# Flowers Foods Inc: Form 10-Q for the period ended Oct 8, 2022

- Company: [Flowers Foods Inc](/companies/flo.md) (CIK 1128928)
- Form: 10-Q
- Filed: 2022-11-10
- Accepted by EDGAR: Nov 10, 2022, 21:13 ET
- Period: 2022-10-08
- Accession: 0000950170-22-024470
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1128928/000095017022024470/flo-20221008.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1128928/000095017022024470/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-10-08.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-17 to 2022-10-08 | $1.16bn | us-gaap:Revenues |
| Revenue | 9 months, 2022-01-02 to 2022-10-08 | $3.72bn | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2022-07-17 to 2022-10-08 | $447.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-02 to 2022-10-08 | $1.44bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-17 to 2022-10-08 | $55.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-02 to 2022-10-08 | $239.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-17 to 2022-10-08 | $6.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-02 to 2022-10-08 | $22.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-17 to 2022-10-08 | $13.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-02 to 2022-10-08 | $55.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-17 to 2022-10-08 | $40.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-02 to 2022-10-08 | $179.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-17 to 2022-10-08 | $0.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-02 to 2022-10-08 | $0.84 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-17 to 2022-10-08 | $0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-02 to 2022-10-08 | $0.85 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-17 to 2022-10-08 | 213,326,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-02 to 2022-10-08 | 213,317,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-02 to 2022-10-08 | $291.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-02 to 2022-10-08 | $128.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-01-02 to 2022-10-08 | $140.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2022-01-02 to 2022-10-08 | $34.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-10-08 | $172.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-10-08 | $835.4m | us-gaap:AssetsCurrent |
| Total assets | at 2022-10-08 | $3.34bn | us-gaap:Assets |
| Current liabilities | at 2022-10-08 | $594.5m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2022-10-08 | $891.5m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2022-10-08 | $1.43bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,521 characters.

The following discussion of the financial condition and results of operations of the company as of and for the twelve and forty weeks ended October 8, 2022 should be read in conjunction with the Form 10-K and Part II., Item 1A., Risk Factors, of this Form 10-Q.

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

- *Executive overview —* provides a summary of our business, operating performance and cash flows, and strategic initiatives.
- *Critical accounting estimates —* describes the accounting areas where management makes critical estimates to report our financial condition and results of operations. There have been no changes to this section from the Form 10-K.
- *Results of operations —* an analysis of the company’s consolidated results of operations for the two comparative periods presented in our Condensed Consolidated Financial Statements.
- *Liquidity and capital resources —* an analysis of cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

### Matters Affecting Comparability

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). 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 items affecting comparability that will provide greater context while reading this discussion:

*(Amounts in thousands)*

*(Amounts in thousands)*

|  | For the Twelve Weeks Ended October 8, 2022 | October 9, 2021 | For the Forty Weeks Ended October 8, 2022 | October 9, 2021 | Footnote Disclosure |
| --- | ---: | ---: | ---: | ---: | --- |
| Business process improvement consulting costs | $8,144 | $9,233 | $28,866 | $27,396 | Note 1 |
| Plant closure costs and impairment of assets | 6,835 | — | 7,825 | — | Note 1 |
| Severance and lease termination costs | — | — | 1,717 | — |  |
| Legal settlements and related costs | 5,500 | 23,089 | 7,500 | 23,089 | Note 13 |
| Recovery on inferior ingredients | — | (950) | — | (828) | Note 1 |
| Acquisition-related costs | 11,582 | — | 11,582 | — | Note 1 |
| Acquisition consideration adjustment | — | — | — | 3,400 | Note 9 |
| Multi-employer pension plan withdrawal costs | — | 3,300 | — | 3,300 | Note 16 |
| Loss on extinguishment of debt | — | — | — | 16,149 | Note 11 |
|  | $32,061 | $34,672 | $57,490 | $72,506 |  |

- *Business process improvement consulting costs related to the transformation strategy initiatives* In the second half of Fiscal 2020, we launched initiatives to transform our business operations, which include upgrading our information system, 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 the “Transformation Strategy Initiatives” section below. The expensed portion of costs incurred related to these initiatives was $8.1 million and $28.9 million during the twelve and forty weeks ended October 8, 2022, respectively. We recognized $9.2 million and $27.4 million during the prior year third quarter and year to date periods, respectively. These costs are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income. We currently expect consulting costs (a portion of which may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract) related to the upgrade of our ERP system to be approximately $70.0 million to $80.0 million for Fiscal 2022.
- *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 produced bread and bun products and 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 relocation charges for bakery equipment of $3.8 million in the third quarter of Fiscal 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 warehouses acquired at the end of Fiscal 2021 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.
- *Severance and lease termination costs* 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 which are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income. The lease termination costs were paid in the second quarter of Fiscal 2022 and the severance payments are anticipated to be paid by the end of Fiscal 2022.
- *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. We paid the settlement accrued for in the second quarter of Fiscal 2022 in the third quarter of Fiscal 2022. In the third quarter of 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 and the company estimated this cost to be approximately $6.6 million. The company commenced repurchasing the distribution rights during the second quarter of Fiscal 2022 and these repurchases are ongoing. All of these amounts are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income.
- *Recovery on inferior ingredients* In the first quarter of Fiscal 2021, we incurred additional costs of $0.1 million related to receiving inferior ingredients used in the production of certain of our gluten-free products. In the third quarter of Fiscal 2021, we received reimbursements of approximately $1.0 million for these previously incurred costs.
- *Acquisition-related costs* In the third quarter of Fiscal 2022, we incurred $11.6 million in costs from the pursuit of an acquisition that failed to materialize. Of this amount, $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 consideration adjustment* In connection with an acquisition completed in Fiscal 2012, the company agreed to make the sellers whole for certain taxes incurred by the sellers on the sale. In the second quarter of Fiscal 2021, there was a tax determination that the sellers owed additional taxes, which we have appealed. If the appeal is unsuccessful, the company estimates that it will owe the sellers approximately $3.4 million, and the company recorded this cost in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income in the second quarter of Fiscal 2021.
- *Multi-employer pension plan withdrawal costs* On September 22, 2021, the union participants of the Retail, Wholesale and Department Store Union Fund (the “RWDSU Fund”) at our Birmingham, Alabama plant voted to withdraw from the RWDSU Fund in the most recent collective bargaining agreement. The union participants became eligible to participate in the Flowers Foods, Inc. 401(k) Retirement Savings Plan, beginning on December 1, 2021. This resulted in the recognition of a pension plan withdrawal liability of $3.3 million (including transition payments) in our Condensed Consolidated Statements of Income. We made the transition payments in December of Fiscal 2021 and the withdrawal liability payment in the first quarter of Fiscal 2022.
- *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.

