FLO US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Item 1., Business, and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this Form 10-K. The following information contains forward-looking statements which involve certain risks and uncertainties. See Forward-Looking Statements at the beginning of this Form 10-K.

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

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

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Critical accounting estimates — describes the accounting areas where management makes critical estimates to report our financial condition and results of operations.

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Results of operations — an analysis of the company’s consolidated results of operations for Fiscal 2022 compared to Fiscal 2021 as presented in the Consolidated Financial Statements. Refer to the Annual Report on Form 10-K for the fiscal year ended January 1, 2022 for a discussion of the results of operations for Fiscal 2021 compared to Fiscal 2020.

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

MATTERS AFFECTING COMPARABILITY

The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2022 and Fiscal 2021 each consisted of 52 weeks and Fiscal 2023 will also consist of 52 weeks. Furthermore, comparative results from quarter to quarter are impacted by the company's fiscal reporting calendar. Internal financial results and key performance indicators are reported on a weekly basis to ensure the same number of Saturdays and Sundays in comparable months to allow for consistent four-week progression analysis. This results in our first quarter consisting of sixteen weeks while the remaining three quarters have twelve weeks (except in cases where there is an extra week every five or six years in the fourth quarter). Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.

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

52 weeks 52 weeks Disclosure

(Amounts in thousands)

Business process improvement consulting costs $ 33,169 $ 31,293 Note 2

Plant closure costs and impairment of assets 7,825 — Note 2

FASTER Act and loss on inferior ingredients 236 944 Note 4

Acquisition-related costs 12,518 — Note 2

Acquisition consideration adjustment — 3,400 Note 12

Legal settlements and related costs 7,500 23,089 Note 22

Loss on extinguishment of debt — 16,149 Note 14

Pension plan settlement loss — 403 Note 20

Multi-employer pension plan withdrawal costs — 3,300 Note 20

Business process improvement consulting costs related to the transformation strategy initiatives. In the second half of Fiscal 2020, we launched initiatives to transform how we operate our business, including upgrading our information system to a more robust platform, as well as investments in e-commerce, autonomous planning, and our “bakery of the future” initiative. In the first quarter of Fiscal 2022, we launched the digital logistics and digital sales initiatives. These initiatives are further discussed in Item 1., Business, of this Form 10-K. The expensed portion of the consulting costs related to both the ERP upgrade and digital strategy initiatives incurred in Fiscal 2022 and Fiscal 2021 was $33.2 million and $31.3 million, respectively, and is reflected in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

Plant closure costs and impairment of assets. On July 19, 2022, the company announced the closure of the Holsum Bakery in Phoenix, Arizona. The bakery, which, produced bread and bun products, ceased production on October 31, 2022. This closure is part of our strategy to optimize our sales portfolio and improve supply chain and manufacturing efficiency. The company recognized severance costs of $1.7 million, multi-employer pension plan withdrawal costs of $1.3 million, and asset impairment and equipment

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relocation charges for bakery equipment of $3.8 million in the third quarter of Fiscal 2022. The severance payments were substantially complete as of December 31, 2022. As a result of the manufacturing line closures, the union participants of the IAM National Pension Fund (the "IAM Fund") at the Phoenix, Arizona bakery will withdraw from the IAM Fund. While this is our best estimate of the ultimate cost of the withdrawal from this plan, additional withdrawal liability may be incurred based on the final IAM Fund assessment or in the event of a mass withdrawal, as defined by statute, occurring anytime within the next three years.

During the first quarter of Fiscal 2022, the company decided to sell two of the twenty-seven warehouses acquired at the end of Fiscal 2021, as further discussed below, and recorded an impairment charge of $1.0 million. The company completed the sale of the impaired warehouse at the end of the first quarter of Fiscal 2022.

Gain on sale, severance costs, and lease termination (gain) loss. In the second quarter of Fiscal 2022, the company committed to a plan to outsource its aviation services and recorded severance and lease termination charges totaling $1.7 million. In the fourth quarter of Fiscal 2022, the company completed the lease buyouts and subsequent sale of two aircrafts and recorded gains on these sales totaling $6.1 million. These amounts are reflected in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income. Lease termination costs were paid in the second quarter of Fiscal 2022 and the severance payments were completed in January 2023.

In Fiscal 2021, the company purchased twenty-seven warehouses that were included in the company’s operating leased assets. Two of the purchased properties were fully impaired in Fiscal 2020, resulting in the recognition of a $2.6 million gain upon completion of the purchase of these assets and this amount is included in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

Food allergen compliance costs and loss on inferior ingredients. In the fourth quarter of Fiscal 2022, the company recognized $2.0 million of compliance costs associated with the Food, Allergy Safety, Treatment, Education, and Research Act (the FASTER Act) signed into law on April 23, 2021 and effective on January 1, 2023. The FASTER Act declared sesame as the ninth major food allergen recognized by the U.S. and requires, among other things, all food products containing sesame (or products produced on the same equipment as products containing sesame) to list it in the ingredients statement or in a separate allergen statement on the packaging. The costs were mostly attributable to write-offs of obsolete packaging and are recorded in our Consolidated Statements of Income.

In the fourth quarter of Fiscal 2021, the company issued a voluntary recall on certain Tastykake multi-pack cupcakes sold in eight states and certain Tastykake Krimpets distributed to retail customers throughout the U.S. due to the potential presence of tiny fragments of metal mesh wire. The recall was initiated following notification by a vendor of the possible contamination in a supplied ingredient. The company incurred costs of $1.8 million related to the recall in Fiscal 2021 and received a full reimbursement for the loss in the fourth quarter of Fiscal 2022.

In the first quarter of Fiscal 2021, we incurred an additional $0.1 million of costs related to receiving inferior ingredients used in the production of certain of our gluten-free products in the previous year. In the third quarter of Fiscal 2021, we received reimbursements of approximately $1.0 million for these previously incurred costs. These costs and related reimbursements are recorded in our Consolidated Statements of Income.

Acquisition-related costs. On December 13, 2022, the company announced it had entered into a definitive agreement to acquire Papa Pita, a manufacturer and distributor of bagels, tortillas, breads, buns, English muffins, and flat breads. Founded in 1983, Papa Pita operates one facility in West Jordan, Utah. Its primary brands include Papa Pita, Great Grains, Bubba's Bagels, and Maya's Tortillas. Additionally, Papa Pita has a significant co-manufacturing business as well as direct-store-distribution in the western U.S. The acquisition closed on February 17, 2023 and the company funded the transaction with cash on-hand and from existing credit facilities. The company incurred $0.9 million of acquisition-related costs associated with the acquisition in Fiscal 2022 and anticipates additional costs to be incurred in the first quarter of Fiscal 2023.

In the third quarter of Fiscal 2022, we incurred $11.6 million in costs from the pursuit of an acquisition that failed to materialize. In addition to customary acquisition costs, we incurred $8.4 million related to realized foreign currency exchange losses. Although the majority of the target company's sales were made in the U.S., the target company's foreign domicile required us to convert funds from U.S. dollars to complete the transaction. Following that conversion, a significant strengthening of the U.S. dollar relative to the target company's currency resulted in the foreign currency exchange loss upon conversion back into U.S. dollars following the failure of the deal.

Acquisition-related costs are recorded in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

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Pension plan settlement loss. In the company-sponsored defined benefit pension plan for union employees (“Plan No. 2”), retired and terminated vested pension plan participants not yet receiving their benefit payments have the option to elect to receive their benefit as a single lump sum payment. In the fourth quarter of Fiscal 2021, a settlement charge of $0.4 million was triggered as a result of lump sum distributions paid in Fiscal 2021.

Acquisition consideration adjustment. In connection with an acquisition completed in Fiscal 2012, the company agreed to make the selling shareholders whole for certain taxes incurred by the stakeholders on the sale. In Fiscal 2021, there was a tax determination that the selling shareholders owed additional taxes of approximately $3.4 million and the Company recorded this cost in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income in Fiscal 2021. During Fiscal 2022, the company reached a settlement and made a partial payment and anticipates making the final payment in Fiscal 2023.

Legal settlements and related costs. During the second and third quarters of Fiscal 2022, we reached agreements to settle certain distributor-related litigation in the aggregate amount of $7.5 million, inclusive of attorney fees. The settlement accrued for in the second quarter of Fiscal 2022 was paid in the third quarter of Fiscal 2022.

In Fiscal 2021, we reached an agreement to settle certain distributor-related litigation for a settlement payment, inclusive of plaintiffs’ attorney fees, of $16.5 million. The payment was made in the second quarter of Fiscal 2022. The settlement also required a phased repurchase of approximately 75 distribution rights, which the company estimated would cost approximately $6.6 million. The company commenced repurchasing the distribution rights during the second quarter of Fiscal 2022 and these repurchases were complete by the end of January 2023.

All amounts related to legal settlements and related costs are recorded in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income. At December 31, 2022, $5.9 million of settlements were accrued (inclusive of obligations for repurchase of distribution rights).

Loss on extinguishment of debt. On April 8, 2021, we completed the early redemption of the Company’s $400.0 million of 4.375% senior notes due 2022 (the “2022 notes”) with proceeds received from the issuance of the Company’s $500.0 million of 2.400% senior notes due 2031 (the “2031 notes”) on March 9, 2021. We recognized a loss on extinguishment of debt of $16.1 million comprised of a make-whole cash payment of $15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling $0.7 million.

