Flowers Foods - 10-Q quarterly report FY

 

 

     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, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o

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

Yes o          No þ

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

 

     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:

     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 30, 2006 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.

(See Accompanying Notes to Condensed Consolidated Financial Statements)

(See Accompanying Notes to Condensed Consolidated Financial Statements)

(See Accompanying Notes to Condensed Consolidated Financial Statements)

(See Accompanying Notes to Condensed Consolidated Financial Statements)

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 sixteen week periods ended April 21, 2007 and April 22, 2006 are not necessarily indicative of the results to be expected for a full year. The balance sheet at December 30, 2006 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 30, 2006.

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 30, 2006. The company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”) as of December 31, 2006, the beginning of the company’s fiscal 2007.

REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2007 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 21, 2007 (sixteen weeks), second quarter ending July 14, 2007 (twelve weeks), third quarter ending October 6, 2007 (twelve weeks) and fourth quarter ending December 29, 2007 (twelve weeks).

SEGMENTS — The company consists of two business segments: Flowers Foods Bakeries Group, LLC (“Flowers Bakeries”) and Flowers Foods Specialty Group, LLC (“Flowers Specialty”). Flowers Bakeries 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. Flowers Specialty 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 sixteen weeks ended April 21, 2007 and April 22, 2006. No other customer accounted for 10% or more of the company’s sales.

     On January 30, 2003, the company entered into an agreement to sell its Mrs. Smith’s Bakeries frozen dessert business (“Mrs. Smith’s”) to The Schwan Food Company (“Schwan”). Included in those assets were the Stilwell, Oklahoma and Spartanburg, South Carolina production facilities and a portion of the company’s Suwanee, Georgia property. On that date, the assets and liabilities related to Mrs. Smith’s were classified as held for sale in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and recorded at estimable fair value less costs to dispose. On April

24, 2003, the company completed the sale of substantially all the assets of Mrs. Smith’s. Subsequent to the sale, the company paid various expenses related to its operation of Mrs. Smith’s, no single one of which was material to the financial condition or results of operations of the company. During the first quarter of fiscal 2004, based on claim activity, the company established a reserve of $5.1 million ($3.1 million, net of income tax) as an estimate of future expenses likely to be incurred by the company in connection with Mrs. Smith’s. The balance of this reserve as of April 21, 2007 and December 30, 2006 was $0.1 million and $0.1 million, respectively. Included in this reserve was $1.8 million, net of income tax benefit, regarding a settlement of a class action lawsuit related to pie shells produced by Mrs. Smith’s. Additional costs of $0.2 million, net of income tax benefit, were recorded as part of discontinued operations during the third quarter of fiscal 2005 relating to this settlement. During the first quarter of fiscal 2006, the company received an insurance recovery of $2.0 million ($1.2 million, net of income tax) relating to this settlement.

     There were no revenues or results of operations recorded for the discontinued operations in the sixteen weeks ended April 21, 2007 and April 22, 2006.

     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 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”). The company adopted SFAS 158 as of the end of fiscal 2006, however comprehensive income for interim periods in fiscal 2006 continued to include minimum pension liability adjustments pursuant to SFAS No. 87, Employers’ Accounting for Pensions (“SFAS 87”). Total comprehensive income, determined as net income adjusted by other comprehensive income (loss), was $29.4 million and $27.5 million for the sixteen weeks ended April 21, 2007 and April 22, 2006, respectively.

     During the sixteen weeks ended April 21, 2007, changes to accumulated other comprehensive loss, net of income tax, were as follows (amounts in thousands):

     There were no changes in the carrying amount of goodwill for the sixteen weeks ended April 21, 2007. The balance as of April 21, 2007 is as follows (amounts in thousands):

     The changes in the carrying amount of intangible assets, which consist primarily of trademarks, customer-related intangibles and non-compete agreements, for the sixteen weeks ended April 21, 2007 are as follows (amounts in thousands):

     Estimated amortization expense for fiscal 2007, fiscal 2008, fiscal 2009, fiscal 2010 and fiscal 2011 is $2.0 million, $1.5 million, $1.5 million, $1.4 million and $1.4 million, respectively.

     Fair Value Measurements. On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of SFAS 157 will change current practice. SFAS 157 is effective for fiscal years beginning after November 15, 2007 (the company’s fiscal 2008), and interim periods within those fiscal years. The company will assess the effect of this pronouncement on its financial statements, but at this time, no material effect is expected.