### Executive Overview

#### Business

Flowers is the second-largest producer and marketer of packaged bakery foods in the United States (“U.S.”). Our principal products include breads, buns, rolls, snack cakes, and tortillas and are sold under a variety of brand names, including *Nature’s Own, Dave's Killer Bread ("DKB"), Wonder, Canyon Bakehouse, Tastykake,* and *Mrs. Freshley’s.* Our brands are among the best known in the U.S. baking industry. Many of our brands have a major presence in the product categories in which they compete. We manage our business as one operating segment.

Flowers’ strategic priorities include developing our team, focusing on our brands, prioritizing our margins, and proactively seeking smart, disciplined acquisitions in the grain-based foods category. We believe executing on our strategic priorities will drive future growth and margin expansion and deliver meaningful shareholder value over time allowing us to achieve our long-term financial targets of 1% to 2% sales growth, 4% to 6% EBITDA growth, and 7% to 9% EPS growth.

#### Highlights

- *Nature’s Own* is the best-selling loaf bread in the U.S., *DKB* is the #1 selling organic brand in the U.S., and *Canyon Bakehouse* is the #1 selling gluten-free bread brand in the U.S. (Source: *IRI Total US MultiOutlet+C-Store 12 Weeks Ending 10/9/22)*
- Our retail sales comprised 78.8% of total sales for the forty weeks ended October 8, 2022 as compared to 79.0% for the forty weeks ended October 9, 2021.
- As of November 10, 2022, we operate 45 bakeries, which produce fresh and frozen breads and rolls, as well as snack cakes and tortillas.
- We utilize a direct-store-delivery distribution model for fresh bakery foods, whereby product is sold primarily by a network of independent distributor partners to retail and foodservice customers with access to more than 85% of the U.S. population.
- We offer nationwide distribution of certain fresh snack cakes and frozen breads and rolls via contract carriers.

We are continuing to focus on optimization initiatives in our procurement, distribution, operations, and administrative functions and the company is projecting savings in the range of $20 million to $30 million from these activities in Fiscal 2022. Additionally, we transitioned into the build phase of our multi-year ERP upgrade project and we continue to implement our digital strategy initiatives as discussed further in the “Transformation Strategy Initiatives” section below.

#### 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. Our results through the third quarter of Fiscal 2022 have 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 have endured in Fiscal 2022 resulting in greater at-home food consumption than in pre-pandemic periods. We have experienced significant input cost inflation for commodities and transportation, and, to a lesser extent, for labor in the current year period which has partially offset the more optimized sales mix. We expect these inflationary pressures to continue throughout the remainder of Fiscal 2022. To mitigate the ongoing cost pressures, we have implemented multiple price increases in Fiscal 2022.

Additionally, in the latter half of the first quarter and into the second quarter of Fiscal 2022, we experienced heightened supply chain disruptions which impacted our ability to procure adequate quantities of certain raw materials and particularly packaging items, resulting in lower production volumes. Although we were able to mitigate these packaging shortages earlier than originally anticipated, our operating results were negatively impacted. These and other supply chain disruptions could continue to negatively impact production volumes due to uncertainty in the global and U.S. supply chain. Although the conflict between Russia and Ukraine has not impacted us directly, we are closely monitoring its effects on the broader economy, including on the availability and price of commodities used in or for the production of our products. Disruptions in our operations, related to factors including, but not limited to, the procurement of raw materials and packaging items, transport of our products, and available workforce, have negatively impacted, and could continue to negatively impact, our operations, results of operations, cash flows, and liquidity.

Labor shortages and turnover at some of our bakeries in Fiscal 2021 and during the forty weeks ended October 8, 2022 hampered production levels. These and other factors, including, but not limited to, high employment rates and additional government regulations, may continue to adversely affect labor availability and labor costs. These challenges may negatively affect our ability to operate our production lines efficiently or run at full capacity which could lead to increased labor costs, including additional overtime to meet demand and higher wage rates to attract and retain workers. An overall labor shortage, lack of skilled labor, or increased turnover could have a material adverse impact on the company’s operations, results of operations, liquidity, or cash flows.

Our operations may continue to experience disruption due to the continued uncertainty caused by the pandemic, including but not limited to additional variants of the COVID-19 virus, new geographic hotspots, changes in the number of COVID-19 cases, the rate of vaccination within the U.S. population, the efficacy, or lack thereof, of the vaccines, changes in the global and U.S. economic environment, supply chain disruptions and labor shortages, and changes in pandemic safety policies. Our main focus throughout the pandemic has been and continues to be the health and safety of our team members and independent distributor partners. We continue to follow the pandemic guidance of the U.S. Centers for Disease Control and Prevention (CDC).

We believe we have sufficient liquidity to satisfy our cash needs and we continue to execute on our strategic priorities, including our transformation strategy initiatives, as further discussed in the “Liquidity and Capital Resources” sections below.

#### Summary of Operating Results, Cash Flows and Financial Condition

Sales increased 12.7% for the twelve weeks ended October 8, 2022 compared to the same quarter in the prior year due to price/mix contributing 17.8%, partially offset by volume declines of 5.1%. Inflation-driven pricing actions were partially offset by net volume losses. Targeted sales rationalization contributed to the softer volumes.

Sales increased 11.2% for the forty weeks ended October 8, 2022 compared to the same period in the prior year primarily due to inflation-driven pricing actions. This increase was partially offset by volume declines of 3.8%. Targeted sales rationalization and production constraints from supply chain disruptions contributed to the lower volumes. For the forty weeks ended October 8, 2022, 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 the twelve weeks ended October 8, 2022 was $55.5 million compared to $52.1 million in the prior year quarter. Price increases and decreases in legal settlement and consulting costs drove the increase. These items were partially offset by significantly higher input and transportation costs, higher distributor distribution fees, lower production volumes, and the current year acquisition-related costs and plant closure costs.

Income from operations for the forty weeks ended October 8, 2022 was $239.1 million compared to $241.1 million in the prior year period. Sales increases from positive pricing actions and decreases in legal settlement costs were more than offset by considerable input and transportation cost increases, increased distributor distribution fees, and lower production volumes year over year.

Net income for the twelve weeks ended October 8, 2022 was $40.5 million compared to $38.9 million in the prior year period. The increase resulted primarily from greater income from operations, as described above, partially offset by a higher effective tax rate in the current year quarter.

Net income for the forty weeks ended October 8, 2022 was $179.8 million compared to $166.9 million in the prior year period. The increase resulted primarily from the loss on extinguishment of debt in the prior year period.

