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 July 14, 2007

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)

     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).

     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 AUGUST 17, 2007
Common Stock, $.01 par value with		91,384,527
Preferred Share Purchase Rights

 

 

FLOWERS FOODS, INC.

INDEX

		PAGE
		NUMBER
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of July 14, 2007 and December 30, 2006			4
Condensed Consolidated Statements of Income for the Twelve and Twenty-Eight Weeks Ended July 14, 2007 and July 15, 2006			5
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Twenty-Eight Weeks Ended July 14, 2007			6
Condensed Consolidated Statements of Cash Flows for the Twenty-Eight Weeks Ended July 14, 2007 and July 15, 2006			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			28
PART II. Other Information
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 4. Submission of Matters to a Vote of Security Holders			29
Item 6. Exhibits			29
SIGNATURES
EX-3.1 RESTATED ARTICLES OF INCORPORATION
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATIONS OF THE CEO AND CFO

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 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 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.

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		JULY 14, 2007				DECEMBER 30, 2006
ASSETS
Current Assets:
Cash and cash equivalents		$	13,264			$	13,914
Accounts and notes receivable, net of allowances of $846 and $160, respectively			140,481				131,879
Inventories, net:
Raw materials			13,389				12,573
Packaging materials			11,268				10,539
Finished goods			20,907				20,613
			45,564				43,725
Spare parts and supplies			27,753				25,724
Deferred taxes			10,293				11,679
Other			24,153				15,195
			261,508				242,116
Net Property, Plant and Equipment			461,430				464,442
Notes Receivable			83,803				74,428
Assets Held for Sale — Distributor Routes			14,986				22,908
Other Assets			16,898				3,038
Goodwill			75,537				75,537
Other Intangible Assets, net			22,862				24,121
		$	937,024			$	906,590
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and capital leases		$	6,936			$	7,406
Accounts payable			98,162				90,945
Other accrued liabilities			99,451				86,891
			204,549				185,242
Long-Term Debt and Capital Leases			28,020				79,126
Other Liabilities:
Post-retirement/post-employment obligations			—				146
Deferred taxes			48,657				47,394
Other			32,846				25,949
			81,503				73,489
Minority Interest in Variable Interest Entity			7,577				5,870
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock — $100 par value, 100,000 authorized and none issued
Preferred stock — $.01 par value, 900,000 authorized and none issued
Common stock — $.01 par value, 120,000,000 authorized shares, 101,659,924 shares and 67,775,496 shares issued, respectively			1,017				678
Treasury stock — 10,275,398 shares and 7,324,865 shares, respectively			(151,846	)			(162,368	)
Capital in excess of par value			483,130				482,157
Retained earnings			282,475				250,616
Accumulated other comprehensive income (loss)			599				(8,220	)
			615,375				562,863
		$	937,024			$	906,590

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
Sales		$	477,838			$	445,772			$	1,087,785			$	1,009,385
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)			244,942				224,025				551,894				503,360
Selling, marketing and administrative expenses			183,592				176,016				421,555				406,795
Depreciation and amortization			15,116				15,113				35,233				33,939
Gain on insurance recovery			—				—				—				(654	)
Income from operations			34,188				30,618				79,103				65,945
Interest expense			740				987				2,149				2,412
Interest income			(2,672	)			(2,273	)			(6,014	)			(5,219	)
Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle			36,120				31,904				82,968				68,752
Income tax expense			12,914				11,566				29,414				25,335
Income from continuing operations before minority interest and cumulative effect of a change in accounting principle			23,206				20,338				53,554				43,417
Minority interest in variable interest entity			(1,016	)			(614	)			(2,871	)			(1,433	)
Income from continuing operations before cumulative effect of a change in accounting principle			22,190				19,724				50,683				41,984
Income from discontinued operations, net of income tax of $778			—				—				—				1,222
Income before cumulative effect of a change in accounting principle			22,190				19,724				50,683				43,206
Cumulative effect of a change in accounting principle, net of income tax benefit of $362			—				—				—				(568	)
Net income		$	22,190			$	19,724			$	50,683			$	42,638
Net Income Per Common Share:
Basic:
Income from continuing operations before cumulative effect of a change in accounting principle		$	0.24			$	0.21			$	0.56			$	0.46
Income from discontinued operations, net of income tax			—				—				—				0.02
Cumulative effect of a change in accounting principle, net of income tax benefit			—				—				—				(0.01	)
Net income per share		$	0.24			$	0.21			$	0.56			$	0.47
Weighted average shares outstanding			90,761				91,793				90,633				91,512
Diluted:
Income from continuing operations before cumulative effect of a change in accounting principle		$	0.24			$	0.21			$	0.55			$	0.45
Income from discontinued operations, net of income tax			—				—				—				0.02
Cumulative effect of a change in accounting principle, net of income tax benefit			—				—				—				(0.01	)
Net income per share		$	0.24			$	0.21			$	0.55			$	0.46
Weighted average shares outstanding			92,413				93,012				92,148				92,988
Cash dividends paid per common share		$	0.125			$	0.083			$	0.208			$	0.15