     The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (the company’s fiscal 2008). The company will assess the effect of this pronouncement on its financial statements, but at this time, no material effect is expected.

     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, sugar 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 April 21, 2007, the company’s hedge portfolio contained commodity derivatives with a fair value of $3.8 million, which is recorded in other current and long-term assets and liabilities. 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 April 21, 2007 or December 30, 2006 that did not qualify for hedge accounting under SFAS 133.

     Long-term debt and capital leases consisted of the following at April 21, 2007 and December 30, 2006 (amounts in thousands):

     The company has a five-year, $250.0 million unsecured revolving loan facility (the “credit facility”) expiring June 6, 2011. 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.

     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 either rates offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 0.20% for base rate loans and from 0.40% to 1.075% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.30% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. There were $29.0 million in outstanding borrowings under the credit facility at April 21, 2007.

     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 April 21, 2007, the company was in compliance with all restrictive financial covenants under the credit facility.

     Included in accounts payable in the condensed consolidated balance sheets are book overdrafts of $15.3 million and $16.4 million as of April 21, 2007 and December 30, 2006, respectively.

     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 (“FIN 46”), Consolidation of Variable Interest Entities, 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 sixteen weeks ended April 21, 2007 and April 22, 2006:

     The assets consist primarily of $23.1 million and $24.6 million as of April 21, 2007 and April 22, 2006, respectively, of transportation equipment recorded as capital lease obligations.

     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.

     The following table calculates basic earnings per common share and diluted earnings per common share for the sixteen weeks ended April 21, 2007 and April 22, 2006 (amounts in thousands, except per share data):

     Stock options to purchase 989,750 shares and 437,300 shares of common stock were not included in the computation of diluted earnings per share for the sixteen weeks ended April 21, 2007 and April 22, 2006, respectively, because their effect would have been anti-dilutive.

     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 9,750,000 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. Options granted prior to January 1, 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 and become exercisable three 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. 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.

     On February 5, 2007 and during fiscal 2006, fiscal 2003 and fiscal 2001, non-qualified stock options (“NQSOs”) to purchase 554,350 shares, 437,300 shares, 2,138,175 shares and 3,445,200 shares, respectively were granted to eligible employees pursuant to the EPIP. In fiscal 2001, NQSOs to purchase 303,750 shares were granted to non-employee directors. In order to exercise these options, the optionees are required to pay the market value (calculated as the average high/low trading value on the date of grant for the 2001, 2003 and 2006 awards and the closing market price on the date of grant for the 2007 award), which was $29.35 for the fiscal 2007 grant, $28.02 for the fiscal 2006 grant, $14.01 for the fiscal 2003 grant and $6.31 for the fiscal 2001 grant. During fiscal 2005, the NQSOs awarded in fiscal 2001 vested. As of April 21, 2007, there were 194,101 NQSOs outstanding with an exercise price of $6.31, 1,861,275 NQSOs outstanding with an exercise price of $14.01, which will vest in July 2007, 435,400 NQSOs outstanding with an exercise price of $28.02, which will vest in January 2009 and 554,350 NQSO’s outstanding with an exercise price of $29.35, which will vest in February 2010.

     The stock option activity for the sixteen weeks ended April 21, 2007 pursuant to the EPIP is set forth below (amounts in thousands except price data):

     As of April 21, 2007, all options outstanding under the EPIP had an average exercise price of $18.31 and a weighted average remaining contractual life of 6.1 years.

     During the sixteen weeks ended April 21, 2007 and April 22, 2006, the company recorded stock-based compensation expense of $1.6 million and $1.2 million, respectively, relating to NQSOs using the Black-Scholes option-pricing model applying the following assumptions:

The following is a description of the methods used to arrive at the above assumptions:

Dividend yield — estimated dividend yield based on an annual dividend of $0.27.

Expected volatility — based on historical volatility over two years using daily stock prices.

Risk-free interest rate — United States Treasury Constant Maturity rates as of July 16, 2003 (grant date).

Expected option life — equals expected life of grant.

Dividend yield — estimated yield based on the historical dividend payment for the four most recent dividend payments prior to the grant date.

Expected volatility — based on historical volatility over five years using daily stock prices.

Risk-free interest rate — United States Treasury Constant Maturity rates as of January 3, 2006 (grant date).

Expected option life — assumption is based on simplified formula determined in accordance with Staff Accounting Bulletin No. 107, Share-Based Payment.

