flo-10q_20201003.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 3, 2020

☐	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 October 30, 2020, the registrant had 211,603,324 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 3, 2020 and December 28, 2019	3
		Condensed Consolidated Statements of Income for the Twelve and Forty Weeks Ended October 3, 2020 and October 5, 2019	4
		Condensed Consolidated Statements of Comprehensive Income for the Twelve and Forty Weeks Ended October 3, 2020 and October 5, 2019	5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Twelve and Forty Weeks Ended October 3, 2020	6
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Twelve and Forty Weeks Ended October 5, 2019	7
		Condensed Consolidated Statements of Cash Flows For the Forty Weeks Ended October 3, 2020 and October 5, 2019	8
		Notes to Condensed Consolidated Financial Statements (unaudited)	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
	Item 4.	Controls and Procedures	55
PART II. Other Information			56
	Item 1.	Legal Proceedings	56
	Item 1A.	Risk Factors	56
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
	Item 3.	Defaults Upon Senior Securities	56
	Item 4.	Mine Safety Disclosures	56
	Item 5.	Other Information	56
	Item 6.	Exhibits	57
Signatures			58

Forward-Looking Statements

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

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

•

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

•

the ultimate impact of the COVID-19 outbreak and measures taken in response thereto on our business, results of operations and financial condition, which are highly uncertain and are difficult to predict;

•

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

•

changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward more inexpensive 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 or risks associated with the planned implementation of a new enterprise resource planning (“ERP”) system; 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 28, 2019 (the “Form 10-K”), Part II, Item 1A., Risk Factors, of the Quarterly Report on Form 10-Q for the quarterly period ended April 18, 2020 (the “First Quarter Form 10-Q”), 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 3, 2020			December 28, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	325,831		$	11,044
Accounts and notes receivable, net of allowances of $18,053 and $9,473, respectively		312,636			285,606
Inventories, net:
Raw materials		47,925			46,171
Packaging materials		23,783			22,045
Finished goods		56,635			58,843
Inventories, net		128,343			127,059
Spare parts and supplies		68,637			67,456
Other		31,196			62,753
Total current assets		866,643			553,918
Property, plant and equipment, net:
Property, plant and equipment, gross		2,024,624			2,002,633
Less: accumulated depreciation		(1,330,174	)		(1,284,811	)
Property, plant and equipment, net		694,450			717,822
Financing lease right-of-use assets		17,566			22,829
Operating lease right-of-use assets		335,834			376,473
Notes receivable from independent distributor partners		182,061			198,639
Assets held for sale		9,547			4,408
Other assets		11,129			8,236
Goodwill		545,244			545,244
Other intangible assets, net		722,994			750,207
Total assets	$	3,385,468		$	3,177,776
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	-		$	3,730
Current maturities of financing leases		6,497			8,176
Current maturities of operating leases		50,679			52,806
Accounts payable		257,531			233,011
Current postretirement/post-employment obligations		926			29,380
Other accrued liabilities		200,650			201,040
Total current liabilities		516,283			528,143

Noncurrent long-term debt		1,009,839			862,778
Noncurrent financing lease obligations		15,065			19,390
Noncurrent operating lease obligations		300,123			324,131
Total long-term debt and right-of-use lease liabilities		1,325,027			1,206,299
Other liabilities:
Postretirement/post-employment obligations		9,009			14,328
Deferred taxes		123,661			121,395
Other long-term liabilities		60,002			44,181
Total other long-term liabilities		192,672			179,904
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 — 17,126,807 shares and 17,215,514 shares, respectively		(225,412	)		(226,287	)
Capital in excess of par value		656,503			648,492
Retained earnings		918,592			947,046
Accumulated other comprehensive income (loss)		1,604			(106,020	)
Total stockholders’ equity		1,351,486			1,263,430
Total liabilities and stockholders’ equity	$	3,385,468		$	3,177,776

(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 3, 2020			October 5, 2019			October 3, 2020			October 5, 2019
Sales	$	989,650		$	966,561		$	3,364,955		$	3,206,215
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		497,659			509,056			1,674,565			1,669,749
Selling, distribution and administrative expenses		386,739			362,380			1,305,678			1,197,926
Depreciation and amortization		32,162			33,196			110,005			111,344
Recovery on inferior ingredients		—			—			—			(413	)
Restructuring and related impairment charges		20,100			3,277			30,635			6,042
Income from operations		52,990			58,652			244,072			221,567
Interest expense		8,706			8,705			29,346			30,368
Interest income		(5,951	)		(6,371	)		(20,408	)		(21,441	)
Pension plan settlement and curtailment (gain) loss		(7,153	)		—			109,054			—
Other components of net periodic pension and postretirement benefits (credit) expense		(72	)		518			(1	)		1,729
Income before income taxes		57,460			55,800			126,081			210,911
Income tax expense		13,113			12,442			29,587			48,592
Net income	$	44,347		$	43,358		$	96,494		$	162,319
Net income per common share:
Basic:
Net income per common share	$	0.21		$	0.20		$	0.46		$	0.77
Weighted average shares outstanding		211,800			211,711			211,776			211,575
Diluted:
Net income per common share	$	0.21		$	0.20		$	0.45		$	0.77
Weighted average shares outstanding		212,458			212,014			212,270			211,956
Cash dividends paid per common share	$	0.2000		$	0.1900		$	0.5900		$	0.5600

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 3, 2020			October 5, 2019			October 3, 2020		October 5, 2019
Net income	$	44,347		$	43,358		$	96,494	$	162,319
Other comprehensive income (loss), net of tax:
Pension and postretirement plans:
Settlement and curtailment (gain) loss		(5,365	)		—			81,500		—
Net gain for the period		5,365			—			21,058		—
Amortization of prior service cost included in net income		9			59			73		198
Amortization of actuarial loss included in net income		43			1,177			1,039		3,923
Pension and postretirement plans, net of tax		52			1,236			103,670		4,121
Derivative instruments:
Net change in fair value of derivatives		9,409			(7,124	)		2,202		(4,577	)
Loss (gain) reclassified to net income		677			259			1,752		(2,864	)
Derivative instruments, net of tax		10,086			(6,865	)		3,954		(7,441	)
Other comprehensive income (loss), net of tax		10,138			(5,629	)		107,624		(3,320	)
Comprehensive income	$	54,485		$	37,729		$	204,118	$	158,999

(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 3, 2020
	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 11, 2020		228,729,585	$	199	$	653,672		$	916,565		$	(8,534	)		(17,126,920	)	$	(225,414	)	$	1,336,488
Net income									44,347												44,347
Derivative instruments, net of tax												10,086									10,086
Pension and postretirement plans, net of tax												52									52
Amortization of share-based compensation awards						2,833															2,833
Issuance of deferred compensation						(2	)								113			2			—
Dividends paid — $0.2000 per common share									(42,320	)											(42,320	)
Balances at October 3, 2020		228,729,585	$	199	$	656,503		$	918,592		$	1,604			(17,126,807	)	$	(225,412	)	$	1,351,486

	For the Forty Weeks Ended October 3, 2020
	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 December 28, 2019		228,729,585	$	199	$	648,492		$	947,046		$	(106,020	)		(17,215,514	)	$	(226,287	)	$	1,263,430
Net income									96,494												96,494
Derivative instruments, net of tax												3,954									3,954
Pension and postretirement plans, net of tax												103,670									103,670
Amortization of share-based compensation awards						9,669															9,669
Issuance of deferred compensation						(32	)								2,397			32			—
Time-based restricted stock units issued (Note 16)						(975	)								74,204			975			—
Issuance of deferred stock awards						(651	)								49,539			651			—
Stock repurchases															(37,433	)		(783	)		(783	)
Dividends paid on vested share-based payment awards									(109	)											(109	)
Dividends paid — $0.5900 per common share									(124,839	)											(124,839	)
Balances at October 3, 2020		228,729,585	$	199	$	656,503		$	918,592		$	1,604			(17,126,807	)	$	(225,412	)	$	1,351,486

(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 Income (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 — $0.1900 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 Income (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 16)						(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 — $0.5600 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 CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Forty Weeks Ended
	October 3, 2020			October 5, 2019
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income	$	96,494		$	162,319
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring and related impairment charges		21,310			5,663
Stock-based compensation		9,669			5,834
Loss (gain) reclassified from accumulated other comprehensive income to net income		2,224			(3,942	)
Depreciation and amortization		110,005			111,344
Deferred income taxes		(34,083	)		8,570
Provision for inventory obsolescence		1,940			54
Allowances for accounts receivable		11,050			8,819
Pension and postretirement plans cost		109,929			2,487
Other		2,091			1,189
Qualified pension plan contributions		(7,600	)		(2,500	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net		(37,498	)		(19,519	)
Inventories, net		(3,224	)		(7,824	)
Hedging activities, net		6,105			(6,683	)
Accounts payable		24,511			4,808
Other assets and accrued liabilities		51,513			7,481
NET CASH PROVIDED BY OPERATING ACTIVITIES		364,436			278,100
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(68,270	)		(70,610	)
Proceeds from sale of property, plant and equipment		1,700			2,548
Repurchase of independent distributor territories		(2,286	)		(1,753	)
Cash paid at issuance of notes receivable		(8,036	)		(17,904	)
Principal payments from notes receivable		24,219			22,525
Other investing activities		86			88
NET CASH DISBURSED FOR INVESTING ACTIVITIES		(52,587	)		(65,106	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid, including dividends on share-based payment awards		(124,948	)		(119,799	)
Stock repurchases		(783	)		(7,054	)
Change in bank overdrafts		(2,432	)		3,116
Proceeds from debt borrowings		480,100			485,400
Debt obligation payments		(337,600	)		(587,900	)
Contingent consideration payments		(4,700	)		—
Payments on financing leases		(6,493	)		(4,985	)
Payments for financing fees		(206	)		(110	)
NET CASH PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES		2,938			(231,332	)
Net increase (decrease) in cash and cash equivalents		314,787			(18,338	)
Cash and cash equivalents at beginning of period		11,044			25,306
Cash and cash equivalents at end of period	$	325,831		$	6,968

(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 3, 2020 and October 5, 2019 are not necessarily indicative of the results to be expected for a full fiscal year. The Condensed Consolidated Balance Sheet at December 28, 2019 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2019 (the “Form 10-K”).

COVID-19 — On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide, which has led to adverse impacts on the United States (“U.S.”) and global economies. Due to the drastic change in consumer buying patterns as a result of the COVID-19 pandemic, we have experienced a more favorable shift in sales mix to our branded retail products resulting in significant growth in income from operations for the first three quarters of fiscal 2020 compared to the same period in the prior year, partially offset by the restructuring costs and related consulting costs described below.

In light of COVID-19, the company has taken actions to safeguard its capital position. During the first quarter of fiscal 2020, we borrowed an additional $200.0 million under our credit facility (as defined below). We borrowed this additional amount out of an abundance of caution to ensure future liquidity given the significant impact on global financial markets and economies as a result of the COVID-19 outbreak. Subsequently, during the second quarter of fiscal 2020, we made net debt repayments of $61.3 million. If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including $477.6 million of remaining availability on our debt facilities as of October 3, 2020, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds.

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, leases, 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 2020 consists of 53 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 18, 2020 (sixteen weeks), second quarter ended July 11, 2020 (twelve weeks), third quarter ended October 3, 2020 (twelve weeks) and fourth quarter ending January 2, 2021 (thirteen weeks).

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

SIGNIFICANT CUSTOMER — Below is the effect that our largest customer, Walmart/Sam’s Club, had on the company’s sales for the twelve and forty weeks ended October 3, 2020 and October 5, 2019. 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 3, 2020

October 5, 2019

October 3, 2020

October 5, 2019

(% of Sales)

Total

21.1

21.5

21.3

Walmart/Sam’s Club is our only customer with greater than 10% of outstanding trade receivables, representing 19.1% and 18.9%, on a consolidated basis, as of October 3, 2020 and December 28, 2019, 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 credit losses during the first quarter of our fiscal 2020 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.