During the forty weeks ended October 8, 2022, we generated net cash flows from operations of $291.5 million and invested $128.4 million in capital expenditures and made a $9.0 million cost-method investment in Base Culture, as further discussed below. Additionally, we made stock repurchases of $34.6 million and paid $140.1 million in dividends to our shareholders. During the forty weeks ended October 9, 2021, we generated net cash flows from operations of $315.2 million, invested $86.7 million in capital expenditures, paid $131.5 million in dividends to our shareholders and decreased our total indebtedness by $81.9 million. 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. At October 8, 2022, all of our outstanding debt obligations had fixed interest rates.

Late in the first quarter of Fiscal 2022, we increased production capacity for our organic products by adding a production line at our Henderson, Nevada bakery. We anticipate this added capacity will allow us to better serve the West Coast market. In the third quarter of Fiscal 2022, we announced the closure of the Holsum Bakery in Phoenix, Arizona, as discussed above.

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.

#### Transformation Strategy Initiatives

In the second half of Fiscal 2020, we launched initiatives to transform our business operations. The primary goals of these initiatives are: (1) enable a more agile business model, empowering the organization by fundamentally redesigning core business processes; (2) embed digital capabilities and transform the way we engage with our consumers, customers and employees; and (3) modernize and simplify our application and technology infrastructure landscape, inclusive of the upgrade of our ERP system. We completed the initial planning and road mapping phase of the ERP upgrade at the end of Fiscal 2020 and transitioned into the design phase in early Fiscal 2021 and the build phase at the beginning of Fiscal 2022.

#### Digital Strategy Initiatives

Our digital strategy initiatives include investments in digital domains of e-commerce, autonomous planning, bakery of the future, digital logistics, and digital sales. In e-commerce, we strive to become a category and market share leader, engage with the consumer through digital platforms and marketplaces, and support our retail partners’ omnichannel strategies. The autonomous planning domain encompasses predictive ordering, cost-to-serve modeling, integrated business planning, and supply and demand forecasting, among other areas. Bakery of the future involves transforming our current manufacturing processes and operational visibility to apply industry-leading digital manufacturing tools, such as real-time performance management and visibility, automation of repetitive processes, standardization of processes and procedures, and sensor-based quality monitoring tools to improve consistency and quality. Digital logistics includes real-time operational visibility, improving our routing efficiency, and automating the freight bill pay audit process. Finally, digital sales will focus on improving our sales execution through improved visibility to in-store activities, streamlined reporting, and improved collaboration tools across our sales ecosystem.

These digital domains are expected to improve data visibility and efficiencies while automating many of our processes. When fully implemented, we expect this work will further our brand efforts, bring us ever closer to the consumer, increase operational efficiencies, and deliver higher-quality, real-time insights, which will in turn enable more predictive business decision-making. We transitioned into the implementation phase for the e-commerce, autonomous planning, and bakery of the future domains and selected two bakeries for the pilot program for bakery of the future and autonomous planning in Fiscal 2021. To date, we have rolled out these programs to more than twelve bakeries and will continue to invest in these new ways of working.

#### ERP Upgrade

This initiative includes upgrading our information system platform and is expected to improve data management and efficiencies while automating many of our processes. During the first quarter of Fiscal 2021, we engaged a leading, global consulting firm to assist us in planning and implementing the upgrade of our ERP platform and serve as the system integrator for the project. We transitioned into the build phase of the project in the beginning of Fiscal 2022.

We expect the transformation strategy initiatives to require significant capital investment and expense over the next several years. We currently anticipate the upgrade of our ERP system will cost approximately $275 million (of which approximately 40% is anticipated to be capitalized) and anticipate the upgrade to be completed in 2026. As of October 8, 2022, we have incurred costs related to the project of approximately $125 million. Costs related to the digital initiatives are more fluid and cannot be estimated.

### CRITICAL ACCOUNTING POLICIES:

Our financial statements are prepared in accordance with GAAP. These principles are numerous and complex. Our significant accounting policies are summarized in the Form 10-K. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. Refer to the Form 10-K for a discussion of the areas where we believe that the estimates, judgments or interpretations that we have made, if different, could yield the most significant differences in our financial statements. There have been no significant changes to our critical accounting policies from those disclosed in the Form 10-K.

### RESULTS OF OPERATIONS:

Results of operations, expressed as a percentage of sales and the dollar and percentage change from period to period, for the twelve and forty weeks ended October 8, 2022 and October 9, 2021, respectively, are set forth in the tables below (dollars in thousands):

|  | For the Twelve Weeks Ended October 8, 2022 | October 9, 2021 | Percentage of Sales October 8, 2022 | October 9, 2021 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $1,158,169 | $1,027,800 | 100.0 | 100.0 | $130,369 | 12.7 |
| Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) | 615,621 | 515,078 | 53.2 | 50.1 | 100,543 | 19.5 |
| Selling, distribution and administrative expenses | 447,363 | 426,575 | 38.6 | 41.5 | 20,788 | 4.9 |
| Plant closure costs and impairment of assets | 6,835 | — | 0.6 | — | 6,835 | NM |
| Recovery on inferior ingredients | — | (950) | — | (0.1) | 950 | NM |
| Multi-employer pension plan withdrawal costs | — | 3,300 | — | 0.3 | (3,300) | NM |
| Depreciation and amortization | 32,899 | 31,680 | 2.8 | 3.1 | 1,219 | 3.8 |
| Income from operations | 55,451 | 52,117 | 4.8 | 5.1 | 3,334 | 6.4 |
| Other components of net periodic pension and postretirement benefit plans credit | (178) | (94) | (0.0) | (0.0) | (84) | NM |
| Interest expense, net | 1,342 | 1,311 | 0.1 | 0.1 | 31 | 2.4 |
| Income before income taxes | 54,287 | 50,900 | 4.7 | 5.0 | 3,387 | 6.7 |
| Income tax expense | 13,759 | 12,048 | 1.2 | 1.2 | 1711 | 14.2 |
| Net income | $40,528 | $38,852 | 3.5 | 3.8 | $1,676 | 4.3 |
| Comprehensive income | $46,489 | $34,909 | 4.0 | 3.4 | $11,580 | 33.2 |