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

														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				Income (Loss)				Shares				Cost				Total
		(Amounts in thousands, except for share data)
Balances at December 30, 2006							67,775,496			$	678			$	482,157			$	250,616			$	(8,220	)			(7,324,865	)		$	(162,368	)		$	562,863
Cumulative effect of a change in accounting principle — FIN 48 (See Note 13)																			(382	)															(382	)
Cumulative effect of a change in accounting principle — SFAS 158 (See Note 12)																			657				5,036												5,693
Net Income		$	50,683																50,683																50,683
Derivative instruments			3,673																				3,673												3,673
Amortization of prior service costs			110																				110												110
Comprehensive income		$	54,466
Adjustment for 3-for-2 stock split (Note 1)							33,884,428				339				(339	)											(3,425,133	)							0
Exercise of stock options (includes income tax benefits of $2,547)															(1,120	)											325,200				7,210				6,090
Issuance of restricted stock award															(3,312	)											149,400				3,312				0
Amortization of restricted/deferred stock awards															2,816																				2,816
Stock option compensation															2,928																				2,928
Dividends paid — $0.208 per common share																			(19,099	)															(19,099	)
Balances at July 14, 2007							101,659,924			$	1,017			$	483,130			$	282,475			$	599				(10,275,398	)		$	(151,846	)		$	615,375

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income		$	50,683			$	42,638
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle			—				930
Stock based compensation			10,478				5,025
Depreciation and amortization			35,233				33,939
Deferred income taxes			(1,408	)			(5,868	)
Provision for inventory obsolescence			497				422
Allowances for accounts receivable			662				492
Minority interest in variable interest entity			2,871				1,433
Other			(225	)			(793	)
Changes in assets and liabilities:
Accounts and notes receivable, net			(8,509	)			(19,363	)
Inventories, net			(2,336	)			(1,184	)
Other assets			1,870				24,409
Pension contributions			—				(14,000	)
Accounts payable and other accrued liabilities			13,198				5,788
NET CASH PROVIDED BY OPERATING ACTIVITIES			103,014				73,868
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(33,445	)			(32,296	)
Purchase of notes receivable			(10,130	)			(1,437	)
Acquisitions, net of cash acquired			—				(887	)
Other			1,379				(2,132	)
NET CASH DISBURSED FOR INVESTING ACTIVITIES			(42,196	)			(36,752	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid			(19,099	)			(13,850	)
Exercise of stock options			3,544				5,981
Income tax benefit related to stock awards			2,547				8,132
Stock repurchases			—				(40,162	)
Change in book overdraft			3,116				751
Payment of financing fees			—				(333	)
Proceeds from debt borrowings			110,500				216,300
Debt and capital lease obligation payments			(162,076	)			(207,292	)
NET CASH DISBURSED FOR FINANCING ACTIVITIES			(61,468	)			(30,473	)
Net (decrease) increase in cash and cash equivalents			(650	)			6,643
Cash and cash equivalents at beginning of period			13,914				11,001
Cash and cash equivalents at end of period		$	13,264			$	17,644

(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 twenty-eight week periods ended July 14, 2007 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 ended July 14, 2007 (twelve weeks), third quarter ending October 6, 2007 (twelve weeks) and fourth quarter ending December 29, 2007 (twelve weeks).

STOCK SPLIT — On June 1, 2007, the board of directors declared a 3-for-2 stock split of the company’s common stock in the form of a 50% stock dividend. The record date for the split was June 15, 2007, and new shares were issued on June 29, 2007. All share and per share information has been restated for all prior periods presented giving retroactive effect to the stock split.

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 twelve and twenty-eight weeks ended July 14, 2007 and July 15, 2006. No other customer accounted for 10% or more of the company’s sales.

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006 _
		(Percent of Sales)								(Percent of Sales)
Flowers Bakeries			17.6	%			16.8	%			17.1	%			16.2	%
Flowers Specialty			2.6				2.5				2.7				2.6
Total			20.2	%			19.3	%			19.8	%			18.8	%

2. DISCONTINUED OPERATIONS

     On April 23, 2003, the company sold its Mrs. Smith’s Bakeries frozen dessert business (“Mrs. Smith’s”) to The Schwan Food Company (“Schwan”). 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 a settlement of a class action lawsuit related to pie shells produced by Mrs. Smith’s during the company’s ownership.

     There were no revenues or results of operations recorded for the discontinued operations in the twelve or twenty-eight weeks ended July 14, 2007 and July 15, 2006.

3. 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 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 $25.1 million and $54.5 million for the twelve and twenty-eight weeks ended July 14, 2007, respectively. Total comprehensive income was $20.6 million and $48.1 million for the twelve and twenty-eight weeks ended July 15, 2006, respectively.