Accounts and Notes Receivable. Accounts and notes receivable consist of trade receivables, current portions of distributor notes receivable, and miscellaneous receivables. The company recognizes an allowance for credit losses related to its accounts and notes receivable to present the net amount expected to be collected as of the balance sheet date. The company estimates this allowance based on historical data such as days sales outstanding trends, previous write-offs of balances, and weekly reviews of aged trial balances, among others. Accounts and notes receivable balances are written off when deemed uncollectible and are recognized as a deduction from the allowance for credit losses. Expected recoveries, not to exceed the amount previously written off, are considered in determining the reserve balance at the balance sheet date. As of fiscal year end, balances older than six months are deemed uncollectible and are fully reserved for in the allowance. Activity in the allowance for trade accounts receivable credit losses for the forty weeks ended October 3, 2020 was as follows (amounts in thousands):

Allowance at December 28, 2019	$	2,089
Amounts charged to expense		6,627
Write-offs		—
Recoveries and other		(400	)
Allowance at October 3, 2020	$	8,316

The amounts charged to expense for bad debts in the table above, along with other non-trade accounts receivable amounts, are reported as adjustments to reconcile net income to net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The write-offs represent the amounts that are used to reduce the gross accounts and notes receivable at the time the balance due from the customer is written-off.

In light of the current economic uncertainty for certain of our foodservice customers caused by COVID-19, we recorded an additional bad debt allowance of $2.7 million in the first quarter of fiscal 2020.

RECOVERY ON INFERIOR INGREDIENTS

Beginning in the second quarter of fiscal 2018 and continuing through the fourth quarter of fiscal 2019, we have recognized identifiable and measurable costs associated with receiving inferior ingredients. These costs totaled $1.4 million for the forty weeks ended October 5, 2019. We received reimbursements for a portion of previously incurred costs of $1.8 million during the forty weeks ended October 5, 2019. These reimbursements, net of the costs incurred, are presented as recoveries on the ‘Recovery on inferior ingredients’ line item in our Condensed Consolidated Statements of Income. We continue to seek recovery of all losses through appropriate means.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board (“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 new standard requires earlier recognition of credit losses. The company adopted the new standard as of December 29, 2019, the beginning of our fiscal 2020. The adoption of this guidance did not impact our financial statements; however, updated disclosures are included in Note 1, Basis of Presentation, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Changes were made to our internal control over financial reporting processes for estimating and evaluating the appropriateness of reserves for credit exposures.

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 is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Companies still have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The company adopted the new standard as of December 29, 2019, the beginning of our fiscal 2020, and, consistent with prior years, anticipates performing its

annual impairment testing of goodwill in its fourth quarter of fiscal 2020, or earlier if there is a triggering event, under the new guidance. The company does not currently anticipate the adoption of the new standard to have a material impact on our financial statements.

Accounting pronouncements not yet adopted

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.

In December 2019, the FASB issued guidance which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. This guidance will be effective for us in our fiscal 2021, with the option to early adopt at any time prior to the effective date. Accounting for franchise taxes will require adoption on a retrospective or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other applicable provisions will require adoption on a retrospective, modified retrospective, or prospective basis, as required by this guidance. We do not anticipate that the adoption of this guidance will have a material impact on our financial statements and disclosures.

In March 2020, the FASB issued new accounting rules that provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard can be applied anytime between the first quarter of 2020 and the fourth quarter of 2022. The company is currently in the process of evaluating the impact of adoption of the new rules on the company’s financial condition, results of operations, cash flows and disclosures.

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

In fiscal 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. Most importantly, Project Centennial marked a significant shift in mindset from a sales and operations focused enterprise to a brand focused, consumer focused packaged foods company. Strategic priorities developed as part of Project Centennial were designed to improve margins and profitably grow revenue over time. These priorities included: reducing costs to fuel growth, developing leading capabilities, reinvigorating core business, and capitalizing on product adjacencies.

Today, we have an organization dedicated to the consumer. We are hyper-focused on growing our brands and committed to real innovation to drive growth, with a renewed sense of passion about cost management. We have updated the strategic priorities to include the following:

Develop team: Capabilities to build brands and create value.

Focus on brands: Enhance relevancy and expand presence. 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.

The company operated under an organizational structure established with two business units (“BUs”), Fresh Bakery and Snacking/Specialty since May of 2017, and realigned key leadership roles. This structure also provided for centralized marketing, sales, supply chain, shared-services/administrative, and corporate strategy functions, each with more clearly defined roles and responsibilities. On July 17, 2020, the company implemented additional organizational structure changes designed to increase focus on brand growth, product innovation, and improving its cake operations. Elimination of the BUs and adoption of a brand focused

organization structure was completed in the third quarter of fiscal 2020 and the company continues to report 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.

Prioritize margins: Optimize the portfolio and supply chain. The company incurred $1.3 million and $0.9 million of employee termination benefits charges related to a voluntary employee separation incentive plan (the “VSIP”) in the second and third quarters of fiscal 2020, respectively. All payments under the VSIP are expected to be paid by early fiscal 2021. Additionally, in the third quarter of fiscal 2020, the company announced an involuntary reduction-in-force plan (the “RIF”) and recognized charges of $5.2 million. These charges consisted primarily of employee severance and benefits-related costs and were recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income.

During the second quarter of fiscal 2020, the company entered into a contract to sell three closed bakeries currently included in assets held for sale and certain idle equipment at other bakeries included in property, plant and equipment, resulting in the recognition of $4.6 million of impairment charges. The sale of these assets is anticipated to be completed during the fourth quarter of fiscal 2020. Additionally, in order to optimize our distribution network, we vacated certain distribution depots during the third quarter of fiscal 2020, some of which are owned and others that were leased. This resulted in the recognition of lease termination charges and lease impairment charges totaling $13.5 million in the current quarter. In order to optimize sales and production of our organic products, the company decided to cease using the Alpine Valley finite-lived trademark, resulting in a $4.6 million impairment charge in the second quarter of 2020. These costs are recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income as referenced in the table below.

The company recognized impairment charges related to manufacturing line closures in the first quarter of fiscal 2019 and for a closed plant recorded in assets held for sale during the second quarter of fiscal 2019. The plant is being sold to streamline our core operations. In the third quarter of fiscal 2019, the company announced the closure of an additional bakery and recorded asset impairments on property, plant and equipment. Additionally, we recorded a gain related to a facility which had been previously impaired in a prior year. These costs are recorded in the restructuring and related impairment charges line item on our Condensed Consolidated Statements of Income as referenced in the table below. The company continues to explore additional opportunities to streamline our core operations, but as of October 3, 2020, we cannot estimate the additional costs expected to be incurred for this initiative.

Smart M&A: Disciplined approach to acquisitions in baked foods that enhance our branded portfolio and margin profile.

The tables below present the components of costs associated with Project Centennial and include the consulting and third-party implementation costs related to the project for the twelve and forty weeks ended October 3, 2020 and October 5, 2019 (amounts in thousands):

	For the Twelve Weeks Ended		For the Forty Weeks Ended
	October 3, 2020		October 3, 2020
Restructuring and related impairment charges:
Impairment of trademark	$	—	$	4,636
Impairment of property, plant and equipment		611		5,245
Employee termination benefits		5,996		7,261
Lease termination and lease impairment charges (1)		13,493		13,493
Restructuring and related impairment charges (2)		20,100		30,635
Project Centennial consulting costs (3)		5,068		14,044
Total Project Centennial restructuring and implementation costs	$	25,168	$	44,679

	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
Total restructuring and related impairment charges (2)	$	3,277		$	6,042

(1)	Lease termination and lease impairment charges include cash payments and impairment charges of $2.2 million and $11.3 million, respectively.

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

(3)	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 3, 2020 and October 5, 2019 (amounts in thousands):

	VSIP			RIF			Employee Termination Benefits⁽¹⁾			Reorganization Costs⁽²⁾		Distribution Network Optimization			Total
Liability balance at December 28, 2019	$	174		$	—		$	1,450		$	—	$	—		$	1,624
Charges		2,184			5,226			(149	)		—		2,213			9,474
Cash payments		(1,642	)		(4,714	)		(1,075	)		—		(2,213	)		(9,644	)
Liability balance (3) at October 3, 2020	$	716		$	512		$	226		$	—	$	—		$	1,454

	VSIP		RIF		Employee Termination Benefits⁽¹⁾			Reorganization Costs⁽²⁾			Distribution Network Optimization		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

(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. The quantitative disclosures for our leases follow below.

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

	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 3, 2020		October 5, 2019		October 3, 2020		October 5, 2019
Lease modifications and renewals	$	4,486	$	3,606	$	11,307	$	4,933
Lease impairments	$	11,280	$	3,381	$	11,371	$	8,314
Lease terminations	$	3,527	$	—	$	4,112	$	7,335

Lease costs incurred by lease type, and/or type of payment, and other supplemental quantitative disclosures as of and for the forty weeks ended October 3, 2020 and October 5, 2019 were as follows (amounts in thousands):

	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 3, 2020		October 5, 2019		October 3, 2020		October 5, 2019
Lease cost:
Amortization of right-of-use assets	$	1,704	$	1,708	$	5,733	$	5,307
Interest on lease liabilities		188		236		675		768
Operating lease cost		16,385		16,212		55,066		53,892
Short-term lease cost		1,156		662		2,308		2,024
Variable lease cost		4,926		5,619		17,961		19,610
Total lease cost	$	24,359	$	24,437	$	81,743	$	81,601

	For the Forty Weeks Ended
	October 3, 2020		October 5, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from financing leases	$	674	$	768
Operating cash flows from operating leases	$	57,526	$	55,997
Financing cash flows from financing leases	$	6,493	$	4,985
Right-of-use assets obtained in exchange for new financing lease liabilities	$	58	$	9,714
Right-of-use assets obtained in exchange for new operating lease liabilities	$	11,861	$	34,116

Weighted-average remaining lease term (years):
Financing leases			3.1
Operating leases			9.6
Weighted-average IBR (percentage):
Financing leases			3.7
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 3, 2020 (in thousands) were as follows:

	Operating lease liabilities			Financing lease liabilities
Remainder of 2020	$	17,228		$	1,978
2021		62,012			6,784
2022		50,958			5,479
2023		45,854			6,508
2024		38,436			1,503
2025 and thereafter		214,630			722
Total minimum lease payments		429,118			22,974
Less: amount of lease payments representing interest		(78,316	)		(1,412	)
Present value of future minimum lease payments		350,802			21,562
Less: current obligations under leases		(50,679	)		(6,497	)
Long-term lease obligations	$	300,123		$	15,065

5. ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)

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 3, 2020 and October 5, 2019, 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 3, 2020			October 5, 2019			Where Net Income is Presented
Gains and losses on cash flow hedges:
Interest rate contracts	$	(33	)	$	(33	)	Interest expense
Commodity contracts		(869	)		(313	)	Cost of sales, Note 3
Total before tax		(902	)		(346	)	Total before tax
Tax benefit		225			87		Income tax expense
Total net of tax		(677	)		(259	)	Net of tax
Amortization of defined benefit pension items:
Prior-service costs		(12	)		(80	)	Note 1
Settlement gain		7,153			—		Note 1
Actuarial losses		(57	)		(1,574	)	Note 1
Total before tax		7,084			(1,654	)	Total before tax
Tax (expense) benefit		(1,771	)		418		Income tax expense
Total net of tax		5,313			(1,236	)	Net of tax
Total reclassifications	$	4,636		$	(1,495	)	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 3, 2020			October 5, 2019			Where Net Income is Presented
Gains and losses on cash flow hedges:
Interest rate contracts	$	(110	)	$	(110	)	Interest expense
Commodity contracts		(2,224	)		3,942		Cost of sales, Note 3
Total before tax		(2,334	)		3,832		Total before tax
Tax benefit (expense)		582			(968	)	Income tax expense
Total net of tax		(1,752	)		2,864		Net of tax
Amortization of defined benefit pension items:
Prior-service credits		(98	)		(265	)	Note 1
Settlement loss		(109,054	)		—		Note 1
Actuarial losses		(1,389	)		(5,248	)	Note 1
Total before tax		(110,541	)		(5,513	)	Total before tax
Tax benefit		27,929			1,392		Income tax expense
Total net of tax		(82,612	)		(4,121	)	Net of tax
Total reclassifications	$	(84,364	)	$	(1,257	)	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) expense line item on the Condensed Consolidated Statements of Income. See Note 17, 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 3, 2020, 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 28, 2019	$	1,658	$	(107,678	)	$	(106,020	)
Other comprehensive (loss) income before reclassifications		2,202		21,058			23,260
Reclassified to earnings from AOCI		1,752		82,612			84,364
AOCI at October 3, 2020	$	5,612	$	(4,008	)	$	1,604

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 income 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	)