|  | For the Forty Weeks Ended October 8, 2022 | October 9, 2021 | Percentage of Sales October 8, 2022 | October 9, 2021 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $3,723,152 | $3,347,277 | 100.0 | 100.0 | $375,875 | 11.2 |
| Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) | 1,926,297 | 1,662,716 | 51.7 | 49.7 | 263,581 | 15.9 |
| Selling, distribution and administrative expenses | 1,440,665 | 1,336,255 | 38.7 | 39.9 | 104,410 | 7.8 |
| Plant closure costs and impairment of assets | 7,825 | — | 0.2 | — | 7,825 | NM |
| Recovery on inferior ingredients | — | (828) | — | (0.0) | 828 | NM |
| Multi-employer pension plan withdrawal costs | — | 3,300 | — | 0.1 | (3,300) | NM |
| Depreciation and amortization | 109,244 | 104,685 | 2.9 | 3.1 | 4,559 | 4.4 |
| Income from operations | 239,121 | 241,149 | 6.4 | 7.2 | (2,028) | (0.8) |
| Other components of net periodic pension and postretirement benefit plans credit | (594) | (312) | (0.0) | (0.0) | (282) | NM |
| Interest expense, net | 4,947 | 6,582 | 0.1 | 0.2 | (1,635) | (24.8) |
| Loss on extinguishment of debt | — | 16,149 | — | 0.5 | (16,149) | NM |
| Income before income taxes | 234,768 | 218,730 | 6.3 | 6.5 | 16,038 | 7.3 |
| Income tax expense | 54,971 | 51,865 | 1.5 | 1.5 | 3,106 | 6.0 |
| Net income | $179,797 | $166,865 | 4.8 | 5.0 | $12,932 | 7.7 |
| Comprehensive income | $178,005 | $163,188 | 4.8 | 4.9 | $14,817 | 9.1 |

NM - the computation is not meaningful.

Percentages may not add due to rounding.

TWELVE WEEKS ENDED OCTOBER 8, 2022 COMPARED TO TWELVE WEEKS ENDED OCTOBER 9, 2021

### Sales (dollars in thousands)

|  | For the Twelve Weeks Ended October 8, 2022 | October 9, 2021 | Percentage of Sales October 8, 2022 | October 9, 2021 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Branded retail | $748,401 | $688,995 | 64.6 | 67.0 | $59,406 | 8.6 |
| Store branded retail | 163,937 | 124,639 | 14.2 | 12.1 | 39,298 | 31.5 |
| Non-retail and other | 245,831 | 214,166 | 21.2 | 20.9 | 31,665 | 14.8 |
| Total | $1,158,169 | $1,027,800 | 100.0 | 100.0 | $130,369 | 12.7 |

(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 generally attributable to the following:

| Percentage Point Change in Sales Attributed to: |  |
| --- | ---: |
| Pricing/mix | 17.8 |
| Volume | (5.1) |
| Total percentage change in sales | 12.7 |

Sales increased significantly quarter over quarter due to positive pricing actions implemented in the latter half of Fiscal 2021 and during the first three quarters of Fiscal 2022 to mitigate considerable cost inflation, partially offset by volume losses. Year over year sales comparisons for store branded and non-retail and other sales benefitted from price increases that took place primarily in the current year, whereas branded retail sales were lapping prior year price increases. Volume decreases in branded retail and non-retail and other sales were partially offset by volume growth in store branded retail products. We continued to execute on our portfolio strategy of shifting more of our sales to higher margin, value-added branded retail products. This shift, combined with supply chain disruptions and labor shortages, contributed to the volume decreases. The promotional environment has remained relatively stable in the third quarter of Fiscal 2022 as compared to the same quarter in the prior year, however, this trend may not continue in future periods.

Branded retail sales increased 8.6% quarter over quarter due to favorable price/mix resulting from inflation-driven pricing actions and improved promotional efficiency, partially offset by volume declines. The largest volume declines occurred in branded cake, branded traditional loaf breads, and branded buns and rolls. Branded cake volumes declined due to targeted sales rationalization and the impact of supply chain disruptions and labor shortages during the current year quarter. Sales of our leading brands, *Nature's Own, DKB,* and *Canyon Bakehouse*, continued to perform well benefiting from inflation-driven price increases, however, inflationary impacts on consumer spending and, to a lesser extent, supply chain constraints, pressured volumes.

Store branded retail sales were significantly higher quarter over quarter due to price increases implemented to mitigate inflationary pressures and volume growth resulting from trade down from branded retail to store branded retail products, net of targeted sales rationalization. Sales of our store branded retail products had been declining prior to the pandemic and we experienced an acceleration of this trend during the last two fiscal years. This trend started to reverse in the second quarter of Fiscal 2022 and continued to expand in the third quarter of Fiscal 2022 partly due to the inflation-driven price increases and, to a much lesser extent, consumers shifting from branded retail to store branded retail products. However, store branded retail sales continue to comprise a smaller portion of our total sales mix as compared to pre-pandemic levels.

Non-retail sales increased quarter over quarter from positive price/mix due to inflation-driven pricing actions, partially offset by volume declines. Foodservice drove most of the volume decrease. Targeted sales rationalization, including exiting certain low margin business, and production constraints from supply chain disruptions contributed to the lower volumes.

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

| Line Item Component | For the Twelve Weeks Ended October 8, 2022 % of Sales | October 9, 2021 % of Sales | Increase (Decrease) as a % of Sales |
| --- | ---: | ---: | ---: |
| Ingredients and packaging | 32.9 | 28.1 | 4.8 |
| Workforce-related costs | 13.5 | 14.9 | (1.4) |
| Other | 6.8 | 7.1 | (0.3) |
| Total | 53.2 | 50.1 | 3.1 |

Materials, supplies, labor and other production costs as a percent of sales rose sharply quarter over quarter due to considerable input cost inflation, partially mitigated by inflation-driven pricing actions. In the current year quarter, ingredient and packaging costs continued to be impacted by the decades-high inflationary environment and these cost increases outpaced the sales price increases. Additionally, reduced outside purchases of product (sales with no associated ingredient costs) and sharp increases in egg prices as a result of the avian influenza outbreak earlier this year contributed to the higher ingredient and packaging costs. We anticipate ingredient and packaging costs to remain volatile and egg prices to remain a headwind for the remainder of Fiscal 2022. Although workforce-related costs did not increase at the same rate as the sales price increases, the competitive labor market combined with lower production volumes continued to impact our operations and we expect this trend to continue. Lower employee fringe costs also contributed to the decrease in workforce-related costs as a percent of sales. The decrease in the Other line item mostly reflects lower outside purchases of product, partially offset by reduced manufacturing efficiencies. We expect similar challenges could occur as a result of uncertainty in the global and U.S. supply chain.

