flo-10q_20191005.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 5, 2019

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

For the transition period from to

Commission file number 1-16247

FLOWERS FOODS, INC.

(Exact name of registrant as specified in its charter)

Georgia

58-2582379

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1919 FLOWERS CIRCLE, THOMASVILLE, Georgia

(Address of principal executive offices)

31757

(Zip Code)

(229)-226-9110

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FLO

NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

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

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

As of November 1, 2019, the registrant had 211,514,071 shares of common stock, $0.01 par value per share, outstanding.

FLOWERS FOODS, INC.

INDEX

			PAGE NUMBER
PART I. Financial Information			3
	Item 1.	Financial Statements (unaudited)	3
		Condensed Consolidated Balance Sheets as of October 5, 2019 and December 29, 2018	3
		Condensed Consolidated Statements of Income For the Twelve and Forty Weeks Ended October 5, 2019 and October 6, 2018	4
		Condensed Consolidated Statements of Comprehensive Income For the Twelve and Forty Weeks Ended October 5, 2019 and October 6, 2018	5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity For the Twelve and Forty Weeks Ended October 5, 2019 and October 6, 2018	6
		Condensed Consolidated Statements of Cash Flows For the Forty Weeks Ended October 5, 2019 and October 6, 2018	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 4.	Controls and Procedures	58
PART II. Other Information			59
	Item 1.	Legal Proceedings	59
	Item 1A.	Risk Factors	59
	Item 2.	Unregistered Sales of Securities and Use of Proceeds	60
	Item 3.	Defaults Upon Senior Securities	60
	Item 4.	Mine Safety Disclosures	60
	Item 5.	Other Information	60
	Item 6.	Exhibits	61
Signatures			62

Forward-Looking Statements

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

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

•

unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with or increased costs related to our employees and third-party service providers; 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), including as a result of product recalls or safety concerns related to our products;

•

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

•

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

•

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

•

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

•

our ability to execute our business strategies, including those strategies we have initiated under Project Centennial, which may involve, among other things, (i) the integration of acquisitions or the acquisition or disposition of assets at presently targeted values, (ii) the deployment of new systems and technology, and (iii) an enhanced organizational structure;

•

consolidation within the baking industry and related industries;

•

changes in pricing, customer and consumer reaction to pricing actions, and the pricing environment among competitors within the industry;

•

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

•

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

•

increases in employee and employee-related costs, including funding of pension plans;

•

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

•

any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters, labor strikes or work stoppages, technological breakdowns, product contamination, product recalls or safety concerns related to our products, or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events;

•

the failure of our information technology systems to perform adequately, including any interruptions, intrusions or security breaches of such systems; 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. Refer to Part I, Item 1A., Risk Factors, of our Annual Report on Form 10-K for the year ended December 29, 2018 (the “Form 10-K”) and Part II, Item 1A., Risk Factors, of this Form 10-Q for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

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

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

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

(Unaudited)

	October 5, 2019			December 29, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	6,968		$	25,306
Accounts and notes receivable, net of allowances of $5,776 and $5,751, respectively		299,365			287,482
Inventories, net:
Raw materials		45,613			44,502
Packaging materials		23,249			21,868
Finished goods		61,530			56,253
Inventories, net		130,392			122,623
Spare parts and supplies		66,792			65,076
Other		62,310			43,237
Total current assets		565,827			543,724
Property, plant and equipment, net:
Property, plant and equipment, gross		1,981,880			1,981,723
Less: accumulated depreciation		(1,272,325	)		(1,237,876	)
Property, plant and equipment, net		709,555			743,847
Financing lease right-of-use assets		24,359			—
Operating lease right-of-use assets		379,652			—
Notes receivable from independent distributor partners		200,523			204,125
Assets held for sale		4,363			6,606
Other assets		7,530			6,927
Goodwill		545,244			545,379
Other intangible assets, net		772,373			794,929
Total assets	$	3,209,426		$	2,845,537
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,714		$	5,000
Current maturities of capital leases		—			5,896
Current maturities of financing leases		7,357			—
Current maturities of operating leases		52,937			—
Accounts payable		251,939			242,084
Current postretirement/post-employment obligations		20,356			1,283
Other accrued liabilities		185,639			146,076
Total current liabilities		521,942			400,339

Noncurrent long-term debt		874,284			974,594
Noncurrent capital lease obligations		—			16,046
Noncurrent financing lease obligations		21,087			—
Noncurrent operating lease obligations		328,891			—
Total long-term debt and right-of-use lease liabilities		1,224,262			990,640
Other liabilities:
Postretirement/post-employment obligations		13,955			39,149
Deferred taxes		109,166			102,658
Other long-term liabilities		46,769			54,484
Total other long-term liabilities		169,890			196,291
Commitments and Contingencies
Stockholders’ equity:
Preferred stock — $100 stated par value, 200,000 authorized shares and none issued		—			—
Preferred stock — $.01 stated par value, 800,000 authorized shares and none issued		—			—
Common stock — $.01 stated par value and $.001 current par value, 500,000,000 authorized shares and 228,729,585 shares and 228,729,585 shares issued, respectively		199			199
Treasury stock — 17,215,627 shares and 17,834,378 shares, respectively		(226,288	)		(231,648	)
Capital in excess of par value		646,897			653,477
Retained earnings		985,015			945,410
Accumulated other comprehensive loss		(112,491	)		(109,171	)
Total stockholders’ equity		1,293,332			1,258,267
Total liabilities and stockholders’ equity	$	3,209,426		$	2,845,537

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 5, 2019			October 6, 2018			October 5, 2019			October 6, 2018
Sales	$	966,561		$	923,449		$	3,206,215		$	3,071,185
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		509,056			485,680			1,669,749			1,599,673
Selling, distribution and administrative expenses		362,380			353,051			1,197,926			1,167,879
Depreciation and amortization		33,196			32,662			111,344			111,949
(Recovery) loss on inferior ingredients		—			(1,891	)		(413	)		1,993
Impairment of assets		—			—			—			2,483
Multi-employer pension plan withdrawal costs		—			—			—			2,322
Restructuring and related impairment charges		3,277			497			6,042			2,557
Income from operations		58,652			53,450			221,567			182,329
Interest expense		8,705			8,180			30,368			27,390
Interest income		(6,371	)		(6,615	)		(21,441	)		(21,176	)
Pension plan settlement loss		—			930			—			6,633
Other components of net periodic pension and postretirement benefits expense (credit)		518			(171	)		1,729			(1,204	)
Income before income taxes		55,800			51,126			210,911			170,686
Income tax expense		12,442			11,496			48,592			34,367
Net income	$	43,358		$	39,630		$	162,319		$	136,319
Net income per common share:
Basic:
Net income per common share	$	0.20		$	0.19		$	0.77		$	0.65
Weighted average shares outstanding		211,711			211,082			211,575			210,994
Diluted:
Net income per common share	$	0.20		$	0.19		$	0.77		$	0.64
Weighted average shares outstanding		212,014			211,564			211,956			211,452
Cash dividends paid per common share	$	0.1900		$	0.1800		$	0.5600		$	0.5300

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

(Unaudited)

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 5, 2019			October 6, 2018			October 5, 2019			October 6, 2018
Net income	$	43,358		$	39,630		$	162,319		$	136,319
Other comprehensive income (loss), net of tax:
Pension and postretirement plans:
Settlement loss		—			696			—			4,959
Net loss for the period		—			(32,639	)		—			(19,883	)
Amortization of prior service cost included in net income		59			35			198			96
Amortization of actuarial loss included in net income		1,177			768			3,923			2,709
Pension and postretirement plans, net of tax		1,236			(31,140	)		4,121			(12,119	)
Derivative instruments:
Net change in fair value of derivatives		(7,124	)		7,394			(4,577	)		9,055
Loss (gain) reclassified to net income		259			266			(2,864	)		689
Derivative instruments, net of tax		(6,865	)		7,660			(7,441	)		9,744
Other comprehensive loss, net of tax		(5,629	)		(23,480	)		(3,320	)		(2,375	)
Comprehensive income	$	37,729		$	16,150		$	158,999		$	133,944

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	For the Twelve Weeks Ended October 5, 2019
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Loss			Number of Shares			Cost			Total
Balances at July 13, 2019		228,729,585	$	199	$	645,376		$	981,846		$	(106,862	)		(17,215,740	)	$	(226,290	)	$	1,294,269
Net income									43,358												43,358
Derivative instruments, net of tax												(6,865	)								(6,865	)
Pension and postretirement plans, net of tax												1,236									1,236
Amortization of share-based compensation awards						1,523															1,523
Issuance of deferred compensation						(2	)								113			2			—
Dividends paid — $.1900 per common share									(40,189	)											(40,189	)
Balances at October 5, 2019		228,729,585	$	199	$	646,897		$	985,015		$	(112,491	)		(17,215,627	)	$	(226,288	)	$	1,293,332

	For the Forty Weeks Ended October 5, 2019
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Loss			Number of Shares			Cost			Total
Balances at December 29, 2018		228,729,585	$	199	$	653,477		$	945,410		$	(109,171	)		(17,834,378	)	$	(231,648	)	$	1,258,267
Net income									162,319												162,319
Derivative instruments, net of tax												(7,441	)								(7,441	)
Pension and postretirement plans, net of tax												4,121									4,121
Cumulative effect of change in accounting principle									(2,915	)											(2,915	)
Amortization of share-based compensation awards						5,834															5,834
Issuance of deferred compensation						(5	)								339			5			—
Performance-contingent restricted stock awards issued (Note 17)						(11,498	)								885,123			11,498			—
Issuance of deferred stock awards						(911	)								69,377			911			—
Stock repurchases															(336,088	)		(7,054	)		(7,054	)
Dividends paid on vested share-based payment awards									(1,361	)											(1,361	)
Dividends paid — $.5600 per common share									(118,438	)											(118,438	)
Balances at October 5, 2019		228,729,585	$	199	$	646,897		$	985,015		$	(112,491	)		(17,215,627	)	$	(226,288	)	$	1,293,332

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	For the Twelve Weeks Ended October 6, 2018
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Income (Loss)			Number of Shares			Cost			Total
Balances at July 14, 2018		228,729,585	$	199	$	650,934		$	960,865		$	(82,260	)		(17,846,284	)	$	(231,803	)	$	1,297,935
Net income									39,630												39,630
Derivative instruments, net of tax												7,660									7,660
Pension and postretirement plans, net of tax												(31,140	)								(31,140	)
Amortization of share-based compensation awards						1,442															1,442
Issuance of deferred compensation						(1	)								113			1			—
Dividends paid — $.1800 per common share									(37,959	)											(37,959	)
Balances at October 6, 2018		228,729,585	$	199	$	652,375		$	962,536		$	(105,740	)		(17,846,171	)	$	(231,802	)	$	1,277,568

	For the Forty Weeks Ended October 6, 2018
	Common Stock				Capital in						Accumulated
	Number of				Excess						Other			Treasury Stock
	Shares Issued		Par Value		of Par Value			Retained Earnings			Comprehensive Loss			Number of Shares			Cost			Total
Balances at December 30, 2017		228,729,585	$	199	$	650,872		$	919,658		$	(84,559	)		(18,203,381	)	$	(235,493	)	$	1,250,677
Net income									136,319												136,319
Derivative instruments, net of tax												9,744									9,744
Pension and postretirement plans, net of tax												(12,119	)								(12,119	)
Exercise of stock options						(151	)								72,785			942			791
Amortization of share-based compensation awards						6,892															6,892
Issuance of deferred compensation						(122	)								9,411			122			—
Performance-contingent restricted stock awards issued (Note 17)						(4,062	)								313,906			4,062			—
Issuance of deferred stock awards						(1,054	)								81,255			1,054			—
Stock repurchases															(120,147	)		(2,489	)		(2,489	)
Dividends paid on vested share-based payment awards									(492	)											(492	)
Dividends paid — $.5300 per common share									(111,755	)											(111,755	)
Reclassification of stranded income tax effects to retained earnings									18,806			(18,806	)
Balances at October 6, 2018		228,729,585	$	199	$	652,375		$	962,536		$	(105,740	)		(17,846,171	)	$	(231,802	)	$	1,277,568

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Forty Weeks Ended
	October 5, 2019			October 6, 2018
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income	$	162,319		$	136,319
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring and related impairment charges		5,663			174
Stock-based compensation		5,834			6,892
Impairment of assets		—			2,483
(Gain) loss reclassified from accumulated other comprehensive income to net income		(3,942	)		811
Depreciation and amortization		111,344			111,949
Deferred income taxes		8,570			21,139
Provision for inventory obsolescence		54			833
Allowances for accounts receivable		8,819			3,968
Pension and postretirement plans cost		2,487			6,372
Other		1,189			(4,643	)
Qualified pension plan contributions		(2,500	)		(40,700	)
Changes in operating assets and liabilities, net of acquisitions and disposals:
Accounts receivable, net		(19,519	)		(20,297	)
Inventories, net		(7,824	)		(8,847	)
Hedging activities, net		(6,683	)		7,939
Accounts payable		4,808			60,810
Other assets and accrued liabilities		7,481			(53,143	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		278,100			232,059
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(70,610	)		(74,992	)
Proceeds from sale of property, plant and equipment		2,548			1,366
Repurchase of independent distributor territories		(1,753	)		(2,306	)
Cash paid at issuance of notes receivable		(17,904	)		(19,007	)
Principal payments from notes receivable		22,525			20,961
Other investing activities		88			566
NET CASH DISBURSED FOR INVESTING ACTIVITIES		(65,106	)		(73,412	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid, including dividends on share-based payment awards		(119,799	)		(112,247	)
Exercise of stock options		—			791
Stock repurchases		(7,054	)		(2,489	)
Change in bank overdrafts		3,116			3,746
Proceeds from debt borrowings		485,400			1,000
Debt obligation payments		(587,900	)		(4,750	)
Payments for financing fees		(110	)		(100	)
Payments on financing leases		(4,985	)		—
NET CASH DISBURSED FOR FINANCING ACTIVITIES		(231,332	)		(114,049	)
Net (decrease) increase in cash and cash equivalents		(18,338	)		44,598
Cash and cash equivalents at beginning of period		25,306			5,129
Cash and cash equivalents at end of period	$	6,968		$	49,727

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

BASIS OF ACCOUNTING — The accompanying unaudited Condensed Consolidated Financial Statements of Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the unaudited Condensed Consolidated Financial Statements included herein contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the company’s financial position, results of operations and cash flows. The results of operations for the twelve and forty weeks ended October 5, 2019 and October 6, 2018 are not necessarily indicative of the results to be expected for a full fiscal year. The Condensed Consolidated Balance Sheet at December 29, 2018 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Form 10-K.

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

REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2019 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 20, 2019 (sixteen weeks), second quarter ended July 13, 2019 (twelve weeks), third quarter ended October 5, 2019 (twelve weeks) and fourth quarter ending December 28, 2019 (twelve weeks).

REPORTING SEGMENT — On May 3, 2017, the company announced an enhanced organizational structure designed to provide greater focus on the company’s long-term strategic objectives, emphasize brand growth and innovation in line with a national branded food company, drive enhanced accountability, and reduce costs. The new organizational structure establishes two business units (“BUs”), Fresh Packaged Bread and Snacking/Specialty, and realigns key leadership roles. The new structure also provides for centralized marketing, sales, supply chain, shared-services/administrative, and corporate strategy functions, each with clearly defined roles and responsibilities. The company has concluded that under the new organizational structure the company has one operating segment based on the nature of products the company sells, intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the chief executive officer (“CEO”), who is the chief operating decision maker, for the purpose of assessing performance and allocating resources. Capital allocations, such as building a new bakery or other investments, impact both BUs, as the two BUs are so intertwined in the production of products, sales, marketing and other functions. Beginning with the first quarter of 2019, the comparative periods are presented on a consolidated basis due to the change to a single operating segment.

SIGNIFICANT CUSTOMER — Following is the effect that our largest customer, Walmart/Sam’s Club, had on the company’s sales for the twelve and forty weeks ended October 5, 2019 and October 6, 2018. Walmart/Sam’s Club is the only customer to account for greater than 10% of the company’s sales.

For the Twelve Weeks Ended

For the Forty Weeks Ended

October 5, 2019

October 6, 2018

October 5, 2019

October 6, 2018

(% of Sales)

Total

21.5

20.2

21.3

20.3

Walmart/Sam’s Club is our only customer with greater than 10% of outstanding trade receivables, representing 20.6% and 17.8%, on a consolidated basis, as of October 5, 2019 and December 29, 2018, respectively, of our trade receivables.

SIGNIFICANT ACCOUNTING POLICIES — Significant changes to our critical accounting policies from those disclosed in the Form 10-K are presented below. The policy changes for accounting for leases during the first quarter of our fiscal 2019 are a result of adopting new guidance issued by the Financial Accounting Standards Board (the “FASB”). See Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the new guidance.

Leases. Primarily, the company leases real estate for distribution, manufacturing and office use, along with production and IT equipment. The company applies the new guidance to individual leases of assets, except for certain leases that employ the portfolio method. See below for the company’s policy around application of the portfolio method.

When the company receives substantially all the economic benefits from and directs the use of specified property, plant and equipment, transactions give rise to leases. See Note 4, Leases, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further qualitative and quantitative information around the company’s lease portfolio. Our classes of assets include: land; buildings; machinery and equipment; furniture, fixtures and transportation equipment; and construction in progress.

The company has elected the practical expedient within the guidance to not separate lease and non-lease components within lease transactions for the following classes of assets: land; buildings; and furniture, fixtures and transportation equipment. The company has elected the short-term lease exception (lessee only) for all classes of assets and does not apply the recognition requirements for leases of 12 months or less. Lease payments for short-term leases are recognized as expense either straight-line over the lease term or as incurred depending on whether the lease payments are fixed or variable. These elections are applied consistently for all leases.

The company has elected to apply a portfolio approach for leases with similar terms and conditions, commencement dates, and executed at or near the same time as one another, as it is reasonably expected that application of the lease model to the portfolio would not differ materially from application to the individual leases.

The company allocates consideration (i.e., lease payments) to the lease and non-lease components within a transaction on a relative stand-alone price basis to lease and non-lease components within a transaction.