Multi-employer pension plan withdrawal costs. On September 22, 2021, the union participants of the Retail, Wholesale and Department Store Union Fund (the “Fund”) at our Birmingham, Alabama plant voted to withdraw from the Fund in the most recent collective bargaining agreement. The withdrawal was effective, and the union participants became eligible to participate in the Flowers Foods, Inc. 401(k) Retirement Savings Plan, on December 1, 2021, which resulted in the recognition of a pension plan withdrawal liability of $3.3 million (including transition payments) in our Consolidated Statements of Income. The transition payments were paid in December 2021 and the withdrawal liability was paid in April 2022.

EXECUTIVE OVERVIEW

We are the second-largest producer and marketer of packaged bakery foods in the U.S. with Fiscal 2022 sales of $4.8 billion. We operate in the highly competitive fresh bakery market. Our product offerings include a wide range of fresh breads, buns, rolls, snack items and tortillas, as well as frozen breads and rolls, which we produce at 46 plants in 19 states. Our products are sold under leading brands such as Nature’s Own, Dave’s Killer Bread, Canyon Bakehouse, Tastykake, Mrs. Freshley’s, and Wonder. Item 1., Business, of this Form 10-K for additional information regarding our customers and brands, business strategies, strengths and core competencies, and competition and risks.

Impact of the Inflationary Economic Environment, Other Macroeconomic Factors, and COVID-19 on Our Business

We continue to monitor the impact of the inflationary economic environment, supply chain disruptions, labor shortages, the conflict between Russia and Ukraine, and the COVID-19 pandemic on our business as further discussed in Item 1., Business, of this Form 10-K.

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Summary of Operating Results, Cash Flows and Financial Condition:

Our results in Fiscal 2022 continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. Remote and hybrid-work arrangements spurred by the pandemic endured in Fiscal 2022 which resulted in greater at-home food consumption than in pre-pandemic periods. We experienced significant input cost inflation for commodities and transportation, and, to a lesser extent, for labor in Fiscal 2022 which partially offset this benefit. We expect these inflationary pressures to continue in Fiscal 2023. To mitigate the ongoing cost pressures, we implemented price increases in Fiscal 2022 and in early Fiscal 2023.

Sales increased 11.0% in Fiscal 2022 compared to Fiscal 2021 primarily due to inflation-driven pricing actions that contributed to positive price/mix of 15.4%. This increase was partially offset by volume declines of 4.4%. Targeted sales rationalization and production constraints from supply chain disruptions contributed to the lower volumes. Our leading brands, Nature's Own, DKB, and Canyon Bakehouse, continued to perform well as these brands all experienced double-digit sales growth from positive price/mix.

Income from operations for Fiscal 2022 was $303.2 million, an increase of 2.8% as compared to the prior year. The increase resulted from sales increases from positive pricing actions, lower workforce-related incentive compensation expense year over year, and decreased legal settlement charges. These items were mostly offset by significant cost inflation for input and transportation costs, lower production volumes year over year, and the acquisition and plant closure costs incurred in the current year.

Net income was $228.4 million for Fiscal 2022, an increase of 10.8% as compared to the prior year. The improvement in the current year resulted primarily from the $16.1 million loss on extinguishment of debt ($12.1 million net of tax) recognized in the prior year and increased income from operations year over year.

In Fiscal 2022, we generated net cash flows from operations of $360.9 million and invested $169.1 million in capital expenditures (inclusive of $61.3 million for the ongoing ERP upgrade) and $9.0 million in a cost-method investment as further discussed below. Additionally, we made stock repurchases of $34.6 million and paid $186.5 million in dividends to our shareholders. Our cash and cash equivalents balance as of December 31, 2022 was $165.1 million. In Fiscal 2022, we amended our accounts receivable securitization facility (the “AR facility”) to, among other things, extend the maturity date to September 27, 2024. At December 31, 2022, all of our outstanding debt obligations were fixed rate debt. Additionally, on May 26, 2022, the Board of Directors increased the company's share repurchase authorization by 20.0 million shares.

In Fiscal 2021, we generated net cash flows from operations of $344.6 million, invested $136.0 million in capital expenditures and purchased a portfolio of leased warehouses for $64.7 million. Additionally, we reduced our total indebtedness by $81.9 million and paid $175.9 million in dividends to our shareholders in Fiscal 2021. On March 9, 2021, we issued the 2031 notes and used the net proceeds from the offering to complete the early redemption of our outstanding 2022 notes and for other debt repayments. Cash and cash equivalents at January 1, 2022 was $185.9 million.

During the second quarter of Fiscal 2022, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility. Base Culture's product offerings include better-for-you, gluten-free, and grain-free sliced breads and baked goods and are all-natural, 100% Paleo-certified, kosher-certified, dairy-free, soy-free, and non-GMO verified.

On February 17, 2023, subsequent to the end of Fiscal 2022, the company completed the acquisition of Papa Pita and funded the purchase with cash on-hand and a drawdown on our credit facility. The credit facility is variable rate debt and exposes the company to greater interest rate risk.

Critical Accounting Estimates

The company’s discussion and analysis of its results of operations and financial condition are based upon the Consolidated Financial Statements of the company, which have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these financial statements requires the company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues, expenses, and cash flows during the reporting period. On an ongoing basis, the company evaluates its estimates, including those related to customer programs and incentives, bad debts, raw materials, inventories, long-lived assets, leased assets, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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The selection and disclosure of the company’s critical accounting estimates have been discussed with the company’s audit committee. Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements of this Form 10-K includes a summary of the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The following table lists, in no particular order of importance, areas of critical assumptions and estimates used in the preparation of the Consolidated Financial Statements. Additional detail can be found in the following notes:

Critical Accounting Estimate Note

Revenue recognition —

Derivative financial instruments 10

Long-lived assets —

Goodwill and other intangible assets 9

Self-insurance reserves 22

Income tax expense and accruals 21

Postretirement plans 20

Stock-based compensation 18

Commitments and contingencies 22

Revenue Recognition. Revenue is recognized when obligations under the terms of a contract with our customers are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The company records both direct and estimated reductions to gross revenue for customer programs and incentive offerings at the time the incentive is offered or at the time of revenue recognition for the underlying transaction that results in progress by the customer towards earning the incentive. These allowances include price promotion discounts, coupons, customer rebates, cooperative advertising, and product returns. Consideration payable to a customer is recognized at the time control transfers and is a reduction to revenue. The recognition of costs for promotion programs involves the use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors.Price promotion discount expense is recorded as a reduction to gross sales when the discounted product is sold to the customer.

Derivative Financial Instruments. The company’s cost of primary raw materials is highly correlated to certain commodities markets. Raw materials, such as our baking ingredients, experience price fluctuations. If actual market conditions become significantly different than those anticipated, raw material prices could increase significantly, adversely affecting our results of operations. We enter into forward purchase agreements and other derivative financial instruments qualifying for hedge accounting to manage the impact of volatility in raw material prices. The company measures the fair value of its derivative portfolio using fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. When quoted market prices for identical assets or liabilities are not available, the company bases fair value on internally developed models that use current market observable inputs, such as exchange-quoted futures prices and yield curves. Refer to Item 7A., Quantitative and Qualitative Disclosures About Market Risk, of this Form 10-K for additional information about our derivative financial instruments, including a sensitivity analysis of the company’s potential exposure to commodity price risk.

Valuation of Long-Lived Assets, Goodwill and Other Intangible Assets. The company records an impairment charge to property, plant and equipment, goodwill and intangible assets in accordance with applicable accounting standards when, based on certain indicators of impairment, it believes such assets have experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of these underlying assets could result in losses or an inability to recover the carrying value of the asset that may not be reflected in the asset’s current carrying value, thereby possibly requiring impairment charges in the future. Impairment charges recorded in Fiscal 2022 are discussed above in the “Matters Affecting Comparability” section.

Flowers has concluded it has one operating segment based on the nature of products that Flowers sells, an intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the CEO, who is the chief operating decision maker, for the purpose of assessing performance and allocating resources. The company also determined we have one reporting unit.

The company evaluates the recoverability of the carrying value of its goodwill on an annual basis or at a time when events occur that indicate the carrying value of the goodwill may be impaired. We have elected not to perform the qualitative approach, but instead perform a quantitative analysis by comparing the fair value of the reporting unit with which the goodwill is associated to the carrying amount of the reporting unit. If the fair value is less than the carrying value, the goodwill is written down to the extent the carrying amount exceeds the fair value.

Our annual evaluation of goodwill impairment requires management judgment and the use of estimates and assumptions to determine the fair value of our reporting unit. Fair value is estimated using standard valuation methodologies incorporating market participant considerations and management’s assumptions on revenue, revenue growth rates, operating margins, discount rates, and EBITDA (defined as earnings before interest, taxes, depreciation and amortization). Our estimates can significantly affect the outcome of the test. We perform the fair value assessment using the income and market approach. Changes in our forecasted operating results and other assumptions could materially affect these estimates. This test is performed in the fourth quarter of each fiscal year unless

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circumstances require this analysis be completed sooner. The income approach is tested using a sensitivity analysis to changes in the discount rate and yield a sufficient buffer to significant variances in our estimates. The estimated fair value of our reporting unit exceeded its carrying value in excess of $4.6 billion in Fiscal 2022. A 1% decrease in the discount rate would increase the fair value of the reporting unit by $1.1 billion and a 1% increase in the discount rate would decrease the fair value by $0.9 billion. Based on management’s evaluation, no impairment charges relating to goodwill were recorded for Fiscal 2022 or 2021.