Prices of ingredients and packaging materials fluctuate and we continually monitor these markets. Ingredient and packaging costs are currently experiencing significant volatility and are expected to remain volatile for the remainder of Fiscal 2022. The cost of these inputs has fluctuated widely, and may continue to so, due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

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

| Line Item Component | For the Twelve Weeks Ended October 8, 2022 % of Sales | October 9, 2021 % of Sales | Increase (Decrease) as a % of Sales |
| --- | ---: | ---: | ---: |
| Workforce-related costs | 10.3 | 11.1 | (0.8) |
| Distributor distribution fees | 14.5 | 14.9 | (0.4) |
| Other | 13.8 | 15.5 | (1.7) |
| Total | 38.6 | 41.5 | (2.9) |

Price increases in excess of wage inflation and lower employee fringe benefit costs in the current year quarter resulted in lower workforce-related costs as a percent of sales. Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. The decrease in the Other line item reflects the $17.6 million reduction in legal settlement and related costs and reduced consulting costs, net of the $11.6 million acquisition-related costs in the current year period. Transportation cost increases were mostly offset by sales price increases. See the “Matters Affecting Comparability” section above for a discussion of the project-related consulting costs, legal settlements and related costs, and the current year acquisition-related costs.

### Plant Closure Costs and Impairment of Assets, Recovery on Inferior Ingredients, 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 implemented during Fiscal 2022, but increased in dollars mainly due to assets we have placed in service and increased depreciation related to twenty-seven leased warehouses purchased at the end of Fiscal 2021, two of which were moved to held for sale in the first quarter of Fiscal 2022.

### Income from Operations

Income from operations decreased as a percent of sales for the twelve weeks ended October 8, 2022 compared to the twelve weeks ended October 9, 2021 mostly due to substantial input cost inflation, partially offset by inflation-driven sales price increases and lower selling, distribution, and administrative expenses as a percent of sales.

### Net Interest Expense

Net interest expense was relatively consistent with the prior year quarter as a percent of sales and in dollars.

### Income Tax Expense

The effective tax rate for the twelve weeks ended October 8, 2022 was 25.3% compared to 23.7% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to larger net favorable discrete items related to tax credits in the prior year quarter. For both periods presented, the primary differences in the effective rate and the statutory rate were state income taxes which includes the recognition of a discrete benefit related to state tax credits.

### Comprehensive Income

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

FORTY WEEKS ENDED OCTOBER 8, 2022 COMPARED TO FORTY WEEKS ENDED OCTOBER 9, 2021

### Sales (dollars in thousands)

|  | Forty Weeks Ended October 8, 2022 | October 9, 2021 | Percentage of Sales October 8, 2022 | October 9, 2021 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Branded retail | $2,440,500 | $2,225,224 | 65.5 | 66.5 | $215,276 | 9.7 |
| Store branded retail | 494,749 | 418,161 | 13.3 | 12.5 | 76,588 | 18.3 |
| Non-retail and other | 787,903 | 703,892 | 21.2 | 21.0 | 84,011 | 11.9 |
| Total | $3,723,152 | $3,347,277 | 100.0 | 100.0 | $375,875 | 11.2 |

(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 generally attributable to the following:

| Percentage Point Change in Sales Attributed to: |  |
| --- | ---: |
| Pricing/mix | 15.0 |
| Volume | (3.8) |
| Total percentage change in sales | 11.2 |

Sales increased significantly year over year mainly due to inflation-driven pricing actions implemented to mitigate rising operating costs, partially offset by volume declines across all three sales categories. We continue to execute on our portfolio strategy to shift more of our sales to higher margin, value-added branded retail products and this shift, combined with supply chain disruptions and labor shortages, contributed to the lower volumes. The promotional environment has remained relatively stable in the first three quarters of Fiscal 2022 as compared to the same period in the prior year, however, this trend may not continue in future periods.

Branded retail sales increased 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 the current year period. Sales of our leading brands, *Nature's Own, DKB,* and *Canyon Bakehouse*, all experienced double-digit sales growth driven by inflation-driven price increases and, to a much lesser extent, volume growth, although volumes were pressured by the impact of supply chain disruptions.

Store branded retail sales increased considerably year over year due to price increases implemented to mitigate inflationary pressures. Volumes declined slightly due to targeted sales rationalization and supply chain disruptions, partially offset by the impact of consumers shifting more of their purchases from branded retail products to store branded products, particularly in white loaf breads.

Non-retail sales increased year over year from positive price/mix due to inflation-driven pricing actions, partially offset by volume declines. Volume declines in foodservice, fast food, and co-manufactured items drove the decrease and were partially offset by volume increases in vending products. Targeted sales rationalization as well as production constraints from supply chain disruptions contributed to the lower volumes.

We anticipate our Fiscal 2022 sales will be higher than Fiscal 2021 sales due to pricing actions taken at the beginning of the first quarter of Fiscal 2022 and additional price increases implemented through the second and third quarters of Fiscal 2022.

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

| Line item component | For the Forty Weeks Ended October 8, 2022 % of sales | October 9, 2021 % of sales | Increase (Decrease) as a % of sales |
| --- | ---: | ---: | ---: |
| Ingredients and packaging | 31.6 | 27.7 | 3.9 |
| Workforce-related costs | 13.7 | 14.8 | (1.1) |
| Other | 6.4 | 7.2 | (0.8) |
| Total | 51.7 | 49.7 | 2.0 |

Materials, supplies, labor and other production costs as a percent of sales increased significantly year over year due to considerable input cost inflation. In Fiscal 2022, inflation impacted all ingredient and packaging items, and most significantly for flour costs, which outpaced the sales price increases. Additionally, increases in finished goods inventory period over period resulted in higher ingredient and packaging costs. We anticipate input costs to remain volatile for the remainder of Fiscal 2022. Although workforce-related costs did not increase at the same rate as the sales price increases, the competitive labor market continues to impact our operations and we expect this trend to continue. The Other line item reflects the impact of timing differences of the sell-through of product inventories and reduced outside purchases of product, 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.

Prices of ingredients and packaging materials fluctuate and we continually monitor these markets. Ingredient and packaging costs are currently experiencing significant volatility and are expected to remain volatile for the remainder of Fiscal 2022. The cost of these inputs has fluctuated widely during the current year, and may continue to so, due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

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

| Line item component | For the Forty Weeks Ended October 8, 2022 % of sales | October 9, 2021 % of sales | Increase (Decrease) as a % of sales |
| --- | ---: | ---: | ---: |
| Workforce-related costs | 10.8 | 11.3 | (0.5) |
| Distributor distribution fees | 14.7 | 15.0 | (0.3) |
| Other | 13.2 | 13.6 | (0.4) |
| Total | 38.7 | 39.9 | (1.2) |

Price increases we have implemented and lower employee fringe benefit costs in the current year period more than offset wage inflation rates resulting in lower workforce-related costs as a percent of sales. 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 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, the $3.4 million prior year acquisition consideration adjustment, and reduced marketing investments period over period. Partially offsetting these items were $11.6 million of acquisition-related costs incurred in the current year period and higher 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.

