United States
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 4, 2008

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

For the transition period from                 to                

FLOWERS FOODS, INC.

GEORGIA		58-2582379
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA (Address of principal executive offices)

31757 (Zip Code)

229/226-9110 (Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

TITLE OF EACH CLASS		OUTSTANDING AT NOVEMBER 7, 2008
Common Stock, $.01 par value with Preferred Share Purchase Rights		92,746,782

 

 

FLOWERS FOODS, INC.

INDEX

		PAGE
		NUMBER
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of October 4, 2008 and December 29, 2007			4
Condensed Consolidated Statements of Income for the Twelve and Forty Weeks Ended October 4, 2008 and October 6, 2007			5
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Forty Weeks Ended October 4, 2008			6
Condensed Consolidated Statements of Cash Flows for the Forty Weeks Ended October 4, 2008 and October 6, 2007			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
PART II. Other Information
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 6. Exhibits			34
Signatures			35
Exhibit index			36
EX-31.1
EX-31.2
EX-31.3
EX-32

FORWARD-LOOKING STATEMENTS

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

     Forward-looking statements are based on current information and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results, performance, and achievements to differ materially from those projected are discussed in this report and may include, but are not limited to:

	•		unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including changes in pricing, advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with our employees, independent distributors and third party service providers; and (vi) laws and regulations (including environmental and health-related issues), accounting standards or tax rates in the markets in which we operate;
	•		the loss or financial instability of any significant customer(s);
	•		our ability to execute our business strategy, which may involve integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values;
	•		our ability to operate existing, and any new, manufacturing lines according to schedule;
	•		the level of success we achieve in developing and introducing new products and entering new markets;
	•		changes in consumer behavior, trends and preferences, including health and whole grain trends;
	•		our ability to implement new technology as required;
	•		the credit and business risks associated with our independent distributors and customers which operate in the highly competitive retail food and foodservice industries, including the amount of consolidation in these industries;
	•		customer and consumer reaction to pricing actions; and
	•		any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events.

     The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Please refer to Part I, Item 1A., Risk Factors, in the company’s Form 10-K for the year ended December 29, 2007 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.

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)

		OCTOBER 4, 2008				DECEMBER 29, 2007
ASSETS
Current Assets:
Cash and cash equivalents		$	17,383			$	19,978
Accounts and notes receivable, net of allowances of $1,042 and $131, respectively			171,247				137,682
Inventories, net:
Raw materials			18,136				14,257
Packaging materials			13,813				10,809
Finished goods			26,761				22,271
			58,710				47,337
Spare parts and supplies			31,637				28,574
Deferred taxes			34,842				1,863
Other			69,385				33,800
Total current assets			383,204				269,234
Property, Plant and Equipment, net of accumulated depreciation of $592,107 and $556,960, respectively			591,103				486,522
Notes Receivable			92,673				88,469
Assets Held for Sale — Distributor Routes			9,692				12,396
Other Assets			29,141				32,525
Goodwill			197,938				76,338
Other Intangible Assets, net			107,645				22,051
Total assets		$	1,411,396			$	987,535
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and capital leases		$	18,832			$	6,920
Accounts payable			120,291				98,302
Other accrued liabilities			154,445				108,423
Total current liabilities			293,568				213,645
Long-Term Debt and Capital Leases			276,587				22,508
Other Liabilities:
Deferred taxes			94,356				50,974
Other			49,901				36,391
Total other liabilities			144,257				87,365
Minority Interest in Variable Interest Entity			9,167				7,802
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock — $100 par value, 200,000 authorized and none issued
Preferred stock — $.01 par value, 800,000 authorized and none issued
Common stock — $.01 par value, 500,000,000 authorized shares, 101,659,924 shares and 101,659,924 shares issued, respectively			1,017				1,017
Treasury stock — 8,913,142 shares and 9,755,350 shares, respectively			(157,799	)			(154,801	)
Capital in excess of par value			520,706				484,472
Retained earnings			351,222				303,386
Accumulated other comprehensive (loss) income			(27,329	)			22,141
Total stockholders’ equity			687,817				656,215
Total liabilities and stockholders’ equity		$	1,411,396			$	987,535

(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								FOR THE FORTY
		WEEKS ENDED								WEEKS ENDED
		OCTOBER 4, 2008				OCTOBER 6, 2007				OCTOBER 4, 2008				OCTOBER 6, 2007
Sales		$	575,937			$	475,225			$	1,793,300			$	1,563,010
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)			298,792				244,321				942,356				796,215
Selling, marketing and administrative expenses			217,382				181,727				666,719				603,282
Depreciation and amortization			17,373				15,357				54,318				50,590
Gain on sale of assets			—				—				2,306				—
Gain on insurance recovery			—				718				686				718
Income from operations			42,390				34,538				132,899				113,641
Interest expense			(1,903	)			(762	)			(3,077	)			(2,911	)
Interest income			2,914				2,747				10,242				8,761
Income before income taxes and minority interest			43,401				36,523				140,064				119,491
Income tax expense			15,519				12,788				50,012				42,202
Income before minority interest			27,882				23,735				90,052				77,289
Minority interest in variable interest entity			(467	)			(1,234	)			(2,905	)			(4,105	)
Net income		$	27,415			$	22,501			$	87,147			$	73,184
Net Income Per Common Share:
Basic:
Net income per share		$	0.30			$	0.25			$	0.95			$	0.81
Weighted average shares outstanding			92,407				91,113				91,919				90,788
Diluted:
Net income per share		$	0.29			$	0.24			$	0.94			$	0.79
Weighted average shares outstanding			93,297				92,524				92,707				92,234
Cash dividends paid per common share		$	0.15			$	0.125			$	0.425			$	0.333

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)