In connection with acquisitions, the company has acquired trademarks, customer lists, and non-compete agreements, a portion of which are amortizable. The company evaluates these assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The undiscounted future cash flows of each intangible asset are compared to the carrying amount, and if less than the carrying value, the intangible asset is written down to the extent the carrying amount exceeds the fair value. The fair value is computed using the same approach described above for goodwill and includes the same risks and estimates. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment. We use the multi-period excess earnings and relief from royalty methods to value these intangibles. The method used for impairment testing purposes is consistent with the valuation method employed at acquisition of the intangible asset. No impairment charges related to amortizing intangible assets were recorded in Fiscal 2022 or 2021.

As of December 31, 2022, the company also owns trademarks acquired through acquisitions with a total carrying value of $127.1 million that are indefinite-lived intangible assets not subject to amortization. The company evaluates the recoverability of intangible assets not subject to amortization by comparing the fair value to the carrying value on an annual basis or at a time when events occur that indicate the carrying value may be impaired. In addition, the assets are evaluated to determine whether events and circumstances continue to support an indefinite life. The fair value is compared to the carrying value of the intangible asset, and if less than the carrying value, the intangible asset is written down to fair value. There are certain inherent risks included in our expectations about the performance of acquired trademarks and brands. If we are unable to implement our growth strategies for these acquired intangible assets as expected, it could adversely impact the carrying value of the brands. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment.

Leases. The company’s leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation, and IT equipment. The company uses the applicable incremental borrowing rate at lease commencement to perform the lease classification tests on lease components and to measure the lease liabilities and right-of-use assets in situations when discount rates implicit in leases cannot be readily determined.

Self-Insurance Reserves. We are self-insured for various levels of general liability, auto liability, workers’ compensation, and employee medical and dental coverage. Insurance reserves are calculated on a combination of an undiscounted basis based on actual claims data and estimates of incurred but not reported claims developed utilizing historical claims trends. Projected settlements of incurred but not reported claims are estimated based on pending claims, historical trends, industry trends related to expected losses and actual reported losses, and key assumptions, including loss development factors and expected loss rates. Though the company does not expect them to do so, actual settlements and claims could differ materially from those estimated. Material differences in actual settlements and claims could have an adverse effect on our financial condition and results of operations.

A sensitivity analysis has been prepared to quantify the impact of changes in claim severity and frequency on the estimated unpaid losses on the company’s workers’ compensation liabilities. We estimate a 1% change in the claim severity and frequency would result in immaterial changes in the workers’ compensation liability.

Income Tax Expense and Accruals. The annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Changes in statutory rates and tax laws in jurisdictions in which we operate may have a material effect on the annual tax rate. The effect of these changes, if any, would be recognized as a discrete item upon enactment.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid.

Our income tax expense, deferred tax assets and liabilities, and reserve for uncertain tax benefits reflect our best assessment of future taxes to be paid in the jurisdictions in which we operate. The company records a valuation allowance to reduce its deferred tax assets if we believe it is more likely than not that some or all of the deferred assets will not be realized. While the company considers future taxable income and ongoing prudent and feasible tax strategies in assessing the need for a valuation allowance, if these estimates and assumptions change in the future, the company may be required to adjust its valuation allowance, which could result in a charge to, or an increase in, income in the period such determination is made.

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Periodically, we face audits from federal and state tax authorities, which can result in challenges regarding the timing and amount of income or deductions. We provide reserves for potential exposures when we consider it more likely than not that a taxing authority may take a sustainable position on a matter contrary to our position. We evaluate these reserves on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements that may impact the ultimate payment of such potential exposures. While the ultimate outcome of audits cannot be predicted with certainty, we do not currently believe that current or future audits will have a material adverse effect on our consolidated financial condition or results of operations. The company is no longer subject to federal examination for years prior to Fiscal 2019, and with limited exceptions, for years prior to 2018 in state jurisdictions.

Postretirement Plans. The company records pension costs and benefit obligations related to its defined benefit plans based on actuarial valuations. These valuations reflect key assumptions determined by management, including the discount rate, expected long-term rate of return on plan assets and mortality. Material changes in pension costs and in benefit obligations may occur in the future due to experience that is different than assumed and changes in these assumptions. A sensitivity analysis of pension costs has been prepared to quantify the impact of changes in the discount rate. We estimate a 0.25% change in the discount rate would result in approximately $0.1 million change in pension costs on a pre-tax basis.

The company sponsors a defined benefit pension plan for union employees, Plan No. 2, and a frozen nonqualified plan covering former Tasty executives.

We use a spot rate approach (“granular method”) to estimate the service cost and interest cost components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows, as we believe this provides the best estimate of service and interest costs.

The pension plan’s investment committee, which consists of certain members of management, establishes investment guidelines and regularly monitors the performance of the plan’s assets. The investment committee is responsible for executing these strategies and investing the pension assets in accordance with ERISA and fiduciary standards. The investment objective of the pension plan is to preserve the plan’s capital and maximize investment earnings within acceptable levels of risk and volatility. The investment committee meets on a regular basis with its investment advisors to review the performance of the plan’s assets. Based upon performance and other measures and recommendations from its investment advisors, the investment committee rebalances the plan’s assets to the targeted allocation when considered appropriate. The asset allocation for Plan No. 2 as of December 31, 2022 is equal to 0-70% equity securities, 30-100% fixed-income securities, and 0-10% short-term investments and cash. For the details of our pension plan assets, see Note 20, Postretirement Plans, of Notes to Consolidated Financial Statements of this Form 10-K.

In developing the expected long-term rate of return on plan assets at each measurement date, the company considers the plan assets’ historical actual returns, targeted asset allocations, and the anticipated future economic environment and long-term performance of the individual asset classes, based on the company’s investment strategy. While appropriate consideration is given to recent and historical investment performance, the assumption represents management’s best estimate of the long-term prospective return. Further, pension costs do not include an explicit expense assumption, and therefore the return on assets rate reflects the long-term expected return, net of expenses. Based on these factors, the long-term rate of return assumption for Plan No. 2 was set at 5.9% for Fiscal 2022 and is unchanged for Fiscal 2023.

The company utilizes the Society of Actuaries’ (“SOA”) published mortality tables and improvement scales in developing their best estimates of mortality. In October 2019, the SOA published its final report on their “standard” mortality table (“Pri-2012”). For purposes of measuring pension benefit obligations of Plan No. 2, the company used a blue color adjustment to the Pri-2012 base table and a projection scale of MP-2021. No other collar adjustments are applied for any other plans. In addition, contingent annuitant mortality rates are applied for surviving spouses after the death of the original retiree.

The company determines the fair value of substantially all of its plans’ assets utilizing market quotes rather than developing “smoothed” values, “market related” values, or other modeling techniques. Plan asset gains or losses in a given year are included with other actuarial gains and losses due to remeasurement of the plans’ projected benefit obligations (“PBO”). If the total unrecognized gain or loss exceeds 10% of the larger of (i) the PBO or (ii) the market value of plan assets, the excess of the total unrecognized gain or loss is amortized over the expected average remaining service period of active covered employees (or average future lifetime of participants if the plan is inactive or frozen). Prior service cost or credit, which represents the effect on plan liabilities due to plan amendments, is amortized over the average remaining service period of active covered employees (or average future lifetime if the plan is inactive or frozen).

In Fiscal 2023, the company does not expect to make any cash contributions to Plan No. 2 and expects to pay $0.3 million in nonqualified pension benefits from corporate assets.

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Stock-based compensation. Stock-based compensation expense for all share-based payment awards granted is determined based on the grant date fair value. The company recognizes these compensation costs net of an estimated forfeiture rate, and recognizes compensation cost only for those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the share-based payment award.

We grant performance stock awards that separately have a market and performance condition. The expense computed for the total shareholder return shares (“TSR”) is fixed and recognized on a straight-line basis over the vesting period. The expense computed for the return on invested capital (“ROIC”) shares can change depending on the expected attainment of performance condition goals. The expense for the ROIC shares can be within a range of 0% to 125% of the target. There is a possibility that this expense component will change in subsequent quarters depending on how the company performs relative to the ROIC target. Additionally, there are time-based stock awards that vest over a period of three years. See Note 18, Stock-Based Compensation, of Notes to Consolidated Financial Statements of this Form 10-K for additional information. In early Fiscal 2023, the company granted stock awards to certain employees. The company expects stock-based compensation expense for Fiscal 2023 to be relatively consistent with Fiscal 2022. This estimate is inclusive of an additional $1.5 million of expense anticipated to be recognized in the first quarter of Fiscal 2023 due to the payout for the Fiscal 2021 grant currently trending at 125% of target.

Commitments and contingencies. 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, including lawsuits related to the independent distributors, which are being handled and defended in the ordinary course of business. Loss contingencies are recorded at the time it is probable an asset is impaired or a liability has been incurred and the amount can be reasonably estimated. For litigation claims, the company considers the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the loss. Losses are recorded in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

Results of Operations

Consolidated Results - Fiscal 2022 compared to Fiscal 2021

The company’s results of operations, expressed as a percentage of sales, are set forth below for Fiscal 2022 and Fiscal 2021:

Percentage of Sales Increase (Decrease)

(Amounts in thousands, except percentages)

FASTER Act and loss on inferior ingredients 236 944 0.0 0.0 (708 ) NM

Plant closure costs and impairment of assets 7,825 — 0.2 — 7,825 NM

Multi-employer pension plan withdrawal costs — 3,300 — 0.1 (3,300 ) NM

Pension plan settlement loss — 403 — 0.0 (403 ) NM

NM – the computation is not meaningful

Percentages may not add due to rounding.