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

	For the Forty Weeks Ended
	October 3, 2020			October 5, 2019
Gross (loss) gain reclassified from AOCI into net income	$	(2,224	)	$	3,942
Tax benefit (expense)		556			(995	)
Net of tax	$	(1,668	)	$	2,947

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The table below summarizes our goodwill and other intangible assets at October 3, 2020 and December 28, 2019, respectively, each of which is explained in additional detail below (amounts in thousands):

	October 3, 2020		December 28, 2019
Goodwill	$	545,244	$	545,244
Amortizable intangible assets, net of amortization		595,894		623,107
Indefinite-lived intangible assets		127,100		127,100
Total goodwill and other intangible assets	$	1,268,238	$	1,295,451

As of October 3, 2020 and December 28, 2019, respectively, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

	October 3, 2020						December 28, 2019
Asset	Cost		Accumulated Amortization		Net Value		Cost		Accumulated Amortization		Net Value
Trademarks	$	472,557	$	65,791	$	406,766	$	477,193	$	55,746	$	421,447
Customer relationships		318,021		131,161		186,860		318,021		117,836		200,185
Non-compete agreements		5,154		5,015		139		5,154		4,954		200
Distributor relationships		4,123		3,060		1,063		4,123		2,848		1,275
Distributor routes held and used		1,123		57		1,066		—		—		—
Total	$	800,978	$	205,084	$	595,894	$	804,491	$	181,384	$	623,107

Aggregate amortization expense for the twelve and forty weeks ended October 3, 2020 and October 5, 2019 was as follows (amounts in thousands):

	Amortization Expense
For the twelve weeks ended October 3, 2020	$	7,042
For the twelve weeks ended October 5, 2019	$	6,767
For the forty weeks ended October 3, 2020	$	23,700
For the forty weeks ended October 5, 2019	$	22,556

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

	Amortization of Intangibles
Remainder of 2020	$	6,974
2021	$	29,881
2022	$	29,332
2023	$	28,451
2024	$	27,756

There were $127.1 million of indefinite-lived intangible trademark assets separately identified from goodwill at October 3, 2020 and December 28, 2019. 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.

In order to optimize sales and production of our organic products, the company decided to cease using the Alpine Valley finite-lived trademark resulting in a $4.6 million impairment charge in the second quarter of fiscal 2020. The impairment charge is recorded in the restructuring and related impairment charges line item of our Condensed Consolidated Statements of Income.

7. 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 4,040 IDPs’ distribution rights as of October 3, 2020 and 4,200 as of December 28, 2019, 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 3, 2020	$	5,951
For the twelve weeks ended October 5, 2019	$	6,371
For the forty weeks ended October 3, 2020	$	20,408
For the forty weeks ended October 5, 2019	$	21,441

At October 3, 2020 and December 28, 2019, respectively, the carrying value of the distributor notes receivable was as follows (amounts in thousands):

	October 3, 2020		December 28, 2019
Distributor notes receivable	$	210,352	$	226,348
Current portion of distributor notes receivable recorded in accounts and notes receivable, net		28,291		27,709
Long-term portion of distributor notes receivable	$	182,061	$	198,639

At October 3, 2020 and December 28, 2019, 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 3, 2020 is presented below. 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 12, 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	$	396,562	$	433,772	2
2022 notes	$	399,277	$	414,664	2

For fair value disclosure information about our derivative assets and liabilities see Note 8, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

8. 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 3, 2020, 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	$	7,372		$	—	$	—	$	7,372
Other long-term		454			—		—		454
Total		7,826			—		—		7,826

Liabilities:
Other current		(159	)		—		—		(159	)
Other long-term		—			—		—		—
Total		(159	)		—		—		(159	)
Net Fair Value	$	7,667		$	—	$	—	$	7,667

As of December 28, 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	$	3,191		$	—	$	—	$	3,191
Other long-term		589			—		—		589
Total		3,780			—		—		3,780

Liabilities:
Other current		(814	)		—		—		(814	)
Other long-term		(792	)		—		—		(792	)
Total		(1,606	)		—		—		(1,606	)
Net Fair Value	$	2,174		$	—	$	—	$	2,174

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 2022. 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 3, 2020 and December 28, 2019, 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 3, 2020			December 28, 2019			October 3, 2020			December 28, 2019
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	$	7,372	Other current assets	$	3,191	Other accrued liabilities	$	159	Other accrued liabilities	$	814
Commodity contracts	Other assets		454	Other assets		589	Other long-term liabilities		—	Other long-term liabilities		792
Total		$	7,826		$	3,780		$	159		$	1,606

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 (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 3, 2020		October 5, 2019			into Income (Effective Portion)(2)	October 3, 2020			October 5, 2019
Interest rate contracts	$	—	$	—		Interest expense	$	(25	)	$	(25	)
Commodity contracts		9,409		(7,124	)	Production costs(3)		(652	)		(234	)
Total	$	9,409	$	(7,124	)		$	(677	)	$	(259	)

	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 3, 2020		October 5, 2019			into Income (Effective Portion)(2)	October 3, 2020			October 5, 2019
Interest rate contracts	$	—	$	—		Interest expense	$	(83	)	$	(83	)
Commodity contracts		2,202		(4,577	)	Production costs(3)		(1,669	)		2,947
Total	$	2,202	$	(4,577	)		$	(1,752	)	$	2,864

1.	Amounts in parentheses indicate debits to determine net income.

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

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 3, 2020 and October 5, 2019, respectively, related to the company’s commodity risk hedges.

At October 3, 2020, 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	$	(345	)	$	205	$	(140	)
Expiring in 2020		—			—		—
Expiring in 2021		5,775			—		5,775
Expiring in 2022		(23	)		—		(23	)
Total	$	5,407		$	205	$	5,612

Derivative Transactions Notional Amounts

As of October 3, 2020, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in thousands):

	Notional Amount
Wheat contracts	$	95,771
Soybean oil contracts		14,889
Natural gas contracts		7,245
Corn contracts		7,148
Total	$	125,053

The company’s derivative instruments contain no credit-risk related contingent features at October 3, 2020. As of October 3, 2020 and December 28, 2019, the company had $1.2 million and $7.0 million, respectively, in other current assets representing collateral for hedged positions. At October 3, 2020 and December 28, 2019, the company had $4.1 million and $1.2 million, respectively, recorded in other accrued liabilities representing collateral from counterparties for hedged positions.

9. OTHER CURRENT AND NON-CURRENT ASSETS

Other current assets consist of (amounts in thousands):

	October 3, 2020		December 28, 2019
Prepaid assets	$	19,240	$	15,380
Recovery from legal settlement in principle		—		22,300
Fair value of derivative instruments		7,372		3,191
Collateral to counterparties for derivative positions		1,236		7,012
Income taxes receivable		2,348		13,924
Other		1,000		946
Total	$	31,196	$	62,753

The recovery from legal settlement in principle represents funds in the amount of $22.3 million that were paid by the company’s insurance provider to the plaintiffs at final settlement of two lawsuits during the first quarter of fiscal 2020. See Note 14, 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 3, 2020		December 28, 2019
Unamortized financing fees	$	945	$	1,084
Investments		3,171		3,496
Fair value of derivative instruments		454		589
Deposits		2,063		1,998
Unamortized cloud computing arrangement costs		1,904		929
Pension Plans		2,467		—
Other		125		140
Total	$	11,129	$	8,236

10. OTHER ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES

Other accrued liabilities consist of (amounts in thousands):

	October 3, 2020		December 28, 2019
Employee compensation	$	23,982	$	21,966
VSIP and RIF liabilities		1,228		174
Employee vacation		18,040		23,660
Employee bonus		42,726		19,476
Fair value of derivative instruments		159		814
Self-insurance reserves		29,416		30,294
Bank overdraft		11,335		13,767
Accrued interest		397		7,881
Accrued utilities		5,492		5,005
Accrued income taxes		3,171		—
Accrued other taxes		13,418		6,870
Accrued advertising		3,892		4,637
Accrued legal settlements		32,162		51,450
Accrued legal costs		4,341		1,705
Contingent acquisition consideration		—		5,000
Accrued short-term deferred income		4,783		5,337
Collateral from counterparties for derivative positions		4,078		1,188
Other		2,030		1,816
Total	$	200,650	$	201,040

See Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for details on the legal settlements.

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

	October 3, 2020		December 28, 2019
Deferred income	$	20,441	$	24,840
Deferred compensation		16,470		15,558
Fair value of derivative instruments		—		792
Other deferred credits		1,591		1,609
Deferred payroll taxes under the CARES Act		19,843		—
Other		1,657		1,382
Total	$	60,002	$	44,181

11. 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. During the first quarter of fiscal 2020, two closed bakeries were reclassified as held for sale. During the second quarter of fiscal 2020, the company entered into a contract to sell these two closed bakeries and an additional bakery previously recorded as held for sale, resulting in the recognition of $4.2 million of impairment charges. The impairment charge is recorded in the restructuring and related impairment charges line item of our Condensed Consolidated Statements of Income. 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 3, 2020 and December 28, 2019, respectively (amounts in thousands):

	October 3, 2020		December 28, 2019
Distributor territories	$	3,408	$	3,016
Property, plant and equipment		6,139		1,392
Total assets held for sale	$	9,547	$	4,408

12. 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 3, 2020 and December 28, 2019, respectively (amounts in thousands):

	October 3, 2020		December 28, 2019
Unsecured credit facility	$	100,000	$	41,750
2026 notes		396,562		396,122
2022 notes		399,277		398,906
Accounts receivable securitization facility		114,000		26,000
Other notes payable		—		3,730
		1,009,839		866,508
Less current maturities of long-term debt		—		(3,730	)
Total long-term debt	$	1,009,839	$	862,778

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 3, 2020 and December 28, 2019, which reduce the availability of funds under the credit facility. The outstanding LOCs are for the benefit of certain insurance companies and lessors. None of the outstanding LOCs are recorded as a liability on the Condensed Consolidated Balance Sheets.

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 of $2.1 million representing the difference between the net proceeds, after expenses, received upon issuance of debt and the amount repayable at its maturity. The company also paid issuance costs of $3.6 million (including underwriting fees and 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 3, 2020, and December 28, 2019, respectively, the company was in compliance with all restrictive covenants under the indenture governing the 2026 notes.

Accounts Receivable Securitization Facility. On July 17, 2013, the company entered into an accounts receivable securitization facility (the “facility”). The company has amended the facility eight times since execution, most recently on September 23, 2020. These eight amendments include provisions that (i) increased the revolving commitments under the facility to $200.0 million from $150.0 million, (ii) added a leverage pricing grid, (iii) added an additional bank to the lending group, (iv) made certain other conforming changes, (v) removed a bank from the lending group, and (vi) most recently, extended the term by one additional year to September 27, 2022. 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. As of October 3, 2020 and December 28, 2019, respectively, the company was in compliance with all restrictive covenants under the facility.

The table below presents the borrowings and repayments under the facility during the forty weeks ended October 3, 2020:

	Amount (thousands)
Balance at December 28, 2019	$	26,000
Borrowings		207,500
Payments		(119,500	)
Balance at October 3, 2020	$	114,000

The table below presents the net amount available for working capital and general corporate purposes under the facility as of October 3, 2020:

	Amount (thousands)
Gross amount available	$	200,000
Outstanding		(114,000	)
Available for withdrawal	$	86,000

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 table below presents the highest and lowest outstanding balance under the facility during the forty weeks ended October 3, 2020:

Amount

(thousands)

High balance

154,000

Low balance

19,000

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 $0.3 million on October 3, 2020 and $0.2 million on December 28, 2019, respectively, and is recorded in other assets on the Condensed Consolidated Balance Sheets.

2022 Notes. On April 3, 2012, the company issued $400.0 million of senior notes. 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 3, 2020 and December 28, 2019, 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 3, 2020 and December 28, 2019, 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 $0.7 million and $0.9 million on October 3, 2020 and December 28, 2019, 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 8, 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 3, 2020.