														Capital								Accumulated
						Common Stock								in Excess								Other				Treasury Stock
		Comprehensive				Number of				Par				of Par				Retained				Comprehensive				Number of
		Income				Shares Issued				Value				Value				Earnings				(Loss) Income				Shares				Cost				Total
		(Amounts in thousands, except for share data)
Balances at December 29, 2007							101,659,924			$	1,017			$	484,472			$	303,386			$	22,141				(9,755,350	)		$	(154,801	)		$	656,215
Net income		$	87,147																87,147																87,147
Derivative instruments			(49,628	)																			(49,628	)											(49,628	)
Amortization of prior service costs			158																				158												158
Comprehensive income		$	37,677
Exercise of stock options															(1,947	)											289,775				4,626				2,679
Issuance of restricted stock award															(3,984	)											249,880				3,984				0
Issuance of deferred stock award															(386	)											24,045				386				0
Amortization of deferred and restricted stock awards															4,669																				4,669
Stock option compensation															3,354																				3,354
Tax benefits related to share based awards															2,229																				2,229
Stock repurchases																											(1,720,148	)			(44,072	)			(44,072	)
Issuance for acquisition															32,299												1,998,656				32,078				64,377
Dividends paid — $0.425 per common share																			(39,311	)															(39,311	)
Balances at October 4, 2008							101,659,924			$	1,017			$	520,706			$	351,222			$	(27,329	)			(8,913,142	)		$	(157,799	)		$	687,817

(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 4, 2008				OCTOBER 6, 2007
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income		$	87,147			$	73,184
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation			9,271				12,721
Depreciation and amortization			54,318				50,590
Deferred income taxes			(3,072	)			(3,550	)
Provision for inventory obsolescence			705				727
Allowances for accounts receivable			940				1,114
Minority interest in variable interest entity			2,905				4,105
Other			(2,483	)			(1,183	)
Changes in assets and liabilities:
Accounts and notes receivable, net			(16,123	)			(7,572	)
Inventories, net			(8,358	)			(4,940	)
Other assets			(40,791	)			22,418
Pension contributions			—				(1,000	)
Accounts payable and other accrued liabilities			(35,603	)			8,602
NET CASH PROVIDED BY OPERATING ACTIVITIES			48,856				155,216
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(68,470	)			(47,443	)
Increase of notes receivable			(4,988	)			(13,011	)
Acquisitions, net of cash acquired			(168,087	)			—
Other			3,600				1,296
NET CASH DISBURSED FOR INVESTING ACTIVITIES			(237,945	)			(59,158	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid			(39,311	)			(30,483	)
Exercise of stock options			2,679				16,885
Income tax benefit related to stock awards			1,977				7,102
Stock repurchases			(44,072	)			(12,763	)
Payment of financing fees			(747	)			—
Change in book overdraft			5,214				(8,948	)
Proceeds from debt borrowings			456,000				146,500
Debt and capital lease obligation payments			(195,246	)			(203,073	)
NET CASH PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES			186,494				(84,780	)
Net (decrease) increase in cash and cash equivalents			(2,595	)			11,278
Cash and cash equivalents at beginning of period			19,978				13,914
Cash and cash equivalents at end of period		$	17,383			$	25,192

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     INTERIM FINANCIAL STATEMENTS — The accompanying unaudited condensed consolidated financial statements of Flowers Foods, Inc. (“the company”) have been prepared by the company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the company’s financial position, the results of its operations and its cash flows. The results of operations for the twelve and forty week periods ended October 4, 2008 and October 6, 2007 are not necessarily indicative of the results to be expected for a full year. The balance sheet at December 29, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

     ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 intangibles, self-insurance reserves, income tax expense and accruals and pension obligations. These estimates are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

     REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2008 consists of 53 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 19, 2008 (sixteen weeks), second quarter ended July 12, 2008 (twelve weeks), third quarter ended October 4, 2008 (twelve weeks) and fourth quarter ending January 3, 2009 (thirteen weeks).

     SEGMENTS — The company consists of two business segments: direct-store-delivery (“DSD”), formerly referred to as Flowers Foods Bakeries Group, and warehouse delivery, formerly referred to as Flowers Foods Specialty Group. The DSD segment focuses on the production and marketing of bakery products to customers in the southeastern, southwestern and mid-Atlantic areas of the United States primarily through its direct-store-delivery system. The warehouse delivery segment produces snack cakes for sale to co-pack, retail and vending customers as well as frozen bread, rolls and buns for sale to retail and foodservice customers primarily through warehouse distribution.

     SIGNIFICANT CUSTOMER — Following is the effect our largest customer, Wal-Mart/Sam’s Club, had on the company’s sales for the twelve and forty weeks ended October 4, 2008 and October 6, 2007. No other customer accounted for 10% or more of the company’s sales.

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 4, 2008				OCTOBER 6, 2007				OCTOBER 4, 2008				OCTOBER 6, 2007
		(Percent of Sales)								(Percent of Sales)
DSD			18.0	%			17.7	%			18.0	%			17.3	%
Warehouse delivery			2.5				2.5				2.6				2.6
Total			20.5	%			20.2	%			20.6	%			19.9	%

2. COMPREHENSIVE INCOME (LOSS)

     Other comprehensive income (loss) results from derivative financial instruments and amortization of prior service costs related to the company’s defined benefit and postretirement plans pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R (“SFAS 158”). Total comprehensive income, determined as net income adjusted by other comprehensive income (loss), was $(15.9) million and $37.7 million for the twelve and forty weeks ended October 4, 2008, respectively. Total comprehensive income was $31.1 million and $85.6 million for the twelve and forty weeks ended October 6, 2007, respectively.