The company presents operating lease payments as cash outflows from operating activities and financing lease payments as cash outflows from financing activities in the Condensed Consolidated Statements of Cash Flows. The amortization of the right-of-use asset is presented in the same line item as the change in the operating lease liability in the other assets and accrued liabilities line item.

The company will use the applicable incremental borrowing rate at lease commencement to perform the lease classification tests on lease components and to measure the lease liabilities and right-of-use assets in situations when discount rates implicit in leases cannot be readily determined. We will also apply the “bright-line” thresholds within the guidance for lease classification for all classes of assets.

PRODUCT RECALL AND (RECOVERY) LOSS ON INFERIOR INGREDIENTS

Product Recall

On July 9, 2019, the company issued a voluntary product recall for certain hamburger and hot dog buns and other bakery products due to the potential presence of small pieces of hard plastic that may have been introduced during production. The products recalled were distributed to retail customers under a variety of brand names in 18 states. The costs for the product recall were $0.8 million for the forty weeks ended October 5, 2019.

(Recovery) loss on inferior ingredients

In June 2018, the company received from a supplier several shipments of inferior yeast, which reduced product quality and disrupted production and distribution of foodservice and retail bread and buns at several of the company’s bakeries during the second quarter of 2018. While the supplier confirmed that the inferior yeast used in the baking process was safe for consumption, customers and consumers reported instances of unsatisfactory product attributes, primarily involving smell and taste.

In addition, the company incurred costs associated with inferior whey during the third quarter of fiscal 2018. A voluntary recall was issued on July 18, 2018 due to the potential of tainted whey. Costs associated with these inferior ingredients were reclassified from material, supplies, labor and other production costs and selling, distribution and administrative expenses to the ‘(Recovery) loss on inferior ingredients’ line item in our Condensed Consolidated Statements of Income.

Beginning in the second quarter of fiscal 2018 and continuing through the first quarter of fiscal 2019, we have recognized identifiable and measurable costs associated with receiving inferior ingredients. We have received reimbursements for a portion of previously incurred costs. These reimbursements are presented as recoveries on the ‘(Recovery) loss on inferior ingredients’ line item in our Condensed Consolidated Statements of Income. We continue to seek recovery of all losses through appropriate means. The table below presents the (recovery) loss on inferior ingredients (amounts in thousands):

	For the Twelve Weeks Ended					For the Forty Weeks Ended
	October 5, 2019		October 6, 2018			October 5, 2019			October 6, 2018
Loss on inferior ingredients	$	—	$	2,265		$	1,409		$	6,149
Recovery on inferior ingredients		—		(4,156	)		(1,822	)		(4,156	)
(Recovery) loss on inferior ingredients	$	—	$	(1,891	)	$	(413	)	$	1,993

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02 Leases (ASC Topic 842, the “new standard”) that requires an entity to recognize lease liabilities and a right-of-use asset (“ROU assets” and “ROU liabilities”) for virtually all leases (other than those that meet the definition of a short-term lease) on the balance sheet and to disclose key information about the entity’s leasing arrangements. This new standard was effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods, with earlier adoption permitted. The company adopted the new standard as of December 30, 2018 and applied the modified retrospective transition method. The company also chose the optional transition relief provided in ASU No. 2018-11 which allows the company to apply the new standard in fiscal 2019 and to recognize a cumulative-effect adjustment to the adoption period opening balance of retained earnings.

The company elected the package of transition practical expedients within the new standard. As required by the new standard, these expedients were elected as a package, and consistently applied across the company’s lease portfolio. Given this election, the company did not reassess the following:

•

whether any expired or existing contracts are or contain leases;

•

the lease classification for any expired or existing leases; or

•

the treatment of initial direct costs relating to any existing leases.

We have chosen the option to not adjust prior comparative periods. The company recognized a cumulative effect adjustment to the opening balance of retained earnings of $2.9 million, net of tax, at adoption.

In applying the modified retrospective transition method to these leases, the company measured lease liabilities at the present value of the sum of remaining minimum rental payments. These lease liabilities have been measured using the company’s incremental borrowing rates at the later of (i) the earliest period presented or (ii) the commencement date of the applicable lease. The right-of-use assets for these operating leases have been measured as the initial measurement of applicable lease liabilities adjusted for any unamortized initial direct costs, prepaid/accrued rent, and unamortized lease incentives.

The adoption of this new standard and application of the modified retrospective transition approach resulted in the following additional impacts to the company’s Condensed Consolidated Balance Sheet at December 30, 2018: (1) assets increased by $387.3 million, primarily representing recognition of right-of-use assets for operating leases; and (2) liabilities increased by $391.9 million, primarily representing recognition of lease liabilities for operating leases. In addition, the company previously recorded right-of-use assets and liabilities of $21.9 million as property, plant, and equipment. At adoption, the company recorded right-of-use assets of $19.8 million and right-of-use liabilities of $23.6 million for these financing leases.

During the second quarter of fiscal 2019, the company adopted new guidance on accounting for a cloud computing arrangement that is hosted by a vendor. The company has elected the prospective transition method at adoption. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.

Accounting pronouncements not yet adopted

In June 2016, the FASB issued guidance that effects loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. Additional guidance for this topic was issued in April 2019. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the company’s fiscal 2020). Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (the company’s fiscal 2019). The company will adopt this standard in the first quarter of fiscal 2020. The company is determining what the impact, if any, will be on the trade and notes receivables recorded in our Condensed Consolidated Financial Statements.

In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment. The guidance removed Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Companies will still have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. This guidance will be applied prospectively. Companies are required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure shall be provided in the first annual reporting period and in the interim period within the first annual reporting period when the company adopts this guidance. This change to the guidance is effective for fiscal years beginning after December 15, 2019 (the company’s fiscal 2020). Early adoption is permitted after January 1, 2017. The company anticipates adopting this guidance in our fiscal 2020. The company is currently evaluating the impact on our Condensed Consolidated Financial Statements.

In August 2018, the FASB issued guidance to modify the disclosure requirements on fair value measurements. The guidance removes, modifies, and adds certain disclosures related to Level 1, Level 2, and Level 3 assets. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the company’s fiscal 2020). The company is currently evaluating when this guidance will be adopted and the impact on our Condensed Consolidated Financial Statements.

In August 2018, the FASB issued guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 (the company’s fiscal 2021). Disclosures were removed for the amounts in accumulated other comprehensive income (“AOCI”) expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of assets expected to be returned to the employer, certain related party disclosures, and the effects of a one-percentage-point change in the assumed health care cost trend rates. Additional disclosures include the weighted average interest crediting rate for plans with promised crediting interest rates and an explanation of the reasons for significant gains and losses related to the benefit obligation for the period. This guidance shall be applied on a retrospective basis and can be early adopted. The company is currently evaluating when this guidance will be adopted and the impact on our Condensed Consolidated Financial Statements.

We have reviewed other recently issued accounting pronouncements and concluded that either they are not applicable to our business or no material effect is expected upon future adoption.

3. RESTRUCTURING ACTIVITIES

On August 10, 2016, we announced the launch of Project Centennial, a comprehensive business and operational review. We identified opportunities to enhance revenue growth, streamline operations, improve efficiencies, and make investments that strengthen our competitive position and improve margins over the long term. We began Project Centennial with an evaluation of our brands, product mix, and organizational structure. We then developed strategic priorities to help us capitalize on retail and consumer changes. The primary objective is to improve margins and profitably grow revenue over time. These priorities are as follows:

Reduce costs to fuel growth. The company is focusing on reducing costs in our purchased goods and services initiative and our supply chain optimization plan. Purchased goods and services operations have been centralized to create standardization and develop consistent policies and specifications. Supply chain optimization intends to reduce operational complexity and capitalize on scale. This initiative includes, and will continue to include, consulting and other third-party costs as we finalize the organizational structure. We incurred $0.7 million and $9.4 million for these non-restructuring consulting costs during the twelve and forty weeks ended October 6, 2018, respectively. There were no consulting costs during the twelve and forty weeks ended October 5, 2019.

Develop leading capabilities. On May 3, 2017, the company announced an enhanced organizational structure designed to provide greater focus on the company’s strategic objectives, emphasize brand growth and innovation in line with a national branded food company, drive enhanced accountability, reduce costs, and strengthen our long-term strategy. The new organizational structure established two BUs, Fresh Bakery and Snacking/Specialty, and realigned key leadership roles. The new structure also provided for centralized marketing, sales, supply chain, shared-services/administrative, and corporate strategy functions, each with more clearly defined roles and responsibilities. Transition to the new reporting structure was completed in the first quarter of fiscal 2019 and the company is now reporting our financial results in one operating segment. See Note 1, Basis of Presentation, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for a description of our segment presentation.

We began relocating certain employees during the third quarter of fiscal 2017 as we transitioned to the new structure. Reorganization costs are recognized in the restructuring charges line item on the Condensed Consolidated Statements of Income.

On July 17, 2017, the company commenced a voluntary employee separation incentive plan (the “VSIP”). The VSIP was implemented as part of our effort to restructure and streamline operations and better position the company for profitable growth. The VSIP election period closed on September 25, 2017 and resulted in approximately 325 employees accepting the offer. The separations began on September 7, 2017, and were substantially complete by the end of fiscal 2017. We recorded a credit of $0.6 million during the forty weeks ended October 6, 2018. These charges consisted primarily of employee severance and benefits-related costs and are recorded in the restructuring charges line item on our Condensed Consolidated Statements of Income.

Reinvigorate core business. This objective is to invest in our brands to align brands to consumers to maximize our return on investment. We expect to incur significant incremental marketing costs annually for brand development. These costs will not be restructuring and will be recognized as incurred. Project Centennial is expected to be completed by our fiscal 2021.

The company recognized impairment charges during fiscal 2019 related to manufacturing line closures of $0.5 million during the first quarter of fiscal 2019 and $3.9 million during the third quarter of fiscal 2019. The company also recognized an impairment charge of $1.3 million for a closed plant recorded in assets held for sale during the second quarter of fiscal 2019. The company sold a closed plant, which was recorded in assets held for sale which was previously impaired in a prior fiscal year, during the third quarter of fiscal 2019. The company received $1.9 million and recognized a gain of $0.8 million at the time of sale. The impairment charges and the gain recognized are recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income as referenced in the table below.

Capitalize on product adjacencies. This initiative focuses on growing market share in underdeveloped markets. Adjacencies are geographic and/or product categories that are expected to leverage our competitive advantages. This can be achieved either organically with our high-potential brands or through strategic acquisitions.

The tables below present the components of costs associated with Project Centennial for the twelve and forty weeks ended October 5, 2019 and October 6, 2018 (amounts in thousands):

	For the Twelve Weeks Ended			For the Forty Weeks Ended
	October 5, 2019			October 5, 2019
Restructuring and related impairment charges:
Reorganization costs	$	—		$	253
Gain on bakery sale		(833	)		(833	)
Impairment of assets		3,881			5,663
Employee termination benefits		229			959
Restructuring and related impairment charges (1)	$	3,277		$	6,042

	For the Twelve Weeks Ended		For the Forty Weeks Ended
	October 6, 2018		October 6, 2018
Restructuring and related impairment charges:
Reorganization costs	$	323	$	2,636
VSIP		—		(597	)
Impairment of assets		174		174
Employee termination benefits		—		344
Restructuring and related impairment charges (1)		497		2,557
Project Centennial implementation costs (2)		729		9,376
Total Project Centennial restructuring and implementation costs	$	1,226	$	11,933

(1)	Presented on our Condensed Consolidated Statements of Income.

(2)	Costs are recorded in the selling, distribution and administrative expenses line item of our Condensed Consolidated Statements of Income.

The tables below present the components of, and changes in, our restructuring accruals for the forty weeks ended October 5, 2019 and October 6, 2018 (amounts in thousands):

	VSIP		Employee Termination Benefits⁽¹⁾			Reorganization Costs⁽²⁾			Total
Liability balance at December 29, 2018	$	174	$	227		$	—		$	401
Charges		—		959			253			1,212
Cash payments		—		(644	)		(253	)		(897	)
Liability balance (3) at October 5, 2019	$	174	$	542		$	—		$	716

	VSIP			Employee Termination Benefits⁽¹⁾			Reorganization Costs⁽²⁾			Total
Liability balance at December 30, 2017	$	25,022		$	468		$	—		$	25,490
Charges		(597	)		344			2,636			2,383
Cash payments		(24,234	)		(769	)		(2,636	)		(27,639	)
Liability balance (3) at October 6, 2018	$	191		$	43		$	—		$	234

(1)	Employee termination benefits are not related to the VSIP.

(2)	Reorganization costs include employee relocation expenses.

(3)	Recorded in the other accrued current liabilities line item of our Condensed Consolidated Balance Sheets.

4. LEASES

The company’s leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation and IT equipment (Debt is discussed separately in Note 13, Debt and Other Obligations).

Real estate and equipment contracts normally do not provide for substitution of assets. These contracts occasionally contain multiple lease and non-lease components. Generally, non-lease components represent maintenance and utility related charges, and are primarily minor to the overall value of applicable contracts. These contracts also contain fixed payments with stated rent escalation clauses or fixed payments based on an index such as CPI. Additionally, some contracts contain tenant improvement allowances, rent holidays, lease premiums, and contingent rent provisions (which are treated as variable lease payments). Building and/or office space leases generally require the company to pay for common area maintenance (CAM), insurance, and taxes that are not included in the base rental payments, with the majority of these leases treated as net leases, and the remainder treated as gross or modified gross leases.

The lease term for real estate leases primarily ranges from one to 27 years, with a few leases that are month to month, and accounted for as short-term leases. See discussion on short-term leases below. The term of bakery equipment leases primarily ranges from less than a year up to eight years. Transportation equipment generally has terms of less than one year up to seven years. IT equipment is typically leased from less than a year up to five years. Certain equipment (i.e., equipment subject to management contracts) and IT equipment leases have terms shorter than a year, and are accounted for as short-term leases. See discussion on short-term leases below.

These contracts may contain renewal options for periods of one month up to 10 years at fixed percentages of market pricing, with some that are reasonably certain of exercise. For those contracts that contain leases, the company recognizes renewal options as part of right-of-use assets and lease liabilities. All other renewal and termination options are not reasonably certain of exercise or occurrence as of October 5, 2019.

These contracts may also contain right of first offer purchase options, along with expansion options that are not reasonably certain of exercise. Additionally, these contracts do not contain residual value guarantees, and there are no other restrictions or covenants in the contracts.

For these real estate contracts, the company’s exclusive use of specified real estate for a specific term and for consideration resulted in the company treating these contracts as leases under the new standard.

For those contracts that contain leases of buildings and land, the company has elected to not separate land components from leases of specified property, plant, and equipment, as it was determined to have no effect on lease classification for any lease component, and the amounts recognized for the land lease components would have been immaterial.

These contracts may also contain end term purchase options, whereby, the company may purchase the assets for stated pricing at the lesser of fair market value or a percentage of original asset cost. Yet, these purchase options were determined to not be reasonably certain of exercise or occurrence as of October 5, 2019. Additionally, these contracts do not contain residual value guarantees, and there are no other restrictions or covenants in the contracts.

The company’s ability to make those decisions that most effect the economic benefits derived from the use of the equipment, accompanied by receiving substantially all outputs and utility from the use of the equipment resulted in the company accounting for these contracts as leases.

These leases are classified as operating leases under the new standard because real estate leases do not transfer ownership at the end of the lease term, assets are not of such a specialized nature that real estate would not have alternative uses to lessors at the end of the lease term, lease terms do not represent a major part of the total useful life of real estate, and the present value of lease payments do not represent substantially all the fair value of leased assets at commencement.

Short-term leases

The company has also entered into short-term leases of certain real estate assets, along with IT equipment, and various equipment used for short-term bakery needs through equipment placement or service contracts that require purchase of consumables. These leases extend for periods of 1-12 months. Lease term and amounts of payments are generally fixed. There are no purchase options present, however, there generally are renewals that could extend lease terms for additional periods. Generally, renewal options, as they cannot be unilaterally exercised, are not reasonably certain of exercise, do not contain residual value guarantees, and there are no other restrictions or covenants in the leases.

Therefore, the company recognizes lease payments from these short-term leases and variable payments on the Condensed Consolidated Statements of Income in the period in which obligation for those payments have been incurred.

Modifications and reassessments

During the forty weeks ended October 5, 2019, the company elected certain renewal options that were not previously certain of exercise. Election of these renewal options resulted in reassessment of lease terms for the applicable leases.

The company included the renewal periods in measurement of lease terms in fiscal 2019 for the applicable leases. Given that rental payments in the renewal periods were fixed, the company also remeasured the lease payments, and reallocated remaining contract consideration to the lease components within the applicable real estate leases. Although the triggering events did not result in changes to lease classification (i.e., all remained operating leases), they did affect the measurement of lease liabilities, ROU assets, and amounts recognized as lease expense for the applicable real estate leases.

The reassessments and modifications as of, and for, the forty weeks ended October 5, 2019 resulted in a net increase in lease assets and liabilities of $8.1 million.

There were no other circumstances and/or triggering events that required reassessment as of October 5, 2019.

Other significant judgments and assumptions

During the forty weeks ended October 5, 2019, for all classes of assets, the company primarily used our incremental borrowing rates (“IBR”) to perform lease classification tests and measure lease liabilities because discount rates implicit in the company’s leases were not readily determinable.

See Note 2, Recent Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further details around adoption of the new lease standard, information around transition and effective date, along with the company’s significant accounting policies around the new standard.

Embedded leases

The company maintains a transportation agreement with an entity that transports a portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company has concluded that this agreement contains embedded leases for the trucks and trailers used to satisfy the service provider’s obligations to the company. As of October 5, 2019, there were $17.5 million of financing right-of-use lease assets and $21.6 million of financing right-of-use lease liabilities for these trucks and trailers. As of December 29, 2018, there was $21.9 million, respectively, in net property, plant and equipment and capital lease obligations associated with these trucks and trailers.