     During the twenty-eight weeks ended July 14, 2007, changes to accumulated other comprehensive loss, net of income tax, were as follows (amounts in thousands):

		2007
Accumulated other comprehensive loss, December 30, 2006		$	(8,220	)
Derivative transactions:
Net deferred gains on closed contracts, net of income tax of $447			714
Reclassified to earnings, net of income tax of $(406)			(649	)
Effective portion of change in fair value of hedging instruments, net of income tax of $2,258			3,608
Amortization of prior service costs, net of income tax of $69			110
Cumulative effect of a change in accounting principle, net of income tax of $3,153 (See Note 12)			5,036
Accumulated other comprehensive income, July 14, 2007		$	599

4. GOODWILL AND OTHER INTANGIBLE ASSETS

     There were no changes in the carrying amount of goodwill for the twenty-eight weeks ended July 14, 2007. The balance as of July 14, 2007 is as follows (amounts in thousands):

Flowers Bakeries		$	71,861
Flowers Specialty			3,676
Total		$	75,537

     The changes in the carrying amount of intangible assets, which consist primarily of trademarks, customer-related intangibles and non-compete agreements, for the twenty-eight weeks ended July 14, 2007, are as follows (amounts in thousands):

		Flowers Bakeries				Flowers Specialty				Total
Balance as of December 30, 2006		$	19,626			$	4,495			$	24,121
Amortization expense			(862	)			(397	)			(1,259	)
Balance as of April 21, 2007		$	18,764			$	4,098			$	22,862

     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.

5. NEW ACCOUNTING PRONOUNCEMENTS

     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.

6. DERIVATIVE FINANCIAL INSTRUMENTS

     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 July 14, 2007, the company’s hedge portfolio contained commodity derivatives with a fair value of $8.5 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 July 14, 2007 or December 30, 2006 that did not qualify for hedge accounting under SFAS 133.

7. DEBT AND OTHER OBLIGATIONS

     Long-term debt and capital leases consisted of the following at July 14, 2007 and December 30, 2006 (amounts in thousands):

		JULY 14, 2007				DECEMBER 30, 2006
Unsecured credit facility		$	5,000			$	51,800
Capital lease obligations			24,823				28,108
Other notes payable			5,133				6,624
			34,956				86,532
Less current maturities			6,936				7,406
Total long-term debt and capital leases		$	28,020			$	79,126

     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 $5.0 million in outstanding borrowings under the credit facility at July 14, 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 July 14, 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 $19.6 million and $16.4 million as of July 14, 2007 and December 30, 2006, respectively.

8. 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 (“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 twelve and twenty-eight weeks ended July 14, 2007 and July 15, 2006:

		TWELVE WEEKS ENDED																TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007								JULY 15, 2006								JULY 14, 2007								JULY 15, 2006
						% OF								% OF								% OF								% OF
		VIE				TOTAL				VIE				TOTAL				VIE				TOTAL				VIE				TOTAL
		(Dollars in thousands)
Assets as of respective quarter ends		$	31,634				3.4	%		$	32,547				3.5	%		$	31,634				3.4	%		$	32,547				3.5	%
Sales		$	3,247				0.7	%		$	3,599				0.8	%		$	6,455				0.6	%		$	6,514				0.6	%
Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle		$	1,016				2.8	%		$	614				1.9	%		$	2,871				3.5	%		$	1,433				2.1	%

     The assets consist primarily of $22.8 million and $23.8 million as of July 14, 2007 and July 15, 2006, respectively, of transportation equipment recorded as capital lease obligations.

9. LITIGATION

     The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, 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.

10. EARNINGS PER SHARE

     On June 1, 2007, the board of directors declared a 3-for-2 stock split of the company’s common stock in the form of a 50% stock dividend. The record date for the split was June 15, 2007, and new shares were issued on June 29, 2007. All share and per share information has been restated for all prior periods presented giving retroactive effect to the stock split.

     The following table calculates basic earnings per common share and diluted earnings per common share for the twelve and twenty-eight weeks ended July 14, 2007 and July 15, 2006 (amounts in thousands, except per share data):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
Basic Earnings Per Common Share:
Income from continuing operations before cumulative effect of a change in accounting principle		$	22,190			$	19,724			$	50,683			$	41,984
Basic weighted average shares outstanding			90,761				91,793				90,633				91,512
Basic earnings per common share		$	0.24			$	0.21			$	0.56			$	0.46
Diluted Earnings Per Common Share:
Income from continuing operations before cumulative effect of a change in accounting principle		$	22,190			$	19,724			$	50,683			$	41,984
Basic weighted average shares outstanding			90,761				91,793				90,633				91,512
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock			1,652				1,219				1,515				1,476
Diluted weighted average shares outstanding			92,413				93,012				92,148				92,988
Diluted earnings per common share		$	0.24			$	0.21			$	0.55			$	0.45

     Stock options to purchase 831,525 shares of common stock were not included in the computation of diluted earnings per share for the twelve and twenty-eight weeks ended July 14, 2007 because their effect would have been anti-dilutive. Stock options to purchase 653,100 shares of common stock were not included in the compensation of diluted earnings per share for the twelve and twenty-eight weeks ended July 15, 2006 because their effect would have been anti-dilutive.