     During the forty weeks ended October 4, 2008, changes to accumulated other comprehensive income (loss), net of income tax, were as follows (amounts in thousands):

Accumulated other comprehensive income, December 29, 2007		$	22,141
Derivative transactions:
Net deferred gains on closed contracts, net of income tax of $(3,509)			(5,605	)
Reclassified to earnings, net of income tax of $303			485
Effective portion of change in fair value of hedging instruments, net of income tax of $(27,863)			(44,508	)
Amortization of prior service costs, net of income tax of $95			158
Accumulated other comprehensive loss, October 4, 2008		$	(27,329	)

3. ACQUISITIONS

     On August 4, 2008, the company acquired 100% of the outstanding shares of capital stock of C & G Holdings, Inc. which operates under the name ButterKrust Bakery (“ButterKrust”). ButterKrust manufactures fresh breads and rolls in Lakeland, Florida and its products are available throughout Florida under the Country Hearth, Rich Harvest, and Sunbeam brands, as well as store brands. The results of ButterKrust’s operations have been included in the consolidated financial statements since August 4, 2008 and are included in the company’s DSD operating segment. As a result of the acquisition, the company has added additional production capacity in the Florida market.

     The aggregate purchase price was $91.0 million in cash, including the payoff of certain indebtedness and other payments and acquisition costs. The following table presents the preliminary allocation of the acquisition cost, including professional fees and other related costs, to the assets acquired and liabilities assumed, based on their fair values (amounts in thousands):

At August 4, 2008
Purchase price:
Cash, including acquisition costs		$	90,983
Total consideration						$	90,983
Allocation of purchase price:
Current assets		$	8,214
Property, plant, and equipment			36,880
Other assets			1,591
Intangible assets			22,600
Goodwill			56,805
Total assets acquired						$	126,090
Current liabilities		$	11,119
Long-term debt and other			4,672
Long-term pension and postretirement liabilities			9,081
Deferred tax liabilities			10,235
Total liabilities assumed						$	35,107
Net assets acquired						$	90,983

     The allocation of the purchase price is based on preliminary data and could change when final valuation is completed. The following table presents the allocation of the intangible assets subject to amortization (amounts in thousands, except for amortization periods):

						Weighted average
		Amount				Amortization years
Trademarks		$	2,200				22.0
Customer relationships			18,900				25.0
		$	21,100				24.7

     Acquired intangible assets not subject to amortization include trademarks for $1.5 million. Goodwill of $56.8 million is allocated to the DSD operating segment. None of the intangible assets, including goodwill, are deductible for tax purposes.

     On August 11, 2008, a wholly owned subsidiary of the company merged with Holsum Holdings, LLC. (“Holsum”). Holsum operates two bakeries in the Phoenix, Arizona area and serves customers in Arizona, New Mexico, southern Nevada and southern California with fresh breads and rolls under the Holsum, Aunt Hattie’s, and Roman Meal brands. The results of Holsum’s operations are included in the company’s consolidated financial statements as of August 11, 2008 and are included in the company’s DSD operating segment. As a result of the merger, the company has expanded into new geographic markets.

     The aggregate purchase price was $143.7 million, consisting of $79.8 million in cash, including the payoff of certain indebtedness, 1,998,656 shares of company common stock, contingent consideration, a working capital adjustment and acquisition costs. The value of the shares issued was determined based on application of Emerging Issues Task Force Issue 97-15 ‘Accounting for Contingency Arrangements Based on Security Prices in a Purchase Business Combination’ (the “Issue”). The contingent consideration payment of up to $5.0 million is payable to the sellers in cash should the company’s common stock not trade over a target price for ten consecutive trading days during the two year period beginning February 11, 2009. Any future contingent payment made will affect the company’s equity and not goodwill.

     The following table presents the preliminary allocation of the acquisition cost, including professional fees and other related costs, to the assets acquired and liabilities assumed, based on their fair values (amounts in thousands):

At August 11, 2008
Purchase price:
Cash, including acquisition costs		$	79,842
Common stock			64,377
Estimated working capital adjustment			(476	)
Total consideration						$	143,743
Allocation of purchase price:
Current assets		$	19,757
Property, plant, and equipment			54,924
Other assets			330
Intangible assets			64,900
Goodwill			64,795
Total assets acquired						$	204,706
Current liabilities		$	19,546
Deferred taxes			35,337
Long-term liabilities			6,080
Total liabilities assumed						$	60,963
Net assets acquired						$	143,743

     The allocation of the purchase price is based on preliminary data and could change when final valuation is completed. The following table presents the allocation of the intangible assets subject to amortization (amounts in thousands, except for amortization periods):

						Weighted average
		Amount				Amortization years
Trademarks		$	19,200				20.0
Customer relationships			43,100				20.0
Distributor relationships			2,600				15.0
		$	64,900				19.8

     Goodwill of $64.8 million is allocated to the DSD operating segment. None of the intangible assets, including goodwill, are deductible for tax purposes.

     The following unaudited pro forma consolidated results of operations have been prepared as if the acquisitions of ButterKrust and Holsum occurred at the beginning of each period presented (amounts in thousands, except per share data):

		For the twelve weeks ended								For the forty weeks ended
		October 4, 2008				October 6, 2007				October 4, 2008				October 6, 2007
Sales		$	597,795			$	527,445			$	1,993,218			$	1,732,572
Net income		$	27,006			$	21,981			$	85,866			$	72,368
Net income per share — Basic		$	0.29			$	0.24			$	0.92			$	0.78
Net income per share — Diluted		$	0.29			$	0.23			$	0.91			$	0.77

     These amounts have been calculated after adjusting the results of ButterKrust and Holsum to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and amortizable intangible assets had been applied from the beginning of each period presented. In addition, pro forma adjustments have been made for the common shares issued for Holsum and the interest incurred for financing the acquisitions. Taxes have also been adjusted for the effect of the items discussed.

