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K, dated March 28, 2003, File No. 1-16247).
 
       
10.7
    Form of Continuation of Employment Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1016247)
 
       
10.8
    Ninth Amendment dated November 7, 2005 to the Flowers Foods, Inc. Retirement Plan No. 1 as Amended and restated effective as of March 26, 2001. (Incorporated by reference to Flowers Foods’ Quarterly Report on Form 10-Q dated November 17, 2005, File No. 1-16247).
 
       
10.9
    Form of Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 1, 2006, File No. 1-16247).
 
       
10.10
    Form of 2008 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated February 27, 2008, File No. 1-16247).
 
       
10.11
    First Amendment and Waiver, dated October 5, 2007, among Flowers Foods, Inc., a Georgia corporation, the lenders party to the Credit Agreement and Deutsche Bank AG New York Branch, as Administrative Agent. (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated October 11, 2007, File No. 1-16247).

37


Table of Contents

         
Exhibit        
No       Name of Exhibit
  10.12
    Agreement and Plan of Merger, dated June 23, 2008, by and among, Flowers Foods, Inc., Peachtree Acquisition Co., LLC, Holsum Bakery, Inc., Lloyd Edward Eisele, Jr. and The Lloyd Edward Eisele, Jr. Revocable Trust (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K/A dated June 25, 2008, File No. 1-16247).
   
       
  10.13
    Credit Agreement, dated as of August 1, 2008, among Flowers Foods, Inc., the Lenders Party thereto from time to time, Bank of America N.A., Cooperative Centrale Raiffeisen-Boerenleen Bank, B.A., “Rabobank International”, New York Branch, and Branch Banking & Trust Company as co-documentation agents, SunTrust Bank, as syndication agent, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Flowers Foods’ Current Report on Form 8-K dated August 6, 2008, File No. 1-16247).
   
       
  10.14
    Form of 2009 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1-16247).
   
       
  10.15
    Form of 2009 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1-16247).
   
       
  10.16
    Form of 2009 Deferred Shares Agreement, by and between Flowers Foods, Inc. and certain members of the Board of Directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 4, 2009, File No. 1-16247).
   
       
  10.17
    Form of 2010 Restricted Stock Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 3, 2010, File No. 1-16247).
   
       
  10.18
    Form of 2010 Nonqualified Stock Option Agreement, by and between Flowers Foods, Inc. and certain executive officers of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 3, 2010, File No. 1-16247).
   
       
   21
    Subsidiaries of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods’ Annual Report on Form 10-K dated March 3, 2010, File No. 1-16247).
 
       
 *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.
 
       
 *31.3
    Certification of Chief Accounting 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 George E. Deese, Chief Executive Officer, R. Steve Kinsey, Chief Financial Officer and Karyl H. Lauder, Chief Accounting Officer for the Quarter Ended October 9, 2010.
 
       
*101.CAL
    XBRL Taxonomy Extension Calculation Linkbase.
 
       
*101.DEF
    XBRL Taxonomy Extension Definition Linkbase.
 
       
*101.INS
    XBRL Instance Document.
 
       
*101.LAB
    XBRL Taxonomy Extension Label Linkbase.
 
       
*101.PRE
    XBRL Taxonomy Extension Presentation Linkbase.
 
       
*101.SCH
    XBRL Taxonomy Extension Schema Linkbase.
 
*   Filed herewith

38