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Sales

$ % $ % % Change

(Amounts in thousands) (Amounts in thousands)

(The table above presents certain sales by category that have been reclassified from amounts previously reported to conform to the current period presentation.)

The change in sales was attributable to the following:

Percentage point change in sales attributed to: Branded Retail Other Total

Favorable (Unfavorable)

Total percentage point change in sales 9.2 14.5 11.0

* Computations above are calculated as follows:

Price/Mix $ = Current fiscal year units x change in price per unit

Price/Mix % = Price/Mix $ ÷ Prior fiscal year Sales $

Volume $ = Prior fiscal year price per unit x change in units

Volume % = Volume $ ÷ Prior fiscal year Sales $

The company disaggregates its sales into two categories, Branded Retail and Other. This aligns with our brand-focused strategy to drive above-market growth via innovation and focusing on higher margin products. The Other category includes store branded retail and non-retail sales (foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing).

Sales increased significantly year over year primarily due to positive pricing actions implemented during the latter half of Fiscal 2021 and throughout Fiscal 2022 to mitigate considerable cost inflation. Volume declines partially offset the increase. Our mix of Branded Retail sales to total sales of 65.3% for Fiscal 2022 decreased modestly as compared to 66.4% for Fiscal 2021, but continued to exceed pre-pandemic levels (60.1% for Fiscal 2019). Volume decreases in Branded Retail and non-retail sales were partially offset by modest volume growth in store branded retail products. We continued to implement our portfolio strategy of shifting more of our sales to higher margin, value-added branded retail products. This shift in focus resulted in increased rationalization of store branded retail and non-retail products, which combined with supply chain disruptions and labor shortages, contributed to the volume decreases. Improved promotional efficiency (measurement of a promotion’s impact on operating performance) in the current year also contributed to the sales increase. The promotional environment remained relatively stable during Fiscal 2022, however this trend may not continue in future periods.

We anticipate our Fiscal 2023 sales will be positively impacted by the benefit of price increases implemented during Fiscal 2022 and at the beginning of Fiscal 2023, and the Papa Pita acquisition completed in February 2023, however, this benefit could be offset to some extent by changes in consumer buying patterns which are unpredictable.

Branded Retail Sales

Branded Retail sales grew substantially year over year due to favorable price/mix resulting from price increases and improved promotional efficiency, partially offset by volume declines, most notably in branded cake items and branded traditional loaf bread products. Branded cake volumes were negatively impacted by targeted sales rationalization, supply chain disruptions, and labor shortages during Fiscal 2022. Volume declines in branded traditional loaf breads resulted partially from consumer demand shifting to store branded products.

Sales of our leading brands, Nature's Own, DKB, and Canyon Bakehouse, all experienced double-digit sales growth due to inflation-driven price increases and, to a much lesser extent, volume growth, although volumes were pressured by the impact of supply chain disruptions. In Fiscal 2022, we introduced Nature's Own Hawaiian loaf bread, Nature's Own Perfectly Crafted Sourdough loaf bread, DKB Organic Everything Bread, and Canyon Bakehouse Gluten-Free Brioche and Hawaiiandinner roll varieties, among other

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new products. Additionally, in Fiscal 2022, we introduced new varieties of DKB snack bars and, in December, announced the nationwide rollout of certain varieties. Previously, the DKB snack bars were only available for purchase in certain test markets or from our consumer testing website. In early Fiscal 2023, we launched DKB Crunchy Snack Bites in test markets. The DKB snack bars and snack bites are part of an initiative to extend our presence beyond the traditional bread category and into the snacking category.

Other Sales

Sales in the Other sales category increased considerably year over year due to price increases implemented to mitigate inflationary pressures. Volumes declined due to targeted sales rationalization, softer demand for our foodservice and restaurant products, and supply chain disruptions. Volume growth in store branded white loaf breads partially offset these declines as consumer demand shifted from branded retail products to store branded products. Sales of our store branded retail products had been declining prior to the pandemic and we experienced an acceleration of this trend during the prior two fiscal years. This trend started to reverse in the second quarter of Fiscal 2022 and the reversal expanded in the third and fourth quarters of Fiscal 2022. However, store branded retail sales continue to compose a smaller portion of our total sales mix as compared to pre-pandemic levels.

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

Overall, costs increased significantly year over year as a percent of sales due to considerable input cost inflation. In Fiscal 2022, inflation impacted all ingredient and packaging items, and most significantly flour costs, which outpaced the sales price increases. Increases in finished goods inventory year over year also resulted in higher ingredient and packaging costs. We anticipate that input costs will remain volatile in Fiscal 2023. Although workforce-related costs did not increase at the same rate as the sales price increases and decreased as a percent of sales year over year, the competitive labor market continues to impact our operations and we expect this trend to continue. Lower incentive compensation costs year over year, partly due to prior year appreciation bonuses for frontline workers of $4.0 million, also contributed to reduced workforce-related costs. The Other line item reflects reduced outside purchases of product (sales with no associated ingredient costs) and the impact of timing differences of the sell-through of product inventories, net of reduced manufacturing efficiencies and lower production volumes. Similar to workforce-related costs, other costs did not increase at the same rate as the sales price increases.

In the latter half of the first quarter of Fiscal 2022, we experienced heightened supply chain disruptions which impacted our ability to procure adequate quantities of certain raw materials and packaging items contributing to lower production volumes. We effectively navigated these challenges faster than originally anticipated, although with more costly inputs, partially mitigating the negative impact to our operating results. We expect these challenges to continue as a result of uncertainty in the global and U.S. supply chain.

We continually monitor the markets for ingredients and packaging materials, the prices of which have fluctuated widely, and may continue to do so, due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances. Ingredient and packaging costs are currently experiencing significant volatility and are expected to remain volatile during Fiscal 2023. To manage the impact of volatility in certain raw material prices, we enter into forward purchase agreements and other financial instruments. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings. We currently anticipate ingredient and packaging costs to be a headwind in the first half of Fiscal 2023 relative to Fiscal 2022.

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

Distributor distribution fees 14.6 14.9 (0.3 )

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Sales price increases and lower incentive compensation and employee fringe benefit costs year over year more than offset wage inflation rates resulting in lower workforce-related costs as a percent of sales. Prior year appreciation bonuses paid to frontline workers of $1.7 million also contributed to the lower workforce-related costs. The appreciation bonuses were in addition to the company’s annual performance-based cash incentive plan in which all Flowers employees participate. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. However, this decrease was more than offset by the substantial rise in transportation costs which is reflected in the Other line item.

The decrease in the Other line item reflects the $15.6 million decrease in legal settlements and related costs year over year and the $3.4 million prior year acquisition consideration adjustment in the prior year. Increases in gains on sales of assets also contributed to the overall decrease in costs. Partially offsetting these items were $12.5 million of acquisition-related costs incurred in the current year and increased transportation costs. See the “Matters Affecting Comparability” section above for a discussion of legal settlements and related costs, the prior year acquisition consideration adjustment, and acquisition-related costs. Additionally, See Note 22, Commitments and Contingencies, of Notes to Consolidated Financial Statements of this Form 10-K for additional information regarding legal settlements. The company anticipates increased marketing expense in Fiscal 2023 to support the nationwide launch of our DKB snack bars.

FASTER Act and Loss on Inferior Ingredients, Plant Closure Costs and Impairment of Assets, and Multi-Employer Pension Plan Withdrawal Costs

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

Depreciation and Amortization Expense

Depreciation and amortization expense decreased as a percent of sales due to price increases we have implemented, but increased in dollars primarily due to assets placed in service in the current year and depreciation associated with twenty-seven leased warehouses purchased at the end of Fiscal 2021, two of which were moved to assets held for sale in the first quarter of Fiscal 2022. The company anticipates depreciation and amortization expense will increase in Fiscal 2023 partly due to the Papa Pita acquisition and the ERP upgrade.

Income from Operations

Income from operations increased in dollars but decreased as a percent of sales year over year. The decrease as a percent of sales resulted primarily from significant input cost inflation and the plant closure costs incurred in the current year, partially offset by reduced selling, distribution, and administrative expenses and prior year multi-employer pension plan withdrawal costs.

Pension Plan Settlement Loss

As discussed in the “Matters Affecting Comparability” section above, we recognized $0.4 million of non-cash pension plan settlement charges in Fiscal 2021 associated with Plan No. 2.

Net Interest Expense

Year over year, net interest expense (exclusive of the portion related to the loss on extinguishment of debt discussed below) decreased in dollars and as a percent of sales primarily due to the lower interest rate on the 2031 notes as compared to the 2022 notes that were redeemed in the first quarter of Fiscal 2021 and, to a lesser extent, lower average amounts outstanding under our borrowing arrangements.

Loss on Extinguishment of Debt

In the first quarter of Fiscal 2021, we completed the redemption of the outstanding 2022 notes and incurred a loss of $16.1 million due to the make-whole provision of $15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling $0.7 million as further discussed in the “Matters Affecting Comparability” section above.