11. 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 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.

Stock Options

     On February 5, 2007 and during fiscal 2006, fiscal 2003 and fiscal 2001, non-qualified stock options (“NQSOs”) to purchase 831,525 shares, 655,950 shares, 3,207,263 shares and 5,167,800 shares, respectively were granted to eligible employees pursuant to the EPIP. In fiscal 2001, NQSOs to purchase 455,625 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 $19.57 for the fiscal 2007 grant, $18.68 for the fiscal 2006 grant, $9.34 for the fiscal 2003 grant and $4.21 for the fiscal 2001 grant. During fiscal 2005, the NQSOs awarded in fiscal 2001 vested. As of July 14, 2007, there were 165,562 NQSOs outstanding with an exercise price of $4.21, 2,791,893 NQSOs outstanding with an exercise price of $9.34, which vested on July 16, 2007, 653,100 NQSOs outstanding with an exercise price of $18.68, which will vest in January 2009 and 831,525 NQSO’s outstanding with an exercise price of $19.57, which will vest in February 2010.

     The stock option activity for the twenty-eight weeks ended July 14, 2007 pursuant to the EPIP is set forth below (amounts in thousands except price data):

						Weighted Average
		Options				Exercise Price
Outstanding at December 30, 2006			4,098			$	10.37
Granted			831			$	19.57
Exercised			(488	)		$	7.26
Outstanding at July 14, 2007			4,441			$	12.44
Exercisable at July 14, 2007			413
Weighted average exercise price of options granted during the twenty-eight weeks ended July 14, 2007		$	19.57

     As of July 14, 2007, all options outstanding under the EPIP had an average exercise price of $12.44 and a weighted average remaining contractual life of 5.9 years.

     During the twelve weeks ended July 14, 2007 and July 15, 2006, the company recorded stock-based compensation expense of $1.3 million and $0.9 million, respectively, relating to NQSOs. During the twenty-eight weeks ended July 14, 2007 and July 15, 2006, the company recorded stock-based compensation expense of $2.9 million and $2.1 million, respectively, relating to NQSOs. This expense was calculated using the Black-Scholes option-pricing model applying the following assumptions:

		2003 Grant				2006 Grant				2007 Grant
Weighted average fair value per share ($)			4.10				6.20				6.30
Dividend yield (%)			1.61				1.60				1.70
Expected volatility (%)			36.89				36.00				33.90
Risk-free interest rate (%)			4.35				4.25				4.74
Expected option life (years)			10.00				5.00				5.00

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

2003 Grant:

Dividend yield — estimated dividend yield based on an annual dividend of $0.18.

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.

2006 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.

2007 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 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 July 14, 2007, there was $6.4 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 2.2 years.

     Cash received from option exercises for the twenty-eight weeks ended July 14, 2007 and July 15, 2006 was $3.5 million and $6.0 million, respectively. The cash tax benefit realized for the tax deductions from option exercises was $2.5 million and $8.1 million, respectively, for the twenty-eight weeks ended July 14, 2007 and July 15, 2006. The total intrinsic value of stock options exercised was $6.6 million and $20.6 million for the twenty-eight weeks ended July 14, 2007 and July 15, 2006, 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 become fully vested on the fourth anniversary of the date of grant. The company recorded $0.1 million and $0.2 million in compensation expense during the twelve and twenty-eight weeks ended July 14, 2007, respectively, and $0.1 million and $0.2 million for the twelve and twenty-eight weeks ended July 15, 2006, respectively, related to this restricted stock.

     During the second quarter of fiscal 2006 and fiscal 2005, non-employee directors were granted an aggregate of 38,460 shares and 44,010 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 $0.1 million and $0.2 million in compensation expense during the twelve weeks ended July 14, 2007 and July 15, 2006, respectively, and $0.3 million and $0.4 million of compensation expense during the twenty-eight weeks ended July 14, 2007 and July 15, 2006, respectively, related to this restricted stock.

     On February 5, 2007 and January 3, 2006 certain key employees were granted an aggregate of 224,100 shares of performance-contingent restricted stock at a grant price of $19.57 and an aggregate of 203,550 shares of performance-contingent restricted stock at a grant price of $18.68, 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 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:

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

     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 $20.98 and $19.44, respectively. The company recorded expense of $1.0 million and $0.5 million for the twelve weeks ended July 14, 2007 and July 15, 2006, respectively, and $2.1 million and $1.1 million of compensation expense during the twenty-eight weeks ended July 14, 2007 and July 15, 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 twenty-eight weeks ended July 14, 2007 is set forth below (amounts in thousands, except price data):

						Weighted average fair
		Number of shares				value
Beginning balance at December 30, 2006			354			$	16.91
Granted			224			$	20.98
Vested			(38	)		$	19.50
Ending balance at July 14, 2007			540			$	18.42

     As of July 14, 2007, there was $4.7 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 1.3 years.