Quantitative disclosures

Lease costs incurred by lease type, and/or type of payment for the twelve and forty weeks ended October 5, 2019 were as follows (in thousands):

	For the Twelve Weeks Ended		For the Forty Weeks Ended
	October 5, 2019		October 5, 2019
Lease cost:
Amortization of right-of-use assets	$	1,708	$	5,307
Interest on lease liabilities		236		768
Operating lease cost		16,212		53,892
Short-term lease cost		662		2,024
Variable lease cost		5,619		19,610
Total lease cost	$	24,437	$	81,601

Other supplemental quantitative disclosures as of, and for, the twelve and forty weeks ended October 5, 2019 were as follows (in thousands):

	For the Twelve Weeks Ended		For the Forty Weeks Ended
	October 5, 2019		October 5, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from financing leases	$	236	$	768
Operating cash flows from operating leases	$	17,026	$	55,997
Financing cash flows from financing leases	$	1,682	$	4,985
Right-of-use assets obtained in exchange for new financing lease liabilities	$	2,537	$	9,714
Right-of-use assets obtained in exchange for new operating lease liabilities	$	17,483	$	34,116

Additional information on the IBR and remaining lease terms were as follows:

Weighted-average remaining lease term (years):
Financing leases			3.8
Operating leases			10.0
Weighted-average IBR (percentage):
Financing leases			3.6
Operating leases			4.1

Estimated undiscounted future lease payments under non-cancelable operating leases and financing leases, along with a reconciliation of the undiscounted cash flows to operating and financing lease liabilities, respectively, as of October 5, 2019 (in thousands) were as follows:

	Operating lease liabilities			Financing lease liabilities
Remainder of 2019	$	12,063		$	1,207
2020		71,950			9,005
2021		57,797			6,662
2022		47,302			5,367
2023		42,291			6,387
2024 and thereafter		240,824			2,093
Total minimum lease payments		472,227			30,721
Less: amount of lease payments representing interest		(90,399	)		(2,277	)
Present value of future minimum lease payments		381,828			28,444
Less: current obligations under leases		(52,937	)		(7,357	)
Long-term lease obligations	$	328,891		$	21,087

Lease disclosures prior to adoption of the new standard

The company leases certain property and equipment under various operating and capital lease arrangements that expire over the next 18 years. The property leases include distribution facilities, thrift store locations, and two manufacturing facilities. The equipment leases include production, sales, distribution, transportation, and office equipment. Initial lease terms range from two to 26 years. Many of the operating leases provide the company with the option, after the initial lease term, either to purchase the property at the then fair value or renew its lease at fair value rents for periods from one month to 10 years. Rent escalations vary in these leases, from no escalation over the initial lease term, to escalations linked to changes in economic variables such as the consumer price index. Rental expense is recognized on a straight-line basis over the terms of the leases. The capital leases are primarily used for distribution vehicle financing and are discussed in Note 14, Variable Interest Entities, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Future minimum lease payments under scheduled capital leases that have initial or remaining non-cancelable terms more than one year are as follows (amounts in thousands):

	Capital Leases
2019	$	6,392
2020		3,511
2021		4,191
2022		2,620
2023		2,263
Thereafter		4,631
Total minimum payments		23,608
Less: amount representing interest		(1,666	)
Obligations under capital leases		21,942
Less: current obligations due within one year		(5,896	)
Long-term obligations under capital leases	$	16,046

The table below presents the total future minimum lease payments under scheduled operating leases that have initial or remaining non-cancelable terms more than one year as of December 29, 2018 (amounts in thousands):

	Operating Leases
2019	$	65,071
2020		60,378
2021		50,744
2022		44,798
2023		36,308
Thereafter		232,423
Total minimum payments	$	489,722

5. ACQUISITION

On December 14, 2018, the company completed the acquisition of 100% of the outstanding membership interests of Canyon Bakehouse, LLC (“Canyon”), a leading gluten-free bread baker, from its members for total consideration of $205.2 million, including an earn-out recorded as contingent consideration. We believe the acquisition of Canyon strengthens our position as the second-largest baker in the U.S. by giving us access to the fast-growing gluten-free bread category. The acquisition has been accounted for as a business combination. The total goodwill recorded for this acquisition was $80.5 million and it is deductible for tax purposes.

During fiscal 2018, the company incurred $4.5 million of acquisition-related costs for Canyon. This table is based on preliminary valuations for the assets acquired, liabilities assumed, and the allocated intangible assets and goodwill. The open valuations primarily relate to deferred taxes. The acquisition-related costs were recorded in the selling, distribution and administrative expense line item in our Condensed Consolidated Statements of Income. The following table summarizes the consideration paid for Canyon based on the fair value at the acquisition date (amounts in thousands):

Fair Value of consideration transferred:
Cash consideration paid	$	200,208
Working capital adjustments		314
Contingent consideration		4,700
Total consideration	$	205,222

Recognized amounts of identifiable assets acquired and liabilities assumed:
Property, plant, and equipment	$	42,165
Identifiable intangible assets		78,380
Financial assets		4,211
Net recognized amounts of identifiable assets acquired		124,756
Goodwill	$	80,466

Goodwill decreased $0.1 million from December 29, 2018 to October 5, 2019 due to changes in working capital, property, plant, and equipment, and the financial assets. See Note 7, Goodwill and Other Intangible Assets, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for changes in goodwill.

The following table presents the acquired intangible assets subject to amortization (amounts in thousands, except amortization periods):

	Total		Weighted average amortization years		Attribution Method
Trademarks	$	41,700		40.0	Straight-line
Customer relationships		36,400		25.0	Sum of year digits
Noncompete agreements		280		1.7	Straight-line
Total intangible assets	$	78,380		32.9

The fair value of trade receivables was $3.6 million. The gross amount of the receivables was $3.7 million with $0.1 million determined to be uncollectible. We did not acquire any other class of receivables as a result of the Canyon acquisition.

The contingent consideration liability was reviewed as of October 5, 2019 to determine the probable payment. Changes in the fair value of the contingent consideration liability since acquisition are recognized as a selling, distribution, and administrative expense in the Condensed Consolidated Statements of Income. The contingent consideration liability is recorded in other accrued liabilities on our Condensed Consolidated Balance Sheets.

Acquisition pro formas

We determined that the consolidated results of operations for Canyon were immaterial in the aggregate and the pro forma financial statements are not required for fiscal 2019. The purchase price allocation attributable to Canyon is preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be adjusted to reflect new information obtained about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates.

6. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

During the twelve and forty weeks ended October 5, 2019 and October 6, 2018, reclassifications out of AOCI were as follows (amounts in thousands):

	Amount Reclassified from AOCI
	For the Twelve Weeks Ended						Affected Line Item in the Statement
Details about AOCI Components (Note 2)	October 5, 2019			October 6, 2018			Where Net Income is Presented
Gains and losses on cash flow hedges:
Interest rate contracts	$	(33	)	$	(33	)	Interest expense
Commodity contracts		(313	)		(323	)	Cost of sales, Note 3
Total before tax		(346	)		(356	)	Total before tax
Tax benefit		87			90		Income tax expense
Total net of tax		(259	)		(266	)	Net of tax
Amortization of defined benefit pension items:
Prior-service costs		(80	)		(48	)	Note 1
Settlement loss		—			(930	)	Note 1
Actuarial losses		(1,574	)		(1,027	)	Note 1
Total before tax		(1,654	)		(2,005	)	Total before tax
Tax benefit		418			506		Income tax expense
Total net of tax		(1,236	)		(1,499	)	Net of tax
Total reclassifications	$	(1,495	)	$	(1,765	)	Net of tax

	Amount Reclassified from AOCI
	For the Forty Weeks Ended						Affected Line Item in the Statement
Details about AOCI Components (Note 2)	October 5, 2019			October 6, 2018			Where Net Income is Presented
Gains and losses on cash flow hedges:
Interest rate contracts	$	(110	)	$	(110	)	Interest income (expense)
Commodity contracts		3,942			(811	)	Cost of sales, Note 3
Total before tax		3,832			(921	)	Total before tax
Tax (expense) benefit		(968	)		232		Income tax expense
Total net of tax		2,864			(689	)	Net of tax
Amortization of defined benefit pension items:
Prior-service credits		(265	)		(129	)	Note 1
Settlement loss		—			(6,633	)	Note 1
Actuarial losses		(5,248	)		(3,624	)	Note 1
Total before tax		(5,513	)		(10,386	)	Total before tax
Tax benefit		1,392			2,622		Income tax expense
Total net of tax		(4,121	)		(7,764	)	Net of tax
Total reclassifications	$	(1,257	)	$	(8,453	)	Net of tax

Note 1:

These items are included in the computation of net periodic pension cost and are reported in the other components of net periodic pension and postretirement benefits credit line item on the Condensed Consolidated Statements of Income. See Note 18, Postretirement Plans, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information.

Note 2:

Amounts in parentheses indicate debits to determine net income.

Note 3:

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

During the forty weeks ended October 5, 2019, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):

	Cash Flow Hedge Items			Defined Benefit Pension Plan Items			Total
AOCI at December 29, 2018	$	(4,135	)	$	(105,036	)	$	(109,171	)
Other comprehensive loss before reclassifications		(4,577	)		—			(4,577	)
Reclassified to earnings from AOCI		(2,864	)		4,121			1,257
AOCI at October 5, 2019	$	(11,576	)	$	(100,915	)	$	(112,491	)

During the forty weeks ended October 6, 2018, changes to AOCI, net of income tax, by component were as follows (amounts in thousands and parentheses denote a debit balance):

	Cash Flow Hedge Items			Defined Benefit Pension Plan Items			Total
AOCI at December 30, 2017	$	(6,483	)	$	(78,076	)	$	(84,559	)
Other comprehensive income (loss) before reclassifications		9,055			(19,883	)		(10,828	)
Reclassified to earnings from AOCI		689			7,764			8,453
Reclassified to retained earnings from AOCI		(1,709	)		(17,097	)		(18,806	)
AOCI at October 6, 2018	$	1,552		$	(107,292	)	$	(105,740	)

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

	For the Forty Weeks Ended
	October 5, 2019			October 6, 2018
Gross (gain) loss reclassified from AOCI into income	$	(3,942	)	$	811
Tax expense (benefit)		995			(205	)
Net of tax	$	(2,947	)	$	606

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The table below summarizes our goodwill and other intangible assets at October 5, 2019 and December 29, 2018, respectively, each of which is explained in additional detail below (amounts in thousands):

	October 5, 2019		December 29, 2018
Goodwill	$	545,244	$	545,379
Amortizable intangible assets, net of amortization		565,773		588,329
Indefinite-lived intangible assets		206,600		206,600
Total goodwill and other intangible assets	$	1,317,617	$	1,340,308

Changes in the carrying amount of goodwill during the forty weeks ended October 5, 2019 are presented in the table below and relate to the Canyon acquisition discussed in Note 5, Acquisition, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q (amounts in thousands):

	Total
Outstanding at December 29, 2018	$	545,379
Change in goodwill related to acquisition		(135	)
Outstanding at October 5, 2019	$	545,244

As of October 5, 2019 and December 29, 2018, respectively, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

	October 5, 2019						December 29, 2018
Asset	Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value
Trademarks	$	413,092	$	53,200	$	359,892	$	413,092	$	44,711	$	368,381
Customer relationships		318,021		113,698		204,323		318,021		99,904		218,117
Non-compete agreements		5,154		4,935		219		5,154		4,874		280
Distributor relationships		4,123		2,784		1,339		4,123		2,572		1,551
Total	$	740,390	$	174,617	$	565,773	$	740,390	$	152,061	$	588,329

Aggregate amortization expense for the twelve and forty weeks ended October 5, 2019 and October 6, 2018 was as follows (amounts in thousands):

	Amortization Expense
For the twelve weeks ended October 5, 2019	$	6,767
For the twelve weeks ended October 6, 2018	$	5,975
For the forty weeks ended October 5, 2019	$	22,556
For the forty weeks ended October 6, 2018	$	19,918

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

	Amortization of Intangibles
Remainder of 2019	$	6,683
2020	$	28,606
2021	$	27,893
2022	$	27,189
2023	$	26,309

There were $206.6 million of indefinite-lived intangible trademark assets separately identified from goodwill at October 5, 2019 and December 29, 2018. These trademarks are classified as indefinite-lived because we believe they are well established brands with a long history and well-defined markets. In addition, we are continuing to use these brands both in their original markets and throughout our expansion territories. We believe these factors support an indefinite-life. We perform an annual impairment analysis, or on an interim basis if the facts and circumstances change, to determine if the trademarks are realizing their expected economic benefits.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, and short-term debt approximates fair value because of the short-term maturity of the instruments. Notes receivable are entered into in connection with the purchase of independent distributors’ distribution rights by independent distributor partners (“IDPs”). These notes receivable are recorded in the Condensed Consolidated Balance Sheets at carrying value, which represents the closest approximation of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As a result, the appropriate interest rate that should be used to estimate the fair value of the distributor notes receivable is the prevailing market rate at which similar loans would be made to IDPs with similar credit ratings and for the same maturities. However, the company financed approximately 4,250 IDPs’ distribution rights as of October 5, 2019 and 4,300 as of December 29, 2018, respectively, all with varied financial histories and credit risks. Considering the diversity of credit risks among the IDPs, the company has no method to accurately determine a market interest rate to apply to the notes. The distribution rights are generally purchased by the IDP with a 5% down payment with the remainder financed for up to 10 years. The distributor notes receivable are collateralized by the IDPs’ distribution rights. The company maintains a wholly-owned subsidiary to assist in financing the distribution rights purchase activities if requested by new IDPs, using the distribution rights and certain associated assets as collateral. These notes receivable earn interest at a fixed rate.

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

	Interest Income
For the twelve weeks ended October 5, 2019	$	6,371
For the twelve weeks ended October 6, 2018	$	6,615
For the forty weeks ended October 5, 2019	$	21,441
For the forty weeks ended October 6, 2018	$	21,176

At October 5, 2019 and December 29, 2018, respectively, the carrying value of the distributor notes receivable was as follows (amounts in thousands):

	October 5, 2019		December 29, 2018
Distributor notes receivable	$	228,066	$	230,470
Current portion of distributor notes receivable recorded in accounts and notes receivable, net		27,543		26,345
Long-term portion of distributor notes receivable	$	200,523	$	204,125

At October 5, 2019 and December 29, 2018, respectively, the company has evaluated the collectability of the distributor notes receivable and determined that a reserve is not necessary. Payments on these distributor notes receivable are collected by the company weekly in conjunction with the distributor settlement process.

The fair value of the company’s variable rate debt at October 5, 2019 approximates the recorded value. The fair value of the company’s 3.5% senior notes due 2026 (“2026 notes”) and 4.375% senior notes due 2022 (“2022 notes”), as discussed in Note 13, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q are estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements and are considered a Level 2 valuation. The fair value of the 2026 notes and 2022 notes are presented in the table below (amounts in thousands, except level classification):

	Carrying Value		Fair Value		Level
2026 notes	$	395,990	$	410,666	2
2022 notes	$	398,794	$	418,784	2

For fair value disclosure information about our derivative assets and liabilities see Note 9, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

9. DERIVATIVE FINANCIAL INSTRUMENTS

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

Level 1:

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

Level 2:

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

Level 3:

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

Commodity Risk

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

As of October 5, 2019, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):

	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	131		$	—	$	—	$	131
Other long-term		34			—		—		34
Total		165			—		—		165

Liabilities:
Other current		(14,048	)		—		—		(14,048	)
Other long-term		(1,583	)		—		—		(1,583	)
Total		(15,631	)		—		—		(15,631	)
Net Fair Value	$	(15,466	)	$	—	$	—	$	(15,466	)

As of December 29, 2018, the company’s hedge portfolio contained commodity derivatives, which are recorded in the following accounts with fair values measured as indicated (amounts in thousands):

	Level 1			Level 2		Level 3		Total
Assets:
Other current	$	501		$	—	$	—	$	501
Other long-term		—			—		—		—
Total		501			—		—		501

Liabilities:
Other current		(7,732	)		—		—		(7,732	)
Other long-term		(1,203	)		—		—		(1,203	)
Total		(8,935	)		—		—		(8,935	)
Net Fair Value	$	(8,434	)	$	—	$	—	$	(8,434	)

The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix, or limit increases in, prices for a period extending into fiscal 2021. These instruments are designated as cash-flow hedges. The change in the fair value for these derivatives is reported in AOCI. All the company-held commodity derivatives at October 5, 2019 and December 29, 2018, respectively, qualified for hedge accounting.

Interest Rate Risk

The company previously entered into treasury rate locks at the time we executed the 2022 and 2026 notes. These rate locks were designated as a cash flow hedge and the fair value at termination was deferred in AOCI. The deferred amount reported in AOCI is being reclassified to interest expense as interest payments are made on the related notes through the maturity date.

Derivative Assets and Liabilities

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

	Derivative Assets						Derivative Liabilities
	October 5, 2019			December 29, 2018			October 5, 2019			December 29, 2018
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Other current assets	$	131	Other current assets	$	501	Other accrued liabilities	$	14,048	Other accrued liabilities	$	7,732
Commodity contracts	Other assets		34	Other assets		—	Other long-term liabilities		1,583	Other long-term liabilities		1,203
Total		$	165		$	501		$	15,631		$	8,935

Derivative AOCI transactions

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

	Amount of Gain or (Loss)						Amount of (Gain) or Loss
	Recognized in AOCI on Derivatives						Reclassified from AOCI
	(Effective Portion)					Location of (Gain) or Loss	into Income (Effective Portion)
Derivatives in Cash Flow	For the Twelve Weeks Ended					Reclassified from AOCI	For the Twelve Weeks Ended
Hedge Relationships(1)	October 5, 2019			October 6, 2018		into Income (Effective Portion)(2)	October 5, 2019			October 6, 2018
Interest rate contracts	$	—		$	—	Interest expense	$	25		$	25
Commodity contracts		(7,124	)		7,394	Production costs(3)		234			241
Total	$	(7,124	)	$	7,394		$	259		$	266

	Amount of Gain or (Loss)						Amount of (Gain) or Loss
	Recognized in AOCI on Derivatives						Reclassified from AOCI
	(Effective Portion)					Location of (Gain) or Loss	into Income (Effective Portion)
Derivatives in Cash Flow	For the Forty Weeks Ended					Reclassified from AOCI	For the Forty Weeks Ended
Hedge Relationships(1)	October 5, 2019			October 6, 2018		into Income (Effective Portion)(2)	October 5, 2019			October 6, 2018
Interest rate contracts	$	—		$	—	Interest expense	$	83		$	83
Commodity contracts		(4,577	)		9,055	Production costs(3)		(2,947	)		606
Total	$	(4,577	)	$	9,055		$	(2,864	)	$	689

1.	Amounts in parentheses indicate debits to determine net income (loss).

2.	Amounts in parentheses, if any, indicate credits to determine net income (loss).

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

There was no hedging ineffectiveness, and no amounts were excluded from the ineffectiveness testing, during the twelve and forty weeks ended October 5, 2019 and October 6, 2018, respectively, related to the company’s commodity risk hedges.