	Amount (thousands)
Balance at December 28, 2019	$	41,750
Borrowings		272,600
Payments		(214,350	)
Balance at October 3, 2020	$	100,000

The table below presents the net amount available under the credit facility as of October 3, 2020:

	Amount (thousands)
Gross amount available	$	500,000
Outstanding		(100,000	)
Letters of credit		(8,400	)
Available for withdrawal	$	391,600

The table below presents the highest and lowest outstanding balance under the credit facility during the forty weeks ended October 3, 2020:

Amount

(thousands)

High balance

235,000

Low balance

6,400

Aggregate maturities of debt outstanding as of October 3, 2020 are as follows (excluding unamortized debt discount and issuance costs) (amounts in thousands):

Remainder of 2020	$	—
2021		—
2022		614,000
2023		—
2024		—
2025 and thereafter		400,000
Total	$	1,014,000

Debt discount and issuance costs are being amortized straight-line (which approximates the effective method) over the term of the underlying debt outstanding. The table below reconciles the debt issuance costs and debt discounts to the net carrying value of each of our debt obligations (excluding line-of-credit arrangements) at October 3, 2020 (amounts in thousands):

			Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value
2026 notes	$	400,000	$	3,438	$	396,562
2022 notes		400,000		723		399,277
Total	$	800,000	$	4,161	$	795,839

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 28, 2019 (amounts in thousands):

			Debt Issuance Costs
	Face Value		and Debt Discount		Net Carrying Value
2026 notes	$	400,000	$	3,878	$	396,122
2022 notes		400,000		1,094		398,906
Other notes payable		3,750		20		3,730
Total	$	803,750	$	4,992	$	798,758

13. VARIABLE INTEREST ENTITIES

Distribution rights agreement VIE analysis

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

Incorporated IDPs acquire distribution rights and enter into a contract with the company to sell the company’s products in the IDPs’ defined geographic territory. The incorporated IDPs have the option to finance the acquisition of their distribution rights with the company. They can also pay cash or obtain external financing at the time they acquire the distribution rights. The combination of the company’s loans to the incorporated IDPs and the ongoing distributor arrangements with the incorporated IDPs provide a level of funding to the equity owners of the various incorporated IDPs that would not otherwise be available. As of October 3, 2020 and December 28, 2019, there was $175.0 million and $183.2 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.

14. 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.

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 19 complaints filed by distributors alleging that such distributors were misclassified as independent contractors. Eleven of these lawsuits seek class and/or collective action treatment. The remaining eight 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 six 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	On January 31, 2020, the parties reached an agreement in principal to settle this matter for a payment of $8.3 million, inclusive of attorneys’ fees and costs, service awards, and incentives for class members who are active distributors to enter into an amendment to their distributor agreements. The parties are currently working to obtain final court approval of the settlement. This settlement charge was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the fourth quarter of fiscal 2019.
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. On August 3, 2020, the Court reconsidered its January 15, 2019 order and decertified the FLSA collective action.
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
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

Case Name

Case No.

Venue

Date Filed

Status

Caddick et al. v. Tasty Baking Co.

2:19-cv-02106

U.S. District Court Eastern District of

Pennsylvania

5/15/2019

On October 9, 2020, the parties reached an agreement in principal to settle this matter and a companion case pending in the U.S. District Court for the District of New Jersey (Bertino v. Tasty Baking Co., No. 1:20-cv-03752) for a payment of $2.55 million, inclusive of attorneys’ fees and costs, service awards, and consideration for class members who are active distributors to enter into an amendment to their distributor agreements. The parties are currently working to obtain final court approval of the settlement. 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 2020.

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 fiscal 2019, the company has settled, and the appropriate court has approved, the following collective/class action lawsuits filed by distributors alleging that such distributors were misclassified as independent contractors:

Case Name

Case No.

Venue

Date Filed

Comments

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 September 29, 2020, the Court dismissed this lawsuit and approved an agreement to settle this matter and the Boulange matter (see below) for a payment of $13.25 million, inclusive of attorneys’ fees and costs, service awards, and incentives for class members who are active distributors to enter into an amendment to their distributor agreements. This settlement charge was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the fourth quarter of fiscal 2019 and was paid during the fourth quarter of fiscal 2020.

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.

Case Name

Case No.

Venue

Date Filed

Comments

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 January 31, 2020, the parties reached an agreement in principal to settle this matter for a payment of $7.6 million, inclusive of attorneys’ fees and costs, service awards, and incentives for class members who are active distributors to enter into an amendment to their distributor agreements. On October 22, 2020, the Court granted final approval of the settlement. The parties are awaiting a written order from the Court dismissing the lawsuit. This settlement charge was recorded as a selling, distribution and administrative expense in our Condensed Consolidated Statements of Income during the fourth quarter of fiscal 2019 and paid during the fourth quarter of fiscal 2020.

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 U.S. 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 allowed 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. On December 11, 2019, the Court approved the settlement described in the Stipulation. The settlement required payment of $21.0 million, which amount the company’s insurer deposited in the escrow account described in the Stipulation. This amount was recorded on the company’s Condensed Consolidated Balance Sheet as of December 28, 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. At the satisfaction of all requirements under the Stipulation in January 2020 the ‘Recovery from legal settlement in principle’ and ‘Accrued legal settlement’ amounts (both recorded on the Condensed Consolidated Balance Sheets) were de-recognized on the company’s Condensed Consolidated Balance Sheet.

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. On February 26, 2020, the court granted judgment approving the consolidated federal derivative action settlement and Fee Award. The judgment became final on March 27, 2020. Pursuant to the stipulation of settlement, once the judgment dismissing the consolidated federal derivative action became final, the plaintiffs in the consolidated state derivative action voluntarily dismissed that action with prejudice on April 2, 2020. The Fee Award was recorded on the company’s Condensed Consolidated Balance Sheet as of December 28, 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. At the satisfaction of all requirements under the Fee Award in early April 2020, the ‘Recovery from legal settlement in principle’ and ‘Accrued legal settlement’ amounts (both recorded on the Condensed Consolidated Balance Sheets) were de-recognized on the company’s Condensed Consolidated Balance Sheets.

See Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the company’s commitments.

15. 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 3, 2020 and October 5, 2019, respectively (amounts and shares in thousands, except per share data):

	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 3, 2020		October 5, 2019		October 3, 2020		October 5, 2019
Net income	$	44,347	$	43,358	$	96,494	$	162,319
Basic Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		211,800		211,711		211,776		211,575
Basic earnings per common share	$	0.21	$	0.20	$	0.46	$	0.77
Diluted Earnings Per Common Share:
Basic weighted average shares outstanding for common stock		211,800		211,711		211,776		211,575
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock		658		303		494		381
Diluted weighted average shares outstanding for common stock		212,458		212,014		212,270		211,956
Diluted earnings per common share	$	0.21	$	0.20	$	0.45	$	0.77

There were no anti-dilutive shares and 11,940 anti-dilutive shares during the twelve and forty weeks ended October 3, 2020, respectively, and there were 11,030 and 64,860 anti-dilutive shares during the twelve and forty weeks ended October 5, 2019, respectively.

16. STOCK-BASED COMPENSATION

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

The following is a summary of restricted stock and deferred stock outstanding under the Omnibus Plan described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below. The company typically grants awards at the beginning of its fiscal year. Information on grants to employees during fiscal 2020 is discussed below.

Performance-Contingent Restricted Stock Awards

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

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

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

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2017 award, which vested in fiscal 2019, vested at 153% of target. No awards vested during the forty weeks ended October 3, 2020.

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 is 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	Shares Granted		Vesting Date	Fair Value per Share
12/30/2018		440	3/1/2022	$	21.58
5/23/2019		11	3/1/2022	$	27.23
7/14/2019		5	3/1/2022	$	23.32
10/6/2019		2	3/1/2022	$	22.52
12/29/2019		331	2/28/2023	$	25.00
4/19/2020		8	2/28/2023	$	23.14
07/12/2020		2	2/28/2023	$	21.97

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. No awards vested during the forty weeks ended October 3, 2020.

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 is 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	Shares Granted		Vesting Date	Fair Value per Share
12/30/2018		440	3/1/2022	$	18.29
5/23/2019		11	3/1/2022	$	23.08
7/14/2019		5	3/1/2022	$	23.32
10/6/2019		2	3/1/2022	$	22.52
12/29/2019		331	2/28/2023	$	21.74
4/19/2020		8	2/28/2023	$	23.14
07/12/2020		2	2/28/2023	$	21.97

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 share data).

Award Granted

Fiscal Year

Vested

TSR Modifier

Increase

ROIC Modifier

Decrease

Dividends at

Vesting

(thousands)

Tax

Benefit

Fair Value at

Vesting

2017

2019

205,686

(97,131

)

1,219

936

18,570

Performance-Contingent Restricted Stock

The company’s performance-contingent restricted stock activity for the forty weeks ended October 3, 2020 is presented below (amounts in thousands, except price data):

	Shares			Weighted Average Grant Date Fair Value
Nonvested shares at December 28, 2019		662		$	20.16
Initial grant at target		682		$	23.31
Vested		—		$	—
Forfeited		(90	)	$	20.71
Nonvested shares at October 3, 2020		1,254		$	21.82

As of October 3, 2020, there was $16.7 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 2.09 years. The total intrinsic value of shares vested during the forty weeks ended October 5, 2019 was $18.6 million. There were no shares that vested during the twelve and forty weeks ended October 3, 2020.

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	Shares Granted		Vesting Date	Fair Value per Share
12/30/2018		244	Equally over 3 years	$	18.29
5/23/2019		43	5/23/2023	$	23.08
12/29/2019		219	Equally over 3 years	$	21.74

The TBRSU Shares activity for the forty weeks ended October 3, 2020 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 28, 2019		270		$	19.06
Vested		(74	)	$	18.29
Granted		219		$	21.74
Forfeitures		(27	)	$	20.18
Nonvested shares at October 3, 2020		388		$	20.64		2.02	$	5,527

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

Award Granted

Fiscal Year

Vested

Dividends at

Vesting

(thousands)

Tax

Benefit

Fair Value at

Vesting

2019

2020

1,584

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 2020, non-employee directors elected to receive, and were granted, an aggregate grant of 2,299 common shares for board retainer deferrals pursuant to the Omnibus Plan. During the first quarter of fiscal 2020, 2,707 common shares were vested and deferred. A total of 4,660 common shares that were previously vested and deferred were issued for 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 2019, non-employee directors received an aggregate of 46,240 shares, of which 17,340 shares were deferred, for their annual grant pursuant to the Omnibus Plan that vested during the twelve weeks ended July 11, 2020. During the second quarter of fiscal 2020, non-employee directors received 39,900 shares for their annual grant pursuant to the Omnibus Plan. Additionally, during the third quarter of fiscal 2020, an aggregate of 11,940 shares were granted to three newly elected non-employee directors, representing a prorated portion of the annual grant pursuant to the Omnibus Plan. During the forty weeks ended October 3, 2020, non-employee directors received 15,979 shares of previously deferred annual grant awards.

The deferred stock activity for the forty weeks ended October 3, 2020 is set forth below (amounts in thousands, except price data):

	Shares			Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Unrecognized compensation cost
Nonvested shares at December 28, 2019		49		$	22.31
Vested		(49	)	$	22.31
Granted		54		$	23.15
Nonvested shares at October 3, 2020		54		$	23.15		0.69	$	836

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 3, 2020 and October 5, 2019, respectively (amounts in thousands):

	For the Twelve Weeks Ended
	October 3, 2020		October 5, 2019
Performance-contingent restricted stock awards	$	1,904	$	926
TBRSU Shares		667		347
Deferred and restricted stock		262		250
Total stock-based compensation	$	2,833	$	1,523

	For the Forty Weeks Ended
	October 3, 2020		October 5, 2019
Performance-contingent restricted stock awards	$	6,503	$	3,791
TBRSU Shares		2,317		1,149
Deferred and restricted stock		849		894
Total stock-based compensation	$	9,669	$	5,834

17. POSTRETIREMENT PLANS

The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at October 3, 2020 compared to accounts at December 28, 2019 (amounts in thousands):

	October 3, 2020		December 28, 2019
Noncurrent asset	$	2,467	$	-
Current liability	$	926	$	29,380
Noncurrent liability	$	9,009	$	14,328
Accumulated other comprehensive loss, net of tax	$	4,060	$	107,678

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. During the third quarter of fiscal 2019, the company offered Plan No. 1 participants the option to receive an annuity purchased from an insurance carrier or a lump sum cash payment. During the first quarter of fiscal 2020, the company transferred $6.4 million in cash to Plan No. 1 to ensure that sufficient assets were available for the lump sum payments and annuity purchases. This was made up of a $1.4 million cash contribution and an unsecured, short-term, interest-free loan to Plan No. 1 of $5.0 million. The company completed the transfer of all lump sum payments and transferred all remaining benefit obligations related to Plan No. 1 to a highly rated insurance company on March 4, 2020 in order to purchase a group annuity contract which began paying plan benefits on May 1, 2020. The company also recognized $116.2 million of non-cash pension termination charges, made up of a settlement charge of $111.9 million and a curtailment loss of $4.3 million, in our Condensed Consolidated Statements of Income during the first quarter of fiscal 2020, both of which were estimated based on the best information available at the time

In the third quarter of fiscal 2020, the company finalized its group annuity contract for Plan No. 1 and received a refund of premium in the amount of $7.1 million, which is reported in the company’s Condensed Consolidated Statements of Income for the third quarter of fiscal 2020. The company reversed the $6.4 million (consisting of $5.0 million loan and $1.4 million contribution) cash transfer made in the first quarter of fiscal 2020 since the cash was no longer needed to sufficiently cover the obligations of the transaction. Based on this updated information, the company has updated its prior estimates of the settlement and curtailment charges. The company recognized $109.1 million of non-cash pension termination charges, made up of a settlement charge of $104.8 million and a curtailment loss of $4.3 million for the forty weeks ended October 3, 2020.