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. Subsequent to the end of the second quarter of fiscal 2007, on July 20, 2007 the company paid $9.4 million in cash as a result of the vesting of an employee stock appreciation rights award granted in 2003. 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 twelve weeks ended July 14, 2007 and July 15, 2006, the company recorded compensation expense of $1.1 million and $0.3 million, respectively, and $3.7 million and $1.1 million of compensation expense during the twenty-eight weeks ended July 14, 2007 and July 15, 2006, 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 July 14, 2007 and July 15, 2006 the company recorded expense of $0.2 million and a credit of $0.1 million, respectively, and $1.0 million and $0.1 million of expense during the twenty-eight weeks ended July 14, 2007 and July 15, 2006, respectively, related to these rights.

     The fair value of the rights at July 14, 2007 ranged from $23.68 to $29.45. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at July 14, 2007: dividend yield 1.7%; expected volatility 32.0%; risk-free interest rate 5.07% and expected life of 2.05 years to 4.45 years.

     The rights activity for the twenty-eight weeks ended July 14, 2007 is set forth below (amounts in thousands, except price data):

Beginning balance at December 30, 2006			929
Rights exercised			(15	)
Rights forfeited			(30	)
Ending balance at July 14, 2007			884
Weighted average — grant date fair value		$	9.81

Deferred Stock

     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 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 and June 5, 2007, 20,520 shares and 34,350 shares, respectively, of deferred stock were granted to certain non-employee directors who elected to convert their retainers. Based on the closing stock price of $19.57 on February 5, 2007 and $23.00 on June 5, 2007, the company recorded expense of $0.1 million and $0.2 million during the twelve and twenty-eight weeks ended July 14, 2007, respectively, relating to deferred stock.

Stock-Based Compensation Expense Summary

     Stock-based compensation expense recognized during the twelve and twenty-eight weeks ended July 14, 2007 and July 15, 2006 is set forth below (amounts in thousands, except per share data):

		TWELVE WEEKS ENDED								TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
Total stock-based compensation expense included in selling, marketing and administrative expenses		$	3,905			$	1,855			$	10,478			$	5,025
Income tax effect			1,398				673				3,720				1,849
Total stock-based compensation expense included in income from continuing operations before cumulative effect of a change in accounting principle		$	2,507			$	1,182			$	6,758			$	3,176
Impact on earnings per share on income from continuing operations before cumulative effect of a change in accounting principle:
Basic		$	(0.03	)		$	(0.01	)		$	(0.07	)		$	(0.03	)
Diluted		$	(0.03	)		$	(0.01	)		$	(0.07	)		$	(0.03	)

     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.

12. 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.

     The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at July 14, 2007 as compared to accounts at December 30, 2006 (amounts in thousands):

		AS OF
		JULY 14,				DECEMBER 30,
		2007				2006
Noncurrent benefit asset		$	19,630			$	7,475
Current benefit liability		$	390			$	390
Noncurrent benefit liability		$	7,393			$	7,621
Accumulated other comprehensive loss		$	4,483			$	9,630

     The amounts above include activity for the twenty-eight weeks of fiscal 2007 as well as adjustments relating to the elimination of the early measurement date.

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 July 14, 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 income for the company’s plans include the following components (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
Service cost		$	60			$	58			$	140			$	1,696
Interest cost			3,770				3,615				8,796				8,525
Expected return on plan assets			(5,307	)			(4,798	)			(12,383	)			(11,196	)
Amortization of net loss			—				6				—				14
Total net periodic benefit income		$	(1,477	)		$	(1,119	)		$	(3,447	)		$	(961	)

Post-retirement Benefit Plan

     The company provides certain medical and life insurance benefits for eligible retired employees. The medical plan covers eligible retirees under the active medical 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):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
Service cost		$	70			$	74			$	163			$	174
Interest cost			90				91				210				207
Amortization of prior service cost			77				77				179				179
Amortization of net loss			—				5				—				11
Total net periodic benefit cost		$	237			$	247			$	552			$	571

401(k) Retirement Savings Plan

     The Flowers Foods 401(k) Retirement Savings Plan (“the Plan”) covers substantially all of the company’s employees who have completed certain service requirements. The cost and contributions for those employees who also participate in the defined benefit pension plan is 25% of the first $400 contributed by the employee. Prior to January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan was 2% of compensation and 50% of the employees’ contributions, up to 6% of compensation. Effective January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan increased to 3% of compensation and 50% of the employees’ contributions, up to 6% of compensation. During the twelve weeks ended July 14, 2007 and July 15, 2006, the total cost and contributions were $3.0 million and $2.9 million, respectively. During the twenty-eight weeks ended July 14, 2007 and July 15, 2006, the total cost and contributions were $7.8 million and $6.9 million, respectively.

13. INCOME TAXES

     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. The gross amount of unrecognized benefits was $4.4 million on the date of adoption.

     As of July 14, 2007, the gross amount of unrecognized tax benefits was $4.9 million, exclusive of interest accrued and is recorded in other long-term liabilities on the condensed consolidated balance sheet. This amount (less $2.0 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 $0.8 million and $0.6 million at July 14, 2007 and December 30, 2006, respectively.