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Income Tax Expense

The effective tax rate for Fiscal 2022 was 23.5% compared to 23.9% in the prior year. The decrease in the rate year over year was primarily due to windfalls on stock-based compensation awards that vested in Fiscal 2022. For the current year, the primary differences in the effective rate and the statutory rate related to state income taxes and windfalls on the vesting of stock-based compensation awards in the current year. The primary differences in the effective rate and statutory rate for the prior year were state income taxes.

The Inflation Reduction Act ("IRA") did not have a material impact on the effective tax rate for Fiscal 2022 and there is no anticipated material impact on the effective tax rate in future periods.

Comprehensive Income

The increase in comprehensive income year over year resulted primarily from the increase in net earnings and changes in the fair value of derivatives.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION

Strategy

We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths. Furthermore, we strive to maintain a conservative financial position as we believe it allows us flexibility to make investments and acquisitions and is a strategic competitive advantage. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, and obligated debt repayments. We believe we currently have access to available funds and financing sources to meet our short and long-term capital requirements. The company’s strategy for allocating excess cash flows includes:

•

implementing our strategic priorities, including our transformation strategy initiatives;

•

paying dividends to our shareholders;

•

maintaining a conservative financial position;

•

making strategic acquisitions; and

•

repurchasing shares of our common stock.

Although there has been no material adverse impact on the company’s results of operations, liquidity or cash flows in Fiscal 2022, volatility in global and U.S. economic environments could significantly impact our ability to generate future cash flows and we continue to evaluate these various potential business risks. Those potential risks include the possibility of future economic downturns which could result in a significant shift away from our branded retail products to store branded products, supply chain disruptions that have impacted, and could continue to impact, the procurement of raw materials and packaging items, workforce availability, and our ability to implement additional pricing actions to offset rising inflation, among other risks.

In light of the potential risks detailed above associated with the current inflationary economic environment and the ongoing pandemic, the company has taken actions to safeguard its capital position. In the first quarter of Fiscal 2021, we issued the 2031 notes and used the net proceeds from the offering to redeem in full the outstanding 2022 notes, extending the earliest maturity date of our non-revolving debt to 2026. If the company were to experience a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including amounts available on our debt facilities, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds. We believe the fundamentals of the company remain strong and that we have sufficient liquidity on hand to continue business operations during the volatile global and U.S. economic environments and the pandemic. The company had total available liquidity of $852.3 million as of December 31, 2022, consisting of cash on hand and the available balances under the credit facility and the AR facility.

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We expect the transformation strategy initiatives will require significant capital investment and expense over the next several years. We currently anticipate the upgrade of our ERP system will cost approximately $350 million (of which approximately 32% has been or is anticipated to be capitalized) and anticipate the upgrade to be completed in 2026. Previously, these costs were estimated to be approximately $275 million. The increase in estimated costs resulted from expanding the project scope and anticipation of greater reliance on external resources for bakery deployments due to labor constraints. As of December 31, 2022, we have incurred costs related to the project of approximately $153 million. In Fiscal 2023, we expect costs for the upgrade of our ERP system (a portion of which may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract) to be approximately $80 million to $90 million. Costs related to our digital initiatives are more fluid and cannot currently be estimated. See Item 1A., Risk Factors, “We may experience difficulties in designing and implementing the upgrade of our ERP system.”

On February 17, 2023, we funded the purchase price of the Papa Pita transaction with cash on hand and from our credit facilities.

The company leases certain property and equipment under various financing and operating lease arrangements. Most of the operating leases provide the company with the option, after the initial lease term, to purchase the property at the then fair value, renew the lease at the then fair value, or return the property. The financing leases provide the company with the option to purchase the property at a fixed price at the end of the lease term. The company believes the use of leases as a financing alternative places the company in a more favorable position to fulfill its long-term strategy for the use of its cash flow. See Note 13, Leases, of Notes to Consolidated Financial Statements of this Form 10-K for detailed financial information regarding the company’s lease arrangements.

On May 26, 2022, our Board of Directors increased the company's share repurchase authorization by 20.0 million shares.

Key items impacting our liquidity, capital resources and financial position in Fiscal 2022 and 2021:

Fiscal 2022:

•

Generated $360.9 million of net cash from operating activities.

•

Paid dividends to our shareholders of $186.5 million.

•

Invested in our business through capital expenditures of $169.1 million (inclusive of $61.3 million of capital expenditures, including amounts recognized in accounts payable at year end, for the ERP upgrade).

•

Repurchased $34.6 million of our common stock.

•

Incurred business process improvement consulting costs of $33.2 million related to the ongoing transformation strategy initiatives (exclusive of capitalized or deferred costs).

Fiscal 2021:

•

Generated $344.6 million of net cash from operating activities.

•

Paid dividends to our shareholders of $175.9 million.

•

Reduced our total debt outstanding $81.9 million.

•

Invested in our business through capital expenditures of $136.0 million (inclusive of $23.0 million of capital expenditures, including amounts recognized in accounts payable at year end, for the ERP upgrade) and purchase of leased warehouses of $64.7 million.

•

Incurred business process improvement consulting costs of $31.3 million related to the ongoing transformation strategy initiatives (exclusive of capitalized or deferred costs).

Liquidity Discussion

Flowers Foods’ cash and cash equivalents were $165.1 million at December 31, 2022 and $185.9 million at January 1, 2022. The cash and cash equivalents were derived from the activities presented in the table below (amounts in thousands):

Cash flow component Fiscal 2022 Fiscal 2021

Cash flows provided by operating activities $ 360,889 $ 344,610

Cash disbursed for investing activities (151,088 ) (191,438 )

Cash disbursed for financing activities (222,167 ) (274,777 )

Effect of exchange rates in cash (8,371 ) —

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

Loss on foreign currency exchange rates 8,371 —

Impairment of assets 3,897 —

Allowances for accounts receivable 8,518 6,071

•

Refer to the Acquisition-related costs (loss on foreign currency exchange rates) and Plant closure costs and impairment of assets discussion in the “Matters Affecting Comparability” section above regarding these items.

•

For Fiscal 2022 and 2021, deferred income tax activity was primarily composed of changes in temporary differences year over year.

•

Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs (including $0.7 million related to the write-off of unamortized costs upon the early redemption of the 2022 notes in the first quarter of Fiscal 2021), activity in the allowances for inventory obsolescence, and gains or losses on the sale of assets.

Net cash for working capital requirements and pension plan contributions included the following items (amounts in thousands):

Changes in accounts receivable, net $ (55,420 ) $ (10,600 )

Changes in inventories, net (37,396 ) (9,767 )

Changes in hedging activities, net (224 ) (4,967 )

Changes in other assets and accrued liabilities, net (39,080 ) (46,749 )

Qualified pension plan contributions (1,000 ) —

•

The change in accounts receivable, inventories, and accounts payable were mainly attributable to significant price increases and cost inflation in Fiscal 2022 and 2021.

•

Hedging activities change from market movements that affect the fair value and required collateral of positions and the timing and recognition of deferred gains or losses. These changes will occur as part of our hedging program, although the degree and financial impact cannot be estimated.

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•

The change in other assets primarily resulted from changes in prepaid assets, service contracts, and income tax receivable balances in each respective period. Changes in employee compensation accruals, legal settlement accruals, and payroll tax deferrals under the CARES Act primarily resulted in the change in other accrued liabilities. In Fiscal 2021, we paid $1.5 million of restructuring-related cash charges. In Fiscal 2022, we accrued $7.5 million of legal settlements and paid $18.5 million, of which $16.5 million had been accrued for in the prior year. Additionally, during Fiscal 2022, we repurchased distribution rights as required by a prior year legal settlement totaling $4.3 million. In Fiscal 2021, we accrued $23.1 million of legal settlements (inclusive of distribution rights repurchase obligations) and paid $11.9 million, all of which had been accrued for in prior years. We anticipate making payments of approximately $32.6 million, including our share of employment taxes, in performance-based cash awards under our cash incentive plans in the first quarter of Fiscal 2023. During Fiscal 2022 and 2021, the company paid $43.8 million and $64.6 million, respectively, including our share of employment taxes, in performance-based cash awards under the company’s incentive plan. An additional $1.8 million and $0.4 million was paid during Fiscal 2022 and 2021, respectively, for our share of employment taxes on the vesting of the performance-contingent restricted stock awards in each respective year. Under the CARES Act, the company deferred approximately $30.0 million of the employer share of Social Security tax for the period from the beginning of the second quarter of Fiscal 2020 through December 31, 2020 and paid approximately $15.0 million in December 2021 and the remainder in December 2022.

•

During Fiscal 2022, we made a voluntary qualified defined benefit pension plan cash contribution of $1.0 million to Plan No 2. We did not make any contributions to our qualified defined benefit pension plans in Fiscal 2021. We do not expect to make any voluntary cash contributions to our pension plans in Fiscal 2023 and expect to pay $0.3 million in nonqualified pension benefits from corporate assets. The company believes its cash flow and balance sheet will allow it to fund future pension needs without adversely affecting the business strategy of the company.

Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for Fiscal 2022 and 2021 (amounts in thousands):

Purchase of property, plant, and equipment $ (169,071 ) $ (135,964 )

Purchase of leased portfolio — (64,689 )

Acquisition of trademarks — (10,200 )

Investment in unconsolidated affiliate (9,000 ) —

Proceeds from sale of property, plant and equipment 7,681 2,995

Net cash disbursed for investing activities $ (151,088 ) $ (191,438 )

•

The company currently estimates capital expenditures of approximately $140.0 million to $150.0 million (inclusive of expenditures for the ERP upgrade of $20.0 million to $30.0 million) in Fiscal 2023.