4. GAIN ON SALE OF ASSETS

     During the second quarter of fiscal 2008 the company completed the sale and closure of a plant in Atlanta, Georgia resulting in a gain of $2.3 million. The company incurred $1.7 million of cost of goods sold expenses primarily for employee severance, obsolete inventory, and equipment relocation costs. An additional $0.3 million related to the closure of the facility is included in selling, marketing and administrative expenses.

5. GOODWILL AND OTHER INTANGIBLES

     The changes in the carrying amount of goodwill for the forty weeks ended October 4, 2008, are as follows (amounts in thousands):

		DSD				Warehouse delivery				Total
Balance as of December 29, 2007		$	71,861			$	4,477			$	76,338
Goodwill acquired during the year			121,600				—				121,600
Balance as of October 4, 2008		$	193,461			$	4,477			$	197,938

     During the forty weeks ended October 4, 2008, the company acquired two companies that are included in the DSD operating segment. See Note 3. Acquisitions for goodwill and amortizable intangible asset increases related to these acquisitions.

     As of October 4, 2008 and December 29, 2007, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

		October 4, 2008												December 29, 2007
						Accumulated												Accumulated
Asset		Cost				Amortization				Net Value				Cost				Amortization				Net Value
Trademarks		$	33,608			$	1,296			$	32,312			$	12,208			$	826			$	11,382
Customer relationships			75,434				4,825				70,609				13,434				3,426				10,008
Non-compete agreements			1,874				1,223				651				1,874				1,213				661
Distributor relationships			2,600				27				2,573				—				—				—
Total		$	113,516			$	7,371			$	106,145			$	27,516			$	5,465			$	22,051

     There is an additional $1.5 million of indefinite life intangible assets from the ButterKrust acquisition separately identified from goodwill. In connection with the sale of Mrs. Smith’s Bakeries frozen dessert business in April 2003, the company entered into a 5-year non-compete agreement (“agreement”) with Schwan valued at $3.0 million recorded as an intangible liability. The company recognized income related to this agreement as a reduction of amortization expense over the life of the agreement. The carrying amount of this liability at December 29, 2007 was $0.2 million and was fully accreted to income during the forty weeks ended October 4, 2008.

     Aggregate amortization expense for the twelve weeks ended October 4, 2008 and October 6, 2007 were as follows (amounts in thousands):

		2008				2007
Amortizable intangible assets expense		$	1,033			$	431
Amortizable intangible liabilities (income)			—				(138	)
Other			(11	)			(11	)
Total		$	1,022			$	282

     Aggregate amortization expense for the forty weeks ended October 4, 2008 and October 6, 2007 were as follows (amounts in thousands):

		2008				2007
Amortizable intangible assets expense		$	1,906			$	1,688
Amortizable intangible liabilities (income)			(196	)			(462	)
Other			(34	)			(34	)
Total		$	1,676			$	1,192

     Estimated amortization of intangibles for the remainder of 2008 and the next four years is as follows (amounts in thousands):

		Amortization of
		Intangibles
Remainder of 2008		$	1,354
2009			5,816
2010			5,791
2011			5,791
2012			5,791

6. RECENT ACCOUNTING PRONOUNCEMENTS

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective December 30, 2007, did not have a material impact on our consolidated financial position and results of operations. Please refer to Note 7 Derivative Financial Instruments for a detailed discussion.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141R is effective, on a prospective basis,

for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of SFAS No. 141R on its consolidated balance sheet and statements of income.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in unconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The company is currently assessing the impact of SFAS No. 160 on its consolidated financial position and results of operations.

     In February 2008, the FASB issued Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2) which delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities that are recognized or disclosed in the financial statements at fair value on a nonrecurring basis only. These include nonfinancial assets and liabilities not measured at fair value on an ongoing basis but subject to fair value adjustments in certain circumstances, for example, assets that have been deemed to be impaired. The company is currently assessing the impact of FSP 157-2 on its consolidated financial position and results of operations.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The company is currently evaluating the requirements of SFAS No. 161. The adoption of SFAS No. 161 is not expected to have an impact on the company’s financial position, results of operations or cash flows as the pronouncement addresses disclosure requirements only.

     In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not anticipate that the adoption of SFAS 162 will materially impact the company.

     In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The company is currently assessing the impact of the adoption of FSP EITF No. 03-6-1 but does not expect the impact to have a material effect on its results of operations or earnings per share.

7. DERIVATIVE FINANCIAL INSTRUMENTS

     In the first fiscal quarter of fiscal 2008 the company began measuring the fair value of its derivative portfolio using common definitions under SFAS No. 157, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. Under SFAS No. 157, measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1:    Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets

Level 2:    Modeled fair value with model inputs that are all observable market values

Level 3:    Modeled fair value with at least one model input that is not an observable market value

     This change in measurement technique had no material impact on the reported value of our derivative portfolio.

COMMODITY PRICE RISK

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

     As of October 4, 2008, the company’s commodity hedge portfolio contained derivatives with a fair value of $(49.4) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

		Level 1				Level 2				Level 3				Total
Assets:
Other current		$	—			$					—			$
Other long-term			—				—				—				—
Total			—				—				—				—
Liabilities:
Other current			(38.2	)			(7.5	)			—				(45.7	)
Other long-term			(2.7	)			(1.0	)			—				(3.7	)
Total			(40.9	)			(8.5	)			—				(49.4	)
Net Fair Value		$	(40.9	)		$	(8.5	)		$	—			$	(49.4	)

     The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2009. Under SFAS 133, these instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. The company held no commodity derivatives at October 4, 2008 or December 29, 2007 that did not qualify for hedge accounting under SFAS 133. As of October 4, 2008, there is also $55.8 million recorded in other current assets representing collateral for hedged positions.