At October 5, 2019, the balance in AOCI related to commodity price risk and interest rate risk derivative transactions that closed or will expire over the following years are as follows (amounts in thousands and net of tax) (amounts in parenthesis indicate a debit balance):

	Commodity Price Risk Derivatives			Interest Rate Risk Derivatives		Totals
Closed contracts	$	(114	)	$	97	$	(17	)
Expiring in 2019		(61	)		—		(61	)
Expiring in 2020		(11,058	)		—		(11,058	)
Expiring in 2021		(270	)		—		(270	)
Expiring in 2022		(170	)		—		(170	)
Total	$	(11,673	)	$	97	$	(11,576	)

Derivative Transactions Notional Amounts

As of October 5, 2019, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):

	Notional Amount
Wheat contracts	$	121,333
Soybean oil contracts		12,545
Natural gas contracts		13,073
Corn contracts		10,308
Total	$	157,259

The company’s derivative instruments contain no credit-risk related contingent features at October 5, 2019. As of October 5, 2019 and December 29, 2018, the company had $23.0 million and $15.4 million, respectively, in other current assets representing collateral for hedged positions. There were no amounts representing collateral recorded in other accrued liabilities for hedged positions as of October 5, 2019 and December 29, 2018.

10. OTHER CURRENT AND NON-CURRENT ASSETS

Other current assets consist of (amounts in thousands):

	October 5, 2019		December 29, 2018
Prepaid assets	$	14,781	$	22,286
Recovery from legal settlement in principle		22,300		—
Fair value of derivative instruments		131		501
Collateral to counterparties for derivative positions		23,000		15,408
Income taxes receivable		532		3,917
Other		1,566		1,125
Total	$	62,310	$	43,237

The recovery from legal settlement in principle represents funds in the amount of $22.3 million that are expected to be paid by the company’s insurance provider to the plaintiffs at final settlement of two lawsuits. See Note 15, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on this settlement in principle.

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

	October 5, 2019		December 29, 2018
Unamortized financing fees	$	1,181	$	1,391
Investments		3,208		3,125
Fair value of derivative instruments		34		—
Deposits		2,083		2,257
Other		1,024		154
Total	$	7,530	$	6,927

The company recognized an impairment of $2.5 million for the notes receivable (not related to IDPs) because the counterparty defaulted on the note during the first quarter of fiscal 2018. This amount is recorded in the impairment of assets line item on the Condensed Consolidated Statements of Income.

11. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of (amounts in thousands):

	October 5, 2019		December 29, 2018
Employee compensation	$	22,755	$	19,469
VSIP liabilities		174		174
Employee vacation		24,760		23,345
Employee bonus		13,132		7,931
Fair value of derivative instruments		14,048		7,732
Self-insurance reserves		29,499		29,353
Bank overdraft		13,666		10,550
Accrued interest		481		8,152
Accrued income taxes		223		—
Accrued other taxes		13,004		5,661
Accrued advertising		8,413		3,145
Accrued legal settlements		22,300		9,053
Accrued legal costs		4,603		3,874
Contingent acquisition consideration		4,931		4,700
Accrued short-term deferred income		5,542		5,525
Other		8,108		7,412
Total	$	185,639	$	146,076

The company presented the current portion of postretirement benefit obligations in the ‘Other’ line item in the accrued liabilities table above for fiscal 2018. This current liability is being presented separately on the Condensed Consolidated Balance Sheets beginning in the third quarter of fiscal 2019. See Note 15, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the legal settlements.

12. ASSETS HELD FOR SALE

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

Additional assets recorded in assets held for sale are for property, plant and equipment. The carrying values of assets held for sale are not amortized and are evaluated for impairment as required at the end of the reporting period. The table below presents the assets held for sale as of October 5, 2019 and December 29, 2018, respectively (amounts in thousands):

	October 5, 2019		December 29, 2018
Distributor territories	$	2,970	$	3,188
Property, plant and equipment		1,393		3,418
Total assets held for sale	$	4,363	$	6,606

13. DEBT AND OTHER OBLIGATIONS

Long-term debt (net of issuance costs and debt discounts excluding line-of-credit arrangements) (leases are separately discussed in Note 4, Leases) consisted of the following at October 5, 2019 and December 29, 2018, respectively (amounts in thousands):

	October 5, 2019			December 29, 2018
Unsecured credit facility	$	10,000		$	—
2026 notes		395,990			395,550
2022 notes		398,794			398,423
Accounts receivable securitization facility		69,500			177,000
Other notes payable		3,714			8,621
		877,998			979,594
Less current maturities of long-term debt		(3,714	)		(5,000	)
Total long-term debt	$	874,284		$	974,594

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

The company also had standby letters of credit (“LOCs”) outstanding of $8.4 million at October 5, 2019 and December 29, 2018 which reduce the availability of funds under the credit facility (as defined below). The outstanding LOCs are for the benefit of certain insurance companies and lessors. None of the outstanding LOCs are recorded as a liability on the Condensed Consolidated Balance Sheets.

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

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

The face value of the 2026 notes is $400.0 million. There was a debt discount representing the difference between the net proceeds, after expenses, received upon issuance of debt and the amount repayable at its maturity. The company also paid issuance costs of $3.6 million (including underwriting fees and legal fees) on the 2026 notes. Debt issuance costs and the debt discount are being amortized to interest expense over the term of the 2026 notes. As of October 5, 2019, and December 29, 2018, respectively, the company was in compliance with all restrictive covenants under the indenture governing the 2026 notes. The table below presents the debt discount, underwriting fees and the legal and other fees for issuing the 2026 notes (amounts in thousands):

	Amount at Issuance
Debt discount	$	2,108
Underwriting, legal, and other fees		3,634
Total fees	$	5,742

Accounts Receivable Securitization Facility. On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). The company has amended the facility seven times since execution, most recently on September 27, 2019. These amendments include provisions which (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million, (ii) added a leverage pricing grid, (iii) added an additional bank to the lending group, (iv) made certain other conforming changes, and (v) extended the term, most recently one additional year to September 27, 2021. The amendment that added the additional bank was accounted for as an extinguishment of the debt. The remaining amendments were accounted for as modifications.

Under the facility, a wholly-owned, bankruptcy-remote subsidiary purchases, on an ongoing basis, substantially all trade receivables. As borrowings are made under the facility, the subsidiary pledges the receivables as collateral. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions of collections to the company. We include the subsidiary in our Condensed Consolidated Financial Statements. The facility contains certain customary representations and warranties, affirmative and negative covenants, and events of default. There was $69.5 million and $177.0 million outstanding under the facility on October 5, 2019 and December 29, 2018, respectively. As of October 5, 2019 and December 29, 2018, respectively, the company was in compliance with all restrictive covenants under the facility. The company currently has $128.0 million available under its facility for working capital and general corporate purposes. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.

Optional principal repayments may be made at any time without premium or penalty. Interest is due two days after our reporting periods end in arrears on the outstanding borrowings and is computed as the cost of funds rate plus an applicable margin of 85 basis points. An unused fee of 30 basis points is applicable on the unused commitment at each reporting period. Financing costs paid at inception of the facility and at the time amendments are executed are being amortized over the life of the facility. The balance of unamortized financing costs was $0.2 million on October 5, 2019 and $0.2 million on December 29, 2018, respectively, and are recorded in other assets on the Condensed Consolidated Balance Sheets.

2022 Notes. On April 3, 2012, the company issued $400.0 million of senior notes. The company pays semiannual interest on the 2022 notes on each April 1 and October 1 and the 2022 notes will mature on April 1, 2022. The 2022 notes bear interest at 4.375% per annum. On any date prior to January 1, 2022, the company may redeem some or all of the 2022 notes at a price equal to the greater of (1) 100% of the principal amount of the notes redeemed and (2) a “make-whole” amount plus, in each case, accrued and unpaid interest. The make-whole amount is equal to the sum of the present values of the remaining scheduled payments of principal thereof (not including any interest accrued thereon to, but not including, the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate (as defined in the indenture governing the notes), plus 35 basis points, plus in each case, unpaid interest accrued thereon to, but not including, the date of redemption. At any time on or after January 1, 2022, the company may redeem some or all of the 2022 notes at a price equal to 100% of the principal amount of the 2022 notes redeemed plus accrued and unpaid interest. If the company experiences a “change of control triggering event” (which involves a change of control of the company and the related rating of the notes below investment grade), it is required to offer to purchase the 2022 notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest thereon unless the company exercised its option to redeem the 2022 notes in whole. The 2022 notes are also subject to customary restrictive covenants for investment grade debt, including certain limitations on liens and sale and leaseback transactions.

The face value of the 2022 notes is $400.0 million and the debt discount on the 2022 notes at issuance was $1.0 million. The company paid issuance costs (including underwriting fees and legal fees) on the 2022 notes of $3.9 million. The issuance costs and the debt discount are being amortized to interest expense over the term of the 2022 notes. As of October 5, 2019 and December 29, 2018, the company was in compliance with all restrictive covenants under the indenture governing the 2022 notes.

Credit Facility. The company is party to an amended and restated credit agreement, dated as of October 24, 2003, with the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent, the swingline lender and issuing lender. Under the amended and restated credit agreement, our credit facility (the “credit facility”) is a five-year, $500.0 million senior unsecured revolving loan facility with the following terms and conditions: (i) a maturity date of November 29, 2022; (ii) an applicable margin for revolving loans maintained as (1) base rate loans and swingline loans with a range of 0.00% to 0.575% and (2) Eurodollar loans with a range of 0.575% to 1.575%, in each case, based on the leverage ratio of the company and its subsidiaries; (iii) an applicable facility fee with a range of 0.05% to 0.30%, due quarterly on all commitments under the amended and restated credit agreement, based on the leverage ratio of the company and its subsidiaries; and (iv) a maximum leverage ratio covenant to permit the company, at its option, in connection with certain acquisitions and investments and subject to the terms and conditions provided in the amended and restated credit agreement, to increase the maximum ratio permitted thereunder on one or more occasions to 4.00 to 1.00 for a period of four consecutive fiscal quarters, including and/or immediately following the fiscal quarter in which such acquisitions or investments were completed (the “covenant holiday”), provided that each additional covenant holiday will not be available to the company until it has achieved and maintained a leverage ratio of at least 3.75 to 1.00 and has been complied with for at least two fiscal quarters.

In addition, the credit facility contains a provision that permits the company to request up to $200.0 million in additional revolving commitments, for a total of up to $700.0 million, subject to the satisfaction of certain conditions. Proceeds from the credit facility may be used for working capital and general corporate purposes, including capital expenditures, acquisition financing, refinancing of indebtedness, dividends and share repurchases. The credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the amended credit facility and can meet its presently foreseeable financial requirements. As of October 5, 2019 and December 29, 2018, respectively, the company was in compliance with all restrictive covenants under the credit facility.

Financing costs paid at inception of the credit facility and at the time amendments are executed are being amortized over the life of the credit facility. The balance of unamortized financing costs was $1.0 million and $1.2 million on October 5, 2019 and December 29, 2018, respectively, and are recorded in other assets on the Condensed Consolidated Balance Sheets.

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, and tax payments, as well as derivative transactions, which are part of the company’s overall risk management strategy as discussed in Note 9, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. The table below presents the borrowings and repayments under the credit facility during the forty weeks ended October 5, 2019.

	Amount (thousands)
Balance at December 29, 2018	$	—
Borrowings		208,400
Payments		(198,400	)
Balance at October 5, 2019	$	10,000

The table below presents the net amount available under the credit facility as of October 5, 2019:

	Amount (thousands)
Gross amount available	$	500,000
Outstanding		(10,000	)
Letters of credit		(8,400	)
Available for withdrawal	$	481,600

The table below presents the highest and lowest outstanding balance under the credit facility during the forty weeks ended October 5, 2019:

Amount

(thousands)

High balance

122,200

Low balance

—

Aggregate maturities of debt outstanding as of October 5, 2019 are as follows (excluding unamortized debt discount and issuance costs) (amounts in thousands):

Remainder of 2019	$	—
2020		3,750
2021		69,500
2022		410,000
2023		—
2024 and thereafter		400,000
Total	$	883,250

Debt discount and issuance costs are being amortized straight-line (which approximates the effective method) over the term of the underlying debt outstanding. The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at October 5, 2019 (amounts in thousands):

			Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value
2026 notes	$	400,000	$	4,010	$	395,990
2022 notes		400,000		1,206		398,794
Other notes payable		3,750		36		3,714
Total	$	803,750	$	5,252	$	798,498

The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at December 29, 2018 (amounts in thousands):

			Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value
2026 notes	$	400,000	$	4,450	$	395,550
2022 notes		400,000		1,577		398,423
Other notes payable		8,750		129		8,621
Total	$	808,750	$	6,156	$	802,594

14. VARIABLE INTEREST ENTITIES

Transportation agreement variable interest entity (the “VIE”) analysis

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. As of December 29, 2018, this entity qualified as a VIE, but the company determined it was not the primary beneficiary of the VIE because the company did not (i) have the ability to direct the significant activities of the VIE and (ii) provide any implicit or explicit guarantees or other financial support to the VIE for specific return or performance benchmarks. In addition, we did not provide, nor did we intend to provide, financial or other support to the entity.

The company reconsidered its relationship with the entity because the entity was sold and the company has concluded the entity no longer qualifies as a VIE beginning in the second quarter of fiscal 2019.

Distribution rights agreement VIE analysis

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

Incorporated IDPs acquire distribution rights and enter into a contract with the company to sell the company’s products in the IDPs’ defined geographic territory. The incorporated IDPs have the option to finance the acquisition of their distribution rights with the company. They can also pay cash or obtain external financing at the time they acquire the distribution rights. The combination of the company’s loans to the incorporated IDPs and the ongoing distributor arrangements with the incorporated IDPs provide a level of funding to the equity owners of the various incorporated IDPs that would not otherwise be available. As of October 5, 2019 and December 29, 2018, there was $182.1 million and $154.4 million, respectively, in gross distribution rights notes receivable outstanding from incorporated IDPs.

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

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

15. COMMITMENTS AND CONTINGENCIES

Self-insurance reserves and other commitments and contingencies

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

In the event the company ceases to utilize the independent distributor model or exits a geographic market, the company is contractually required in some situations to purchase the distribution rights from the independent distributor. The company expects to continue operating under this model and has concluded that the possibility of a loss is remote.

The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these laws and regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition, results of operations, cash flows or the competitive position of the company. The company believes it is currently in substantial compliance with all material environmental laws and regulations affecting the company and its properties. In August 2016, the U.S. Department of Labor (the “Department”) notified the company that it was scheduled for a compliance review under the Fair Labor Standards Act. On November 5, 2018, the company was advised by the Department that the compliance review has been closed.

Litigation

The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, including personal injury, commercial, contract, environmental, antitrust, product liability, health and safety and employment matters, which are being handled and defended in the ordinary course of business. 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.

At this time, the company is defending 17 complaints filed by distributors alleging that such distributors were misclassified as independent contractors. Twelve of these lawsuits seek class and/or collective action treatment. The remaining five cases either allege individual claims or do not seek class or collective action treatment or, in cases in which class treatment was sought, the court denied class certification. The respective courts have ruled on plaintiffs’ motions for class certification in eight of the pending cases, each of which is discussed below. Unless otherwise noted, a class was conditionally certified under the FLSA in each of the cases described below, although the company has the ability to petition the court to decertify that class at a later date:

Case Name	Case No.	Venue	Date Filed	Status
Rosinbaum et al. v. Flowers Foods, Inc. and Franklin Baking Co., LLC	7:16-cv-00233	U.S. District Court Eastern District of North Carolina	12/1/2015
Neff et al. v. Flowers Foods, Inc., Lepage Bakeries Park Street, LLC, and CK Sales Co., LLC	5:15-cv-00254	U.S. District Court District of Vermont	12/2/2015	On May 16, 2019, the Court denied defendants’ motion to decertify the FLSA class and granted Plaintiff’s motion to certify under Federal Rule of Civil Procedure 23 a state law class of distributors who operated in the state of Vermont.
Noll v. Flowers Foods, Inc., Lepage Bakeries Park Street, LLC, and CK Sales Co., LLC	1:15-cv-00493	U.S. District Court District of Maine	12/3/2015	On January 15, 2019, the Court denied defendants’ motion to decertify the FLSA class and granted Plaintiff’s motion to certify under Federal Rule of Civil Procedure 23 a state law class of distributors who operated in the state of Maine.
Richard et al. v. Flowers Foods, Inc., Flowers Baking Co. of Lafayette, LLC, Flowers Baking Co. of Baton Rouge, LLC, Flowers Baking Co. of Tyler, LLC and Flowers Baking Co. of New Orleans, LLC	6:15-cv-02557	U.S. District Court Western District of Louisiana	10/21/2015
Carr et al. v. Flowers Foods, Inc. and Flowers Baking Co. of Oxford, Inc.	2:15-cv-06391	U.S. District Court Eastern District of Pennsylvania	12/1/2015	On May 7, 2019, the Court denied defendants' motion to decertify the FLSA class and granted Plaintiffs' motion to certify under Federal Rule of Civil Procedure 23 three state law classes of distributors who operated in the states of Maryland, Pennsylvania, and New Jersey.
Boulange v. Flowers Foods, Inc. and Flowers Baking Co. of Oxford, Inc.	2:16-cv-02581	U.S. District Court Eastern District of Pennsylvania	3/25/2016	This matter has been consolidated with the Carr litigation described immediately above.
Medrano v. Flowers Foods, Inc. and Flowers Baking Co. of El Paso, LLC	1:16-cv-00350	U.S. District Court District of New Mexico	4/27/2016
Martins v. Flowers Foods, Inc., Flowers Baking Co. of Bradenton, LLC and Flowers Baking Co. of Villa Rica, LLC	8:16-cv-03145	U.S. District Court Middle District of Florida	11/8/2016

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

Since the beginning of our fiscal 2018, the company has settled, and the appropriate court has approved, the following collective and/or class action lawsuits filed by distributors alleging that such distributors were misclassified as independent contractors. In each of these settlements, in addition to the monetary terms noted below, the settlements also included certain non-economic terms intended to strengthen and enhance the independent contractor model:

Case Name

Case No.