### Plant Closure Costs and Impairment of Assets, Recovery on Inferior Ingredients, 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 implemented during the forty weeks ended October 8, 2022, but increased in dollars mainly due to assets placed in service and increased depreciation related to twenty-seven leased warehouses purchased at the end of Fiscal 2021, two of which were moved to held for sale in the first quarter of Fiscal 2022.

### Income from Operations

Income from operations decreased as a percent of sales for the forty weeks ended October 8, 2022 compared to the forty weeks ended October 9, 2021 mostly due to substantial input cost inflation, partially offset by sales increases and lower selling, distribution, and administrative expenses as a percent of sales, as discussed above.

### Net Interest Expense

Net interest expense (exclusive of the portion related to the loss on extinguishment of debt in the prior year period discussed below) decreased in dollars and as a percent of sales year over year due to lower average amounts outstanding under our borrowing arrangements and the lower interest rate on the 2031 notes as compared to the 2022 notes which were redeemed in the first quarter of Fiscal 2021. Lower interest income year over year partially offset the decrease in net interest expense.

### 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.

### Income Tax Expense

The effective tax rate for the forty weeks ended October 8, 2022 was 23.4% compared to 23.7% in the prior year period. The decrease in the rate was primarily due to favorable windfalls on stock-based compensation recorded discretely in the current year period. For the current year period, the primary differences in the effective rate and the statutory rate were state income taxes including the recognition of discrete tax credits and windfalls on stock-based compensation. The primary differences in the effective rate and statutory rate for the prior year period were state income taxes including the recognition of discrete tax credits.

### Comprehensive Income

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

### LIQUIDITY AND CAPITAL RESOURCES:

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

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 use of its 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 for the forty weeks ended October 8, 2022, volatility in global and U.S. economic environments, including as a result of, among other things, the inflationary economic environment, supply chain disruptions, labor shortages, the conflict between Russia and Ukraine, and the COVID-19 pandemic on our business, 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 that 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, the workforce available to us, and our ability to implement additional pricing actions to offset rising inflation.

In light of the potential risks detailed above, the company has taken actions to safeguard its capital position. We continue to maintain higher levels of cash on hand compared to pre-pandemic levels and in the first quarter of Fiscal 2021 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. Additionally, we repaid the outstanding balances on both the accounts receivable securitization facility (the “facility”) and the credit facility (the “credit facility”) with proceeds from the issuance of the 2031 notes and from cash flows from operations. The macroeconomic-related factors discussed above remain fluid and the future impact on the company’s business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including amounts available on our debt facilities, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds. We believe that we have sufficient liquidity on hand to continue business operations during the pandemic and the volatile global and U.S. economic environments. The company had total available liquidity of $864.3 million as of October 8, 2022, consisting of cash on hand and the available balances under the credit facility and the facility.

### Liquidity Discussion for the Forty Weeks Ended October 8, 2022 and October 9, 2021

Cash and cash equivalents were $172.7 million at October 8, 2022 and $185.9 million at January 1, 2022, significantly higher than historical pre-pandemic levels. The cash and cash equivalents were derived from the activities presented in the tables below (amounts in thousands):

| Cash Flow Component | For the Forty Weeks Ended October 8, 2022 | October 9, 2021 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by operating activities | $291,534 | $315,223 | $(23,689) |
| Cash disbursed for investing activities | (119,256) | (81,714) | (37,542) |
| Cash disbursed for financing activities | (177,034) | (233,462) | 56,428 |
| Effect of exchange rates on cash | (8,371) | — | (8,371) |
| Total change in cash | $(13,127) | $47 | $(13,174) |

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

|  | For the Forty Weeks Ended October 8, 2022 | October 9, 2021 | Change |
| --- | ---: | ---: | ---: |
| Depreciation and amortization | $109,244 | $104,685 | $4,559 |
| Loss on foreign currency exchange rates | 8,371 | — | 8,371 |
| Impairment of assets | 3,897 | — | 3,897 |
| Gain reclassified from accumulated other comprehensive income to net income | (5,625) | (1,055) | (4,570) |
| Allowances for accounts receivable | 5,811 | 5,880 | (69) |
| Stock-based compensation | 20,124 | 16,768 | 3,356 |
| Deferred income taxes | 11,519 | (1,294) | 12,813 |
| Other non-cash items | 4,173 | 5,665 | (1,492) |
| Net non-cash adjustment to net income | $157,514 | $130,649 | $26,865 |

45

- Refer to the *Acquisition-related costs* and *Plant closure and impairment of assets* discussion in the “Matters Affecting Comparability” section above for additional information regarding these items.
- For the forty weeks ended October 8, 2022, deferred income tax activity was composed of changes in temporary differences year over year, including the impact of the vesting of stock equity awards and legal settlement payments. For the forty weeks ended October 9, 2021, deferred income taxes changed due to changes in temporary differences.
- 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) and gains or losses on the sale of assets.

Net changes in working capital consisted of the following items (amounts in thousands):

|  | For the Forty Weeks Ended October 8, 2022 | October 9, 2021 | Change |
| --- | ---: | ---: | ---: |
| Changes in accounts receivable, net | $(71,882) | $(5,961) | $(65,921) |
| Changes in inventories, net | (33,476) | (8,200) | (25,276) |
| Changes in hedging activities, net | 2,654 | (1,002) | 3,656 |
| Changes in other assets and accrued liabilities, net | (20,424) | (4,045) | (16,379) |
| Changes in accounts payable, net | 78,351 | 36,917 | 41,434 |
| Qualified pension plan contributions | (1,000) | — | (1,000) |
| Net changes in working capital and pension plan contributions | $(45,777) | $17,709 | $(63,486) |

- Changes in accounts receivable, inventories, and accounts payable were mainly attributable to significant price increases and cost inflation through the third quarter of Fiscal 2022.
- Hedging activities change due to market movements that affect the fair value and the associated required collateral of positions and the timing and recognition of deferred gains or losses. These changes will continue to occur, though the degree and financial impact cannot be currently estimated, as part of our hedging program.
- The change in other assets primarily resulted from changes in prepaid assets in each respective period. Changes in employee compensation accruals and legal settlement accruals primarily resulted in the change in other accrued liabilities. During the first quarter of Fiscal 2022 and Fiscal 2021, we paid $43.8 million and $64.6 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plans. An additional $1.8 million and $0.4 million was paid during the first quarter of Fiscal 2022 and Fiscal 2021, respectively, for our share of employment taxes on the vesting of employee restricted stock awards in each respective year. During the forty weeks ended October 8, 2022, the company accrued $7.5 million and paid $2.0 million of legal settlements that occurred in the current year period and paid a $16.5 million legal settlement that had been accrued for in a prior period. During the forty weeks ended October 9, 2021, we paid $8.7 million of legal settlements, all of which had been accrued for in prior periods. As of October 8, 2022, the remaining balance of the employer share of Social Security tax deferred under the CARES Act was $16.4 million which is due to be paid by December 31, 2022.
- The company made a voluntary defined benefit pension plan contribution of $1.0 million to Plan No. 2 in the third quarter of Fiscal 2022.