•

As discussed in the Executive Overview section above, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility.

Cash Flows Disbursed for Financing Activities. The table below presents net cash disbursed for financing activities for Fiscal 2022 and 2021 (amounts in thousands):

Payment of financing fees (282 ) (6,022 )

Change in bank overdrafts 799 261

Net change in debt obligations — (81,858 )

Payments on financing leases (1,597 ) (1,745 )

Net cash disbursed for financing activities $ (222,167 ) $ (274,777 )

•

Our annual dividend rate increased from $0.84 per share in Fiscal 2021 to $0.88 per share in Fiscal 2022. While there are no requirements to increase our dividend rate, we have shown a recent historical trend to do so. We anticipate funding future dividend payments from cash flows from operations.

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•

In Fiscal 2022, we paid additional financing costs associated with the Fiscal 2021 amendment of the credit facility and for the amendment of the AR facility in the third quarter of Fiscal 2022. In the prior year period, we paid financing costs associated with the issuance of the 2031 notes in the first quarter of Fiscal 2021 and for the amendments of the AR facility and credit facility in the third quarter of Fiscal 2021.

•

Stock repurchase decisions are made based on our stock price, our belief of relative value, and our cash projections at any given time. See Note 17, Stockholders’ Equity, of Notes to Consolidated Financial Statements of this Form 10-K for additional information. A portion of these shares were acquired to satisfy employees’ tax withholding and payment obligations in connection with the vesting of restricted stock awards, which are repurchased by the company based on the fair market value on the vesting date.

•

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

Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at December 31, 2022 and January 1, 2022. For a detailed description of our debt and right-of-use lease obligations and information regarding our distributor arrangements, deferred compensation, and guarantees and indemnification obligations, see Note 13, Leases, and Note 14, Debt and Other Commitments, of Notes to Consolidated Financial Statements of this Form 10-K:

Interest Rate at Final Balance at Fixed or

(Amounts in thousands)

Credit facility 5.42% 2026 — — Variable Rate

AR facility 5.27% 2024 — — Variable Rate

Long-term debt and right-of-use lease obligations $ 1,128,935 $ 1,143,157

Total stockholders’ equity was as follows at December 31, 2022 and January 1, 2022:

Balance at

(Amounts in thousands)

On March 9, 2021, the company issued $500.0 million of senior notes with a maturity date of March 15, 2031. The company pays semiannual interest on the 2031 notes on each March 15 and September 15 and the notes bear interest at 2.400% per annum. The net proceeds received of $494.3 million (before expenses and net of debt discount at issuance of $2.4 million and underwriting discount of $3.3 million) from the issuance of the 2031 notes were used for the early redemption of the outstanding 2022 notes and repayments on the AR facility and the credit facility. The early redemption of the 2022 notes resulted in cash payments of $415.4 million (inclusive of a make-whole amount of $15.4 million) which is classified as a financing cash outflow in the Consolidated Statement of Cash Flows. We recognized a loss on extinguishment of debt of $16.1 million comprised of the make-whole cash payment of $15.4 million and non-cash charges of $0.7 million for the write-off of unamortized debt discount and debt issuance costs.

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The credit facility and AR facility are generally used for short term liquidity needs. The company has historically entered into amendments and extensions approximately one year prior to the maturity of these facilities. During the third quarter of Fiscal 2021, we amended the credit facility to, among other things, extend the maturity date to July 30, 2026. During the third quarter of Fiscal 2022, we amended the AR facility to, among other things, extend the maturity date to September 27, 2024. The following table details the amounts available under the AR facility and credit facility and the highest and lowest balances outstanding under these arrangements during Fiscal 2022:

Amount Available Highest Lowest

for Withdrawal at Balance in Balance in

(Amounts in thousands)

(1)

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

Amounts outstanding under the credit facility can vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 10, Derivative Financial Instruments, of Notes to Consolidated Financial Statements of this Form 10-K. During Fiscal 2022, the company borrowed $230.0 million in revolving borrowings under the credit facility and repaid $230.0 million in revolving borrowings. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

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

Restrictive financial covenants for our borrowings include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the debt agreements and can meet its presently foreseeable financial requirements. As of December 31, 2022 and January 1, 2022, the company was in compliance with all restrictive covenants under our debt agreements.

The company has debt exposure to LIBOR under certain of its agreements, but the agreements contain LIBOR successor rate provisions to cover the discontinuance of LIBOR. The company's successor provisions as currently drafted would result in the adoption of the Secured Overnight Financing Rate (SOFR) if then determinable.

Special Purpose Entities. At December 31, 2022 and January 1, 2022, the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Guarantees. In the event the company ceases to utilize the independent distribution form of doing business or exits a geographic market, the company is contractually required to purchase the distribution rights from the independent distributors.

Stock Repurchase Plan. Previously, our Board had approved a plan that authorized share repurchases of up to 74.6 million shares of the company’s common stock. On May 26, 2022, the Board increased the company's share repurchase authorization by 20.0 million shares. At the close of the company’s fourth quarter on December 31, 2022, 24.4 million shares remained under the existing authorization. Under the share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions or under an accelerated repurchase program 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 Fiscal 2022, 1.32 million shares of the company’s common stock were repurchased under the plan at a cost of $34.6 million and during Fiscal 2021, 0.41 million shares were repurchased under the plan at a cost of $9.5 million. From the inception of the plan through December 31, 2022, 70.1 million shares have been repurchased, at a cost of $687.5 million. There were no repurchases of the company’s common stock during the fourth quarter of Fiscal 2022.

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New Accounting Pronouncements Not Yet Adopted

See Note 3, Recent Accounting Pronouncements, of Notes to Consolidated Financial Statements of this Form 10-K regarding this information.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forwards, futures, swaps, 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, interest rates and commodity prices could increase significantly, adversely affecting our interest costs and the margins from the sale of our products.

Commodity Price Risk

The company enters into commodity forward, futures, option, and swap contracts for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of December 31, 2022, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $(0.5) million and is based on quoted market prices. Approximately $(0.4) million relates to instruments that will be utilized in Fiscal 2023 and the remaining $(0.1) million will be utilized in Fiscal 2024.

A sensitivity analysis has been prepared to quantify the company’s potential exposure to commodity price risk with respect to its derivative portfolio. Based on the company’s derivative portfolio as of December 31, 2022, a hypothetical ten percent change in commodity prices would increase or decrease the fair value of the derivative portfolio by $4.7 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase or decrease in the fair value of the portfolio would be substantially offset by increases or decreases in raw material and packaging prices.

Item 8. Financial Statements and Supplementary Data

Refer to the Index to Consolidated Financial Statements and the Financial Statement Schedule for the required information.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures:

We have established and maintain a system of disclosure controls and procedures that are designed to ensure that material information relating to the company, which is required to be timely disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 (“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 annual report. This evaluation was performed under the supervision and with the participation of management, including both our CEO and our CFO and CAO.

Based upon that evaluation, both our CEO and our CFO and CAO have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our CEO and our CFO and CAO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation our management concluded that our internal control over financial reporting was effective as of December 31, 2022.

The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included herein.

42

Changes in Internal Control Over Financial Reporting:

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

Item 9B. Other Information

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

43

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item with respect to directors of the company is incorporated herein by reference to the information set forth under the captions “Proposal I Election of Directors”, “Directors and Corporate Governance — Directors”, “Directors and Corporate Governance — Corporate Governance — The Board of Directors and Committees of the Board of Directors”, “Directors and Corporate Governance — Corporate Governance — Relationships Among Certain Directors”, “Audit Committee Report” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the company’s definitive proxy statement for the 2023 Annual Meeting of Shareholders expected to be filed with the SEC in April (the “proxy”). The information required by this item with respect to executive officers of the company is set forth in Part I of this Form 10-K.

We have adopted the Flowers Foods, Inc. Code of Business Conduct and Ethics for Officers and Members of the Board of Directors (the “Code of Business Conduct and Ethics”), which applies to all of our directors and executive officers. The Code of Business Conduct and Ethics is publicly available on our website at www.flowersfoods.com in the “CORPORATE GOVERNANCE” section of the “INVESTORS” tab. If we make any substantive amendments to our Code of Business Conduct and Ethics or we grant any waiver, including any implicit waiver, from a provision of the Code of Business Conduct and Ethics, that applies to any of our directors or executive officers, including our principal executive officer and our principal financial officer and principal accounting officer, we intend to disclose the nature of the amendment or waiver on our website at the same location. Alternatively, we may elect to disclose the amendment or waiver in a current report on Form 8-K filed with the SEC.

Our President and CEO certified to the NYSE on June 16, 2022 pursuant to Section 303A.12 of the NYSE’s listing standards, that he was not aware of any violation by Flowers Foods of the NYSE’s corporate governance listing standards as of that date.

Item 11. Executive Compensation

The information required by this item is incorporated herein by reference to the information set forth under the caption “Executive Compensation” in the proxy.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following chart sets forth the amounts of securities authorized for issuance under the company’s compensation plans as of December 31, 2022.