Venue

Date Filed

Comments

Coyle v. Flowers Foods, Inc. and

Holsum Bakery, Inc.

2:15-cv-01372

U.S. District Court District

of Arizona

7/20/2015

On March 23, 2018, the court

dismissed this lawsuit and

approved an agreement to settle

this matter for $4.3 million,

comprised of $1.2 million in

settlement funds, $2.9 million in

attorneys’ fees, and $0.2 million

as an incentive for class

members who are active

distributors not to opt out of

certain portions of the new

distributor agreement. The

settlement consisted of

approximately 190 class

members. This settlement charge

was recorded as a selling,

distribution and administrative

expense in our Condensed Consolidated

Statements of Income during the

third quarter of fiscal 2017 and

was paid during the first quarter

of fiscal 2018.

McCurley v. Flowers Foods, Inc.

and Derst Baking Co., LLC

5:16-cv-00194

U.S. District Court District

of South Carolina

1/20/2016

On September 10, 2018, the

court approved the parties’

agreement to settle this matter

for a payment of $1.5 million,

comprised of $0.8 million in

settlement funds, $0.6 million

in attorneys’ fees, and a

collective $0.1 million for a

service award and as an

incentive for class members

who are active distributors not

to opt out of certain portions of

the new distributor agreement.

The settlement class consisted

of 106 class members. This

settlement charge was recorded

as a selling, distribution and

administrative expense in our

Condensed Consolidated

Statements of Operations

during the fourth quarter

of fiscal 2017. This settlement

was paid on November 1, 2018.

Zapata et al. v. Flowers Foods, Inc. and Flowers Baking Co. of Houston, LLC (the "Zapata litigation")	4:16-cv-00676	U.S. District Court Southern District of Texas	3/14/2016	On September 12, 2018, the court dismissed the Zapata litigation and the Rodriguez litigation (defined below) and approved an agreement to settle both matters for $740,700, including attorneys’ fees, on behalf of 43 distributors. This settlement was paid and recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the third quarter of fiscal 2018.
Rodriguez et al. v. Flowers Foods, Inc. and Flowers Baking Co. of Houston, LLC (the "Rodriguez litigation")	4:16-cv-00245	U.S. District Court Southern District of Texas	1/28/2016	See the Zapata litigation discussion immediately above.
Schucker et al. v. Flowers Foods, Inc., Lepage Bakeries Park St., LLC, and C.K. Sales Co., LLC	1:16-cv-03439	U.S. District Court Southern District of New York	5/9/2016	On September 5, 2018, the court dismissed this lawsuit and approved an agreement to settle this matter for approximately $1.3 million, comprised of $0.4 million in settlement funds, $0.9 million in attorneys’ fees, and a collective $0.1 million for service awards and incentives for class members who are active distributors not to opt out of certain portions of the new distributor agreement. The settlement consisted of 27 class members. This settlement charge was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the first quarter of fiscal 2018. This settlement was paid on November 19, 2018.
Green et al. v. Flowers Foods, Inc. et al.	1:19-cv-01021	U.S. District Court Western District of Tennessee	2/1/2019	*

On September 7, 2018, the company negotiated a global settlement to resolve 12 pending collective action lawsuits against the company for a payment in the amount of $9.0 million, comprised of $5.4 million in settlement funds and $3.6 million in attorneys’ fees. The proposed settlement class consisted of approximately 900 members. The settlement also contained certain non-economic terms intended to strengthen and enhance the independent contractor model, which remains in place. On February 1, 2019, plaintiffs' counsel filed a consolidated complaint with the United States District Court for the Western District of Tennessee to obtain judicial approval of the parties' global settlement. The court approved the global settlement on February 27, 2019. Thereafter, the parties moved to dismiss the 12 settled lawsuits with prejudice. This settlement was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the third quarter of fiscal 2018. A total of $4.2 million was paid in March 2019, and a second payment of $3.5 million was made in June 2019. The remainder of the settlement funds ($1.3 million) reverted to Flowers during the second quarter of fiscal 2019 per the terms of the settlement, and was recorded as a reduction of selling, distribution and administrative expense in our Condensed Consolidated Statements of Income.

On August 12, 2016, a class action complaint was filed in the U.S. District Court for the Southern District of New York by Chris B. Hendley (the “Hendley complaint”) against the company and certain senior members of management (collectively, the “defendants”). On August 17, 2016, another class action complaint was filed in the U.S. District Court for the Southern District of New York by Scott Dovell, II (the “Dovell complaint” and together with the Hendley complaint, the “complaints”) against the defendants. Plaintiffs in the complaints are securities holders that acquired company securities between February 7, 2013 and August 10, 2016. The complaints generally allege that the defendants made materially false and/or misleading statements and/or failed to disclose that (1) the company’s labor practices were not in compliance with applicable federal laws and regulations; (2) such non-compliance exposed the company to legal liability and/or negative regulatory action; and (3) as a result, the defendants’ statements about the company’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis. The counts of the complaints are asserted against the defendants pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 under the Exchange Act. The complaints seek (1) class certification under the Federal Rules of Civil Procedure, (2) compensatory damages in favor of the plaintiffs and all other class members against the defendants, jointly and severally, for all damages sustained as a result of wrongdoing, in an amount to be proven at trial, including interest, and (3) awarding plaintiffs and the class their reasonable costs and expenses incurred in the actions, including counsel and expert fees. On October 21, 2016, the U.S. District Court for the Southern District of New York consolidated the complaints into one action captioned “In re Flowers Foods, Inc. Securities Litigation” (the “consolidated securities action”), appointed Walter Matthews as lead plaintiff (“lead plaintiff”), and appointed Glancy Prongay & Murray LLP and Johnson & Weaver, LLP as co-lead counsel for the putative class. On November 21, 2016, the court granted defendants’ and lead plaintiff’s joint motion to transfer the consolidated securities action to the U.S. District Court for the Middle District of Georgia. Lead plaintiff filed his Consolidated Class Action Complaint on January 12, 2017, raising the same counts and general allegations and seeking the same relief as the Dovell and Hendley complaints. On March 13, 2017, the defendants filed a motion to dismiss the lawsuit which was granted in part and denied in part on March 23, 2018. The court dismissed certain allegedly false or misleading statements as nonactionable under federal securities laws and will allow others to proceed to fact discovery. On July 23, 2018, lead plaintiff filed his motion for class certification. The defendants filed their memorandum of law in opposition to class certification on October 5, 2018. The court scheduled a hearing on the class certification motion for February 28, 2019. On May 10, 2019, the parties filed a notice of settlement informing the court that a settlement in principle of the case had been reached. On July 12, 2019, lead plaintiff and Plaintiff Chris B. Hendley filed an unopposed motion for (1) preliminary approval of the class action settlement; (2) certification of the settlement class; and (3) approval of notice to the settlement class. Also, on July 12, 2019, the parties entered into a Stipulation and Agreement of Settlement (the “Stipulation”), which (along with its exhibits) sets forth in detail the settlement terms, which include releases of the claims asserted against the defendants. The Stipulation and settlement remain subject to court approval. The settlement in principle is for $21.0 million, which amount the company’s insurer has deposited in the escrow account described in the Stipulation. This amount is recorded on the company’s Condensed Consolidated Balance Sheet as of October 5, 2019 as an other current asset due from the insurer and an other accrued liability due for the settlement in principle. Recording this transaction resulted in no impact to the company’s Condensed Consolidated Statements of Income because the expense for the settlement in principle was offset by the expected recovery from the insurer.

On June 8, 2018, a verified shareholder derivative complaint was filed in the U.S. District Court for the Middle District of Georgia by William D. Wrigley, derivatively on behalf of the company (the “Wrigley complaint”), against certain current and former directors and officers of the company. On June 14, 2018, a related verified shareholder derivative complaint was filed in the U.S. District Court for the Middle District of Georgia by Stephen Goldberger, derivatively on behalf of the company (the “Goldberger complaint” and together with the Wrigley complaint, the “federal derivative complaints”), against the same current and former directors and officers of the company. The federal derivative complaints allege, among other things, breaches of fiduciary duties and violations of federal securities laws relating to the company’s labor practices, and seek unspecified damages, disgorgement, and other relief. On June 27, 2018, these federal derivative actions were consolidated and stayed until the earlier of (1) an order from the court on any summary judgment motions that may be filed in the consolidated federal securities action, or (2) notification that there has been a settlement reached in the consolidated federal securities action, or until otherwise agreed to by the parties.

On June 21, 2018, two verified shareholder derivative complaints were filed in the Superior Court of Thomas County, State of Georgia, by Margaret Cicchini Family Trust and Frank Garnier, separately, derivatively on behalf of the company (together, the “state derivative complaints”), against certain current and former directors and officers of the company. The state derivative complaints allege, among other things, breaches of fiduciary duties relating to the company’s labor practices, and seek unspecified damages, disgorgement, and other relief. On July 12, 2018, these state derivative actions were consolidated and stayed until the earlier of (1) an order from the court on any summary judgment motions that may be filed in the consolidated federal securities action, or (2) notification that there has been a settlement reached in the consolidated federal securities action, or until otherwise agreed to by the parties.

On September 26, 2019, the parties to the consolidated federal derivative action filed a Notice of Settlement in Principle and Joint Status Report. On September 30, 2019, the court entered an order staying all deadlines and proceedings, except those that are settlement-related, and ordered the parties to file the settlement documents no later than October 28, 2019. On October 28, 2019, the parties executed a stipulation of settlement, which the plaintiffs filed with the court along with a motion for preliminary approval of the settlement. The settlement terms include certain governance reforms, releases of the claims asserted against the defendants, and the payment by the company’s insurer of $1.3 million in attorneys’ fees, expenses, and service awards (the “Fee Award”) to the plaintiffs’ counsel. The settlement, including the Fee Award, are subject to court approval. Pursuant to the stipulation of settlement, once a judgment dismissing the consolidated federal derivative action becomes final, the plaintiffs in the consolidated state derivative action will voluntarily dismiss that action with prejudice. The Fee Award is recorded on the company’s Condensed Consolidated Balance Sheet as of October 5, 2019 as an other current asset due from the insurer and an other accrued liability due for the settlement in principle. Recording this transaction resulted in no impact to the company’s Condensed Consolidated Statements of Income because the expense for the settlement in principle was offset by the expected recovery from the insurer.

See Note 13, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the company’s commitments.

16. EARNINGS PER SHARE

The following is a reconciliation of net income and weighted average shares for calculating basic and diluted earnings per common share for the twelve and forty weeks ended October 5, 2019 and October 6, 2018, respectively (amounts and shares in thousands, except per share data):

	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 5, 2019		October 6, 2018		October 5, 2019		October 6, 2018
Net income	$	43,358	$	39,630	$	162,319	$	136,319
Basic Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		211,711		211,082		211,575		210,994
Basic earnings per common share	$	0.20	$	0.19	$	0.77	$	0.65
Diluted Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		211,711		211,082		211,575		210,994
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock		303		482		381		458
Diluted weighted average shares outstanding for common stock		212,014		211,564		211,956		211,452
Diluted earnings per common share	$	0.20	$	0.19	$	0.77	$	0.64

There were 11,030 and 64,860 anti-dilutive shares during the twelve and forty weeks ended October 5, 2019, respectively. There were no anti-dilutive shares during the twelve and forty weeks ended October 6, 2018.

17. STOCK-BASED COMPENSATION

On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”). The Omnibus Plan was approved by our shareholders on May 21, 2014. The Omnibus Plan authorizes the compensation committee of the Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other awards to provide our officers, key employees, and non-employee directors’ incentives and rewards for performance. The Omnibus Plan replaced the Flowers Foods’ 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (“EPIP”), the stock appreciation right plan, and the bonus plan. Equity awards granted after May 21, 2014 are governed by the Omnibus Plan. No additional awards were issued under the EPIP after May 21, 2014 and the last issued awards were fully exercised during the first quarter of fiscal 2018. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares.

The following is a summary of stock options, restricted stock, and deferred stock outstanding under the plans described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below. The company typically grants awards at the beginning of its fiscal year. There were no grants to employees during fiscal 2018. Information on grants to employees during fiscal 2019 is discussed below.

Stock Options

The company issued non-qualified stock options (“NQSOs”) during fiscal years 2011 and prior that were vested and fully exercised by the end of our first quarter of fiscal 2018. The company’s final 72,785 stock options, with an exercise price of $10.87, outstanding on December 30, 2017 were exercised during the first quarter of fiscal 2018. There are no outstanding NQSOs as of October 5, 2019.

The cash received, the windfall tax benefit, and intrinsic value from stock option exercises for the forty weeks ended October 6, 2018 were as follows (amounts in thousands):

	October 6, 2018
Cash received from option exercises	$	791
Tax benefit at exercise, net	$	111
Intrinsic value of stock options exercised	$	609

Performance-Contingent Restricted Stock Awards

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

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

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

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2017 award, which vested in fiscal 2019, vested at 153% of target.

The TSR shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the TSR shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) TSR from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ TSR. The inputs are based on historical capital market data.

On May 23, 2019, the company’s CEO received an award of TSR Shares that brings his total grant equal to the CEO’s target award (“promotion award”). This grant will be measured under the same guidelines as the December 30, 2018 grant of TSR Shares described above. The company’s former CEO forfeited 112,840 TSR shares at his retirement on May 23, 2019.

The following performance-contingent TSR Shares have been granted under the Omnibus Plan and have service period remaining (amounts in thousands, except price data):

Grant Date	December 30, 2018		May 23, 2019		July 14, 2019
Shares granted		440		11		5
Vesting date	3/1/2022		3/1/2022		3/1/2022
Fair value per share	$	21.58	$	27.23	$	23.32

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

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

•

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

•

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

•

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

•

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

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2017 award, which vested in fiscal 2019, actual attainment was 75% of ROI Target.

The ROIC Shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of ROIC Shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC Shares will immediately vest at the target level. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the ROIC Shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. Since these awards have a performance condition feature, the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. The 2019 award is being expensed at 100% of ROI Target.

On May 23, 2019, the company’s CEO received a promotion award of ROIC Shares. This grant will be measured under the same guidelines as the December 30, 2018 grant of ROIC Shares described above. The company’s former CEO forfeited 112,840 ROIC shares at his retirement on May 23, 2019.

The following performance-contingent ROIC Shares have been granted under the Omnibus Plan and have service period remaining (amounts in thousands, except price data):

Grant Date	December 30, 2018		May 23, 2019		July 14, 2019
Shares granted		440		11		5
Vesting date	3/1/2022		3/1/2022		3/1/2022
Fair value per share	$	18.29	$	23.08	$	23.32

Performance-Contingent Restricted Stock Summary

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

Award Granted

Fiscal Year

Vested

TSR Modifier

Increase/(Decrease)

ROIC Modifier

Decrease

Dividends at

Vesting

(thousands)

Tax

Benefit/(Expense)

Fair Value at

Vesting

2017

2019

205,686

(97,131

)

1,219

936

18,570

2016

2018

(333,112

)

(114,190

)

405

(2,130

)

6,504

Performance-Contingent Restricted Stock

The company’s performance-contingent restricted stock activity for the forty weeks ended October 5, 2019 is presented below (amounts in thousands, except price data):

	Shares			Weighted Average Grant Date Fair Value
Nonvested shares at December 29, 2018		779		$	21.64
Initial grant at target		913		$	20.10
Grant reduction for not achieving the ROIC modifier		(97	)	$	19.97
Grant increase for achieving the TSR modifier		206		$	23.31
Vested		(885	)	$	22.21
Forfeited		(257	)	$	19.94
Nonvested shares at October 5, 2019		659		$	20.16

As of October 5, 2019, there was $10.2 million of total unrecognized compensation cost related to nonvested restricted stock granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 2.40 years. The total intrinsic value of shares vested during the twelve and forty weeks ended October 5, 2019 was $18.6 million.

Time-Based Restricted Stock Units

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

On May 23, 2019, the company’s CEO was granted TBRSU Shares of approximately $1.0 million pursuant to the Omnibus Plan. This award will vest 100% on the fourth anniversary of the date of grant provided the CEO remains employed by the company during this period. Vesting will also occur in the event of the CEO’s death or disability, but not his retirement if prior to the fourth anniversary of the grant date. Dividends will accrue on the award and will be paid to the CEO on the vesting date for all shares that vest. There were 43,330 shares issued for this award at a fair value of $23.08 per share.

The following TBRSU Shares have been granted under the Omnibus Plan and have service periods remaining (amounts in thousands, except price data):

Grant Date	December 30, 2018		May 23, 2019
Shares granted		244		43
Vesting date	Equally over 3 years		5/23/2023
Fair value per share	$	18.29	$	23.08

The TBRSU Shares activity for the forty weeks ended October 5, 2019 is set forth below (amounts in thousands, except price data):

	TBRSU Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized Compensation Cost
Nonvested shares at December 29, 2018		—		$	—
Granted		288			19.01
Forfeitures		(18	)		18.29
Nonvested shares at October 5, 2019		270		$	19.06		2.57	$	5,471

Deferred Stock

Non-employee directors may convert their annual board retainers into deferred stock equal in value to 100% of the cash payments directors would otherwise receive and the vesting period is a one-year period to match the period that cash would have been received if no conversion existed. Accumulated dividends are paid upon delivery of the shares. During fiscal 2019, non-employee directors elected to receive an aggregate of 2,707 common shares for board retainer deferrals pursuant to the Omnibus Plan. A total of 5,180 common shares were vested and issued for previous board retainer deferrals.

Non-employee directors also receive annual grants of deferred stock. This deferred stock vests one year from the grant date. The deferred stock will be distributed to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one-year minimum vesting period. During fiscal 2018, non-employee directors received an aggregate of 65,000 shares for their annual grant pursuant to the Omnibus Plan that vested during the second quarter of fiscal 2019. During fiscal 2019, non-employee directors received an aggregate of 46,240 shares for their annual grant pursuant to the Omnibus Plan.