Dividend yield — estimated yield based on the historical dividend payment for the four most recent dividend payments prior to the grant date.

Expected volatility — based on historical volatility over five years using daily stock prices.

Risk-free interest rate — United States Treasury Constant Maturity rates as of February 5, 2007 (grant date).

Expected option life — assumption is based on simplified formula determined in accordance with Staff Accounting Bulletin No. 107, Share-Based Payment.

     As of April 21, 2007, there was $7.7 million of total unrecognized compensation expense related to outstanding stock options. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 2.3 years.

     Cash received from option exercises for the sixteen weeks ended April 21, 2007 and April 22, 2006 was $3.0 million and $5.3 million, respectively. The cash tax benefit realized for the tax deductions from option exercises was $1.7 million and $7.2 million, respectively, for the sixteen weeks ended April 21, 2007 and April 22, 2006. The total intrinsic value of stock options exercised was $4.3 million and $18.4 million for the sixteen weeks ended April 21, 2007 and April 22, 2006, respectively.

     On January 4, 2004, the effective date of his election as Chief Executive Officer, George Deese was granted 75,000 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 become fully vested on the fourth anniversary of the date of grant. The company recorded $0.1 million and $0.1 million

in compensation expense during the sixteen weeks ended April 21, 2007 and April 22, 2006, respectively, related to this restricted stock.

     During the second quarter of fiscal 2006 and the second quarter of fiscal 2005, non-employee directors were granted an aggregate of 25,640 shares and 29,340 shares, respectively, of restricted stock. The fair value of these restricted shares on the date of grant was $0.7 million and $0.6 million, respectively. These shares become fully vested on the first anniversary of the date of grant. The company recorded $0.2 million and $0.2 million in compensation expense during the sixteen weeks ended April 21, 2007 and April 22, 2006, respectively, related to this restricted stock.

     On February 5, 2007 and January 3, 2006 certain key employees were granted an aggregate of 149,400 shares of performance-contingent restricted stock at a grant price of $29.35 and an aggregate of 135,700 shares of performance-contingent restricted stock at a grant price of $28.02, respectively. Vesting generally occurs two years from the date of grant 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”). Furthermore, each grant of performance-contingent restricted stock will be adjusted as set forth below:

     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 estimated fair value of the restricted stock granted in 2007 and 2006 is $31.47 and $29.16, respectively. The company recorded expense of $1.1 million and $0.6 million for the sixteen weeks ended April 21, 2007 and April 22, 2006, respectively, related to these restricted stock awards. 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 restricted stock activity for the sixteen weeks ended April 21, 2007 is set forth below (amounts in thousands, except price data):

     As of April 21, 2007, there was $5.8 million of total unrecognized compensation expense related to unvested restricted stock. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.5 years.

     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 will vest. These are the only employee rights currently outstanding. The company records 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

sixteen weeks ended April 21, 2007 and April 22, 2006, the company recorded expense of $2.6 million and $0.8 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 theBlack-Scholes option-pricing model. During the sixteen weeks ended April 21, 2007 and April 22, 2006 the company recorded expense of $0.8 million and $0.2 million, respectively, related to these rights.

     The fair value of the rights at April 21, 2007 ranged from $34.02 to $43.17. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholesoption-pricing model at April 21, 2007: dividend yield 1.8%; expected volatility 33.0%; risk-free interest rate 4.62% and expected life of 0.20 years to 4.60 years.

     The rights activity for the sixteen weeks ended April 21, 2007 is set forth below (amounts in thousands, except price data):

     The company allows non-employee directors to convert their retainers into deferred stock. The deferred stock vests two years from the date of grant and is delivered to the grantee at a designated time selected by the grantee at the date of the grant. The company records compensation expense for deferred stock over the two year vesting period based on the closing price of the company’s common stock on the date of grant. On February 5, 2007, 13,680 shares of deferred stock were granted to certain non-employee directors who elected to convert their retainers. Based on the closing stock price of $29.35 on February 5, 2007, the company recorded compensation expense of $0.1 million during the first quarter of fiscal 2007 relating to deferred stock.