Plan Category (a) (b) (c)

Equity compensation plans approved by security holders 3,919,189 $ — 897,922

Equity compensation plans not approved by security holders — — —

(1)

Includes the grant of 1,630,266 time-based restricted stock units and 2,288,923 performance-based awards. The performance-based awards assume outstanding awards vest at the maximum potential number of shares issuable and may overstate potential dilution.

(2)

Time-based restricted stock units and performance-based awards are not considered in the weighted average exercise price as these awards have no exercise price.

(3)

Assumes all unvested awards are issuable at the maximum potential number of shares issuable and may overstate potential dilution.

44

Under the company’s 2014 Omnibus Equity and Incentive Compensation Plan (the “Omnibus Plan”), the Board is authorized to grant a variety of stock-based awards, including stock options, restricted stock and deferred stock, to its directors and certain of its employees. The number of securities set forth in column (c) above reflects securities available for issuance as stock options, restricted stock and deferred stock under the company’s compensation plans. The number of shares originally available under the Omnibus Plan is 8,000,000 shares. The Omnibus Plan replaced the Flowers Foods’ 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (“EPIP”), the Stock Appreciation Rights Plan, and the Annual Executive Bonus Plan. As a result, no additional shares will be issued under the EPIP. There are 82,779 deferred shares outstanding under the EPIP that will be issued at the end of the deferral period. See Note 18, Stock-Based Compensation, of Notes to Consolidated Financial Statements of this Form 10-K for additional information on equity compensation plans.

The remaining information required by this item is incorporated herein by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the proxy.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated herein by reference to the information set forth under the caption “Directors and Corporate Governance — Corporate Governance — Determination of Independence” and “Transactions with Management and Others” in the proxy.

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to the information set forth under the caption “Proposal III Ratification of Appointment of Independent Registered Public Accounting Firm — Fiscal 2022 and Fiscal 2021 Audit Firm Fee Summary” in the proxy.

45

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)

List of documents filed as part of this report.

1.

Financial Statements of the Registrant

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets at December 31, 2022 and January 1, 2022.

Consolidated Statements of Income for Fiscal 2022, Fiscal 2021, and Fiscal 2020.

Consolidated Statements of Comprehensive Income for Fiscal 2022, Fiscal 2021, and Fiscal 2020.

Consolidated Statements of Changes in Stockholders’ Equity for Fiscal 2022, Fiscal 2021, and Fiscal 2020.

Consolidated Statements of Cash Flows for Fiscal 2022, Fiscal 2021, and Fiscal 2020.

Notes to Consolidated Financial Statements.

2.

Exhibits. The following documents are filed as exhibits hereto:

46

EXHIBIT INDEX

Exhibit

No Name of Exhibit

47

Exhibit

No Name of Exhibit

48

Exhibit

No Name of Exhibit

49

Exhibit

No Name of Exhibit

21.1 * — Subsidiaries of Flowers Foods, Inc.

101.INS * — Inline XBRL Instance Document.

101.SCH * — Inline XBRL Taxonomy Extension Schema Linkbase.

101.CAL * — Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF * — Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB * — Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE * — Inline XBRL Taxonomy Extension Presentation Linkbase.

* Filed herewith

+ Management contract or compensatory plan or arrangement

Item 16. Form 10-K Summary

The company has elected not to provide summary information.

50

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Flowers Foods, Inc. has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 22nd day of February, 2023.

FLOWERS FOODS, INC.

/s/ A. RYALS MCMULLIAN

A. Ryals McMullian

President and

Chief Executive Officer

/s/ R. STEVE KINSEY

R. Steve Kinsey

Chief Financial Officer andChief Accounting Officer

51

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of Flowers Foods, Inc. and in the capacities and on the dates indicated.

Signature Title Date

A. Ryals McMullian

R. Steve Kinsey

/s/ GEORGE E. DEESE Chairman February 22, 2023

George E. Deese

/s/ EDWARD J. CASEY, JR Director February 22, 2023

Edward J. Casey, Jr.

/s/ THOMAS C. CHUBB III Director February 22, 2023

Thomas C. Chubb III

/s/ RHONDA O. GASS Director February 22, 2023

Rhonda O. Gass

/s/ BENJAMIN H. GRISWOLD IV Director February 22, 2023

Benjamin H. Griswold IV

/s/ MARGARET G. LEWIS Director February 22, 2023

Margaret G. Lewis

/s/ W. JAMESON MCFADDEN Director February 22, 2023

W. Jameson McFadden

/s/ JAMES T. SPEAR Director February 22, 2023

James T. Spear

/s/ MELVIN T. STITH, PH.D. Director February 22, 2023

Melvin T. Stith, Ph.D.

/s/ TERRY S. THOMAS Director February 22, 2023

Terry S. Thomas

/s/ C. MARTIN WOOD III Director February 22, 2023

C. Martin Wood III

52

FLOWERS FOODS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets at December 31, 2022 and January 1, 2022 F-4

Notes to Consolidated Financial Statements F-9

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Flowers Foods, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Flowers Foods, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and January 1, 2022, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

F-2

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Workers' Compensation Reserves

As described in Note 2 to the consolidated financial statements, the Company is self-insured for various levels of general liability, including workers’ compensation. As of December 31, 2022, self- insurance reserves totaled approximately $30.6 million, of which workers’ compensation reserves represent a portion of the total balance. Management estimates workers’ compensation reserves based on actual claim data and estimates of incurred but not reported claims developed utilizing historical claim trends, and projected settlements of incurred but not reported claims are estimated based on pending claims, historical trends and industry trends related to expected losses and actual reported losses and key assumptions, including loss development factors and expected loss rates.

The principal considerations for our determination that performing procedures relating to workers’ compensation reserves is a critical audit matter are (i) the significant judgment by management when developing the estimated workers’ compensation reserves; (ii) a high degree of auditor judgment and subjectivity in performing procedures and in evaluating audit evidence relating to the estimated workers’ compensation reserves and management’s significant assumptions related to loss development factors and expected loss rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimate of workers’ compensation reserves, including controls over the development of significant assumptions related to the determination of the loss development factors and expected loss rates. These procedures also included, among others, obtaining and evaluating the Company’s workers’ compensation plan documents and testing management’s process for estimating the workers’ compensation reserves. Testing management’s process included (i) evaluating the reasonableness of significant assumptions, including the loss development factors and expected loss rates used by management to estimate workers’ compensation reserves, (ii) testing the completeness and accuracy of incurred and paid claims data used in management’s workers’ compensation reserves and (iii) using professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the actuarial valuation methods and the reasonableness of loss development factors and expected loss rates.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia

February 22, 2023

We have served as the Company’s auditor since at least 1969. We have not been able to determine the specific year we began serving as auditor of the Company.

F-3

FLOWERS FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

ASSETS

Current assets:

Inventories:

Property, plant and equipment:

Furniture, fixtures and transportation equipment 184,722 184,528

Financing lease right-of-use assets 1,778 3,476

Notes receivable from independent distributor partners 136,882 154,310

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current maturities of long-term debt $ — $ —

Current maturities of financing leases 1,779 1,584

Current maturities of operating leases 43,990 46,390

Long-term debt and right-of-use lease liabilities:

Noncurrent financing lease obligations 116 1,910

Total long-term debt and right-of-use lease liabilities 1,128,935 1,143,157

Other liabilities:

Post-retirement/post-employment obligations 5,814 7,249

Commitments and contingencies

Stockholders’ equity:

Preferred stock — $100 stated par value, 200,000 authorized and none issued — —

Preferred stock — $.01 stated par value, 800,000 authorized and none issued — —

Accumulated other comprehensive income 1,474 2,587

See Accompanying Notes to Consolidated Financial Statements

F-4

FLOWERS FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

Restructuring and related impairment charges — — 35,483

FASTER Act and loss on inferior ingredients 236 944 107

Plant closure costs and impairment of assets 7,825 — —

Multi-employer pension plan withdrawal costs — 3,300 —

Loss on extinguishment of debt — 16,149 —

Pension plan settlement and curtailment loss — 403 108,757

Net income per common share:

Basic:

Net income per common share $ 1.08 $ 0.97 $ 0.72

Diluted:

Net income per common share $ 1.07 $ 0.97 $ 0.72

See Accompanying Notes to Consolidated Financial Statements

F-5

FLOWERS FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

Other comprehensive income, net of tax:

Pension and postretirement plans:

Settlement and curtailment loss — 302 81,277

Current year prior service credit — 1,661 —

Amortization of prior service (credit) cost included in net income (135 ) 41 83

Amortization of actuarial loss included in net income 214 400 1,082

Derivative instruments:

Gain (loss) on effective portion of derivatives 790 (5,348 ) 9,298

(Gain) loss reclassified to net income (4,734 ) (1,681 ) 2,116

Other comprehensive (loss) income, net of tax (1,113 ) (3,837 ) 112,444

See Accompanying Notes to Consolidated Financial Statements

F-6

FLOWERS FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Common Stock Capital AccumulatedOther Treasury Stock

(Amounts in thousands, except share data)

Amortization of stock-based compensation awards 12,855 12,855

Time-based restricted stock awards issued (Note 18) (975 ) 74,204 975 —

Issuance of deferred compensation (39 ) 2,943 39 —

Dividends paid on vested stock-based payments awards (109 ) (109 )

Derivative instruments, net of tax (Note 10) (7,029 ) (7,029 )

Pension and postretirement plans, net of tax (Note 20) 3,192 3,192

Amortization of stock-based compensation awards 21,343 21,343

Dividends paid on vested stock-based payments awards (234 ) (234 )