The deferred stock activity for the forty weeks ended October 5, 2019 is set forth below (amounts in thousands, except price data):

	Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Nonvested shares at December 29, 2018		66		$	19.93
Vested		(66	)	$	19.93
Granted		49		$	22.31
Nonvested shares at October 5, 2019		49		$	22.31		0.64	$	1,092

As of October 5, 2019, there was $0.7 million of total unrecognized compensation cost related to deferred stock awards granted under the Omnibus Plan that will be recognized over a weighted-average period of 0.64 years. The total intrinsic value of shares vested during the twelve and forty weeks ended October 5, 2019 was $1.4 million.

Stock-Based Payments Compensation Expense Summary

The following table summarizes the company’s stock-based compensation expense for the twelve and forty weeks ended October 5, 2019 and October 6, 2018, respectively (amounts in thousands):

	For the Twelve Weeks Ended
	October 5, 2019		October 6, 2018
Performance-contingent restricted stock awards	$	926	$	1,061
TBRSU Shares		347		—
Deferred stock awards		250		381
Total stock-based compensation	$	1,523	$	1,442

	For the Forty Weeks Ended
	October 5, 2019		October 6, 2018
Performance-contingent restricted stock awards	$	3,791	$	5,634
TBRSU Shares		1,149		—
Deferred and restricted stock		894		1,258
Total stock-based compensation	$	5,834	$	6,892

18. POSTRETIREMENT PLANS

The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at October 5, 2019 compared to accounts at December 29, 2018 (amounts in thousands):

	October 5, 2019		December 29, 2018
Current liability	$	20,356	$	1,283
Noncurrent liability	$	13,955	$	39,149
Accumulated other comprehensive loss, net of tax	$	100,915	$	105,036

Defined Benefit Plans and Nonqualified Plan

On September 28, 2018, the Board of Directors approved a resolution to terminate the Flowers Foods, Inc. Retirement Plan No. 1 (“Plan No. 1”), effective December 31, 2018. The company has commenced the plan termination process and expects to distribute a portion of the pension plan assets as lump sum payments in January 2020 with the remaining balance transferred to an insurance company in the form of an annuity by March 2020. The total payments distributed will depend on the lump sum offer participation rate of eligible participants. Based on the estimated value of assets held in the plan, the company currently estimates that a cash contribution of approximately $5.0 million to $35.0 million will be required to fully fund the plan’s liabilities at termination. In addition, based on current assumptions, the Company estimates a final non-cash settlement charge of approximately $119.0 million.

The company continues to recognize settlement accounting charges each year as a result of the ongoing lump sum payments from the plan. Settlement accounting, which accelerates recognition of a plan’s unrecognized net gain or loss, is triggered if the lump sums paid during a year exceeds the sum of the plan’s service and interest cost. The company determined it was probable a settlement would occur and paid lump sums that exceeded that threshold during our first quarter of fiscal 2018 and, as a result, recorded settlement charges in each quarter of fiscal 2018. There were no settlement charges during the forty weeks ended October 5, 2019.

The company used a measurement date of December 31, 2018 for the defined benefit and postretirement benefit plans described below.

The company voluntarily contributed $10.0 million during our first quarter of fiscal 2018, an additional $30.0 million during our second quarter of fiscal 2018, and $0.1 million during our third quarter of fiscal 2018 to Plan No. 1. A voluntary contribution of $0.6 million was made by the company to Plan No. 2 during the third quarter of fiscal 2018. There were no contributions made by the company to either plan during the first or second quarters of fiscal 2019. The company made a voluntary contribution of $2.5 million to Plan No. 2 during the third quarter of fiscal 2019. There have been no contributions to Plan No. 1 during fiscal 2019.

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 5, 2019			October 6, 2018			October 5, 2019			October 6, 2018
Service cost	$	162		$	216		$	541		$	720
Interest cost		2,753			3,166			9,177			9,413
Expected return on plan assets		(3,957	)		(4,464	)		(13,190	)		(14,549	)
Settlement loss		—			930			—			6,633
Amortization of prior service cost		89			97			297			291
Amortization of net loss		1,637			1,126			5,460			3,956
Total net periodic pension cost	$	684		$	1,071		$	2,285		$	6,464

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

Postretirement Benefit Plan

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

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

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 5, 2019			October 6, 2018			October 5, 2019			October 6, 2018
Service cost	$	65		$	66		$	217		$	221
Interest cost		69			54			229			181
Amortization of prior service credit		(9	)		(49	)		(32	)		(163	)
Amortization of net gain		(63	)		(99	)		(212	)		(331	)
Total net periodic postretirement cost (income)	$	62		$	(28	)	$	202		$	(92	)

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

401(k) Retirement Savings Plan

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

	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 5, 2019		October 6, 2018		October 5, 2019		October 6, 2018
Total cost and employer contributions	$	6,264	$	6,013	$	21,137	$	19,600

Multi-employer Pension Plan

On August 18, 2017, the union participants of the Bakery and Confectionary Union and Industry International Pension Fund (the “MEPP Fund”) at our Lakeland, Florida plant voted to withdraw from the MEPP Fund in the most recent collective bargaining agreement. The withdrawal was effective, and the union participants were eligible to participate in the 401(k) plan, on November 1, 2017. During the third quarter of fiscal 2017, the company recorded a liability of $15.2 million related to the withdrawal from the MEPP Fund. During the first quarter of fiscal 2018, the company recorded an additional liability of $2.3 million for the final settlement amount of the withdrawal liability. The withdrawal liability was computed as the net present value of 20 years of monthly payments derived from the company’s share of unfunded vested benefits. The company began making withdrawal liability payments during the first quarter of fiscal 2018. Transition payments, including related tax payments, were made on November 3, 2017 to, and for the benefit of, union participants as part of the collective bargaining agreement. An additional $3.1 million was recorded for these transition payments. The withdrawal liability charge and the transition payments were recorded in the multi-employer pension plan withdrawal costs line item on our Condensed Consolidated Statements of Income. The liability on December 30, 2017 was recorded in other accrued current liabilities on the Condensed Consolidated Balance Sheets. We paid $0.2 million during the first quarter of fiscal 2018 and the balance was paid early in the second quarter of fiscal 2018. While this is our best estimate of the ultimate cost of the withdrawal from the MEPP Fund, additional withdrawal liability may be incurred based on the final fund assessment or in the event of a mass withdrawal, as defined by statute following our complete withdrawal.

19. INCOME TAXES

The effective tax rate for the twelve weeks ended October 5, 2019 was 22.3% compared to 22.5% for the twelve weeks ended October 6, 2018. The decrease in the rate was primarily due to state taxes. A reduction in the fiscal 2019 annualized effective tax rate also favorably impacted the current quarter’s rate. During the twelve weeks ended October 5, 2019, the primary differences in the effective rate and the statutory rate were state income taxes and adjustments to prior year estimates that impact the effective tax rate in the current quarter.

The company’s effective tax rate for the forty weeks ended October 5, 2019 was 23.0% compared to 20.1% for the forty weeks ended October 6, 2018. The lower rate in the prior period was primarily due to a favorable adjustment of $5.6 million related to tax reform enacted in December 2017. During the forty weeks ended October 5, 2019, the primary differences in the effective rate and the statutory rate were state income taxes and windfalls on stock-based compensation.

During the forty weeks ended October 5, 2019, the company’s activity with respect to its uncertain tax positions and related interest expense accrual was not significant to the Condensed Consolidated Financial Statements. As of October 5, 2019, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.

20. SUBSEQUENT EVENTS

The company has evaluated subsequent events since October 5, 2019, the date of these financial statements. We believe there were no material events or transactions discovered during this evaluation that require recognition or disclosure in the financial statements.

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 weeks ended October 5, 2019 should be read in conjunction with the Form 10-K and Part II., Item 1A., Risk Factors, of this Form 10-Q.

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

•

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

•

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

•

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

•

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

Matters Affecting Comparability

•

Product recall — On July 9, 2019, we issued a voluntary product recall for certain hamburger and hot dog buns and other bakery products due to the potential presence of small pieces of hard plastic that may have been introduced during production. The products recalled were distributed to retail customers under a variety of brand names in 18 states. We are not currently aware of any confirmed injuries or illnesses. We incurred costs related to lost production time, scrapped inventory, and product removal, among other costs, of approximately $0.5 million and $0.3 million during the second and third quarters of fiscal 2019, respectively, however, we cannot currently estimate the impact of the recall on future periods.

•

Canyon acquisition — On December 14, 2018, we completed the acquisition of Canyon, a leading gluten-free bread baker. Prior to the acquisition, Canyon’s sales were distributed frozen through natural, specialty, grocery, and mass retailers around the country and this has and will continue. In addition to frozen distribution, we began distributing Canyon branded products fresh via our DSD distribution system during the first quarter of fiscal 2019.

•

Impact of adoption of the new lease accounting standard — We adopted the new lease accounting standard as of the beginning of fiscal 2019 using the modified retrospective method, as such, prior year amounts have not been restated.

Additionally, detailed below are expense (recovery) items affecting comparability that will provide additional context while reading this discussion:

	For the Twelve Weeks Ended					For the Forty Weeks Ended					Footnote
	October 5, 2019		October 6, 2018			October 5, 2019			October 6, 2018		Disclosure
	(Amounts in thousands)					(Amounts in thousands)
Project Centennial consulting costs	$	—	$	729		$	—		$	9,376	Note 3
Restructuring and related impairment charges		3,277		497			6,042			2,557	Note 3
Impairment of assets		—		—			—			2,483	Note 10
(Recovery) loss on inferior ingredients		—		(1,891	)		(413	)		1,993	Note 1
Canyon acquisition costs		—		—			22			—	Note 5
Legal settlements (recovery)				11,921			(1,136	)		21,616	Note 15
Executive retirement agreement				—			763			—
Pension plan settlement loss		—		930			—			6,633	Note 18
Multi-employer pension plan withdrawal costs		—		—			—			2,322	Note 18
	$	3,277	$	12,186		$	5,278		$	46,980

In the second quarter of fiscal 2018, we recognized an income tax benefit of $5.6 million to adjust the estimated provisional benefit recorded in fiscal 2017 related to tax reform enacted in 2017, which partially offset the net expense amount of the pre-tax items for the forty weeks ended October 6, 2018 detailed above.

•

Project Centennial consulting costs — During the second quarter of fiscal 2016, we partnered with a globally recognized consulting firm and launched Project Centennial, an enterprise-wide business and operational review. Key milestones and initiatives of this multi-year project are outlined in the “Executive Overview” section below. We incurred consulting costs associated with the project through fiscal 2018 and the amounts incurred during the twelve and forty weeks ended October 6, 2018 are presented in the table above. These consulting costs are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income.

•

Restructuring and related impairment charges – The following table details restructuring charges recorded during the twelve and forty weeks ended October 5, 2019 and October 6, 2018 (amounts in thousands):

	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 5, 2019		October 6, 2018		October 5, 2019		October 6, 2018
Employee termination benefits and other cash charges	$	229	$	323	$	1,212	$	2,383
Property, plant and equipment impairments, net of gain on sale		3,048		174		4,830		174
Total restructuring and related impairment charges	$	3,277	$	497	$	6,042	$	2,557

On September 16, 2019, we announced the closure of our bakery in Opelika, Alabama which is anticipated to be completed by the end of fiscal 2019. In conjunction with the closure announcement, we recorded asset impairments on property, plant and equipment totaling $3.9 million and severance costs of $0.2 million. Additional severance charges will be recorded in the fourth quarter of fiscal 2019. Also, in the third quarter of fiscal 2019, we recorded a gain on sale of $0.8 million related to a facility which had been previously impaired in a prior year. During the first and second quarters of fiscal 2019, we recorded restructuring charges for asset impairments related to a closed bakery included in assets held for sale and other manufacturing line closures, as well as severance and employee relocation costs related to transitioning to the new organizational structure. In the prior year, costs incurred were mostly for relocation and severance costs as part of the transition to the company’s new organizational structure. We continue to explore additional opportunities to streamline our core operations, but as of October 5, 2019 we cannot estimate the costs expected to be incurred for this initiative.

•

(Recovery) loss on inferior ingredients – Beginning in the second quarter of fiscal 2018 and continuing through the second quarter of fiscal 2019, we recognized identifiable and measurable costs associated with receiving inferior ingredients. For the forty weeks ended October 5, 2019, these costs totaled $1.4 million and we received reimbursements totaling $1.8 million for a portion of previously incurred costs. During the twelve and forty weeks ended October 6, 2018, we recognized $2.3 million and $6.1 million, respectively, of costs and received a reimbursement for these costs of $4.2 million during the third quarter of fiscal 2018. We continue to seek recovery of all losses through appropriate means.

•

Impairment of assets – During the first quarter of fiscal 2018, we recognized an impairment of $2.5 million on a non-IDP notes receivable in our results of operations.

•

Legal settlements – During the forty weeks ended October 5, 2019, we reached agreements to settle distributor-related litigation in the aggregate amount of $0.15 million and recorded a benefit of $1.3 million related to an adjustment of a prior year settlement based on the final amount paid. During the forty weeks ended October 6, 2018, we reached agreements to settle distributor-related litigation in the aggregate amount of $18.8 million, including plaintiffs’ attorney fees, and reached agreements to settle non-IDP litigation in the aggregate amount of $2.8 million. These amounts are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income.

•

Executive retirement agreement – On February 15, 2019, Allen Shiver, president and chief executive officer of the company and a member of the Board of Directors, notified the company he would be retiring from these positions effective May 23, 2019. In connection with Mr. Shiver’s retirement, the company and Mr. Shiver entered into a retirement agreement and general release, and as part of the agreement, Mr. Shiver was paid $1.3 million upon his retirement, which was expensed in the first quarter of fiscal 2019. Additionally, upon his retirement in the second quarter of fiscal 2019, we recognized a benefit of $0.6 million related to the forfeiture of his unvested long-term incentive stock

awards. These amounts are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income.

•

Pension risk mitigation plan – In accordance with our long-term pension risk mitigation plan, at the beginning of fiscal 2016, the company began offering pension plan participants not yet receiving their benefit payments the option to elect to receive their benefit payments as a single lump sum payment. Settlement charges of $4.7 million, $1.0 million, and $0.9 million were triggered in the first, second, and third quarters of fiscal 2018, respectively, as a result of lump sums paid during those quarters. On September 28, 2018, the Board of Directors approved a resolution to terminate the Flowers Foods, Inc. Retirement Plan No. 1, effective December 31, 2018. The plan was closed to new participants on January 1, 1999 and benefit accruals were previously frozen on or before August 1, 2008. The Company has commenced the plan termination process and expects to distribute a portion of the pension plan assets as lump sum payments in January 2020 with the remaining balance transferred to an insurance company in the form of an annuity by March 2020. The total payments distributed will depend on the lump sum offer participation rate of eligible participants. Based on the estimated value of assets held in the plan, the Company currently estimates that a cash contribution of approximately $5.0 million to $35.0 million will be required to fully fund the plan’s liabilities at termination. In addition, based on current assumptions, the Company estimates a final non-cash settlement charge of approximately $119.0 million.

•

Multi-employer pension plan withdrawal costs (“MEPP costs”) – On August 18, 2017, the union participants of the MEPP Fund at our Lakeland, Florida plant voted to withdraw from the MEPP Fund in the most recent collective bargaining agreement. This resulted in the recognition of a $15.2 million pension plan withdrawal liability in the third quarter of fiscal 2017. Transition payments were made to, and for the benefit of, union participants as part of the collective bargaining agreement. The transition payments of $3.1 million were made on November 3, 2017. During the first quarter of fiscal 2018, the pension plan withdrawal liability amount was revised for the final settlement and we recorded an additional $2.3 million of liability. All payments related to the withdrawal from the MEPP Fund were completed by the end of the second quarter of fiscal 2018.

Executive Overview

Business

Flowers is the second-largest producer and marketer of packaged bakery foods in the U.S. We operate in the highly competitive fresh bakery market and our product offerings include fresh breads, buns, rolls, snack cakes and tortillas, as well as frozen breads and rolls. We are focused on opportunities for growth within the baked foods category and seek to have our products available wherever bakery foods are consumed or sold — whether in homes, restaurants, fast food outlets, institutions, supermarkets, convenience stores, or vending machines.

In the second quarter of fiscal 2017, the company announced an enhanced organizational structure designed to emphasize brand growth and innovation in line with a national branded food company, drive enhanced accountability, reduce costs, strengthen long-term strategy and provide greater focus on the strategic initiatives under Project Centennial. We completed our transition to the new structure and began managing our business as one operating segment as of the beginning of fiscal 2019. Prior to that time, the company managed its business and reported segment information in two operating segments, the DSD Segment and the Warehouse Segment.

Highlights

•

Major brands include Nature’s Own, Dave’s Killer Bread (“DKB”), Wonder, and Tastykake.

•

47 operating plants which produce fresh and frozen breads and rolls, as well as snack cakes and tortillas.

•

Direct-store-distribution (“DSD”) of fresh bakery foods sold primarily by a network of independent distributors to retail and foodservice customers with access to over 85% of the U.S. population including the following areas: East, South, Southwest, West Coast, Northwest, and select markets in the Midwest, Nevada and Colorado.

•

Nationwide distribution of certain fresh snack cakes and frozen breads and rolls via contract carriers.

Summary of Operating Results, Cash Flows and Financial Condition

Sales increased 4.7% for the twelve weeks ended October 5, 2019 compared to the same period in the prior year primarily due to the Canyon acquisition, increased sales of branded breakfast items, continued sales growth of DKB branded deli-style breads, growth in traditional branded loaf breads and store branded breads and rolls, and positive price/mix. Partially offsetting these increases were declines in non-retail sales, largely foodservice sales.

Sales increased 4.4% for the forty weeks ended October 5, 2019 compared to the same period in the prior year primarily due to the Canyon acquisition, significant growth in branded breakfast items, growth in store branded breads and rolls, continued sales growth of the DKB branded deli-style breads and traditional branded loaf breads, and positive price/mix. Partially offsetting these increases were softer sales for foodservice products. Since the first quarter of fiscal 2018, we have introduced Nature’s Own Perfectly Crafted breads, Sun-Maid branded breakfast bread, Dave’s Killer Bread English muffins, and new varieties of Dave’s Killer Bread bagels, among other product launches, which contributed to the overall sales growth.