Following the full settlement of Plan No. 1 pension obligations by the end of the first quarter of fiscal 2020, the company reports a balance sheet asset of $0.7 million for the plan. This surplus of Plan No. 1 will be used, as prescribed in the applicable regulations, to fund future company contributions to the Qualified Replacement Plan (as defined below). The company expects to transfer this surplus to a suspense account held within a trust for the Qualified Replacement Plan by the end of the fourth quarter of fiscal 2020.

The company recognizes settlement accounting charges in years when lump sums paid during that year exceed the sum of the plan’s service and interest costs. Settlement accounting accelerates recognition of a plan’s unrecognized net gain or loss. There were no settlement charges recorded during the forty weeks ended October 5, 2019.

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

The company used a measurement date of December 31, 2019 for the defined benefit and postretirement benefit plans described below.

The company contributed $1.4 million during the first quarter of 2020 to Plan No. 1 in connection with the termination of Plan No. 1, as described above. During the third quarter of fiscal 2020, the company made a voluntary contribution of $7.6 million to Plan No. 2. There were no contributions made by the company to either plan during the first and second quarters of fiscal 2019. The company made a voluntary contribution of $2.5 million to Plan No. 2 and no contributions to Plan No. 1 during the third quarter of fiscal 2019.

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

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 3, 2020			October 5, 2019			October 3, 2020			October 5, 2019
Service cost	$	195		$	162		$	657		$	541
Interest cost		229			2,753			1,880			9,177
Expected return on plan assets		(414	)		(3,957	)		(3,518	)		(13,190	)
Settlement and curtailment (gain) loss		(7,153	)		—			109,054			—
Amortization of prior service cost		13			89			101			297
Amortization of net loss		126			1,637			1,619			5,460
Total net periodic pension cost	$	(7,004	)	$	684		$	109,793		$	2,285

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

Postretirement Benefit Plan

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

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

	For the Twelve Weeks Ended						For the Forty Weeks Ended
	October 3, 2020			October 5, 2019			October 3, 2020			October 5, 2019
Service cost	$	65		$	65		$	217		$	217
Interest cost		45			69			151			229
Amortization of prior service credit		(1	)		(9	)		(3	)		(32	)
Amortization of net gain		(69	)		(63	)		(230	)		(212	)
Total net periodic postretirement cost	$	40		$	62		$	135		$	202

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

401(k) Retirement Savings Plan

The Flowers Foods, Inc. 401(k) Retirement Savings Plan (“Qualified Replacement 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 3, 2020		October 5, 2019		October 3, 2020		October 5, 2019
Total cost and employer contributions	$	6,355	$	6,264	$	21,577	$	21,137

18. INCOME TAXES

The company’s effective tax rate for the twelve weeks ended October 3, 2020 was 22.8% compared to 22.3% for the twelve weeks ended October 5, 2019. The increase in the rate was primarily due to higher favorable discrete benefits in the prior year. During the twelve weeks ended October 3, 2020, the primary differences in the effective rate and the statutory rate were state income taxes, recognition of state credits, 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 3, 2020 was 23.5% compared to 23.0% for the forty weeks ended October 5, 2019. The increase in the rate from the prior period was primarily due to reduced windfalls on stock-based compensation and reduced favorable discrete benefits in the current period. During the forty weeks ended October 3, 2020, the primary differences in the effective rate and the statutory rate were state income taxes and discrete items.

During the forty weeks ended October 3, 2020, 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 3, 2020, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.

19. SUBSEQUENT EVENTS

The company has evaluated subsequent events since October 3, 2020, 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 3, 2020 should be read in conjunction with the Form 10-K, Part II, Item 1A., Risk Factors, of the First Quarter Form 10-Q, and Part II, Item 1A., Risk Factors, of this Form 10-Q.

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

•

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

•

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

•

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

•

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

Matters Affecting Comparability

Detailed 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 3, 2020			October 5, 2019		October 3, 2020		October 5, 2019			Disclosure
	(Amounts in thousands)					(Amounts in thousands)
Project Centennial consulting costs	$	5,068		$	—	$	14,044	$	—		Note 3
ERP Road Mapping consulting costs		3,079			—		3,079		—
Restructuring and related impairment charges		20,100			3,277		30,635		6,042		Note 3
Recovery on inferior ingredients		—			—		—		(413	)	Note 1
Canyon acquisition costs		—			—		—		22
Legal settlements (recovery)		3,011			—		6,231		(1,136	)	Note 14
Executive retirement agreement		—			—		—		763
Pension plan settlement and curtailment (gain) loss		(7,153	)		—		109,054		—		Note 17
Other pension plan termination costs		—			—		133		—
	$	24,105		$	3,277	$	163,176	$	5,278

•

Project Centennial consulting costs — During the second quarter of fiscal 2016, we 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. Consulting costs associated with the project during the twelve and forty weeks ended October 3, 2020 were $5.1 million and $14.0 million, respectively, and are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income. We currently expect these costs to be approximately $1.2 million to $1.5 million for the remainder of fiscal 2020. There were no consulting costs associated with the project during the forty weeks ended October 5, 2019.

•

Consulting costs for road mapping the potential upgrade of our ERP platform — We have recently begun road mapping for the potential upgrade of our ERP platform and other system related enhancements (the “ERP Road Mapping”). Consulting costs associated with these activities during the twelve and forty weeks ended October 3, 2020 were $3.1 million and are reflected in the selling, distribution and administrative expenses line item of the Condensed Consolidated Statements of Income. We currently expect consulting costs related to this project to be approximately $1.1 million to $1.3 million for the remainder of fiscal 2020. There were no consulting costs associated with this project during the forty weeks ended October 5, 2019.

•

Restructuring and related impairment charges – The following table details restructuring charges recorded during the twelve and forty weeks ended October 3, 2020 and October 5, 2019 (amounts in thousands):

	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 3, 2020		October 5, 2019		October 3, 2020		October 5, 2019
Employee termination benefits and relocation costs	$	5,996	$	229	$	7,261	$	1,212
Property, plant, and equipment impairments		611		3,048		5,245		4,830
Lease termination and lease impairment charges		13,493		—		13,493		—
Trademark impairments		—		—		4,636		—
Total restructuring and related impairment charges	$	20,100	$	3,277	$	30,635	$	6,042

Fiscal 2020 Charges

The company continues to evaluate its organizational structure in an effort to increase its focus on brand growth and product innovation and improve its cake operations, as discussed further in the “Strategic Initiatives and Update on Progress” section below. The organizational structure changes resulted in employee termination benefits charges related to a voluntary employee separation plan (the “VSIP”) of $1.3 million in the second quarter and $0.9 million in the third quarter. Additionally, in the third quarter, the company announced an involuntary reduction-in-force plan and recognized charges of $5.2 million. The VSIP and reduction-in-force plans together eliminated approximately 250 positions across different departments and job levels and all remaining payments related to the plans are anticipated to be paid by early fiscal 2021.

During the second quarter, the company entered into a contract to sell three closed bakeries currently included in assets held for sale and certain idle equipment at other bakeries, resulting in the recognition of $4.6 million of impairment charges. The sale is anticipated to be completed during the fourth quarter of fiscal 2020. Property, plant, and equipment impairment charges recognized in the third quarter resulted from the company’s decision to sell certain distribution depots, as further discussed below, and an office building.

In order to optimize our distribution network, we vacated certain distribution depots during the third quarter, some of which are owned and others that are leased. This resulted in the recognition of lease termination charges and lease impairment charges totaling $13.5 million in the current quarter. These actions are anticipated to reduce lease costs and generate overall efficiency savings.

Additionally, in order to optimize sales and production of our organic products, the company decided to cease using the Alpine Valley brand, a finite-lived trademark, resulting in a $4.6 million impairment charge in the second quarter.

We continue to explore additional opportunities to streamline our core operations, but as of October 3, 2020 we are unable to estimate the expected costs to be incurred for this initiative.

Fiscal 2019 Charges

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 third quarter, we announced the closure of our Opelika, Alabama bakery and recorded asset impairments on property, plant and equipment totaling $3.9 million and severance costs of $0.2 million. Additionally, in the third quarter, we recorded a gain on sale of $0.8 million related to a facility which had been previously impaired in a prior year.

•

Recovery on inferior ingredients – Beginning in the second quarter of fiscal 2018 and continuing through the fourth quarter of fiscal 2019, we recognized identifiable and measurable costs associated with receiving inferior ingredients. During the forty weeks ended October 5, 2019, we recognized $1.4 million of costs and received reimbursements of previously incurred costs of $1.8 million. No losses or recoveries of inferior ingredients were incurred or received during the forty weeks ended October 3, 2020. We continue to seek recovery of all losses through appropriate means.

•

Legal settlements – Through the third quarters of fiscal 2020 and 2019, we reached agreements to settle distributor-related litigation, including plaintiffs’ attorney fees, in the aggregate amount of $6.2 million and $0.15 million, respectively. Additionally, during the second quarter of fiscal 2019, we recorded a benefit of $1.3 million related to an adjustment of a prior year settlement based on the final amount paid. 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 plan termination – 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. During the third quarter of fiscal 2019, the company offered Plan No. 1 participants the option to receive an annuity purchased from an insurance carrier or a lump sum cash payment. The company completed the transfer of all lump sum payments and transferred all remaining benefit obligations related to Plan No. 1 to a highly rated insurance company on March 4, 2020 in order to purchase a group annuity contract which began paying pension plan benefits May 1, 2020. The company recognized $109.1 million of non-cash pension termination charges, comprised of a settlement charge of $104.8 million ($112.0 million settlement charge in the first quarter of fiscal 2020, net of a $7.2 million gain in the third quarter of fiscal 2020) and a curtailment loss of $4.3 million, and an additional $0.1 million of cash charges for other pension termination costs in our Condensed Consolidated Statements of Income. As of October 3, 2020, Plan No. 1 has been terminated and has a balance sheet asset remaining of $0.7 million for the plan. This surplus of Plan No. 1 will be used, as prescribed in the applicable regulations, to fund future contributions to the Flowers Foods, Inc. 401(k) Retirement Savings Plan (“Qualified Replacement Plan”). The company expects to transfer this surplus to a suspense account held within a trust for the Qualified Replacement Plan by the end of the fourth quarter of 2020. No settlement charges were recorded during the first three quarters of fiscal 2019.

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

•

COVID-19 – On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide, which has led to adverse impacts on the U.S. and global economies. Due to the drastic change in consumer buying patterns as a result of the COVID-19 pandemic, we have experienced a more favorable shift in sales mix to our branded retail products resulting in significant growth in income from operations during the forty weeks ended October 3, 2020 compared to the same period in the prior year, partially offset by the restructuring costs, consulting costs, and legal settlements described above. For additional details on the impact of the COVID-19 pandemic to our business operations and results of operations, see the “Executive Overview – Impact of COVID-19 on Our Business,” “Results of Operations” and “Liquidity and Capital Resources” sections below.

•

Conversion of our Lynchburg, Virginia bakery to organic production — During the first quarter of fiscal 2020, we began the conversion our Lynchburg, Virginia bakery to an all-organic production facility. The converted facility is expected to increase production capacity of our Dave’s Killer Bread (“DKB”) products, allowing the company to better serve east coast markets with fresher product and reduce distribution costs. We incurred start-up costs related to the conversion of approximately $1.9 million and $5.1 million for the twelve and forty weeks ended October 3, 2020, respectively, and these costs are included in materials, supplies, labor and other production costs in our Condensed Consolidated Statements of Income. The bakery resumed production at the end of the third quarter of fiscal 2020.