*Cash Flows Disbursed for Investing Activities*. The table below presents net cash disbursed for investing activities for the forty weeks ended October 8, 2022 and October 9, 2021, respectively (amounts in thousands):

|  | For the Forty Weeks Ended October 8, 2022 | October 9, 2021 | Change |
| --- | ---: | ---: | ---: |
| Purchases of property, plant, and equipment | $(128,372) | $(86,723) | $(41,649) |
| Principal payments from notes receivable, net of repurchases of independent distributor territories | 14,379 | 11,638 | 2,741 |
| Proceeds from sale of property, plant and equipment | 3,335 | 2,525 | 810 |
| Acquisition of trademarks | — | (10,200) | 10,200 |
| Investment in unconsolidated affiliate | (9,000) | — | (9,000) |
| Other | 402 | 1,046 | (644) |
| Net cash disbursed for investing activities | $(119,256) | $(81,714) | $(37,542) |

- We currently anticipate capital expenditures of $150.0 million to $160.0 million for Fiscal 2022 (inclusive of expenditures for the ERP upgrade of $60.0 million to $70.0 million).
- 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 the forty weeks ended October 8, 2022 and October 9, 2021, respectively (amounts in thousands):

|  | For the Forty Weeks Ended October 8, 2022 | October 9, 2021 | Change |
| --- | ---: | ---: | ---: |
| Dividends paid | $(140,052) | $(131,510) | $(8,542) |
| Payment of financing fees | (273) | (5,811) | 5,538 |
| Stock repurchases | (34,586) | (9,510) | (25,076) |
| Change in bank overdrafts | (817) | (3,462) | 2,645 |
| Net change in debt obligations | — | (81,858) | 81,858 |
| Payments on financing leases | (1,306) | (1,311) | 5 |
| Net cash disbursed for financing activities | $(177,034) | $(233,462) | $56,428 |

- Our Board of Directors declared the following quarterly dividends during the forty weeks ended October 8, 2022 (amounts in thousands, except per share data):

| Date Declared | Record Date | Payment Date | Dividend per Common Share | Dividends Paid |
| --- | --- | --- | ---: | ---: |
| August 19, 2022 | September 2, 2022 | September 16, 2022 | $0.2200 | $46,605 |
| May 26, 2022 | June 9, 2022 | June 23, 2022 | $0.2200 | $46,660 |
| February 18, 2022 | March 4, 2022 | March 18, 2022 | $0.2100 | $44,527 |

Additionally, we paid dividends of $2.3 million at the time of vesting of certain restricted stock awards, director stock awards, and at issuance of deferred compensation shares. The increase in dividends paid resulted from an increase in the dividend rate compared to the prior year. 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.

- During the forty weeks ended October 8, 2022, we paid additional financing costs associated with the Fiscal 2021 amendment of the credit facility during the first quarter of Fiscal 2022, as well as financing costs for the amendment of the 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 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. During the forty weeks ended October 8, 2022 and October 9, 2021, we repurchased 1,321,117 and 406,840 shares of our common stock for $34.6 million and $9.5 million, respectively, under a share repurchase plan approved by our Board of Directors. 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 October 8, 2022 and January 1, 2022, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 3, *Leases*, and Note 11, *Debt and Other Obligations*, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

*(Amounts in thousands)*

| Long-term debt and right-of-use lease obligations | Balance at October 8, 2022 | January 1, 2022 | Fixed or Variable Rate | Final Maturity |
| --- | ---: | ---: | --- | --- |
| 2031 notes | $493,826 | $493,333 | Fixed Rate | 2031 |
| 2026 notes | 397,716 | 397,276 | Fixed Rate | 2026 |
| Credit facility | — | — | Variable Rate | 2026 |
| Accounts receivable securitization facility | — | — | Variable Rate | 2024 |
| Right-of-use lease obligations | 284,085 | 300,522 |  | 2036 |
|  | 1,175,627 | 1,191,131 |  |  |
| Less: Current maturities of long-term debt and right- of-use lease obligations | (48,898) | (47,974) |  |  |
| Long-term debt and right-of-use lease obligations | $1,126,729 | $1,143,157 |  |  |
| **Total stockholders' equity** |  |  |  |  |
| Total stockholders' equity | $1,434,765 | $1,411,274 |  |  |

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 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 Condensed 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.

The facility and credit facility are generally used for short-term liquidity needs. During the third quarter of Fiscal 2022, we amended the facility to, among other things, extend the maturity date to September 27, 2024. See Note 11, *Debt and Other Obligations,* of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to closely monitor our liquidity in light of the continued economic uncertainty in the U.S. and throughout the world due to, among other things, 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. There is no current portion payable over the next year for our debt obligations. Amounts available for withdrawal under the facility are determined as the lesser of the total commitments and a formula derived amount based on qualifying trade receivables.

The following table details the amounts available under the facility and credit facility and the highest and lowest balances outstanding under these arrangements during the forty weeks ended October 8, 2022:

*(Amounts in thousands)*

| Facility | Amount Available for Withdrawal at October 8, 2022 | For the Forty Weeks Ended October 8, 2022 Highest Balance | Lowest Balance |
| --- | ---: | ---: | ---: |
| Accounts receivable securitization facility | $200,000 | $100,000 | $— |
| Credit facility (1) | 491,600 | 200,000 | — |
|  | $691,600 |  |  |

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

Amounts outstanding under the credit facility 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 7, *Derivative Financial*

*Instruments,* of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the forty weeks ended October 8, 2022, the company made $230.0 million in revolving borrowings and $230.0 million in payments on revolving borrowings under the credit facility in anticipation of the closing of an acquisition that failed to materialize. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

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

Restrictive financial covenants for our borrowings can include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the debt agreements and can meet presently foreseeable financial requirements. As of October 8, 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.

At October 8, 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.

Under our share repurchase plan, the company may repurchase its common stock in open market or privately negotiated transactions at such times and at such prices as determined to be in the company’s best interest. These repurchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors. During the forty weeks ended October 8, 2022, 1,321,117 shares, at a cost of $34.6 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through October 8, 2022, 70.1 million shares, at a cost of $687.5 million, have been repurchased.