Net income for the twelve weeks ended October 5, 2019 increased 9.4% primarily due to increased sales, significant prior year legal settlements and lower transportation costs. Partially offsetting these items were significantly higher workforce-related costs, increased restructuring charges quarter over quarter, and increased investments in marketing.

Net income for the forty weeks ended October 5, 2019 increased 19.1% primarily due to increased sales and prior year legal settlements, Project Centennial consulting costs, loss on inferior ingredients, pension plan settlement losses, and MEPP costs. A significantly lower effective tax rate in the prior year, as well as rising workforce-related costs and higher restructuring and bad debt expenses in the current year, partially offset the overall increase.

During the forty weeks ended October 5, 2019, we generated net cash flows from operations of $278.1 million and invested $70.6 million in capital expenditures. Additionally, we paid $119.8 million in dividends to our shareholders and reduced our total indebtedness by $102.5 million. During the forty weeks ended October 6, 2018, we generated net cash flows from operations of $232.1 million, inclusive of $40.7 million of voluntary qualified pension plan contributions, invested $75.0 million in capital expenditures, paid $112.2 million in dividends to our shareholders and reduced our total indebtedness by $3.8 million. During the current quarter, we amended the accounts receivable securitization facility (“the facility”) to extend the maturity date an additional year to September 27, 2021.

Project Centennial - Strategic Initiatives and Update on Progress

In June of 2016, the company launched Project Centennial, an enterprise-wide business and operational review to evaluate opportunities to streamline our operations, drive efficiencies, and invest in strategic capabilities that we believe will strengthen our competitive position and drive profitable revenue growth. Based upon the results of this review, Flowers has begun executing on four primary strategic initiatives:

•

reinvigorate the core business – invest in the growth and innovation of our core brands, streamline our brand and product portfolio, improve trade promotion management, and strengthen our partnership with distributors so they can grow their businesses;

•

capitalize on product adjacencies – greater focus on growing segments of the bakery category, such as foodservice, in-store bakery, impulse items, and healthy snacking;

•

reduce costs to fuel growth – reduce complexity and better leverage scale to lower costs; and

•

develop leading capabilities – invest in capabilities to become a more centralized and analytics-focused company.

The company implemented a plan to transition to these primary strategies beginning in fiscal 2017, with the transition intended to be completed by fiscal 2021. By executing on Project Centennial, the company expects to deliver on its stated long-term goals of sales growth in the range of 2% to 4% and EBITDA margins in the range of 12% to 14%. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization. To the extent that we disclose EBITDA and EBITDA margins calculated differently than as described above, we distinguish such measures using different titles such as “Adjusted EBITDA” or “Adjusted EBITDA margin.”

Flowers' priorities for fiscal 2017 and 2018 were to simplify and streamline our brand assortment, provide additional tools to IDPs to enable them to grow their businesses, reduce costs of purchased goods and services, and put in place a more efficient operating model for a national branded food company.

In fiscal 2019 and beyond, Flowers’ priorities are to continue proactively pursuing a lower cost operating model, executing against its stronger brand architecture, and evaluating strategic investments to complement its core business. Benefits from these initiatives are expected to drive sales growth and EBITDA margins to achieve our stated long-term goals discussed above.

During fiscal 2016, we completed the diagnostic phase of Project Centennial, which identified the four strategic initiatives and outlined the timeline and financial targets described above.

During fiscal 2017, the company began the implementation phase of Project Centennial, and made significant progress on several initiatives, including streamlining our brand assortment in key retail categories, reducing spend on purchased goods and services, closing a snack cake plant, hiring a chief marketing officer, completing the VSIP and other workforce reductions, and began transitioning to the company’s new organization structure, which establishes two BUs, Fresh Packaged Bread and Snacking/Specialty, and realigns key leadership roles.

In fiscal 2018, the company completed the implementation phase of Project Centennial, and made continued progress on its strategic priorities, including continued refinements to the organizational structure to align operating functions, drive accountability, generate additional cost savings, and identify new avenues for growth. Some key accomplishments were the introduction of Nature’s Own Perfectly Crafted artisan-inspired, thick-sliced bakery style breads that contain no artificial preservatives, colors or flavors, no high fructose corn syrup, and are Non-GMO Project Verified; the introduction of Dave’s Killer Bread Boomin’ Berry bagels; increasing our marketing budget to support growth of newly launched products and core brands in growth markets; and the acquisition of Canyon, a leading brand of gluten-free bakery products.

On May 3, 2017, the company announced an enhanced organizational structure designed to provide greater focus in the company’s long-term strategic objectives, emphasize brand growth and innovation in line with a national branded food company, drive enhanced accountability, and reduce costs. Flowers has concluded that under the new organizational structure the company has one operating segment based on the nature of products that Flowers sells, an intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the CEO, who is the chief operating decision maker, for the purpose of assessing performance and allocating resources. Capital allocations, such as building a new bakery or other investments impact both BUs, as the two BUs are so intertwined in the production of products, sales, marketing and other functions. This change to one operating segment aligns with the company’s internal structure and investors’ desire to have consistent external reporting. We completed our transition to the new structure and began managing our business as one operating segment as of the beginning of fiscal 2019. Prior to that time, the company managed the business and reported segment information in two operating segments, the DSD Segment and the Warehouse Segment.

The new organizational structure establishes two BUs, Fresh Packaged Bread and Snacking/Specialty, and realigns key leadership roles. The new structure also provides for centralized marketing, sales, supply chain, shared-services/administrative, and corporate strategy functions. We continue to explore additional opportunities to streamline our core operations, but as of October 5, 2019, we cannot estimate the costs expected to be incurred related to these initiatives.

CRITICAL ACCOUNTING POLICIES:

Our financial statements are prepared in accordance with GAAP. These principles are numerous and complex. Our significant accounting policies are summarized in the Form 10-K. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Please see the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K except as disclosed in Note 2, Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q, which details recently adopted accounting pronouncements and accounting pronouncements not yet adopted.

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 weeks ended October 5, 2019 and October 6, 2018, respectively, are set forth below (dollars in thousands):

	For the Twelve Weeks Ended
						Percentage of Sales					Increase (Decrease)
	October 5, 2019		October 6, 2018			October 5, 2019		October 6, 2018			Dollars			%
Sales	$	966,561	$	923,449			100.0		100.0		$	43,112			4.7
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		509,056		485,680			52.7		52.6			23,376			4.8
Selling, distribution and administrative expenses		362,380		353,051			37.5		38.2			9,329			2.6
Restructuring and related impairment charges		3,277		497			0.3		0.1			2,780		NM
(Recovery) loss on inferior ingredients		—		(1,891	)		—		(0.2	)		1,891		NM
Depreciation and amortization		33,196		32,662			3.4		3.5			534			1.6
Income from operations		58,652		53,450			6.1		5.8			5,202			9.7
Other components of net periodic pension and postretirement benefits expense (credit)		518		(171	)		0.1		(0.0	)		689		NM
Pension plan settlement loss		—		930			—		0.1			(930	)	NM
Interest expense, net		2,334		1,565			0.2		0.2			769			49.1
Income tax expense		12,442		11,496			1.3		1.2			946			8.2
Net income	$	43,358	$	39,630			4.5		4.3		$	3,728			9.4
Comprehensive income	$	37,729	$	16,150			3.9		1.7		$	21,579			133.6

NM	Not meaningful.

Percentages may not add due to rounding.

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the forty weeks ended October 5, 2019 and October 6, 2018, respectively, are set forth below (dollars in thousands):

	For the Forty Weeks Ended
							Percentage of Sales						Increase (Decrease)
	October 5, 2019			October 6, 2018			October 5, 2019			October 6, 2018			Dollars			%
Sales	$	3,206,215		$	3,071,185			100.0			100.0		$	135,030			4.4
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		1,669,749			1,599,673			52.1			52.1			70,076			4.4
Selling, distribution and administrative expenses		1,197,926			1,167,879			37.4			38.0			30,047			2.6
Multi-employer pension plan withdrawal costs		—			2,322			—			0.1			(2,322	)	NM
Restructuring and related impairment charges		6,042			2,557			0.2			0.1			3,485		NM
Impairment of assets		—			2,483			—			0.1			(2,483	)	NM
(Recovery) loss on inferior ingredients		(413	)		1,993			(0.0	)		0.1			(2,406	)	NM
Depreciation and amortization		111,344			111,949			3.5			3.6			(605	)		(0.5	)
Income from operations		221,567			182,329			6.9			5.9			39,238			21.5
Other components of net periodic pension and postretirement benefits expense (credit)		1,729			(1,204	)		0.1			(0.0	)		2,933		NM
Pension plan settlement loss		—			6,633			—			0.2			(6,633	)	NM
Interest expense, net		8,927			6,214			0.3			0.2			2,713			43.7
Income tax expense		48,592			34,367			1.5			1.1			14,225			41.4
Net income	$	162,319		$	136,319			5.1			4.4		$	26,000			19.1
Comprehensive income	$	158,999		$	133,944			5.0			4.4		$	25,055			18.7

NM	Not meaningful.

Percentages may not add due to rounding.

TWELVE WEEKS ENDED OCTOBER 5, 2019 COMPARED TO TWELVE WEEKS ENDED OCTOBER 6, 2018

Sales (dollars in thousands)

	For the Twelve Weeks Ended
					Percentage of Sales				Increase (Decrease)
	October 5, 2019		October 6, 2018		October 5, 2019		October 6, 2018		Dollars			%
Branded retail	$	586,070	$	549,346		60.6		59.5	$	36,724			6.7
Store branded retail		150,844		138,750		15.6		15.0		12,094			8.7
Non-retail and other		229,647		235,353		23.8		25.5		(5,706	)		(2.4	)
Total	$	966,561	$	923,449		100.0		100.0	$	43,112			4.7

(The table above presents certain sales by category that have been reclassified from amounts previously reported.)

The change in sales was generally attributable to the following:

Percentage Point Change in Sales Attributed to:
Pricing/mix			2.1
Volume			0.4
Acquisition			2.2
Total percentage change in sales			4.7

Sales increased due to the Canyon acquisition contribution and growth in branded breakfast items, branded organic deli-style breads, traditional branded loaf breads, and store branded breads and buns, combined with overall positive price/mix. These increases were partially offset by declines in non-retail sales, largely foodservice sales.

The Canyon acquisition has extended our product offerings to include gluten-free items, both in the branded retail and store branded retail categories. Prior to the acquisition, Canyon’s products were solely distributed by warehouse distribution. During the first quarter of fiscal 2019, we began the rollout of Canyon’s branded products across our DSD distribution system as well, which we continue to implement as of the current quarter.

Branded retail sales increased due to the Canyon acquisition, significant growth in branded breakfast items under both the DKB and Sun-Maid labels, continued growth in traditional loaf breads under the Nature’s Own label and in branded organic bread under the DKB label, and more favorable price/mix. We introduced Nature’s Own Perfectly Crafted brioche bread and DKB English muffins the first quarter of fiscal 2019, and Sun-Maid breakfast bread late in the third quarter of fiscal 2018. Store branded retail sales increased due to gluten-free store branded items produced by Canyon, volume growth from additional distribution, and positive price/mix, partially offset by volume declines in store branded cake and breakfast breads. Significant declines in foodservice sales and, to a lesser extent, institutional sales resulted in the decrease in non-retail and other sales, partly as a result of negative price/mix.

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

	For the Twelve Weeks Ended				Increase
Line Item Component	October 5, 2019 % of Sales		October 6, 2018 % of Sales		(Decrease) as a % of Sales
Ingredients and packaging		29.8		30.1		(0.3	)
Workforce-related costs		15.1		14.8		0.3
Other		7.8		7.7		0.1
Total		52.7		52.6		0.1

Costs were slightly higher quarter over quarter as a percent of sales due to rising workforce-related costs and decreased manufacturing efficiencies, partially offset by improved sales price/mix and lower ingredient costs. Ingredient costs were lower as percent of sales due to lower prices for organic ingredients, non-organic flour, and eggs in the current quarter, partially offset by higher prices for yeast, softeners and other ingredients. Workforce-related costs were higher due to a competitive labor market and higher employee incentive costs relative to the prior year quarter. Sales and production costs were negatively impacted by lost business due to receipt of inferior ingredients beginning in the second quarter of fiscal 2018.

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

	For the Twelve Weeks Ended				Increase
Line Item Component	October 5, 2019 % of Sales		October 6, 2018 % of Sales		(Decrease) as a % of Sales
Workforce-related costs		10.7		9.9		0.8
Distributor distribution fees		14.7		15.0		(0.3	)
Other		12.1		13.3		(1.2	)
Total		37.5		38.2		(0.7	)

A competitive labor environment and significantly higher employee incentive costs relative to the prior year quarter resulted in the sharp increase in workforce-related costs. Distributor distribution fees decreased as a percent of sales due to a shift in product mix, primarily due to Canyon’s sales being mostly warehouse delivered. The considerable decrease in the Other line item in the table above resulted from prior year legal settlements of $11.9 million or approximately 130 basis points. See Note 15, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding legal settlements. Lower transportation costs, among other costs, were offset by greater investments in marketing initiatives in the current quarter, all of which are included in the Other line item in the table above.

Restructuring and Related Impairment Charges and (Recovery) Loss on Inferior Ingredients

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

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent of sales was relatively consistent quarter over quarter.

Income from Operations

Income from operations increased as a percent of sales for the twelve weeks ended October 5, 2019 compared to the twelve weeks ended October 6, 2018 largely due to sales increases and significantly lower selling, distribution and administrative expenses discussed above, partially offset by higher restructuring charges.

Other Components of Net Periodic Pension and Postretirement Benefits Expense (Credit) and Pension Plan Settlement Loss

Other components of net periodic pension and postretirement benefits expense (credit) changed primarily due to a decrease in pension income resulting from the company changing its pension plan asset allocation to include a larger percentage of fixed-income assets as part of the plan termination process as discussed in the “Matter Affecting Comparability” section above. In the prior year quarter, we recorded a $0.9 million pension plan settlement loss.

Net Interest Expense

Net interest expense for the current quarter was consistent with the prior year quarter as a percent of sales.

Income Tax Expense

The effective tax rate for the twelve weeks ended October 5, 2019 was 22.3% compared to 22.5% in the prior year quarter. The decrease in the rate quarter over quarter primarily resulted from state income taxes. Additionally, a reduction in the fiscal 2019 annualized effective tax rate favorably impacted the current quarter.

For the current quarter, the primary differences in the effective rate and the statutory rate were state income taxes and adjustments to prior year estimates that impact the effective tax rate in the current quarter.

Comprehensive Income

The increase in comprehensive income quarter over quarter resulted primarily from the prior year actuarial loss recognized as a result of the pension plan remeasurement and increased net income, net of changes in the fair value of derivatives.

FORTY WEEKS ENDED OCTOBER 5, 2019 COMPARED TO FORTY WEEKS ENDED OCTOBER 6, 2018

Sales (dollars in thousands)

	Forty Weeks Ended
					Percentage of Sales				Increase (Decrease)
	October 5, 2019		October 6, 2018		October 5, 2019		October 6, 2018		Dollars			%
Branded retail	$	1,929,200	$	1,822,900		60.2		59.4	$	106,300			5.8
Store branded retail		504,809		456,182		15.7		14.8		48,627			10.7
Non-retail and other		772,206		792,103		24.1		25.8		(19,897	)		(2.5	)
Total	$	3,206,215	$	3,071,185		100.0		100.0	$	135,030			4.4

(The table above presents certain sales by category that have been reclassified from amounts previously reported.)

The change in sales was generally attributable to the following:

Percentage Point Change in Sales Attributed to:
Pricing/mix			2.5
Volume			—
Acquisition			1.9
Total percentage change in sales			4.4

Sales increased due to the Canyon acquisition contribution, significant growth in branded breakfast items, growth in both store branded breads and buns, continued sales growth in DKB branded organic deli-style breads and traditional branded loaf breads, and overall positive price/mix. These increases were partially offset by declines in foodservice sales. Additionally, in the prior year, we incurred higher promotional activity associated with the launch of Nature’s Own Perfectly Crafted breads.

Branded retail sales increased due to the acquisition, growth in DKB branded products, more favorable price/mix, and branded product introductions. We introduced Nature’s Own Perfectly Crafted breads in the second quarter of fiscal 2018, Sun-Maid breakfast bread late in the third quarter of fiscal 2018, and DKB English muffins in the first quarter of fiscal 2019. We have continued to expand upon these product introductions with new varieties such as Nature’s Own Perfectly Crafted brioche bread. Store branded retail sales increased due primarily to volume growth from increased distribution of store branded breads and buns, positive price/mix, and the Canyon acquisition. Significant volume declines and negative price/mix for foodservice, and softer volume for vending and institutional items resulted in the decrease in non-retail and other sales. Sales were negatively impacted by lost business due to receipt of inferior ingredients beginning in the second quarter of fiscal 2018.

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

	For the Forty Weeks Ended				Increase
Line item component	October 5, 2019 % of sales		October 6, 2018 % of sales		(Decrease) as a % of sales
Ingredients and packaging		29.4		29.6		(0.2	)
Workforce-related costs		15.0		14.8		0.2
Other		7.7		7.7		—
Total		52.1		52.1		—

Costs were consistent with prior year as a percent of sales. Improved sales and decreased ingredient costs were offset by higher workforce-related costs and lower manufacturing efficiencies. Higher commodity prices were more than offset by improved price/mix, however, workforce-related costs continue to outpace the gains in price/mix. Sales and production costs were negatively impacted by the effects from inferior ingredients although we cannot currently quantify these amounts. We expect ingredient prices to be moderately lower for the remainder of fiscal 2019.