•

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 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.

•

Canyon acquisition — On December 14, 2018, we completed the acquisition of Canyon, a leading gluten-free bread baker. Prior to the acquisition, Canyon’s products were distributed frozen through natural, specialty, grocery, and mass retailers around the country and we expect to continue this distribution model in the future. In addition to frozen distribution, we began distributing Canyon branded products fresh via our direct-store-delivery (“DSD") distribution system during the first quarter of fiscal 2019. A contingent consideration payment of $5.0 million was paid during the first quarter of fiscal 2020 to the sellers based on the achievement of certain sales objectives by the Canyon business in fiscal 2019.

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 grain-based 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. We manage our business as one operating segment.

Highlights

•

Major brands include Nature’s Own, DKB, Wonder, Canyon Bakehouse, Mrs. Freshley’s, and Tastykake.

•

Nature’s Own, including Whitewheat, is the best-selling loaf bread in the U.S., DKB is the #1 selling organic brand in the U.S., and Canyon Bakehouse is the #1 selling gluten-free bread brand in the U.S. (Source: IRI Total US MultiOutlet+C-Store L52 Weeks Ending 10/4/20)

•

Retail sales comprised 80.5% of total sales for the forty weeks ended October 3, 2020 and non-retail and other sales comprised 19.5%.

•

We operate 46 bakeries, which produce fresh and frozen breads and rolls, as well as snack cakes and tortillas.

•

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

•

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

Impact of COVID-19 on Our Business

The COVID-19 pandemic has significantly impacted our business operations and results of operations during the forty weeks ended October 3, 2020, as further described under “Results of Operations” and “Liquidity and Capital Resources” below. The resulting dramatic changes in consumer buying patterns has led to a significant rise in demand for our branded retail products, but sales through our non-retail category, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing, have declined substantially during the pandemic. Year to date, the benefit to income from operations as a result of the favorable mix shift was partially offset by the restructuring costs, consulting costs, and legal settlements described above. Although sales of our branded retail products have moderated as the pandemic has continued, we cannot currently estimate when or if they will return to levels prior to the pandemic.

Additionally, in recognition and support of our frontline workers, we paid $6.2 million in one-time bonuses to eligible hourly and non-exempt employees, leased labor, and contract workers during the first quarter of fiscal 2020. These appreciation bonuses are in addition to the company’s annual bonus program, in which all Flowers employees participate.

On April 14, 2020, we temporarily ceased production at our Tucker, Georgia bakery and on July 9, 2020, we temporarily ceased production at our Savannah, Georgia bakery. Both closures were due to an increase in the number of confirmed COVID-19 cases at these bakeries and an increase in number of workers self-quarantining. Production resumed at the Tucker bakery on April 27, 2020 and at the Savannah Bakery on July 17, 2020. While our other bakeries were able to assist with meeting production needs in these instances, the closure of several of our bakeries across the country at one time or in close succession could negatively impact our ability to meet our production requirements.

While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows, will continue to be impacted by decreases in foodservice and other non-retail outlets sales. Foodservice sales are likely to remain under pressure until the restaurant industry returns to more normal operations. We cannot predict the timing and speed of the foodservice industry recovery, and any delay in the recovery could significantly impact our future results. We continue to actively monitor the collectability of our trade accounts receivables, including our foodservice customers in particular, and recorded additional bad debt allowances of $2.7 million in the first quarter of fiscal 2020. Future losses may be realized if more customers are forced into financial distress or bankruptcy and cannot pay us or their other suppliers on a timely basis or at all.

We continue to actively monitor the global outbreak and spread of COVID-19 and are taking steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We are focused on navigating these challenges presented by the COVID-19 global pandemic through the implementation of additional procedures at each of our locations to comply with U.S. Centers for Disease Control and Prevention (CDC) suggestions. These procedures and actions include, but are not limited to, monitoring the symptoms of employees as shifts start, using personal protective equipment, maintaining (where possible) six feet of distancing, and other considerations. Certain non-production employees have also been working remotely to mitigate contact between personnel. A non-essential travel and visitors ban was also implemented as a way to reduce potential exposure. We are considering the options available to us under the Families First Coronavirus Response Act (“FFCRA Act”) and Coronavirus Aid, Relief, and Economic Security Act (“CARES ACT”) and, as of the beginning of the second quarter of fiscal 2020, we began taking advantage of deferrals of certain payroll tax payments in accordance with the CARES Act. In addition, we continue to evaluate the impact of certain tax credits that are available under these Acts. We have also availed ourselves of the deferral of Federal income tax payments made available under an emergency declaration on March 13, 2020. The evolving COVID-19 pandemic could continue to impact our results of operations and liquidity; the operations of our suppliers, vendors, and customers; and our employees as a result of health concerns, quarantines, facility closures, and travel and logistics restrictions.

Summary of Operating Results, Cash Flows and Financial Condition

Sales increased 2.4% for the twelve weeks ended October 3, 2020 compared to the same quarter in the prior year primarily due to a significant rise in demand for our branded retail products due to the COVID-19 pandemic, which drove a positive shift in mix. Additionally, decreased promotional activity and decreased product returns in the current quarter contributed to the increase. Considerable volume declines in non-retail sales caused by the pandemic and decreased volume for store branded retail products partially offset the increase.

For the forty weeks ended October 3, 2020, sales increased 5.0% compared to the same period in the prior year primarily due to a positive shift in mix resulting from much higher demand for our branded retail products combined with reduced promotional activity and fewer product returns. Partially offsetting the increase were substantial declines in our non-retail sales which have been negatively impacted by lower foodservice sales due to restaurant closings or limited capacity restrictions experienced by these customers during the ongoing pandemic.

Net income for the twelve weeks ended October 3, 2020 increased 2.3% primarily due to a more favorable sales mix, which was largely due to the COVID-19 pandemic, improved ingredient and packaging costs, and the pension plan settlement gain. Mostly offsetting these items were higher restructuring and related impairment charges, consulting costs for Project Centennial and the ERP Road Mapping, and greater employee incentive costs.

Net income was $96.5 million for the forty weeks ended October 3, 2020, a decrease of 40.6% as compared to the same period in the prior year, primarily due to recognizing non-cash pension plan termination costs of $109.1 million in connection with the termination of Plan No. 1, partially offset by a more favorable sales mix, mainly resulting from the COVID-19 pandemic, and decreased ingredient and packaging costs. Increased employee incentive costs, including appreciation bonuses paid to frontline workers, restructuring and related impairment charges, legal settlements, and consulting costs, combined with start-up costs for the Lynchburg, Virginia bakery conversion, also contributed to the decrease in net income year over year.

During the forty weeks ended October 3, 2020, we generated net cash flows from operations of $364.4 million and invested $68.3 million in capital expenditures. Additionally, we paid $124.9 million in dividends to our shareholders and increased our total indebtedness by $142.5 million. During the first quarter of fiscal 2020, we borrowed an additional $200.0 million under our senior unsecured revolving credit facility (the “credit facility”). Although we do not have any presently anticipated need for this additional liquidity, we decided to borrow this additional amount to ensure future liquidity given the significant impact on global financial markets and economies as a result of the COVID-19 outbreak. Through the third quarter of fiscal 2020, the company made net debt repayments of $61.3 million. During the forty weeks ended October 5, 2019, we generated net cash flows from operations of $278.1 million, invested $70.6 million in capital expenditures, paid $119.8 million in dividends to our shareholders and reduced our total indebtedness by $102.5 million. During the current quarter, we amended the accounts receivable securitization facility (“the facility”) to extend the maturity date to September 27, 2022.

Strategic Initiatives and Update on Progress

Today, we have an organization dedicated to the consumer. We are hyper-focused on growing our brands and committed to real innovation to drive growth with a renewed sense of passion about cost management. We have updated the strategic priorities to include the following:

Develop team: Capabilities to build brands and create value.

Focus on brands: Enhance relevancy and expand presence.

Prioritize margins: Optimize the portfolio and supply chain.

Smart M&A: Disciplined approach to acquisitions in baked foods that enhance our branded portfolio and margin profile.

In fiscal 2020, the company:

•

Further refined its organizational structure to better align with our strategic priority to be brands-focused by consolidating the existing two business units - Fresh Packaged Bread and Snacking/Specialty – into a single function.

•

Established the role of chief brand officer who is responsible for managing all Flowers’ brands, as well as its revenue management, shopper marketing, and brand partnership programs.

•

Assigned chief marketing officer to lead stand-alone innovation function.

•

Appointed chief supply chain officer to bring fresh perspective to network and portfolio optimization initiatives.

•

Named a president of cake operations who will focus exclusively on improving profitability of cake operations.

•

Foodservice refocused to maximize value over volume and prioritize a more profitable product mix.

•

Continued to streamline its brand assortment in key retail categories.

•

Augmented sales growth with new product introductions of Nature’s Own Brioche style buns, and DKB hamburger buns.

•

Completed the conversion of its Lynchburg, Virginia facility to organic production to support growing sales of organic products and lower transportation costs.

•

Enhanced its digital marketing strategy to capture e-commerce benefits as consumers move to more online shopping.

•

Updated its incentive compensation framework to continue recruitment and development of our executive team.

•

Announced a VSIP and a reduction-in-force plan as part of its effort to restructure and streamline operations.

We anticipate that by executing on these strategic priorities we will achieve our long-term financial targets of 1%-2% sales growth, 4%-6% EBITDA growth, and 7%-9% adjusted EPS growth.

For fiscal 2020, the company is targeting savings in excess of $20 million driven by ongoing optimization initiatives in its procurement, distribution, operations, and administrative functions. Currently, the company does not expect COVID-19 to materially impact the foregoing optimization 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 3, 2020 and October 5, 2019, respectively, are set forth below (dollars in thousands):

	For the Twelve Weeks Ended
						Percentage of Sales					Increase (Decrease)
	October 3, 2020			October 5, 2019		October 3, 2020			October 5, 2019		Dollars			%
Sales	$	989,650		$	966,561		100.0			100.0	$	23,089			2.4
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		497,659			509,056		50.3			52.7		(11,397	)		(2.2	)
Selling, distribution and administrative expenses		386,739			362,380		39.1			37.5		24,359			6.7
Restructuring and related impairment charges		20,100			3,277		2.0			0.3		16,823		NM
Depreciation and amortization		32,162			33,196		3.2			3.4		(1,034	)		(3.1	)
Income from operations		52,990			58,652		5.4			6.1		(5,662	)		(9.7	)
Other components of net periodic pension and postretirement benefits (credit) expense		(72	)		518		(0.0	)		0.1		(590	)	NM
Pension plan settlement gain		(7,153	)		—		(0.7	)		—		(7,153	)	NM
Interest expense, net		2,755			2,334		0.3			0.2		421			18.0
Income tax expense		13,113			12,442		1.3			1.3		671			5.4
Net income	$	44,347		$	43,358		4.5			4.5	$	989			2.3
Comprehensive income	$	54,485		$	37,729		5.5			3.9	$	16,756			44.4

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 3, 2020 and October 5, 2019, respectively, are set forth below (dollars in thousands):

	For the Forty Weeks Ended
							Percentage of Sales						Increase (Decrease)
	October 3, 2020			October 5, 2019			October 3, 2020			October 5, 2019			Dollars			%
Sales	$	3,364,955		$	3,206,215			100.0			100.0		$	158,740			5.0
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)		1,674,565			1,669,749			49.8			52.1			4,816			0.3
Selling, distribution and administrative expenses		1,305,678			1,197,926			38.8			37.4			107,752			9.0
Restructuring and related impairment charges		30,635			6,042			0.9			0.2			24,593		NM
Recovery on inferior ingredients		—			(413	)		—			(0.0	)		413		NM
Depreciation and amortization		110,005			111,344			3.3			3.5			(1,339	)		(1.2	)
Income from operations		244,072			221,567			7.3			6.9			22,505			10.2
Other components of net periodic pension and postretirement benefits expense		(1	)		1,729			(0.0	)		0.1			(1,730	)	NM
Pension plan settlement and curtailment loss		109,054			—			3.2			—			109,054		NM
Interest expense, net		8,938			8,927			0.3			0.3			11			0.1
Income tax expense		29,587			48,592			0.9			1.5			(19,005	)		(39.1	)
Net income	$	96,494		$	162,319			2.9			5.1		$	(65,825	)		(40.6	)
Comprehensive income	$	204,118		$	158,999			6.1			5.0		$	45,119			28.4

NM	Not meaningful.