     During the forty weeks ended October 4, 2008, $0.5 million was recorded to income for net gains obtained from exiting derivative positions acquired with ButterKrust Bakery and Holsum Bakery, Inc. that did not qualify for hedge accounting treatment. Additionally, $(1.0) million was recorded to income due to changes in fair value of the company’s commodity derivative instruments.

     As of October 4, 2008, the balance in accumulated other comprehensive income related to commodity derivative transactions was $28.8 million. Of this total, approximately $15.8 million, $13.9 million and $0.1 million were related to instruments expiring in 2008, 2009 and 2010, respectively, and $(1.0) million was related to deferred gains on cash flow hedge positions.

INTEREST RATE RISK

     On July 9, 2008 and August 13, 2008, the company entered interest rate swaps with notional amounts of $85.0 million, and $65.0 million, respectively, to fix the interest rate on the $150.0 million term loan executed on August 1, 2008 to fund the acquisitions of ButterKrust and Holsum.

     The interest rate swap agreements result in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amount. The interest rate differential to be paid or received will be recorded as interest expense. Under SFAS 133, these swap transactions are designated as cash-flow hedges. Accordingly, the effective portion of changes in the fair value of the swaps are recorded each period in other comprehensive income. Any ineffective portions of changes in fair value are recorded to current period earnings in selling, marketing and administrative expenses.

     As of October 4, 2008, the aggregate fair value of the interest rate swaps was $(2.0) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

		Level 1				Level 2				Level 3				Total
Assets:
Other current		$	—			$	—			$	—			$	—
Other long-term			—				—				—				—
Total			—				—				—				—
Liabilities:
Other current			—				(1.5	)			—				(1.5	)
Other long-term			—				(0.5	)			—				(0.5	)
Total			—				(2.0	)			—				(2.0	)
Net Fair Value		$	—			$	(2.0	)		$	—			$	(2.0	)

     During the forty weeks ended October 4, 2008, interest expense was not materially impacted by periodic settlements of the swaps.

     As of October 4, 2008, the balance in accumulated other comprehensive income related to interest rate derivative transactions was $1.26 million. Of this total, approximately $0.05 million, $1.10 million, $0.46 million, $(0.10) million, $(0.18) million and $(0.07) million, were related to instruments expiring in 2008 through 2013, respectively.

8. DEBT AND OTHER OBLIGATIONS

     Long-term debt and capital leases consisted of the following at October 4, 2008 and December 29, 2007 (amounts in thousands):

		OCTOBER 4, 2008				DECEMBER 29, 2007
Unsecured credit facilities		$	264,508			$	—
Capital lease obligations			25,566				23,796
Other notes payable			5,345				5,632
			295,419				29,428
Less current maturities			18,832				6,920
Total long-term debt and capital leases		$	276,587			$	22,508

     The company has a five-year, $250.0 million unsecured revolving loan facility (the “credit facility”) expiring October 5, 2012. The company may request to increase its borrowings under the credit facility up to an aggregate of $350.0 million upon the satisfaction of certain conditions. Proceeds from the credit facility may be used for working capital and general corporate purposes, including acquisition financing, refinancing of indebtedness and share repurchases. The credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the credit facility and can meet presently foreseeable financial requirements. As of October 4, 2008 and December 29, 2007, the company was in compliance with all restrictive financial covenants under its credit facility.

     Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 0.30% for base rate loans and from 0.40% to 1.275% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.35% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. The company paid financing costs of $0.3 million during fiscal 2007 in connection with an amendment of its credit facility. These costs, along with unamortized financing costs on the company’s former credit facility of $0.6 million, were deferred and are being amortized over the term of the credit facility. Outstanding borrowings under the credit facility were $114.5 million at October 4, 2008. There were no outstanding borrowings under the credit facility at December 29, 2007. Subsequent to the end of the third quarter of fiscal 2008, the company borrowed an additional $4.0 million under the credit facility.

     On August 1, 2008, the company entered into a credit agreement (“term loan”) with various lending parties. The term loan provides for borrowings through the maturity date of August 4, 2013 for the purpose of completing acquisitions. The maximum amount permitted to be outstanding under the term loan is $150.0 million. The term loan includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company

believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the term loan and can meet presently foreseeable financial requirements. As of October 4, 2008, the amount outstanding under the term loan was $150.0 million.

     Interest is due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for Eurodollar loans and is based on the company’s leverage ratio. Principal payments are due quarterly under the term loan beginning on December 31, 2008 at an annual amortization of 10% of the principal balance for each of the first two years, 15% during the third year, 20% during the fourth year, and 45% during the fifth year. The company paid financing costs of $0.8 million in connection with the term loan, which will be amortized over the life of the term loan.

     Currently, the company’s credit ratings by Standard and Poor’s, Fitch Ratings, and Moody’s are BBB-, BBB, and Baa2, respectively. Changes in the company’s credit ratings do not trigger a change in the company’s available borrowings or costs under the credit facility or term loan, but could affect future credit availability.

     Included in accounts payable in the condensed consolidated balance sheets are book overdrafts of $17.4 million and $12.2 million as of October 4, 2008 and December 29, 2007, respectively.

9. VARIABLE INTEREST ENTITY

     The company maintains a transportation agreement with a thinly capitalized entity. This entity transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualifies as a Variable Interest Entity (“VIE”), but not a Special Purpose Entity and under FASB Interpretation No. 46 Consolidation of Variable Interest Entities (“FIN 46”), the company is the primary beneficiary. In accordance with FIN 46, the company consolidates this entity. The VIE has collateral that is sufficient to meet its capital lease and other debt obligations, and the owner of the VIE personally guarantees the obligations of the VIE. The VIE’s creditors have no recourse against the general credit of the company.