     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). 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 second quarter of fiscal 2007 was 35.8%. 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.

14. SEGMENT REPORTING

     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):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
SALES:
Flowers Bakeries		$	392,549			$	363,900			$	888,850			$	820,339
Flowers Specialty			105,578				102,614				245,810				237,130
Eliminations:
Sales from Flowers Specialty to Flowers Bakeries			(14,038	)			(15,304	)			(33,335	)			(35,822	)
Sales from Flowers Bakeries to Flowers Specialty			(6,251	)			(5,438	)			(13,540	)			(12,262	)
		$	477,838			$	445,772			$	1,087,785			$	1,009,385
DEPRECIATION AND AMORTIZATION:
Flowers Bakeries		$	12,178			$	12,113			$	28,385			$	26,991
Flowers Specialty			2,969				3,030				6,937				7,070
Unallocated			(31	)			(30	)			(89	)			(122	)
		$	15,116			$	15,113			$	35,233			$	33,939

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE:
Flowers Bakeries		$	33,354			$	32,121			$	78,471			$	71,006
Flowers Specialty			6,882				3,736				15,013				8,715
Unallocated			(6,048	)			(5,239	)			(14,381	)			(13,776	)
Interest income, net			1,932				1,286				3,865				2,807
		$	36,120			$	31,904			$	82,968			$	68,752

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

		For the 12 Weeks Ended July 14, 2007												For the 12 Weeks Ended July 15, 2006
		Flowers Bakeries				Flowers Specialty				Total				Flowers Bakeries				Flowers Specialty				Total
Branded Retail		$	229,510			$	22,855			$	252,365			$	213,400			$	22,979			$	236,379
Store Branded Retail			54,582				10,705				65,287				47,614				10,638				58,252
Foodservice and Other			102,206				57,980				160,186				97,448				53,693				151,141
Total		$	386,298			$	91,540			$	477,838			$	358,462			$	87,310			$	445,772
		For the 28 Weeks Ended July 14, 2007												For the 28 Weeks Ended July 15, 2006
		Flowers Bakeries				Flowers Specialty				Total				Flowers Bakeries				Flowers Specialty				Total
Branded Retail		$	517,263			$	51,925			$	569,188			$	477,080			$	52,481			$	529,561
Store Branded Retail			116,545				24,819				141,364				101,048				25,327				126,375
Foodservice and Other			241,502				135,731				377,233				229,949				123,500				353,449
Total		$	875,310			$	212,475			$	1,087,785			$	808,077			$	201,308			$	1,009,385

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     The following discussion of the financial condition and results of operations of the company as of and for the twelve and twenty-eight week period’s ended July 14, 2007 should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

OVERVIEW:

     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 twelve and twenty-eight weeks ended July 14, 2007 increased 7.2% and 7.8%, respectively, as compared to the twelve and twenty-eight weeks ended July 15, 2006. Contributing to these increases were increased pricing, the February 2006 Derst acquisition and product mix shifts.

     For the twelve weeks ended July 14, 2007, the company reported diluted net income per share of $0.24, a 14.3% increase over the $0.21 reported for the twelve weeks ended July 15, 2006. Net income was $22.2 million for the twelve weeks ended July 14, 2007, an increase of 12.5% as compared to $19.7 million for the twelve weeks ended July 15, 2006.

     For the twenty-eight weeks ended July 14, 2007, the company reported diluted income per share from continuing operations before cumulative effect of a change in accounting principle of $0.55, a 22.2% increase over the $0.45 reported for the twenty-eight weeks

ended July 15, 2006. Income from continuing operations before cumulative effect of a change in accounting principle was $50.7 million for the twenty-eight weeks ended July 14, 2007, an increase of 20.7% as compared to $42.0 million for the twenty-eight weeks ended July 15, 2006. Diluted net income per share for the twenty-eight weeks ended July 14, 2007 was $0.55 as compared to $0.46 per share for the twenty-eight weeks ended July 15, 2006, a 19.6% increase. For the twenty-eight weeks ended July 14, 2007, net income was $50.7 million, an 18.9% increase over $42.6 million reported for the twenty-eight weeks ended July 15, 2006.

CRITICAL ACCOUNTING POLICIES:

     Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). These principles are numerous and complex. Our significant accounting policies are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended 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.

MATTERS AFFECTING ANALYSIS:

     Stock Split. On June 1, 2007, the board of directors declared a 3-for-2 stock split of the company’s common stock in the form of a 50% stock dividend. The record date for the split was June 15, 2007, and new shares were issued on June 29, 2007. All share and per share information has been restated for all prior periods presented giving retroactive effect to the stock split.

     Insurance Proceeds from Losses Incurred from Hurricane Katrina. On August 29, 2005, Hurricane Katrina struck the gulf coast of the United States and caused catastrophic damage to the area, particularly New Orleans, Louisiana. The company operates a bakery in New Orleans that was affected by the hurricane. The New Orleans bakery was out of operation until December 8, 2005 due to the many problems in the New Orleans area that were not within the company’s control. During the second quarter of fiscal 2006, the company received insurance proceeds of $1.7 million primarily for business interruption during the twenty-eight weeks of fiscal 2006. Of these proceeds, $1.0 million and $0.7 million were allocated to materials, supplies, labor and other production costs and to selling, marketing and administrative expenses, respectively.