     Stock-based compensation expense recognized during the sixteen weeks ended April 21, 2007 and April 22, 2006 is set forth below (amounts in thousands, except per share data):

     As a result of the adoption of SFAS 123R on January 1, 2006, the company recorded in the first quarter of fiscal 2006, as an expense, a cumulative effect of a change in accounting principle of $0.9 million ($0.6 million, net of income tax benefit) relating to its stock appreciation rights. This was a result of the liability as of January 1, 2006 (the day of adoption of SFAS 123R) as computed using the Black-Scholes pricing model being greater than the recorded liability on that day. Prior to the adoption of SFAS 123R, the company computed expense on the vested portion of the rights as the difference between the grant date market value of its stock and the market value of its stock at the end of the respective reporting period.

     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.

     The following summarizes the company's balance sheet related pension and other postretirement benefit plan accounts at April 21, 2007 as compared to accounts at December 30, 2006 (amounts in thousands):

     The amounts above include activity for the first quarter of fiscal 2007 as well as adjustments relating to the elimination of the early measurement date.

     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 April 21, 2007, 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 cost for the company’s plans include the following components (amounts in thousands):

     The company provides certain medical and life insurance benefits for eligible retired employees. The medical plan covers eligible retirees under the active medical plan. The plan incorporates an up-front deductible, coinsurance payments and retiree contributions at COBRA premium levels. Eligibility and maximum period of coverage is based on age and length of service. The life insurance plan offers coverage to a closed group of retirees.

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

     The Flowers Foods 401(k) Retirement Savings Plan (“the Plan”) covers substantially all of the company’s employees who have completed certain service requirements. The cost and contributions for those employees who also participate in the defined benefit pension plan is 25% of the first $400 contributed by the employee. Prior to January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan was 2% of compensation and 50% of the employees’ contributions, up to 6% of compensation. Effective January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan increased to 3% of compensation and 50% of the employees’ contributions, up to 6% of compensation. During the sixteen weeks ended April 21, 2007 and April 22, 2006, the total cost and contributions were $4.8 million and $4.0 million, respectively.

     In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was adopted by the company as of December 31, 2006. As a result of the adoption of FIN 48, the company recorded a cumulative effect adjustment which reduced retained earnings $0.4 million as of December 31, 2006. On the date of adoption, the gross amount of unrecognized tax benefits was $4.4 million, exclusive of interest accrued and is recorded in other long-term liabilities on the condensed consolidated balance sheet at April 21, 2007. This amount (less $1.9 million related to tax imposed in other jurisdictions), if recognized, would impact the effective tax rate.

     The company accrues interest expense and penalties related to income tax liabilities as a component of income before taxes. No accrual of penalties is reflected on the company’s balance sheet as the company believes the accrual of penalties is not necessary based upon the merits of its income tax positions. The company had accrued interest of approximately $0.7 million and $0.6 million at April 21, 2007 and December 30, 2006, respectively.

     During the first quarter of fiscal 2007, the company’s activity with respect to its FIN 48 reserve and related interest expense accrual was immaterial. At this time, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.

     The company defines the federal jurisdiction as well as various multistate jurisdictions as “major” jurisdictions (within the meaning of FIN 48). As of April 21, 2007, the company is no longer subject to federal examination for years prior to 2004, and is no longer subject to state examination with limited exceptions for years prior to 2002.

     The company’s effective tax rate for the first quarter of fiscal 2007 was 35.2%. The difference in the effective rate and the statutory rate is primarily due to state income taxes, the non-taxable earnings of the consolidated variable interest entity and the Section 199 qualifying production activities deduction.

     Flowers Bakeries produces fresh and frozen packaged bread and rolls and Flowers Specialty produces frozen bread and rolls and snack products. The company evaluates each segment’s performance based on income or loss before interest and income taxes, excluding unallocated expenses and charges which the company’s management deems to be an overall corporate cost or a cost not reflective of the segments’ core operating businesses. Information regarding the operations in these reportable segments is as follows (amounts in thousands):

     Sales by product category in each reportable segment are as follows (amounts in thousands):

     The following discussion of the financial condition and results of operations of the company as of and for the sixteen week period ended April 21, 2007 should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

     Flowers Foods, Inc. is one of the nation’s leading producers and marketers of packaged bakery foods for retail and foodservice customers. The company produces breads, buns, rolls, snack cakes and pastries that are distributed fresh in the Southeast, Southwest and Mid-Atlantic regions and frozen to customers nationwide. Our businesses are organized into two reportable segments. Flowers Bakeries produces fresh and frozen packaged bread and rolls and Flowers Specialty produces frozen bread and rolls, as well as fresh snack products. This organizational structure is the basis of the operating segment data presented in this report.