     Following is the effect of the VIE during the twelve and forty weeks ended October 4, 2008 and October 6, 2007:

		TWELVE WEEKS ENDED																FORTY WEEKS ENDED
		OCTOBER 4, 2008								OCTOBER 6, 2007								OCTOBER 4, 2008								OCTOBER 6, 2007
						% OF								% OF								% OF								% OF
		VIE				TOTAL				VIE				TOTAL				VIE				TOTAL				VIE				TOTAL
		(Dollars in thousands)
Assets as of respective quarter ends		$	33,046				2.3	%		$	32,744				3.4	%		$	33,046				2.3	%		$	32,744				3.5	%
Sales		$	2,554				0.4	%		$	2,989				0.6	%		$	8,053				0.4	%		$	9,444				0.6	%
Income before income taxes and minority interest		$	467				1.1	%		$	1,234				3.4	%		$	2,905				2.1	%		$	4,105				3.4	%

     The assets consist primarily of $22.7 million and $23.7 million as of October 4, 2008 and October 6, 2007, respectively, of transportation equipment recorded as capital lease obligations.

10. 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.

11. EARNINGS PER SHARE

     The following table calculates basic earnings per common share and diluted earnings per common share for the twelve and forty weeks ended October 4, 2008 and October 6, 2007 (amounts in thousands, except per share data):

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 4, 2008				OCTOBER 6, 2007				OCTOBER 4, 2008				OCTOBER 6, 2007
Basic Earnings Per Common Share:
Net income		$	27,415			$	22,501			$	87,147			$	73,184
Basic weighted average shares outstanding			92,407				91,113				91,919				90,788
Basic earnings per common share		$	0.30			$	0.25			$	0.95			$	0.81
Diluted Earnings Per Common Share:
Net income		$	27,415			$	22,501			$	87,147			$	73,184
Basic weighted average shares outstanding			92,407				91,113				91,919				90,788
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock			890				1,411				788				1,446
Diluted weighted average shares outstanding			93,297				92,524				92,707				92,234
Diluted earnings per common share		$	0.29			$	0.24			$	0.94			$	0.79

     Stock options to purchase 847,992 shares of common stock were not included in the computation of diluted earnings per share for the twelve and forty weeks ended October 4, 2008 and stock options to purchase 831,525 shares were not included in the computation of diluted earnings per share for the twelve and forty weeks ended October 6, 2007 because their effect would have been anti-dilutive.

12. STOCK BASED COMPENSATION

     The company accounts for its stock-based compensation in accordance with SFAS 123R, Share-Based Payment (“SFAS 123R”).

     Flowers Foods’ 2001 Equity and Performance Incentive Plan (“EPIP”) authorizes the compensation committee of the board of directors to make awards of options to purchase our common stock, restricted stock, performance stock and performance units and deferred stock. Our officers, key employees and non-employee directors (whose grants are generally approved by the full board of directors) are eligible to receive awards under the EPIP. The aggregate number of shares that may be issued or transferred under the EPIP is 14,625,000 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. Options granted prior to January 3, 2006 may not be exercised later than ten years after the date of grant, and become exercisable four years from the date of grant and generally vest at that time or upon death, disability or retirement of the optionee or upon change in control of Flowers Foods. Options granted on January 3, 2006 and thereafter may not be exercised later than seven years after the date of grant, become exercisable three years from the date of grant, generally vest at that time or upon death, disability or retirement of the optionee or upon change in control of Flowers Foods. In order to exercise these options the optionees are required to pay the market value calculated as the average high/low trading value at date of grant for pre-2007 awards and the closing market price on the date of grant for post-2006 awards. Non-employee director options generally become exercisable one year from the date of grant and vest at that time. The following is a summary of stock options, restricted stock, and deferred stock outstanding under the EPIP. Information relating to the company’s stock appreciation rights which are not issued under the EPIP is also disclosed below.

Stock Options

     The following non-qualified stock options (“NQSOs”) have been granted under the EPIP with service period remaining. The Black-Scholes option-pricing model was used to estimate the grant date fair value (amounts in thousands, except price data):

Grant date		1/3/2006				2/5/2007				2/4/2008
Shares granted			656				832				850
Exercise price		$	18.68			$	19.57			$	24.75
Vesting date			1/3/2009				2/5/2010				2/4/2011
Fair value per share ($)			6.20				6.30				5.80
Dividend yield (%)(1)			1.60				1.70				1.90

Grant date		1/3/2006				2/5/2007				2/4/2008
Expected volatility (%)(2)			36.00				33.90				27.30
Risk-free interest rate (%)(3)			4.25				4.74				2.79
Expected option life (years)(4)			5.00				5.00				5.00
Outstanding at October 4, 2008			647				824				848

     The stock option activity for the forty weeks ended October 4, 2008 pursuant to the EPIP is set forth below (amounts in thousands, except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Options				Exercise Price				Contractual Term				Intrinsic Value
Outstanding at December 29, 2007			2,417			$	15.15
Granted			850			$	24.75
Exercised			(290	)		$	9.23
Forfeited			(4	)		$	22.30
Outstanding at October 4, 2008			2,973			$	18.46				5.20			$	33,394
Exercisable at October 4, 2008			656			$	8.71				4.50			$	13,764

     As of October 4, 2008, all options outstanding under the EPIP had an average exercise price of $18.46 and a weighted average remaining contractual life of 5.2 years.

     During the forty weeks ended October 4, 2008 and October 6, 2007, the company recorded stock-based compensation expense of $3.4 million and $3.9 million, respectively, relating to NQSOs using the Black-Scholes option-pricing model. During the twelve weeks ended October 4, 2008 and October 6, 2007, the company recorded stock-based compensation expense of $1.0 and $0.9 million, respectively.

     As of October 4, 2008, there was $6.2 million of total unrecognized compensation expense related to outstanding stock options. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.90 years.