RESULTS OF OPERATIONS:

     Results of operations, expressed as a percentage of sales, for the twelve and twenty-eight week periods ended July 14, 2007 and July 15, 2006, are set forth below:

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 14, 2007				JULY 15, 2006				JULY 14, 2007				JULY 15, 2006
Sales			100.00	%			100.00	%			100.00	%			100.00	%
Gross margin			48.74				49.74				49.26				50.13
Selling, marketing and administrative expenses			38.42				39.48				38.75				40.30
Depreciation and amortization			3.16				3.39				3.24				3.36
Gain on insurance recovery			—				—				—				(0.06	)
Interest income, net			(0.40	)			(0.29	)			(0.36	)			(0.28	)
Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle			7.56				7.16				7.63				6.81
Income tax expense			2.70				2.59				2.70				2.51
Minority interest in variable interest entity			(0.21	)			(0.14	)			(0.26	)			(0.14	)
Discontinued operations			—				—				—				0.12
Cumulative effect of a change in accounting principle			—				—				—				(0.06	)
Net income			4.65	%			4.43	%			4.67	%			4.22	%

CONSOLIDATED AND SEGMENT RESULTS

TWELVE WEEKS ENDED JULY 14, 2007 COMPARED TO TWELVE WEEKS ENDED JULY 15, 2006

Consolidated Sales.

		For the 12 Weeks Ended								For the 12 Weeks Ended
		July 14, 2007								July 15, 2006
		$				%				$				%				% Increase
		(Amounts in								(Amounts in
		thousands)								thousands)
Branded Retail		$	252,365				52.8	%		$	236,379				53.0	%			6.8	%
Store Branded Retail			65,287				13.7				58,252				13.1				12.1	%
Foodservice and Other			160,186				33.5				151,141				33.9				6.0	%
Total		$	477,838				100.0	%		$	445,772				100.0	%			7.2	%

     The 7.2% increase in sales was attributable to price increases of 5.6%, favorable product mix shifts of 1.8%, partially offset by volume declines of 0.2%. The 1.6% net increase in mix and volume resulted from 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. The company’s 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 due to price increases and, to a lesser extent, volume increases. The increase in foodservice and other sales was primarily due to price increases, partially offset by volume declines.

Flowers Bakeries Sales.

		For the 12 Weeks Ended								For the 12 Weeks Ended
		July 14, 2007								July 15, 2006
		$				%				$				%				% Increase
		(Amounts in								(Amounts in
		thousands)								thousands)
Branded Retail		$	229,510				59.4	%		$	213,400				59.5	%			7.5	%
Store Branded Retail			54,582				14.1				47,614				13.3				14.6	%
Foodservice and Other			102,206				26.5				97,448				27.2				4.9	%
Total		$	386,298				100.0	%		$	358,462				100.0	%			7.8	%

     The 7.8% increase in sales was attributable to price increases of 5.5% and volume increases of 2.3%. The increase in branded retail sales was due to price increases, and to a lesser extent, volume increases. 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 due to increased volume and favorable pricing. The increase in foodservice and other sales was primarily due to price increases.

Flowers Specialty Sales.

		For the 12 Weeks Ended								For the 12 Weeks Ended
		July 14, 2007								July 15, 2006								% Increase
		$				%				$				%				(Decrease)
		(Amounts in								(Amounts in
		thousands)								thousands)
Branded Retail		$	22,855				25.0	%		$	22,979				26.3	%			(0.5	)%
Store Branded Retail			10,705				11.7				10,638				12.2				0.6	%
Foodservice and Other			57,980				63.3				53,693				61.5				8.0	%
Total		$	91,540				100.0	%		$	87,310				100.0	%			4.8	%

     The 4.8% increase in sales was attributable to price increases of 6.5% and favorable product mix shifts of 4.1%, partially offset by volume declines of 5.8%. The volume decline was primarily due to the shift from single unit snack cakes to multi-pack snack cakes and lower sales to vending customers. The slight decrease in branded retail sales was primarily the result of volume declines and a shift in product mix from branded products to foodservice. The slight increase in store branded retail sales was primarily due to price increases, partially offset by a shift in product mix from branded products to foodservice items. 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 second quarter of fiscal 2007 was $232.9 million, or 5.0% higher than gross margin reported for the same period of the prior year of $221.7 million. As a percent of sales, gross margin was 48.7% as compared to 49.7% for the second quarter of fiscal 2006. This decrease as a percent of sales was primarily due to significantly higher ingredient costs, increased rent expense and the receipt of the insurance proceeds in the prior year. These negative items were partially offset by pricing gains, lower packaging and labor costs as a percent of sales and start-up costs in the prior year relating to two 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 over the prior year quarter. The company has been able to partially offset these cost increases through pricing actions, but cannot guarantee to what extent we will be able to continue these actions in the future. The company enters into forward purchase agreements and derivative financial instruments to help partially offset increases in ingredient costs. Any decrease in the availability of these agreements and instruments, or an unexpected significant rise in commodity costs could increase the price of these raw materials and significantly affect our earnings.