     We aim to achieve consistent and sustainable growth in sales and earnings by focusing on improvement in the operating results of our existing businesses and, after detailed analysis acquiring businesses that add value to the company. We believe this consistent and sustainable growth will build value for our shareholders.

     Sales are principally affected by pricing, quality, brand recognition, new product introductions and product line extensions, marketing and service. The company manages these factors to achieve a sales mix favoring its higher-margin branded products, while using private label products to absorb overhead costs and maximize use of production capacity. Sales for the sixteen weeks ended April 21, 2007 increased 8.2% as compared to the sixteen weeks ended April 22, 2006. Contributing to this increase were increased pricing, the February 2006 Derst acquisition and product mix shifts.

     For the first quarter of fiscal 2007, the company reported diluted income per share from continuing operations before cumulative effect of a change in accounting principle of $0.46, a 27.8% increase over the $0.36 reported for the first quarter of fiscal 2006. Income from continuing operations before cumulative effect of a change in accounting principle was $28.5 million for the first quarter of fiscal 2007, an increase of 28.0% as compared to $22.3 million for the first quarter of fiscal 2006. Diluted net income per share for the first quarter of fiscal 2007 was $0.46 as compared to $0.37 per share for the first quarter of fiscal 2006, a 24.3% increase. For the first quarter of fiscal 2007, net income was $28.5 million, a 24.3% increase over $22.9 million reported for the first quarter of fiscal 2006.

     Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). These principles are numerous and complex. Our significant accounting policies are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006. 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. In our Form 10-K for the fiscal year ended December 30, 2006, we discuss the areas where we believe that the estimates, judgments or interpretations that we have made, if different, would have yielded the most significant differences in our financial statements and we urge you to review that discussion.

     Results of operations, expressed as a percentage of sales, for the sixteen week periods ended April 21, 2007 and April 22, 2006, are set forth below:

SIXTEEN WEEKS ENDED APRIL 21, 2007 COMPARED TO SIXTEEN WEEKS ENDED APRIL 22, 2006

     Consolidated Sales.

     The 8.2% increase in sales was attributable to price increases of 6.4%, favorable product mix shifts of 1.4% and unit volume increases of 0.4%. The 1.8% increase in mix and volume resulted from the February 2006 acquisition of Derst Baking Company, which contributed 1.3%, and a slight product mix shift from lower margin cake products to higher margin bread products. The increase in branded retail sales was due primarily to increases in pricing and the Derst acquisition. The company’sNature’s Own products and its branded white bread labels were the key components of these sales. The increase in store branded retail sales was due to price increases and, to a lesser extent, volume increases. The increase in foodservice and other sales was primarily due to price increases.

     The 8.8% increase in sales was attributable to price increases of 6.6% and volume increases of 2.6%, partially offset by product mix shifts of 0.4%. The Derst acquistion contributed 1.6% of the total increase. The increase in branded retail sales was due to price increases and the Derst acquisition. Flowers Bakeries’ Nature’s Own products and its branded white bread labels were the key components of these sales. The increase in store branded retail sales was primarily due to increased volume and favorable pricing. The increase in foodservice and other sales was primarily due to price increases.

     Flowers Specialty Sales.

     The 6.1% increase in sales was attributable to price increases of 6.3% and favorable product mix shifts of 3.8%, partially offset by volume declines of 4.0%. The decrease in branded retail sales was primarily the result of volume declines and a shift in product mix from branded products to foodservice. The decrease in store branded retail sales was primarily due to a shift in product mix from branded products to foodservice items, partially offset by price increases. The increase in foodservice and other sales, which include contract production and vending, was due to favorable product mix shifts and pricing.

     Gross Margin (defined as sales less materials, supplies, labor and other production costs, excluding depreciation, amortization and distributor discounts). Gross margin for the first quarter of fiscal 2007 was $303.0 million, or 6.6% higher than gross margin

reported for the same period of the prior year of $284.3 million. As a percent of sales, gross margin was 49.7% as compared to 50.4% for the first quarter of fiscal 2006. This decrease as a percent of sales was primarily due to significantly higher ingredient costs and increased rent expense, partially offset by pricing gains, lower energy costs and start-up costs in the prior year relating to three new production lines. The significantly higher ingredient costs were driven by increases in flour, gluten and sweeteners, as all three experienced double-digit cost increases.