     Cash received from option exercises for the forty weeks ended October 4, 2008 and October 6, 2007 was $2.7 million and $16.9 million, respectively. The cash tax benefit realized for the tax deductions from option exercises was $2.2 million and $8.5 million, respectively, for the forty weeks ended October 4, 2008 and October 6, 2007. The total intrinsic value of stock options exercised was $4.5 million and $24.3 million for the forty weeks ended October 4, 2008 and October 6, 2007, respectively.

Restricted Stock

     On January 4, 2004, the effective date of his election as Chief Executive Officer, George Deese was granted 112,500 shares of restricted stock pursuant to the EPIP. The fair value of these restricted shares on the date of grant was approximately $1.3 million. These shares became fully vested on January 4, 2008. The company recorded $0.0 million and $0.1 million in compensation expense during the twelve weeks ended October 4, 2008 and October 6, 2007, respectively, related to this restricted stock. The company recorded $0.0 million and $0.3 million in compensation expense during the forty weeks ended October 4, 2008 and October 6, 2007, respectively, related to this restricted stock.

     During the second quarter of fiscal 2006, non-employee directors were granted an aggregate of 38,460 shares of restricted stock. The fair value of these restricted shares on the date of grant was $0.7 million. These shares fully vested on the first anniversary of the

date of grant. The company recorded $0.0 million in compensation expense during the twelve weeks ended October 6, 2007 and $0.3 million during the forty weeks ended October 6, 2007 related to this restricted stock.

     Certain key employees have been granted restricted stock. Vesting generally occurs two years from the date of grant for the 2006 and 2007 awards if, on this date, the company’s average “return on invested capital” over the vesting period equals or exceeds its weighted average “cost of capital” for the same period (the “ROI Target”). The 2008 awards require the “return on invested capital” to exceed the weighted average “cost of capital” by 2.5% for the same period. Furthermore, each grant of performance-contingent restricted stock will be adjusted as set forth below:

•

if the ROI Target is satisfied, then the performance-contingent restricted stock grant may be adjusted based on the company’s total return to shareholders (“Company TSR”) percent rank as compared to the total return to shareholders of the S&P Packaged Food & Meat Index (“S&P TSR”) in the manner set forth below:

	•		If the Company TSR rank is equal to the 50th percentile of the S&P TSR, then no adjustment;
	•		If the Company TSR rank is less than the 50th percentile of the S&P TSR, the grant shall be reduced by 1.3% for each percentile that the Company TSR is less than the 50th percentile of S&P TSR, but in no event shall such reduction exceed 20%; or
	•		If the Company TSR rank is greater than the 50th percentile of the S&P TSR, the grant shall be increased by 1.3% for each percentile that Company TSR is greater than the 50th percentile of S&P TSR, but in no event shall such increase exceed 20%.

     If the grantee dies, becomes disabled or retires, the performance-contingent restricted stock generally vests immediately. In addition, the performance-contingent restricted stock will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to dividend and voting rights on the restricted shares. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.

     The following restricted stock awards have been granted under the EPIP (amounts in thousands, except price data):

Grant date		1/3/2006				2/5/2007				2/4/2008
Shares granted			204				224				210
Vesting date			1/3/2008				2/5/2009				2/4/2010
Fair value per share		$	19.44			$	20.98			$	27.03
Expense during the twelve weeks ended October 4, 2008		$	—			$	509			$	655
Expense during the twelve weeks ended October 6, 2007		$	503			$	753			$	—
Expense during the forty weeks ended October 4, 2008		$	—			$	1,698			$	1,965
Expense during the forty weeks ended October 6, 2007		$	1,559			$	1,838			$	—

     A summary of the status of the company’s nonvested shares as of October 4, 2008, and changes during the forty weeks ended October 4, 2008, is presented below (amounts in thousands, except price data):

						Weighted Average
		Shares				Grant Date Fair Value
Nonvested at December 29, 2007			537			$	18.42
Granted			210			$	27.03
Vested			(314	)		$	16.59
Forfeited			—			$	—
Nonvested at October 4, 2008			433			$	23.92

     As of October 4, 2008, there was $4.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 0.82 years. The fair value of restricted share awards that vested during fiscal 2008 was $7.1 million on the vesting date.

Stock Appreciation Rights

     The company previously awarded stock appreciation rights (“rights”) to key employees throughout the company. These rights vest at the end of four years and are payable in cash equal to the difference between the grant price and the fair market value of the rights on the vesting date. On July 16, 2007 (the company’s third quarter), 448,350 rights granted in 2003 vested. The company recorded compensation expense for these rights on measurement dates based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model. During the twelve weeks ended October 4, 2008 and October 6, 2007, respectively, the company recorded expense of $0.0 million and $0.0 million related to these rights. During the forty weeks ended October 4, 2008 and October 6, 2007, the company recorded expense of $0.0 million and $3.7 million, respectively, related to these rights.

     Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chairman fees into rights. These rights vest after one year and can be exercised over nine years. The company records compensation expense for these rights at a measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model. During the twelve weeks ended October 4, 2008 and October 6, 2007, respectively, the company recorded expense (income) of $0.1 million and $(0.2) million related to these rights. During the forty weeks ended October 4, 2008 and October 6, 2007, respectively, the company recorded expense of $1.2 million and $0.8 million related to these rights.

     The fair value of the rights at October 4, 2008 ranged from $14.63 to $26.08. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 4, 2008: dividend yield 2.2%; expected volatility 29.0%; risk-free interest rate 2.66% and expected life of 1.45 years to 3.85 years.