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

	For the Forty Weeks Ended				Increase
Line item component	October 5, 2019 % of sales		October 6, 2018 % of sales		(Decrease) as a % of sales
Workforce-related costs		10.8		10.5		0.3
Distributor distribution fees		14.8		14.9		(0.1	)
Other		11.8		12.6		(0.8	)
Total		37.4		38.0		(0.6	)

Workforce-related costs were higher as a percent of sales as a result of a competitive labor market and increased employee incentive costs year over year. The decrease in the Other line item in the table above resulted from significant legal settlements and related fees as well as consulting costs related to Project Centennial, which were both incurred in the prior year. Partially offsetting these items were higher bad debt expense and greater investments in marketing in the current year. As discussed in the “Matters Affecting Comparability” section above, we recorded a net benefit of $1.1 million related to legal settlements in the current year compared to expense of $21.6 million in the prior year. We incurred consulting costs associated with Project Centennial of $9.4 million in the prior year.

Restructuring and Related Impairment Charges, Impairment of Assets, (Recovery) Loss on Inferior Ingredients, and MEPP Costs

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

Depreciation and Amortization Expense

Depreciation and amortization expense decreased slightly as a percent of sales due to accelerated depreciation of certain right-of-use assets in the prior year and certain other property, plant and equipment becoming fully depreciated, partially offset by increased amortization expense from amortizing the Canyon intangible assets acquired at the end of fiscal 2018.

Income from Operations

Income from operations increased significantly as a percent of sales for the forty weeks ended October 5, 2019 compared to the forty weeks ended October 6, 2018 largely due to sales increases, decreases in selling, distribution and administrative expenses discussed above, and the prior year loss on inferior ingredients and impairment of assets, somewhat offset by increased restructuring charges year over year.

Other Components of Net Periodic Pension and Postretirement Benefits Expense (Credit) and Pension Plan Settlement Loss

Other components of net periodic pension and postretirement benefits expense (credit) changed primarily due to a decrease in pension income resulting from the company changing its pension plan asset allocation to include a larger percentage of fixed-income assets as part of the plan termination process as discussed in the “Matter Affecting Comparability” section above. Additionally, during the forty weeks ended October 6, 2018, we recorded $6.6 million of pension plan settlement losses.

Net Interest Expense

Net interest expense increased year over year due to higher average amounts outstanding under the company’s debt arrangements primarily due to funding the Canyon acquisition at the end of fiscal 2018.

Income Tax Expense

The effective tax rate for the forty weeks ended October 5, 2019 was 23.0% compared to 20.1% in the prior year. The rate in the prior period was lower primarily due to recognizing an income tax benefit of $5.6 million to adjust the estimated provisional benefit recorded in fiscal 2017 related to tax reform enacted in December 2017.

For the current year, the primary differences in the effective rate and the statutory rate were state income taxes and windfalls on stock-based compensation. The primary differences in the effective rate and the statutory rate for the prior year were state income taxes and adjustments to prior year estimates.

Comprehensive Income

The increase in comprehensive income year over year resulted primarily from the increase in net income and the prior year pension plan actuarial loss, partially offset by changes in the fair value of derivatives.

LIQUIDITY AND CAPITAL RESOURCES:

Strategy

We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths and we do not anticipate significant risks to these cash flows in the foreseeable future. Additionally, we strive to maintain a conservative financial position. We believe having a conservative financial position allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, pension contributions and obligated debt repayments. We believe we currently have access to available funds and financing sources to meet our short and long-term capital requirements. The company’s strategy for use of its excess cash flows includes:

•

implementing our strategies under Project Centennial;

•

paying dividends to our shareholders;

•

maintaining an investment grade credit rating;

•

making strategic acquisitions;

•

repurchasing shares of our common stock; and

•

making discretionary contributions to our qualified pension plans.

Liquidity Discussion for the Forty Weeks Ended October 5, 2019 and October 6, 2018

Cash and cash equivalents were $7.0 million at October 5, 2019 compared to $25.3 million at December 29, 2018. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands):

	For the Forty Weeks Ended
Cash Flow Component	October 5, 2019			October 6, 2018			Change
Cash provided by operating activities	$	278,100		$	232,059		$	46,041
Cash disbursed for investing activities		(65,106	)		(73,412	)		8,306
Cash disbursed for financing activities		(231,332	)		(114,049	)		(117,283	)
Total change in cash	$	(18,338	)	$	44,598		$	(62,936	)

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

	For the Forty Weeks Ended
	October 5, 2019			October 6, 2018			Change
Depreciation and amortization	$	111,344		$	111,949		$	(605	)
Restructuring and related impairment charges		5,663			174			5,489
Impairment of assets		—			2,483			(2,483	)
(Gain) loss reclassified from accumulated other comprehensive income to net income		(3,942	)		811			(4,753	)
Allowances for accounts receivable		8,819			3,968			4,851
Stock-based compensation		5,834			6,892			(1,058	)
Deferred income taxes		8,570			21,139			(12,569	)
Pension and postretirement plans cost		2,487			6,372			(3,885	)
Other non-cash items		1,243			(3,810	)		5,053
Net non-cash adjustment to net income	$	140,018		$	149,978		$	(9,960	)

•

Refer to the Restructuring and related impairment charges and Impairment of assets discussion in the “Matters Affecting Comparability” section above for additional information.

•

Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs and gains or losses on the sale of assets.

Net changes in working capital and pension plan contributions consisted of the following items (amounts in thousands):

	For the Forty Weeks Ended
	October 5, 2019			October 6, 2018			Change
Changes in accounts receivable, net	$	(19,519	)	$	(20,297	)	$	778
Changes in inventories, net		(7,824	)		(8,847	)		1,023
Changes in hedging activities, net		(6,683	)		7,939			(14,622	)
Changes in other assets and accrued liabilities, net		7,481			(53,143	)		60,624
Changes in accounts payable, net		4,808			60,810			(56,002	)
Qualified pension plan contributions		(2,500	)		(40,700	)		38,200
Net changes in working capital and pension plan contributions	$	(24,237	)	$	(54,238	)	$	30,001

•

Hedging activities change from market movements that affect the fair value and the associated required collateral of positions and the timing and recognition of deferred gains or losses. These changes will occur as part of our hedging program.

•

The change in other assets primarily resulted from changes in income tax receivable balances year over year, changes in deferred gains recorded in conjunction with the sale of distribution rights to IDPs, and prepaid rent amounts being included in other assets in the prior year and in right-to-use assets in the current quarter due to changes in lease accounting. Changes in employee compensation accruals, including employee termination benefits, accrued MEPP costs, and changes in legal accruals resulted in the change in other accrued liabilities. During the first quarter of fiscal 2019 and fiscal 2018, we paid $7.9 million and $28.1 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plan. An additional $1.2 million and $0.4 million was paid during the first quarter of fiscal 2019 and fiscal 2018, respectively, for our share of employment taxes on the vesting of the performance-contingent restricted stock awards in each respective year. We paid $27.6 million of VSIP and other restructuring related charges, and $17.5 million of MEPP costs through the third quarter of fiscal 2018. During the forty weeks ended October 5, 2019, we paid $7.9 million of legal settlements, all of which had been accrued for as of December 29, 2018. In the prior year, we recognized $21.6 million of legal settlements and paid $16.4 million of legal settlements, of which $5.2 million had been accrued for in prior periods.

•

The significant change in accounts payable resulted from extending our payment terms with certain of our suppliers during fiscal 2018 as well as increased ingredient costs.

•

We made a $2.5 million voluntary defined benefit plan pension contribution to Plan No. 2 in the third quarter of fiscal 2019. During the forty weeks ended October 6, 2018, we made voluntary contributions to our defined benefit pension plans of $40.7 million. Based on the estimated value of assets held in the plan for Plan No. 1, the company currently estimates that a cash contribution of approximately $5.0 million to $35.0 million will be required to fully fund the plan’s liabilities at termination which is expected to be in the first quarter of fiscal 2020. The company believes its cash flow and balance sheet will allow it to fund future pension needs without adversely affecting the business strategy of the company.

Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for the forty weeks ended October 5, 2019 and October 6, 2018, respectively (amounts in thousands):

	For the Forty Weeks Ended
	October 5, 2019			October 6, 2018			Change
Purchases of property, plant, and equipment	$	(70,610	)	$	(74,992	)	$	4,382
Principal payments from notes receivable, net of repurchases of independent distributor territories		2,956			214			2,742
Proceeds from sale of property, plant and equipment		2,548			1,366			1,182
Net cash disbursed for investing activities	$	(65,106	)	$	(73,412	)	$	8,306

•

We currently anticipate capital expenditures of $100 million to $110 million for fiscal 2019.

Cash Flows Disbursed for Financing Activities. The table below presents net cash disbursed for financing activities for the forty weeks ended October 5, 2019 and October 6, 2018, respectively (amounts in thousands):

	For the Forty Weeks Ended
	October 5, 2019			October 6, 2018			Change
Dividends paid	$	(119,799	)	$	(112,247	)	$	(7,552	)
Exercise of stock options		—			791			(791	)
Payment of financing fees		(110	)		(100	)		(10	)
Stock repurchases		(7,054	)		(2,489	)		(4,565	)
Change in bank overdrafts		3,116			3,746			(630	)
Net change in debt obligations		(102,500	)		(3,750	)		(98,750	)
Payments on financing leases		(4,985	)		—			(4,985	)
Net cash disbursed for financing activities	$	(231,332	)	$	(114,049	)	$	(117,283	)

•

Our dividends paid increased due to an increased dividend payout rate compared to the prior year. While there are no requirements to increase the dividend payout, we have shown a historical trend to do so. If this trend continues in the future, we will have additional cash needs to meet these expected dividend payouts. Our Board of Directors declared the following quarterly dividends during the forty weeks ended October 5, 2019 (amounts in thousands, except per share data):


Date Declared	Record Date	Payment Date	Dividend per Common Share		Dividends Paid
August 16, 2019	August 31, 2018	September 13, 2019	$	0.1900	$	40,189
May 23, 2019	June 7, 2019	June 21, 2019	$	0.1900	$	40,188
February 15, 2019	March 1, 2019	March 15, 2019	$	0.1800	$	38,061

Additionally, we paid dividends of $1.4 million at the time of vesting of our performance-contingent restricted stock awards and at issuance of deferred compensation shares.

•

Stock repurchase decisions are made based on our stock price, our belief of relative value, and our cash projections at any given time. During the forty weeks ended October 5, 2019, we repurchased 0.3 million shares for $7.1 million under a share repurchase plan approved by our Board of Directors. All shares repurchased by the company during the forty weeks ended October 5, 2019 were acquired to satisfy employees’ tax withholding and payment obligations in connection with the vesting of restricted stock awards.

Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at October 5, 2019 and December 29, 2018, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 4, Leases, and Note 13, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

	Balance at				Fixed or	Final
	October 5, 2019		December 29, 2018		Variable Rate	Maturity
Long-term debt and right-of-use lease obligations	(Amounts in thousands)
2026 notes	$	395,990	$	395,550	Fixed Rate	2026
2022 notes		398,794		398,423	Fixed Rate	2022
The credit facility		10,000		—	Variable Rate	2022
The facility		69,500		177,000	Variable Rate	2021
Capital lease obligations		—		21,942
Right-of-use lease obligations		410,272		—		2036
Other notes payable		3,714		8,621		2020
		1,288,270		1,001,536
Current maturities of long-term debt and right-of-use lease obligations		64,008		10,896
Long-term debt and right-of-use lease obligations	$	1,224,262	$	990,640

Total stockholders' equity
Total stockholders' equity	$	1,293,332	$	1,258,267

The facility and credit facility are generally used for short-term liquidity needs. The company has historically entered into amendments and extensions approximately one year prior to the maturity of the facility and the credit facility. There is no current portion payable over the next year for these obligations. On September 27, 2019, we amended the facility to extend the maturity date to September 27, 2021. This amendment was accounted for as a modification and we incurred $0.1 million of financing costs. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.

The following table details the amounts available under the facility and credit facility and the highest and lowest balances outstanding under these arrangements during the forty weeks ended October 5, 2019:

	Amount Available		For the Forty Weeks Ended October 5, 2019
	for Withdrawal at		Highest		Lowest
Facility	October 5, 2019		Balance		Balance
	(Amounts in thousands)
The facility	$	128,000	$	177,000	$	—
The credit facility (1)		481,600		122,200		—
	$	609,600

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

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, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 9, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the forty weeks ended October 5, 2019, the company borrowed $208.4 million in revolving borrowings under the credit facility and repaid $198.4 million in revolving borrowings. The proceeds were mostly used to reduce amounts outstanding under the facility. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

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

Restrictive financial covenants for our borrowings can include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the debt agreements and can meet presently foreseeable financial requirements. As of October 5, 2019, the company was in compliance with all restrictive covenants under our debt agreements.

The company has begun assessing the impact changes from LIBOR to an alternative interest rate benchmark could have on our business.

Under our share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the forty weeks ended October 5, 2019, 0.3 million shares, at a cost of $7.1 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through October 5, 2019, 68.4 million shares, at a cost of $642.6 million, have been repurchased.

Off-Balance Sheet Arrangements

At October 5, 2019, the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Accounting Pronouncements Recently Adopted and Not Yet Adopted

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Commodity Price Risk

The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of October 5, 2019, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $(15.5) million, based on quoted market prices. Of this amount, approximately $(0.1) million relates to instruments that will be utilized in fiscal 2019, $(14.8) million that will be utilized in fiscal 2020, and $(0.6) million in fiscal years 2021 and 2022.

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 5, 2019, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $14.2 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control Over Financial Reporting

Other than the adoption of ASC Topic 842 at the beginning of fiscal 2019, which required the implementation of new accounting processes, systems and business applications and changed our internal controls over lease accounting and financial reporting, there were no changes in internal control over financial reporting that occurred during the fiscal quarter ended October 5, 2019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of all material pending legal proceedings, see Note 15, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

ITEM 1A. RISK FACTORS

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

Disruption in our supply chain or distribution capabilities from political instability, armed hostilities, incidents of terrorism, natural disasters, weather, inferior product or ingredient supply, or labor strikes could have an adverse effect on our business, financial condition and results of operations.

Our ability to make, move and sell products is critical to our success. Damage or disruption to our manufacturing or distribution capabilities, or the manufacturing or distribution capabilities of our suppliers, due to weather, natural disaster, fire or explosion, terrorism, pandemics, inferior product or ingredient supply, labor strikes or work stoppages, or adverse outcomes in litigation involving our independent distributor model, could impair our ability to make, move or sell our products. Moreover, terrorist activity, armed conflict, political instability or natural disasters that may occur within or outside the U.S. may disrupt manufacturing, labor, and other business operations. Failure to take adequate steps to mitigate the likelihood or potential impact of such events and disruption to our manufacturing or distribution capabilities, or to effectively manage such events if they occur, could adversely affect our business, financial conditions and results of operations.

Product removals, damaged product or safety concerns could adversely impact our results of operations.

During fiscal 2019 and 2018, we have been required, and may be required in future periods, to remove certain of our products from the market should they be mislabeled, contaminated, spoiled, tampered with or damaged, including as a result of inferior ingredients provided by any of our suppliers. We may become involved in lawsuits and legal proceedings alleging that the consumption of any of our products causes or caused injury, illness or death. Any such product removal, damaged product or an adverse result in any litigation related to such a product removal or damaged product could have a material adverse effect on our operating and financial results in future periods, depending on the costs of the product removal from the market, the destruction of product inventory, diversion of management time and attention, contractual and other claims made by customers that we supply, loss of key customers, competitive reaction and consumer attitudes. Even if a product liability, consumer fraud or other claim is unsuccessful or without merit, the negative publicity surrounding such assertions regarding our products could adversely affect our reputation and brand image. We also could be adversely affected if our customers or consumers in our principal markets terminate or alter their relationship with us or otherwise lose confidence in the safety and quality of our products.

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 74.6 million shares. Under the share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions or under an accelerated share repurchase program at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors.

There were no common stock repurchases under the plan during the twelve weeks ended October 5, 2019. During the forty weeks ended October 5, 2019, 0.3 million shares, at a cost of $7.1 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through October 5, 2019, 68.4 million shares, at a cost of $642.6 million, have been repurchased. The company currently has 6.2 million shares remaining available for repurchase under the share repurchase plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

The following documents are filed as exhibits hereto:

Exhibit No			Name of Exhibit
3.1		—	Restated Articles of Incorporation of Flowers Foods, Inc., as amended through June 5, 2015 (Incorporated by reference to Exhibit 3.1 to Flowers Foods’ Current Report on Form 8-K, dated June 10, 2015, File No. 1-16247).
3.2		—	Amended and Restated Bylaws of Flowers Foods, Inc., as amended through June 5, 2015 (Incorporated by reference to Exhibit 3.2 to Flowers Foods’ Current Report on Form 8-K, dated June 10, 2015, File No. 1-16247).
10.1	*	—	Seventh Amendment to Receivables Loan, Security and Servicing Agreement, dated as of September 27, 2019, among Flowers Finance II, LLC, Flowers Foods, Inc., Nieuw Amsterdam Receivables Corporation B.V., Coӧperatieve Rabobank U.A. (f/k/a Coӧperatieve Centrale Raiffeisen-Boerenleenbank B.A.), as facility agent and committed lender, PNC Bank, National Association, as facility agent and committed lender, and Coӧperatieve Rabobank U.A., New York Branch (f/k/a Coӧperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch), as administrative agent.
31.1	*	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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 A. Ryals McMullian, President and Chief Executive Officer, R. Steve Kinsey, Chief Financial Officer and Chief Administrative Officer, and Karyl H. Lauder, Senior Vice President and Chief Accounting Officer, for the quarter ended October 5, 2019.
101.INS	*	—	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	*	—	Inline XBRL Taxonomy Extension Schema Linkbase.
101.CAL	*	—	Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	*	—	Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB	*	—	Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE	*	—	Inline XBRL Taxonomy Extension Presentation Linkbase.
104		—	The cover page from Flowers Foods’ Quarterly Report on Form 10-Q for the quarter ended October 5, 2019 has been formatted in Inline XBRL.

*	Filed herewith

SIGNATURES

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

	FLOWERS FOODS, INC.

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

By:

/s/ R. STEVE KINSEY

Name:

R. Steve Kinsey

Title:

Chief Financial Officer and

Chief Administrative Officer

	By:		/s/ KARYL H. LAUDER
	Name:		Karyl H. Lauder
	Title:		Senior Vice President and Chief Accounting Officer

Date: November 6, 2019