     Flowers Bakeries’ gross margin decreased to 54.7% of sales for the first quarter of fiscal 2007, compared to 55.6% of sales for the prior year’s first quarter. This decrease as a percent of sales was primarily due to the higher ingredient costs and increased rent expense as discussed above, partially offset by pricing gains and the start-up costs in the prior year discussed above.

     Flowers Specialty’s gross margin decreased to 29.2% of sales for the first quarter of fiscal 2007, compared to 30.0% of sales for the same period of fiscal 2006. This decrease as a percent of sales was primarily a result of the higher ingredient costs and more outsourcing of production, partially offset by lower packaging and labor costs.

     Selling, Marketing and Administrative Expenses. For the first quarter of fiscal 2007, selling, marketing and administrative expenses were $238.0 million, or 39.0% of sales as compared to $230.8 million, or 40.9% of sales reported for the first quarter of fiscal 2006. This decrease as a percent of sales was due to increased sales, higher pension income and lower distribution costs, partially offset by increased stock-based compensation expense. Pension income increased as a result of improved investment performance and contributions made by the company in prior years. The improvement in distribution expense was primarily the result of higher costs in the first quarter of fiscal 2006 relating to the transition to a new centralized distribution center at Flowers Specialty. The $3.4 million increase in stock-based compensation was the result of a 20.5% increase in the company’s stock price during the first quarter of fiscal 2007, which affected the company’s stock appreciation rights expense, and the issuance of new stock option and restricted stock awards during the first quarter of fiscal 2007. See Note 11 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the company’s stock-based compensation.

     Flowers Bakeries’ selling, marketing and administrative expenses include discounts paid to the independent distributors utilized in our DSD system. Flowers Bakeries’ selling, marketing and administrative expenses were $206.3 million, or 42.2% of sales during the first quarter of fiscal 2007, as compared to $196.3 million, or 43.7% of sales during the same period of fiscal 2006. The decrease as a percent of sales was primarily due to price increases and lower advertising expense, partially offset by the increased stock-based compensation expense discussed above.

     Flowers Specialty’s selling, marketing and administrative expenses were $23.3 million, or 19.2% of sales during the first quarter of fiscal 2007, as compared to $25.8 million, or 22.6% of sales during the first quarter of fiscal 2006. This decrease as a percent of sales was primarily attributable to higher sales and lower labor and distribution costs. The decrease in distribution costs was the result of the transition in the first quarter of fiscal 2006 to a new centralized distribution center discussed above.

     Depreciation and Amortization. Depreciation and amortization expense was $20.1 million for the first quarter of fiscal 2007, an increase of 6.9% from the first quarter of fiscal 2006, which was $18.8 million.

     Flowers Bakeries’ depreciation and amortization expense increased to $16.2 million for the first quarter of fiscal 2007 from $14.9 million in the same period of fiscal 2006. This increase was primarily the result of increased depreciation expense due to capital expenditures placed in service subsequent to the first quarter of fiscal 2006 and the amortization of a trademark and customer relationships associated with the Derst acquisition.

     Flowers Specialty’s depreciation and amortization expense remained relatively unchanged at $4.0 million for the first quarter of fiscal 2007 as compared to the same period of fiscal 2006.

     Gain on Insurance Recovery. During the first quarter of fiscal 2006, certain equipment was destroyed by fire at the company’s Montgomery, Alabama production facility (a part of Flowers Specialty). Property damage insurance proceeds of $1.1 million were received during the sixteen weeks ended April 22, 2006 under the company’s insurance policy. The net book value of the equipment at the time of the fire was $0.4 million, resulting in a gain of $0.7 million.

     Net Interest Income. For the first quarter of fiscal 2007, net interest income was $1.9 million, an increase of $0.4 million from the first quarter of fiscal 2006, which was $1.5 million. The increase was related to higher interest income as a result of an increase in independent distributors’ notes receivable primarily from the sale of territories acquired in the Derst acquisition in February 2006.

     Income From Continuing Operations Before Income Taxes, Minority Interest and Cumulative Effect of a Change in Accounting Principle. Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle for the first quarter of fiscal 2007 was $46.8 million, an increase of $10.0 million from the $36.8 million reported for the first quarter of fiscal 2006.