     Flowers Bakeries’ gross margin decreased to 53.4% of sales for the second quarter of fiscal 2007, compared to 54.8% of sales for the prior year’s second quarter. This decrease as a percent of sales was primarily due to significantly higher ingredient costs, increased rent expense and the receipt of the insurance proceeds in the prior year, partially offset by pricing gains and the start-up costs in the prior year discussed above.

     Flowers Specialty’s gross margin increased slightly to 29.2% of sales for the second quarter of fiscal 2007, compared to 29.1% of sales for the same period of fiscal 2006. This increase as a percent of sales was primarily a result of lower packaging and labor costs, partially offset by increased outsourcing of production.

     Selling, Marketing and Administrative Expenses. For the second quarter of fiscal 2007, selling, marketing and administrative expenses were $183.6 million, or 38.4% of sales as compared to $176.0 million, or 39.5% of sales reported for the second quarter of fiscal 2006. This decrease as a percent of sales was due to increased sales, lower labor costs and distribution costs as a percent of sales and higher pension income. Lower distribution costs were primarily the result of increased capacity closer to certain of the company’s markets therefore, it was not necessary for product to be shipped from great distances. Pension income increased as a result of improved investment performance and contributions made by the company in prior years. These positive items were partially offset by increased stock-based compensation expense and receipt of the insurance proceeds in the prior year. Stock-based compensation expense increased $2.1 million as a result of a 4.9% increase in the company’s stock price during the second 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 $160.6 million, or 41.6% of sales during the second quarter of fiscal 2007, as compared to $152.1 million, or 42.4% of sales during the same period of fiscal 2006. The decrease as a percent of sales was primarily due to price increases and lower labor and distribution costs as a percent of sales, partially offset by the increased stock-based compensation expense discussed above and receipt of the insurance proceeds in the prior year.

     Flowers Specialty’s selling, marketing and administrative expenses were $16.9 million, or 18.5% of sales during the second quarter of fiscal 2007, as compared to $18.7 million, or 21.4% of sales during the second quarter of fiscal 2006. This decrease as a percent of sales was primarily attributable to higher sales and lower distribution and advertising costs.

     Depreciation and Amortization. Depreciation and amortization expense remained unchanged at $15.1 million for the second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006.

     Flowers Bakeries’ depreciation and amortization expense remained relatively unchanged at $12.2 million for the second quarter of fiscal 2007 as compared to the same period of fiscal 2006.

     Flowers Specialty’s depreciation and amortization expense remained relatively unchanged at $3.0 million for the second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006.

     Net Interest Income. For the second quarter of fiscal 2007, net interest income was $1.9 million, an increase of $0.6 million from the second quarter of fiscal 2006, which was $1.3 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 February 2006 Derst acquisition and a decrease in interest expense due to lower average debt outstanding under the company’s credit facility.

     Income Before Income Taxes and Minority Interest. Income before income taxes and minority interest for the second quarter of fiscal 2007 was $36.1 million, an increase of $4.2 million from the $31.9 million reported for the second quarter of fiscal 2006.

     The improvement was primarily the result of improvements in the operating results of Flowers Bakeries and Flowers Specialty of $1.3 million and $3.1 million, respectively, partially offset by an increase in unallocated corporate expenses of $0.8 million. Also contributing to the increase was an increase in net interest income of $0.6 million. The increase at Flowers Bakeries was primarily attributable to higher sales and start-up costs incurred during fiscal 2006 as discussed above, partially offset by increased ingredient costs and the insurance proceeds received in the prior year. The increase at Flowers Specialty was primarily a result of higher sales and lower labor, packaging and distribution costs. The increase in unallocated corporate expenses was primarily due to higher stock-based compensation expense. See Net Interest Income above for a discussion of the increase in this area.

     Income Taxes. The effective tax rate for the second quarter of fiscal 2007 was 35.8% compared to 36.3% in the second 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.

TWENTY-EIGHT WEEKS ENDED JULY 14, 2007 COMPARED TO TWENTY-EIGHT WEEKS ENDED JULY 15, 2006

     Consolidated Sales.

		For the 28 Weeks Ended								For the 28 Weeks Ended
		July 14, 2007								July 15, 2006
		$				%				$				%				% Increase
		(Amounts in								(Amounts in
		thousands)								thousands)
Branded Retail		$	569,188				52.3	%		$	529,561				52.5	%			7.5	%
Store Branded Retail			141,364				13.0				126,375				12.5				11.9	%
Foodservice and Other			377,233				34.7				353,449				35.0				6.7	%
Total		$	1,087,785				100.0	%		$	1,009,385				100.0	%			7.8	%