Percentages may not add due to rounding.

TWELVE WEEKS ENDED OCTOBER 3, 2020 COMPARED TO TWELVE WEEKS ENDED OCTOBER 5, 2019

Sales (dollars in thousands)

	For the Twelve Weeks Ended
					Percentage of Sales				Increase (Decrease)
	October 3, 2020		October 5, 2019		October 3, 2020		October 5, 2019		Dollars			%
Branded retail	$	657,050	$	585,844		66.4		60.6	$	71,206			12.2
Store branded retail		136,639		151,057		13.8		15.6		(14,418	)		(9.5	)
Non-retail and other		195,961		229,660		19.8		23.8		(33,699	)		(14.7	)
Total	$	989,650	$	966,561		100.0		100.0	$	23,089			2.4

(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	8.1
Volume	(5.7	)
Total percentage change in sales	2.4

Sales increases quarter over quarter were primarily due to a significant rise in demand for our branded retail products caused by the COVID-19 pandemic, which resulted in a positive shift in mix from non-retail and store-branded retail sales to branded retail sales. Reduced promotional activity and a reduction in product returns also contributed to the sales increase. Partially offsetting the increase were substantial volume declines in the non-retail and other sales category, most notably, foodservice sales. The pandemic continued to negatively impact business for our foodservice customers due to capacity restrictions and other limiting factors which resulted in lower sales to those customers. Although these trends have continued through the pandemic, branded retail sales growth has begun to moderate, however, we cannot currently estimate when or if these sales will return to levels prior to the pandemic.

Branded retail sales increased significantly due to the COVID-19 pandemic as discussed above. Sales of traditional loaf branded breads, led by our Nature’s Own and Wonder brands, and sales of DKB organic products, contributed most significantly to the increase. Growth in branded buns and rolls also contributed to the increase, partly due to new product introductions earlier in fiscal 2020, including Nature’s Own Brioche style buns and DKB buns. The decrease in store branded retail sales resulted from volume declines as these sales have mostly shifted to branded retail sales. As discussed above, significant volume losses drove the decrease in non-retail and other sales, with our foodservice customers experiencing the greatest declines.

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 3, 2020 % of Sales		October 5, 2019 % of Sales		(Decrease) as a % of Sales
Ingredients and packaging		28.2		29.8		(1.6	)
Workforce-related costs		15.0		15.1		(0.1	)
Other		7.1		7.8		(0.7	)
Total		50.3		52.7		(2.4	)

Costs as a percent of sales were considerably lower quarter over quarter as the ongoing COVID-19 pandemic continued to drive positive shifts in mix from non-retail and store-branded retail products to branded retail products. Partially offsetting the lower costs were $1.9 million of start-up costs related to the conversion of our Lynchburg, Virginia facility to an organic bakery and these costs were largely workforce-related. We completed the bakery conversion at the end of the third quarter of fiscal 2020. Ingredient and packaging costs declined significantly as a percent of sales due to the positive shift in sales mix and a reduction in product returns, both discussed above, combined with decreased production volumes and lower flour costs quarter over quarter. Reduced outside purchases of product partially offset the lower ingredient and packaging costs and this is reflected in the Other line item in the table above.

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

	For the Twelve Weeks Ended				Increase
Line Item Component	October 3, 2020 % of Sales		October 5, 2019 % of Sales		(Decrease) as a % of Sales
Workforce-related costs		11.2		10.7		0.5
Distributor distribution fees		15.3		14.7		0.6
Other		12.6		12.1		0.5
Total		39.1		37.5		1.6

Higher employee incentive costs drove the increase in workforce-related costs as a percent of sales quarter over quarter, partially offset by a more favorable sales mix. Distributor distribution fees increased as a percent of sales primarily due to the shift in product mix, which resulted in a larger portion of our sales being made through IDPs. The increase in the Other line in the table above reflects consulting costs incurred for both Project Centennial and the ERP Road Mapping and legal settlements in the current quarter, all of which are discussed in the “Matters Affecting Comparability” section above. Reduced transportation and travel and entertainment expenses partially offset these costs. Lower fuel costs and distribution network optimization initiatives we continue to implement contributed to the improvement in transportation costs. See Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding legal settlements.

Restructuring and Related Impairment Charges

We recognized $20.1 million and $3.3 million of restructuring and related impairment charges in the current and prior year quarters, respectively. Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.

Depreciation and Amortization Expense

Depreciation and amortization expense was relatively consistent quarter over quarter.

Income from Operations

Income from operations decreased as a percent of sales for the twelve weeks ended October 3, 2020 compared to the twelve weeks ended October 5, 2019 mostly due to higher restructuring and related impairment charges and increased selling, distribution and administrative expenses in the current quarter, as discussed above, partially offset by the positive shift in sales mix caused by the COVID-19 pandemic and improved ingredient and packaging costs.

Pension Plan Settlement Gain

We recognized a $7.2 million pension plan settlement gain in the third quarter of fiscal 2020 as discussed in the “Matters Affecting Comparability” section above.

Net Interest Expense

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

Income Tax Expense

The effective tax rate for the twelve weeks ended October 3, 2020 was 22.8% compared to 22.3% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to higher favorable discrete tax benefits in the prior year quarter.

For the current quarter, the primary differences in the effective rate and the statutory rate were state income taxes, recognition of state tax credits, and adjustments to prior year estimates that impact the effective tax rate in the current quarter. The CARES ACT did not have a material impact on the effective tax rate for the third quarter of fiscal 2020 and there is no anticipated material impact on the effective tax rate in future periods. The primary differences in the effective rate and statutory rate for the prior year quarter were state income taxes and adjustments to prior year tax accruals.

As discussed above, we have also availed ourselves of the deferral of Federal income tax payments made available under an emergency declaration issued on March 13, 2020.

Comprehensive Income

The increase in comprehensive income quarter over quarter resulted primarily from changes in the fair value of derivatives.

FORTY WEEKS ENDED OCTOBER 3, 2020 COMPARED TO FORTY WEEKS ENDED OCTOBER 5, 2019

Sales (dollars in thousands)

	Forty Weeks Ended
					Percentage of Sales				Increase (Decrease)
	October 3, 2020		October 5, 2019		October 3, 2020		October 5, 2019		Dollars			%
Branded retail	$	2,236,301	$	1,928,500		66.5		60.1	$	307,801			16.0
Store branded retail		472,238		505,388		14.0		15.8		(33,150	)		(6.6	)
Non-retail and other		656,416		772,327		19.5		24.1		(115,911	)		(15.0	)
Total	$	3,364,955	$	3,206,215		100.0		100.0	$	158,740			5.0

(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	7.5
Volume	(2.5	)
Total percentage change in sales	5.0

Sales increased significantly year over year primarily due to a substantial rise in demand for our branded retail products caused by the ongoing COVID-19 pandemic, resulting in a positive shift in mix from non-retail and other sales and store branded retail sales to branded retail sales. A reduction in promotional activity and product returns in the current year also positively impacted sales. Considerable volume declines for non-retail and other sales partially offset the overall increase. At the onset of the pandemic in the U.S., business was disrupted for most of our non-retail customers, most significantly foodservice customers, and many had to close or greatly reduce their operations. Although many of our foodservice customers have been able to reopen, they have been subject to capacity restrictions and other limiting factors, which has negatively impacted our non-retail sales. We expect these trends to continue while the pandemic is ongoing, although we expect the branded retail sales growth to continue to moderate as away-from-home dining returns to more normal levels.

Branded retail sales increased significantly due to the COVID-19 pandemic as discussed above, and to a lesser extent, reduced promotional activity and reduced product returns in the current year. In order to quickly meet heightened customer and consumer demand for traditional branded loaf breads and buns at the start of the pandemic, we streamlined our product offerings and focused production on certain high-demand items. Although panic-buying and stock-up shopping patterns have subsided, the shift to at-home consumption remained elevated through the third quarter and continued to favorably impact sales of our traditional branded loaf breads and buns. Additionally, substantial growth in sales of DKB organic breads, buns, and breakfast items contributed largely to the overall increase in branded retail sales. Although not as impactful, Canyon Bakehouse gluten-free products and branded cake both experienced positive growth year over year. Store branded retail sales decreased due to lost store branded breakfast bread business in the second half of the prior year and volume declines for other store branded products as consumers shifted to branded retail products. As discussed above, significant volume losses drove the decrease in non-retail and other sales, with our foodservice customers experiencing the greatest declines.

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 3, 2020 % of sales		October 5, 2019 % of sales		(Decrease) as a % of sales
Ingredients and packaging		27.4		29.4		(2.0	)
Workforce-related costs		14.9		15.0		(0.1	)
Other		7.5		7.7		(0.2	)
Total		49.8		52.1		(2.3	)

Overall, costs decreased considerably year over year as a percent of sales largely from the positive shift in mix from non-retail and store branded retail products to branded retail products caused by the COVID-19 pandemic. Additionally, substantial declines in product returns contributed to the lower costs. Partially offsetting these items were $4.1 million of appreciation bonuses paid to frontline workers and $5.1 million of start-up costs incurred for the conversion of our Lynchburg, Virginia plant to an organic bakery which resumed production at the end of the third quarter. Ingredient and packaging costs were significantly lower as percent of sales due to the positive shift in mix and the decrease in product returns, both discussed above, as well as lower production volumes in the current year. Also, lower prices for organic and non-organic flour, bread bags, and corrugated packaging contributed to the improvement, partially offset by higher yeast prices.

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

	For the Forty Weeks Ended				Increase
Line item component	October 3, 2020 % of sales		October 5, 2019 % of sales		(Decrease) as a % of sales
Workforce-related costs		11.3		10.8		0.5
Distributor distribution fees		15.4		14.8		0.6
Other		12.1		11.8		0.3
Total		38.8		37.4		1.4

Workforce-related costs rose as a percent of sales compared to the prior year primarily due to higher employee incentive costs, including $2.1 million of appreciation bonuses paid to frontline workers as a result of the COVID-19 pandemic, partially offset by a more favorable sales mix. Distributor distribution fees increased considerably as a percent of sales due to the shift in sales mix, which resulted in a larger portion of our sales being made through IDPs. Consulting costs associated with Project Centennial and the ERP Road Mapping, and increased legal settlements were partially offset by reduced transportation and travel and entertainment costs, all of which are included in the Other line item in the table above. We anticipate the distribution network optimization and other cost saving initiatives we are implementing to continue to benefit our cost structure in future periods. As discussed in the “Matters Affecting Comparability” section above, Project Centennial consulting costs were $14.0 million and the ERP Road Mapping consulting costs were $3.1 million in the current year. For the remainder of fiscal 2020, we currently expect consulting costs to be approximately $1.2 million to $1.5 million for Project Centennial and approximately $1.1 million to $1.3 million for the ERP Road Mapping. Legal settlements recorded in the current year were $6.2 million as compared to a net benefit of $1.1 million in the prior year. See Note 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding legal settlements.

Restructuring and Related Impairment Charges and Recovery on Inferior Ingredients

We recognized $30.6 million and $6.0 million of restructuring and related impairment charges in the current and prior year quarters, respectively. Refer to the discussion in the “Matters Affecting Comparability” section above regarding these items.

Depreciation and Amortization Expense

Depreciation and amortization expense was relatively consistent year over year.

Income from Operations

The growth in income from operations year over year as a percent of sales resulted largely from positive shifts in mix caused by the COVID-19 pandemic and lower ingredient and packaging costs, partially offset by increased restructuring and related impairment charges in the current year as well as higher selling, distribution, and administrative expenses, as discussed above.

Pension Plan Settlement and Curtailment Loss

We recognized $109.1 million of non-cash pension plan termination charges in the current year composed of a settlement charge of $104.8 million and a curtailment loss of $4.3 million as discussed in the “Matter Affecting Comparability” section above.

Net Interest Expense

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

Income Tax Expense

The effective tax rate for the forty weeks ended October 3, 2020 was 23.5% compared to 23.0% in the prior year. The increase in the rate year over year was primarily due to the reduced windfalls on the vesting of stock-based compensation awards in the current year and reduced favorable discrete tax benefits in the current period.