     The improvement was primarily the result of improvements in the operating results of Flowers Bakeries and Flowers Specialty of $6.2 million and $3.2 million, respectively, and a decrease in unallocated corporate expenses of $0.2 million. Also contributing to this increase was an increase in net interest income of $0.4 million. The increase at Flowers Bakeries was primarily attributable to higher sales, lower advertising and energy costs and start-up costs incurred during the first quarter of fiscal 2006 as discussed above. The increase at Flowers Specialty was primarily a result of higher sales, lower labor and packaging costs and the transition in the first quarter of fiscal 2006 to a new centralized distribution center discussed above. The decrease in unallocated corporate expenses was primarily due to higher pension income as discussed above. See Net Interest Income above for a discussion of the increase in this area.

     Income Taxes. The effective tax rate for the first quarter of fiscal 2007 was 35.2% compared to 37.4% in the first quarter of the prior year. This decrease primarily relates to increases in the Section 199 qualifying production activities deduction and the non-taxable earnings from the variable interest entity. The difference in the effective rate and the statutory rate is primarily due to state income taxes, the non-taxable earnings of the consolidated variable interest entity and the Section 199 qualifying production activities deduction.

     Minority Interest. Minority interest represents all the earnings of the company’s variable interest entity (“VIE”) under the consolidation provisions of Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. All the earnings of the VIE are eliminated through minority interest due to the company not having any equity ownership in the VIE. The company is required to consolidate this VIE due to the VIE being capitalized with a less than substantive amount of legal form capital investment and the company accounting for a significant portion of the VIE’s revenues. See Note 8 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the company’s VIE.

     Income from Discontinued Operations. During fiscal 2004, the company announced an agreement to settle a class action lawsuit related to pie shells produced by a former operating facility. The costs of this settlement, $1.8 million, net of income tax benefit were recorded by the company as part of discontinued operations. During the first quarter of fiscal 2006, the company received an insurance recovery of $2.0 million ($1.2 million, net of income tax) relating to this settlement. The recovery is recorded as Income from discontinued operations, net of income tax, in the condensed consolidated statement of income for the sixteen weeks ended April 22, 2006.

     Cumulative Effect of a Change in Accounting Principle. As a result of the adoption of Statement of Financial Accounting Standard No. 123R, Share-Based Payment (“SFAS 123R”) on January 1, 2006, the company recorded in the first quarter of fiscal 2006, as an expense, a cumulative effect of a change in accounting principle of $0.9 million ($0.6 million, net of income tax benefit) relating to its stock appreciation rights. This was a result of the liability as of January 1, 2006 (the day of adoption of SFAS 123R) as computed using the Black-Scholes pricing model being greater than the recorded liability on that day. Prior to the adoption of SFAS 123R, the company computed expense on the vested portion of the rights as the difference between the grant date market value of its stock and the market value of its stock at the end of the respective reporting period.

LIQUIDITY AND CAPITAL RESOURCES:

     Liquidity represents our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments as well as our ability to obtain appropriate financing and convert into cash those assets that are no longer required to meet existing strategic and financing objectives. Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving long-range business objectives. Currently, the company’s liquidity needs arise primarily from working capital requirements, capital expenditures and stock repurchases. The company’s strategy for use of its cash flow includes paying dividends to shareholders, making acquisitions, growing internally and repurchasing shares of its common stock when appropriate.

     Flowers Foods’ cash and cash equivalents increased to $15.0 million at April 21, 2007 from $13.9 million at December 30, 2006. The increase resulted from $49.4 million provided by operating activities, partially offset by $17.9 million and $30.4 million disbursed for investing activities and financing activities, respectively.

     Cash Flows Provided by Operating Activities. Net cash of $49.4 million provided by operating activities during the sixteen weeks ended April 21, 2007 consisted primarily of $28.5 million in net income, adjusted for certain non-cash items of $27.7 million and cash disbursed for working capital of $6.8 million.

     On July 16, 2007, the company’s outstanding employee stock appreciation rights granted in 2003 will vest. At that time, cash will be paid to grantees on the rights outstanding in the amount of the difference between the grant price of $14.01 and the company’s stock price on the vesting date plus dividends accrued during the vesting period. Currently there are 448,350 rights outstanding under this grant. The company believes it will have sufficient internally generated cash or amounts available under its credit facility to meet this cash need.

     Cash Flows Disbursed for Investing Activities. Net cash disbursed for investing activities during the sixteen weeks ended April 21, 2007 of $17.9 million consisted primarily of capital expenditures of $14.2 million. Capital expenditures at Flowers Bakeries and Flowers Specialty were $9.6 million and $3.2 million, respectively. The company estimates capital expenditures of approximately $63.0 million to $64.0 million during fiscal 2007. The company also leases certain production machinery and equipment through various operating leases.