     The rights activity for the forty weeks ended October 4, 2008 is set forth below (amounts in thousands except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Rights				Exercise Price				Contractual Term (Years)				Intrinsic Value
Outstanding at December 29, 2007			231			$	11.14
Rights exercised			—				—
Rights forfeited			—				—
Outstanding at October 4, 2008			231			$	11.14				5.17			$	4,307

Deferred Stock

     The company allows non-employee directors to convert their retainers into deferred stock. The deferred stock has a minimum two year vesting period and will be distributed to the individual after that time at a designated time selected by the individual at the date of conversion. During the first quarter of fiscal 2007 and 2008 an aggregate of 20,520 and 22,160 shares, respectively, were converted. The company records compensation expense for this deferred stock over the two-year minimum vesting period based on the closing price of the company’s common stock on the date of conversion.

     During the second quarter of fiscal 2007 and 2008, non-employee directors were granted an aggregate of 34,350 and 35,800 shares, respectively, of deferred stock that has a minimum one year vesting period. The deferred stock will be distributed to the grantee after that time at a designated time selected by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one year minimum vesting period.

     The deferred stock activity for the forty weeks ended October 4, 2008 is set forth below (amounts in thousands, except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Shares				Grant Price				Contractual Term (Years)				Intrinsic Value
Outstanding at December 29, 2007			55			$	21.03
Deferred stock issued			58			$	25.22
Deferred stock exercised			(24	)		$	21.91
Outstanding at October 4, 2008			89			$	23.53				1.14			$	546

     The following table summarizes the company’s stock based compensation expense for the twelve and forty week periods ended October 4, 2008 and October 6, 2007, respectively (amounts in thousands):

		FOR THE TWELVE WEEKS								FOR THE FORTY WEEKS
		ENDED								ENDED
		OCTOBER 4,				OCTOBER 6,				OCTOBER 4,				OCTOBER 6,
		2008				2007				2008				2007
Stock options		$	1,036			$	943			$	3,354			$	3,872
Restricted stock			1,164				1,331				3,663				3,935
Stock appreciation rights			69				(249	)			1,248				4,486
Deferred stock			325				220				1,006				428
Total stock based compensation		$	2,594			$	2,245			$	9,271			$	12,721

13. POST-RETIREMENT PLANS

     On September 29, 2006, the FASB issued SFAS No. 158, which requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS 106”) that have not yet been recognized through net periodic benefit costs will be recognized in accumulated other comprehensive income, net of tax benefits, until they are amortized as a component of net periodic cost. SFAS 158 does not change how pensions and other postretirement benefits are accounted for and reported in the income statement. Companies will continue to follow the existing guidance in SFAS 87, FASB Statement No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits and SFAS 106. SFAS 158 was effective for public companies for fiscal years ending after December 15, 2006. The company adopted the balance sheet recognition provisions of SFAS 158 at December 30, 2006, the end of its fiscal year 2006. SFAS 158 also requires that employers measure the benefit obligation and plan assets as of the fiscal year end for fiscal years ending after December 15, 2008 (the company’s fiscal 2008). In fiscal 2006 and earlier, the company used a September 30 measurement date for its pension and other postretirement benefit plans. The company eliminated the early measurement date in fiscal 2007 and applied the remeasurement alternative in accordance with SFAS 158. Under this alternative, postretirement benefit income measured for the three-month period October 1, 2006 to December 31, 2006 (determined using the September 2006 measurement date) was credited to beginning 2007 retained earnings. As result, the company increased retained earnings $0.7 million, net of taxes of $0.5 million and increased the postretirement benefit asset and liability by $1.3 million and $0.1 million, respectively. The funded status of the company’s postretirement benefit plans was then remeasured at January 1, 2007, resulting in an adjustment to the balance sheet asset, liability and accumulated other comprehensive income. As a result, the postretirement benefit asset was increased $7.4 million and the postretirement benefit liability was decreased $0.7 million, with an offsetting credit to accumulated other comprehensive income of $5.0 million, net of taxes of $3.1 million.

     On August 4, 2008 the company acquired ButterKrust which has defined benefit plans and a postretirement benefit plan. In accordance with SFAS No. 141, the total defined benefit plan and postretirement benefit plan liability of $9.6 million was recorded at the acquisition date and is disclosed in Note 3. Net pension cost for the plans of $0.1 million is recorded in the period for the twelve weeks ended October 4, 2008 for the ButterKrust plans. On August 11, 2008 the company acquired Holsum which has a money purchase plan.

     The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at October 4, 2008 as compared to accounts at December 29, 2007 (amounts in thousands):

		AS OF
		OCTOBER 4,				DECEMBER 29,
		2008				2007
Noncurrent benefit asset		$	40,041			$	34,471
Current benefit liability		$	874			$	403
Noncurrent benefit liability		$	16,450			$	6,599
Accumulated other comprehensive income		$	2,783			$	2,625

Defined Benefit Plans

     The company has trusteed, noncontributory defined benefit pension plans covering certain employees. The benefits are based on years of service and the employees’ career earnings. The plans are funded at amounts deductible for income tax purposes but not less than the minimum funding required by the Employee Retirement Income Security Act of 1974 (“ERISA”). As of October 4, 2008, the assets of the plans included certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities, private and public real estate partnerships, other diversifying strategies and annuity contracts. Effective January 1, 2006, the company curtailed the defined benefit plan that covers the majority of its workforce. Benefits under this plan were frozen, and no

future benefits will accrue under this plan. The company continues to maintain a plan that covers a small number of certain union employees.

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

		FOR THE TWELVE WEEKS								FOR THE FORTY WEEKS
		ENDED								ENDED
		OCTOBER 4,				OCTOBER 6,				OCTOBER 4,				OCTOBER 6,
		2008				2007				2008				2007
Service cost		$	68			$	60			$	225			$	200
Interest cost			4,175				3,770				13,321				12,566
Expected return on plan assets			(5,936	)			(5,307	)			(19,116	)			(17,690	)
Total net periodic benefit income		$	(1,693	)		$	(1,477	)		$	(5,570	)		$	(4,924	)