Derivative instruments, net of tax (Note 10) (3,944 ) (3,944 )

Pension and postretirement plans, net of tax (Note 20) 2,831 2,831

Amortization of stock-based compensation awards 25,822 25,822

Issuance of deferred compensation (46 ) 3,406 46 —

Dividends paid on vested stock-based payments awards (2,260 ) (2,260 )

See Accompanying Notes to Consolidated Financial Statements

F-7

FLOWERS FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

Cash flows provided by (disbursed for) operating activities:

Loss on foreign currency exchange rates 8,371 — —

Restructuring and related impairment charges — — 23,627

Impairment of assets 3,897 — —

Provision for inventory obsolescence 3,679 16 3,601

Qualified pension plan contributions (1,000 ) — (7,600 )

Changes in operating assets and liabilities:

Cash flows provided by (disbursed for) investing activities:

Repurchase of independent distributor territories (8,163 ) (4,585 ) (3,114 )

Acquisition of trademark — (10,200 ) —

Proceeds from sales of property, plant and equipment 7,681 2,995 5,368

Purchase of leased warehouses — (64,689 ) —

Investment in unconsolidated affiliate (9,000 ) — —

Cash flows provided by (disbursed for) financing activities:

Contingent consideration — — (4,700 )

Payments for debt issuance costs (282 ) (6,022 ) (206 )

Effect of exchange rates on cash (8,371 ) — —

Schedule of non-cash investing and financing activities:

Issuance of executive deferred compensation plan common stock $ 46 $ 177 $ 39

Distributor routes sold with deferred gains, net $ 280 $ 241 $ 207

Supplemental disclosures of cash flow information:

Cash paid during the period for:

See Accompanying Notes to Consolidated Financial Statements

F-8

FLOWERS FOODS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

General. The accompanying Consolidated Financial Statements of Flowers Foods, Inc. (the “company”, “Flowers Foods”, “Flowers”, “us”, “we”, or “our”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

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

Note 2. Summary of Significant Accounting Policies

Basis of Consolidation. The Consolidated Financial Statements include the accounts of the company and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year End. Our fiscal year ends on the Saturday nearest December 31, resulting in a 53rd reporting week every five or six years. The last 53-week year was our Fiscal 2020. The next 53-week year will be Fiscal 2025. Our internal financial results and key performance indicators are reported on a weekly calendar basis to ensure the same numbers of Saturdays and Sundays in comparable months and to allow for a consistent four-week progression analysis. The company has elected the first quarter to report the extra four-week period. As such, our quarters are divided as follows:

Quarter Number of Weeks

First Quarter Sixteen

Second Quarter Twelve

Third Quarter Twelve

Fourth Quarter Twelve (or Thirteen in fiscal years with an extra week)

Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.

Revenue Recognition. Revenue is recognized when obligations under the terms of a contract with our customers are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The company records both direct and estimated reductions to gross revenue for customer programs and incentive offerings at the time the incentive is offered or at the time of revenue recognition for the underlying transaction that results in progress by the customer towards earning the incentive. These allowances include price promotion discounts, coupons, customer rebates, cooperative advertising, and product returns. Consideration payable to a customer is recognized at the time control transfers and is a reduction to revenue. The recognition of costs for promotion programs involves the use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors.Price promotion discount expense is recorded as a reduction to gross sales when the discounted product is sold to the customer.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in our selling, distribution, and administrative expenses line item on the Consolidated Statements of Income.

F-9

The company’s production facilities deliver products to independent distributor partners (“IDP” or “IDPs”), who sell and deliver those products to outlets of retail accounts that are within the IDPs’ defined geographic territory. The IDPs sell products using either scan-based trading (“SBT”) technology, authorized charge tickets, or cash sales.

SBT technology allows the retailer to take ownership of our products when the consumer purchases the products rather than at the time they are delivered to the retailer. Control of the inventory does not transfer upon delivery to the retailer because the company controls the risks and rights until the product is scanned at the reseller’s register. Each of the company’s products is considered distinct because the resellers expect each item to be a performance obligation. The company’s performance obligations are satisfied at the point in time when the end consumer purchases the product because each product is considered a separate performance obligation. Consequently, revenue is recognized at a point in time for each scanned item. The company has concluded that we are the principal for SBT sales.

In Fiscal 2022, 2021, and 2020, the company recorded $2.4 billion, $2.2 billion, and $2.3 billion, respectively, in sales through SBT.

SBT is utilized primarily in certain national and regional retail accounts (“SBT Outlet”). Generally, revenue is not recognized by the company upon delivery of our products by the company to the IDP or upon delivery of our products by the IDP to an SBT Outlet, but when our products are purchased by the end consumer. Product inventory in the SBT Outlet is reflected as inventory on the Consolidated Balance Sheets.

The IDP performs a physical inventory of products at each SBT Outlet weekly and reports the results to the company. The inventory data submitted by the IDP for each SBT Outlet is compared with the product delivery data. Product delivered to a SBT Outlet that is not recorded as inventory in the product delivery data has been purchased by the consumer/customer of the SBT Outlet and is recorded as sales revenue by the company.

Non-SBT sales are classified as either authorized charge sales or cash sales. The company provides marketing support to the IDP for authorized charge sales but does not provide marketing support to the IDP for cash sales. Marketing support includes providing a dedicated account representative, resolving complaints, and accepting responsibility for product quality which collectively define how to manage the relationship. Revenue is recognized at a point in time for non-SBT sales.

The company retains inventory risk, establishes negotiated special pricing, and fulfills the contractual obligations for authorized charge sales. The company is the principal, the IDP is the agent, and the reseller is the customer. Revenue is recognized for authorized charge sales when the product is delivered to the customer because the company has satisfied its performance obligations.

Cash sales occur when the IDP is the end customer. The IDP maintains accounts receivable, inventory and fulfillment risk for cash sales. The IDP also controls pricing for the resale of cash sale products. The company is the principal and the IDP is the customer, and an agent relationship does not exist. The discount paid to the IDP for cash sales is recorded as a reduction to revenue. Revenue is recognized for cash sales when the company’s products are delivered to the IDP because the company has satisfied its performance obligations.

Certain sales are under contracts and include a formal ordering system. Orders are placed primarily using purchase orders (“PO”) or electronic data interchange information. Each PO, together with the applicable master supply agreement, is determined to be a separate contract. Product is delivered via contract carriers engaged by either the company or the customer with shipping terms provided in the PO.

Each unit sold, for all product categories, is a separate performance obligation. Each unit is considered distinct because the customer can benefit from each unit by selling each one separately to the end consumer. Additionally, each unit is separately identifiable in the PO. Products are delivered either freight-on-board (“FOB”) shipping or destination. The company’s right to payment is at the time our products are obtained from our warehouse for FOB shipping deliveries. The right to payment for FOB destination deliveries occurs after the products are delivered to the customer. Revenue is recognized at a point in time when control transfers. The company pays commissions to brokers who obtain contracts with customers. Commissions are paid on the total value of the contract, which is determined at contract inception and is based on expected future activity. Broker commissions will not extend beyond a one-year term because each product is considered a separate order in the PO.

The company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the company otherwise would have recognized is one year or less. These costs are included in our selling, distribution, and administrative expenses line item on the Consolidated Statements of Income.

F-10

The company disaggregates revenue by sales channel. Our sales channels are branded retail and other. The other channel includes, store branded retail, foodservice, restaurants, institutional, vending, thrift stores, and contract manufacturing. The company does not disaggregate revenue by geographic region, customer type, or contract type. All revenues are recognized at a point in time. Sales by sales channel category are as follows for Fiscal 2022, 2021, and 2020 (amounts in thousands):

Cash and Cash Equivalents. The company considers deposits in banks, certificates of deposits, and short-term investments with original maturities of three months or less, and highly liquid investments that are readily convertible to known amounts of cash to be cash and cash equivalents.

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

BeginningBalance Charged toExpense Write-Offsand Other EndingBalance

Activity in the allowance for trade accounts receivable credit losses for Fiscal 2022 and 2021 was as follows (amounts in thousands):

The amounts charged to expense for bad debts in the table above, inclusive of other non-trade accounts receivable amounts, are reported as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statements of Cash Flows. The write-offs represent the amounts that are used to reduce the gross accounts and notes receivable at the time the balance due from the customer is written-off. Walmart/Sam’s Club is our only customer with a balance greater than 10% of outstanding trade receivables. Their percentage of trade receivables was 24.3% and 19.8%, on a consolidated basis, as of December 31, 2022 and January 1, 2022, respectively. No other customer accounted for greater than 10% of the company’s outstanding receivables.

Concentration of Credit Risk. The company performs periodic credit evaluations and grants credit to customers, who are primarily in the grocery and foodservice markets, and generally does not require collateral. Our top 10 customers in Fiscal 2022, 2021, and 2020 accounted for 54.5%, 53.7% and 53.6% of sales, respectively. Our largest customer’s, Walmart/Sam’s Club, weighted percent of sales for Fiscal 2022, 2021, and 2020 was as follows:

Percent of Sales

Walmart/Sam’s Club is the only customer to account for greater than 10% of the company’s sales.

Inventories. Inventories at December 31, 2022 and January 1, 2022 are valued at net realizable value. Costs for raw materials and packaging are recorded at moving average cost. Finished goods inventories are valued at average costs.