     Cash Flows Disbursed for Financing Activities. Net cash disbursed for financing activities of $30.4 million during the sixteen weeks ended April 21, 2007 consisted primarily of dividends paid of $7.6 million and net debt repayments of $26.4 million, partially offset by proceeds of $3.0 million from the exercise of stock options.

     The company has a five-year, $250.0 million unsecured revolving loan facility (the “credit facility”) that expires June 6, 2011. 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 April 21, 2007 and December 30, 2006, 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 either rates offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.00% to 0.20% for base rate loans and from 0.40% to 1.075% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.30% 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. Outstanding borrowings under the credit facility were $29.0 million at April 21, 2007. Subsequent to the end of the first quarter of fiscal 2007, the company repaid $11.0 million of these borrowings. As excess funds become available, the company may, from time to time during the remainder of fiscal 2007 repay a portion or all of these borrowings.

     Currently, the company’s credit ratings by Standard and Poor’s, Moody’s Investor Service and Fitch Ratings are BBB-, Baa3, and BBB, respectively. Changes in the company’s credit ratings do not trigger a change in the company’s available borrowings or costs under the credit facility, but could affect future credit availability.

     On February 16, 2007, the Board of Directors declared a dividend of $0.125 per share on the company’s common stock that was paid on March 16, 2007 to shareholders of record on March 2, 2007. This dividend payment was $7.6 million.

     On December 19, 2002, the Board of Directors approved a plan that authorized stock repurchases of up to 11.3 million shares of the company’s common stock. On November 18, 2005, the Board of Directors increased the number of authorized shares to 15.3 million shares. Under the plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the first quarter of fiscal 2007,

no shares of the company’s common stock were purchased under the plan. From the inception of the plan through April 21, 2007, 11.8 million shares at a cost of $247.1 million have been purchased under the plan.

     During the first quarter of fiscal 2007, the company paid $20.2 million in performance-based cash awards under the company’s bonus plan.

     Fair Value Measurements. On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of SFAS 157 will change current practice. SFAS 157 is effective for fiscal years beginning after November 15, 2007 (the company's fiscal 2008), and interim periods within those fiscal years. The company will assess the effect of this pronouncement on its financial statements, but at this time, no material effect is expected.

     The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (the company’s fiscal 2008). The company will assess the effect of this pronouncement on its financial statements, but at this time, no material effect is expected.

     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.

     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 volatility in its raw material and packaging prices. At April 21, 2007, the fair market value of the company’s commodity derivative portfolio was $3.8 million. Of this fair value, $1.3 million is based on quoted market prices and $2.5 million is based on models and other valuation methods. $3.7 million and an immaterial amount of this fair value relates to instruments that will be utilized in fiscal 2007 and 2008, respectively, and $0.1 million relates to instruments that will be utilized in fiscal 2009. A sensitivity analysis has been prepared to estimate the company’s exposure to commodity price risk. Based on the company’s derivative portfolio as of April 21, 2007, a hypothetical ten percent increase in commodity prices under normal market conditions could potentially have an $8.8 million effect on the fair value of the derivative portfolio. The analysis disregards changes in the exposures inherent in the underlying hedged item; however, the company expects that any gain in fair value of the portfolio would be substantially offset by increases in raw material and packaging prices.

     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 Securities Exchange Act of 1934 (the “Exchange Act”), is accumulated and communicated to management in a timely fashion and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. An evaluation of the

effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act was performed as of the end of the period covered by this quarterly report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based upon that evaluation, our CEO and CFO have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

     There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter ended April 21, 2007 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

     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.

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

     Please refer to Part I, Item 1A., Risk Factors, in the company’s Form 10-K for the year ended December 30, 2006 for information regarding factors that could affect the company’s results of operations, financial condition and liquidity. There have been no changes to our risk factors during the first quarter of fiscal 2007.

     On December 19, 2002, the Board of Directors approved a plan that authorized stock repurchases of up to 11.3 million shares of the company’s common stock. On November 18, 2005, the Board of Directors increased the number of authorized shares to 15.3 million shares. Under the plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. The company did not purchase any shares of its common stock during the first quarter of fiscal 2007 under the stock repurchase plan. As of April 21, 2007, the maximum number of shares that may yet be purchased under the plan is 3.5 million.

     Exhibits filed as part of this report are listed in the Exhibit Index attached hereto.

     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.

Date: May 31, 2007