For the current year, the primary differences in the effective rate and statutory rate were state income taxes. The CARES Act did not have a material impact on the effective tax rate for the first three quarters of fiscal 2020 and there is no anticipated material impact on the effective tax rate in future periods. The primary differences in the effective rate and statutory rate for the prior year were state income taxes and windfalls on stock-based compensation.

As discussed above, we have also availed ourselves of the deferral of Federal income tax payments made available under an emergency declaration issued on March 13, 2020.

Comprehensive Income

The increase in comprehensive income year over year resulted primarily from recognizing the pension settlement and curtailment loss in earnings in conjunction with the pension plan termination and changes in the fair value of derivatives, net of the decrease in net earnings.

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. The COVID-19 pandemic may continue to significantly impact the economy and our ability to generate future cash flows. In particular, if the foodservice industry is slow to recover, our future cash flows could be negatively impacted.

We strive to maintain a conservative financial position as 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.

The situation surrounding COVID-19 remains fluid and its future impact on the company’s business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. We believe the fundamentals of the company remain strong and that we have sufficient liquidity on hand to continue business operations during the pandemic. The company had total available liquidity of $803.4 million as of October 3, 2020, consisting of cash on hand and the available balances under our credit facility and accounts receivable securitization facility (the “facility”).

In light of the potential risks associated with the pandemic, the company has taken actions to safeguard its capital position. During the first quarter of fiscal 2020, we borrowed an additional $200.0 million under our credit facility. We borrowed this additional amount out of an abundance of caution to ensure future liquidity given the significant impact on global financial markets and economies as a result of the COVID-19 outbreak. If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including amounts available on our debt facilities, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds.

Liquidity Discussion for the Forty Weeks Ended October 3, 2020 and October 5, 2019

The pandemic presents potential new risks to the company’s business. Although there has been no material adverse impact on the company’s results of operations for the forty weeks ended October 3, 2020, we considered various potential COVID-19-related business risks. Those potential risks include foodservice business continuity as customers have experienced disruptions that negatively impacted their sales and could affect their ability to meet their obligations, including to the company, an extension of days of sales outstanding as customers shift to work-from-home operations, and possible further impacts to production, among other risks.

Cash and cash equivalents were $325.8 million at October 3, 2020 compared to $11.0 million at December 28, 2019, an increase of $314.8 million as a result of the increased liquidity risk discussed above. 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 3, 2020			October 5, 2019			Change
Cash provided by operating activities	$	364,436		$	278,100		$	86,336
Cash disbursed for investing activities		(52,587	)		(65,106	)		12,519
Cash provided by (disbursed for) financing activities		2,938			(231,332	)		234,270
Total change in cash	$	314,787		$	(18,338	)	$	333,125

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 3, 2020			October 5, 2019			Change
Depreciation and amortization	$	110,005		$	111,344		$	(1,339	)
Restructuring and related impairment charges		21,310			5,663			15,647
Loss (gain) reclassified from accumulated other comprehensive income to net income		2,224			(3,942	)		6,166
Allowances for accounts receivable		11,050			8,819			2,231
Stock-based compensation		9,669			5,834			3,835
Deferred income taxes		(34,083	)		8,570			(42,653	)
Pension and postretirement plans cost		109,929			2,487			107,442
Other non-cash items		4,031			1,243			2,788
Net non-cash adjustment to net income	$	234,135		$	140,018		$	94,117

•

Refer to the Restructuring and related impairment charges and Pension plan termination discussions in the “Matters Affecting Comparability” section above for additional information.

•

The change in deferred income taxes was primarily due to the termination of Plan No. 1.

•

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 3, 2020			October 5, 2019			Change
Changes in accounts receivable, net	$	(37,498	)	$	(19,519	)	$	(17,979	)
Changes in inventories, net		(3,224	)		(7,824	)		4,600
Changes in hedging activities, net		6,105			(6,683	)		12,788
Changes in other assets and accrued liabilities, net		51,513			7,481			44,032
Changes in accounts payable, net		24,511			4,808			19,703
Qualified pension plan contributions		(7,600	)		(2,500	)		(5,100	)
Net changes in working capital and pension plan contributions	$	33,807		$	(24,237	)	$	58,044

•

Changes in accounts receivable, inventories, and accounts payable resulted from sales increases.

•

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 continue to occur as part of our hedging program.

•

The change in other assets primarily resulted from changes in income tax receivable balances year over year and changes in deferred gains recorded in conjunction with the sale of distribution rights to IDPs. Changes in employee compensation and legal accruals and changes in payroll and income taxes payable resulted in the change in other accrued liabilities. During the first quarter of fiscal 2020 and fiscal 2019, we paid $18.6 million and $7.9 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plan. An additional $0.2 million and $1.2 million was paid during the first quarter of fiscal 2020 and fiscal 2019, respectively, for our share of employment taxes on the vesting of employee restricted stock awards in each respective year. During the forty weeks ended October 3, 2020, we recognized $6.2 million of legal settlements and paid $3.2 million of legal settlements. In the prior year, we paid $7.9 million of legal settlements, all of which had been accrued for in prior periods. Under the CARES Act, the company expects to defer an estimated $32.0 million of the employer share of the Social Security tax for the period beginning the second quarter of fiscal 2020 through December 31, 2020, and deferred $19.8 million through the third quarter of fiscal 2020. The company otherwise is responsible for the remaining federal employment taxes. The deferred employment tax will be paid over the next two years with half of the required amount to be paid by December 31, 2021 and the remaining amount by December 31, 2022.

•

During the forty weeks ended October 3, 2020, the company made a voluntary defined benefit plan pension contribution of $7.6 million to Plan No. 2. The company made a voluntary defined benefit plan pension contribution of $2.5 million to Plan No. 2 in the third quarter of fiscal 2019. 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 3, 2020 and October 5, 2019, respectively (amounts in thousands):

	For the Forty Weeks Ended
	October 3, 2020			October 5, 2019			Change
Purchases of property, plant, and equipment	$	(68,270	)	$	(70,610	)	$	2,340
Principal payments from notes receivable, net of repurchases of independent distributor territories		13,983			2,956			11,027
Proceeds from sale of property, plant and equipment		1,700			2,548			(848	)
Net cash disbursed for investing activities	$	(52,587	)	$	(65,106	)	$	12,519

•

We currently anticipate capital expenditures of $85 million to $95 million for fiscal 2020.

Cash Flows Provided by (Disbursed for) Financing Activities. The table below presents net cash provided by (disbursed for) financing activities for the forty weeks ended October 3, 2020 and October 5, 2019, respectively (amounts in thousands):

	For the Forty Weeks Ended
	October 3, 2020			October 5, 2019			Change
Dividends paid	$	(124,948	)	$	(119,799	)	$	(5,149	)
Payment of financing fees		(206	)		(110	)		(96	)
Stock repurchases		(783	)		(7,054	)		6,271
Change in bank overdrafts		(2,432	)		3,116			(5,548	)
Payment of contingent consideration		(4,700	)		—			(4,700	)
Net change in debt obligations		142,500			(102,500	)		245,000
Payments on financing leases		(6,493	)		(4,985	)		(1,508	)
Net cash provided by (disbursed for) financing activities	$	2,938		$	(231,332	)	$	234,270

•

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 3, 2020 (amounts in thousands, except per share data):

Date Declared	Record Date	Payment Date	Dividend per Common Share		Dividends Paid
August 14, 2020	August 28, 2020	September 11, 2020	$	0.2000	$	42,320
May 21, 2020	June 5, 2020	June 19, 2020	$	0.2000	$	42,320
February 14, 2020	February 28, 2020	March 13, 2020	$	0.1900	$	40,199

Additionally, we paid dividends of $0.1 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 3, 2020, we repurchased 0.04 million shares for $0.8 million under a share repurchase plan approved by our Board of Directors.

•

The payment for contingent consideration was made to satisfy the contingent consideration liability recorded in the Canyon acquisition.

•

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

Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at October 3, 2020 and December 28, 2019, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 4, Leases, and Note 12, Debt and Other Obligations, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

	Balance at						Fixed or	Final
	October 3, 2020			December 28, 2019			Variable Rate	Maturity
Long-term debt and right-of-use lease obligations	(Amounts in thousands)
2026 notes	$	396,562		$	396,122		Fixed Rate	2026
2022 notes		399,277			398,906		Fixed Rate	2022
Credit facility		100,000			41,750		Variable Rate	2022
Accounts receivable securitization facility		114,000			26,000		Variable Rate	2022
Right-of-use lease obligations		372,364			404,503			2041
Other notes payable		—			3,730
		1,382,203			1,271,011
Less: Current maturities of long-term debt and right- of-use lease obligations		(57,176	)		(64,712	)
Long-term debt and right-of-use lease obligations	$	1,325,027		$	1,206,299

Total stockholders' equity
Total stockholders' equity	$	1,351,486		$	1,263,430

The facility and credit facility are generally used for short-term liquidity needs. As discussed above, in light of the continued economic uncertainty in the U.S. and throughout the world due to the COVID-19 pandemic, the company increased its liquidity through borrowings under the facility and credit facility in previous quarters, although we do not have any presently anticipated need for this additional liquidity. 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 23, 2020, we amended the facility to extend the maturity date to September 27, 2022. This amendment was accounted for as a modification and we incurred $0.2 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 3, 2020:

	Amount Available		For the Forty Weeks Ended October 3, 2020
	for Withdrawal at		Highest		Lowest
Facility	October 3, 2020		Balance		Balance
	(Amounts in thousands)
The facility	$	86,000	$	154,000	$	19,000
The credit facility (1)		391,600		235,000		6,400
	$	477,600

(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 8, Derivative Financial Instruments, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the forty weeks ended October 3, 2020, the company borrowed $272.6 million in revolving borrowings under the credit facility and repaid $214.4 million in revolving borrowings. 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 3, 2020, the company was in compliance with all restrictive covenants under our debt agreements.

The company has debt exposure to LIBOR and sufficient LIBOR successor rate provisions to cover the discontinuance of LIBOR. The company continues to monitor the progression of LIBOR discontinuation and the recommendation for an alternative interest rate benchmark.

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 3, 2020, 0.04 million shares, at a cost of $0.8 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through October 3, 2020, 68.4 million shares, at a cost of $643.4 million, have been repurchased.

Off-Balance Sheet Arrangements

At October 3, 2020, 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 3, 2020, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $7.7 million, based on quoted market prices. Of this amount, approximately $7.7 million relates to instruments that will be utilized in fiscal 2021 and an immaterial amount in fiscal year 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 3, 2020, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $13.3 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 Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the CEO and the CFO and CAO concluded that the company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the company files or submits to the SEC under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the fiscal quarter ended October 3, 2020 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 14, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

ITEM 1A. RISK FACTORS

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

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 3, 2020. During the forty weeks ended October 3, 2020, 0.04 million shares, at a cost of $0.8 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through October 3, 2020, 68.4 million shares, at a cost of $643.4 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		—	Amended and Restated Articles of Incorporation of Flowers Foods, Inc., as amended through May 21, 2020 (Incorporated by reference to Exhibit 3.1 to Flowers Foods’ Current Report on Form 8-K, dated May 28, 2020, File No. 1-16247).
3.2		—	Amended and Restated Bylaws of Flowers Foods, Inc., as amended through May 21, 2020 (Incorporated by reference to Exhibit 3.2 to Flowers Foods’ Current Report on Form 8-K, dated May 28, 2020, File No. 1-16247).
10.1	*	—	Eighth Amendment to Receivables Loan, Security and Servicing Agreement, dated as of September 23, 2020, among Flowers Finance II, LLC, Flowers Foods, Inc., Nieuw Amsterdam Receivables Corporation B.V., Coӧperatieve Rabobank U.A. (f/k/a Coӧperatieve Centrale Raiffeisen-Boerenleenbank B.A.), as facility agent for the Nieuw Amsterdam Lender Group and as a committed lender, Regions Bank, as facility agent for the Regions Bank Lender Group and as a committed lender, and Coӧperatieve Rabobank U.A., New York Branch (f/k/a Coӧperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch), as administrative agent.
31.1	*	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	*	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by A. Ryals McMullian, President and Chief Executive Officer, and R. Steve Kinsey, Chief Financial Officer and Chief Accounting Officer, for the quarter ended October 3, 2020.
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 3, 2020 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 Accounting Officer

Date: November 5, 2020