### Accounting Pronouncements Recently Adopted and Not Yet Adopted

See Note 2, *Recent Accounting Pronouncements*, of Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding recently adopted accounting pronouncements and accounting pronouncements not yet adopted.

## Market risk

As filed, 1,808 characters.

The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forward, futures, swap and option contracts to hedge existing or future exposure to changes in interest rates and commodity prices. The company does not enter into these derivative financial instruments for trading or speculative purposes. If actual market conditions are less favorable than those anticipated, raw material prices could increase significantly, adversely affecting the margins from the sale of our products.

### Commodity Price Risk

The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of market volatility in its raw material and packaging prices. As of October 8, 2022, the company’s hedge portfolio contained commodity derivatives with a fair value of $1.9 million, based on quoted market prices. Of this amount, approximately $0.5 million relates to instruments that will be utilized in Fiscal 2022 and $1.4 million in Fiscal 2023.

A sensitivity analysis has been prepared to quantify the company’s potential exposure to commodity price risk with respect to the derivative portfolio. Based on the company’s derivative portfolio as of October 8, 2022, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $4.1 million. The analysis disregards changes in the exposures inherent in the underlying hedged items; however, the company expects that any increase (decrease) in fair value of the portfolio would be substantially offset by increases (decreases) in raw material and packaging prices.

## Controls and procedures

As filed, 1,542 characters.

### Management’s Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to ensure that material information relating to the company, which is required to be timely disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to management in a timely fashion and is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation and as of the end of the period covered by this report, the CEO and the CFO and CAO concluded that the company’s disclosure controls and procedures were effective to allow timely decisions regarding disclosure in its reports that the company files or submits to the SEC under the Exchange Act.

### Changes in Internal Control Over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the fiscal quarter ended October 8, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

## Risk factors

As filed, 19,722 characters.

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

### Operational Risks

*The extent to which the outbreak of the novel strain of coronavirus ("COVID-19") and measures taken in response thereto, including additional variants of the virus and the efficacy and distribution of vaccines, impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict.*

COVID-19 has spread throughout the world, including the U.S., and has resulted in governmental and other regulatory authorities throughout the U.S. implementing numerous measures to try to contain the virus and any variants of the virus. These measures have impacted and may further impact the consumer, our workforce and operations, as well as the workforce, operations and financial prospects of our customers, vendors and suppliers. There is considerable uncertainty regarding such measures and potential future measures. The spread of COVID-19 caused us to modify our business practices and we may take further actions as may be required by governmental and other regulatory authorities or as we determine are in the best interests of our employees, customers, vendors and suppliers. We can provide no assurance that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to governmental authorities.

COVID-19 has had, and may continue to have, a widespread and broad-reaching effect on the economy and our business. Some of the impacts our business has experienced, is experiencing or may experience as a result of COVID-19 include, but are not limited to, the following:

- We experienced a favorable shift in sales mix to our branded retail products as compared to pre-pandemic periods due to the change in consumer buying patterns as a result of COVID-19, which positively impacted our business operations, including our sales, operating income and cash flows;
- Consumer fears about contracting the disease have altered preferences and spending habits, including significant increases in purchases of fresh and frozen breads during the pendency of quarantines, shelter-in-place orders and other shutdowns; and these trends have moderated in recent periods, which could negatively affect our performance in future periods as compared to prior periods if consumers were to purchase fewer products from us;
- We have experienced, and may experience in the future, temporary facility closures or partial shutdowns in response to government mandates in certain jurisdictions in which we operate and in response to positive diagnoses for COVID-19 in certain facilities for the safety of our employees;
- Our distribution networks, including our DSD distribution system and our warehouse delivery system, where we manage our inventory, or the operations of our logistics and other service providers may be disrupted, temporarily closed or experience worker shortages;
- Disruptions to our suppliers that supply our ingredients, packaging, and other materials necessary to produce, distribute, and sell our products may affect the ability of our suppliers to fulfill their obligations to us and may cause disruptions to our operations; and
- We also implemented a work from home policy for many of our corporate employees, which may negatively impact productivity and cause other disruptions to our business.

The extent to which the spread of COVID-19 impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak and additional variants, its severity, the actions to contain the virus or treat its impact, including the distribution and efficacy of vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of COVID-19's global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. Any of these events could exacerbate the other risks and uncertainties described herein, or in other reports filed with the SEC from time to time, and could materially adversely affect our business, results of operations and financial condition.

*The costs of maintaining and enhancing the value and awareness of our brands are increasing, which could have an adverse impact on our revenues and profitability.*

We rely on the success of our well-recognized brand names and we intend to maintain our strong brand recognition by continuing to devote resources to advertising, marketing and other brand building efforts. Brand value could diminish significantly due to several factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products (whether or not valid), our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers. The growing use of social and digital media platforms by consumers and third parties increases the speed and extent that information or misinformation and opinions can be shared. Brand recognition and loyalty can be impacted by the effectiveness of our advertising campaigns, marketing programs and sponsorships, as well as our use of social media. In addition, failure to comply with local or other laws and regulations could also hurt our reputation. Our marketing investments may not prove successful in maintaining or increasing our market share. If we are not able to successfully maintain our brand recognition or were to suffer damage to our reputation or loss of consumer confidence in our products for any of these reasons, our revenues and profitability could be adversely affected.

*We may be adversely impacted by the failure to successfully realize the expected benefits of acquisitions, divestitures or joint ventures.*

From time to time, we undertake acquisitions, divestitures, joint ventures and co-investments. The success of any acquisition, divestiture or joint venture depends on our ability to identify opportunities that help us meet our strategic objectives, consummate a transaction on favorable contractual terms, and achieve expected returns and other financial benefits.

Acquisitions, including future acquisitions, require us to efficiently integrate the acquired business or businesses, which involves a significant degree of difficulty, including the following:

- integrating the operations and business cultures of the acquired businesses while carrying on the ongoing operations of the businesses we operated prior to the acquisitions;
- managing a significantly larger company than before consummation of the acquisitions;
- the possibility of faulty assumptions underlying our expectations regarding the prospects of the acquired businesses;
- coordinating a greater number of diverse businesses and businesses located in a greater number of geographic locations;
- attracting and retaining the necessary personnel associated with the acquisitions;
- creating uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters; and
- expectations about the performance of acquired trademarks and brands and the fair value of such trademarks and brands.

Divestitures have operational risks that may include impairment charges. Divestitures also present unique financial and operational risks, including diverting management attention from the existing core business, separating personnel and financial data and other systems, and adversely affecting existing business relationships with suppliers and customers.

We may co-invest in the future with third parties through partnership, joint ventures, or other entities, acquiring non-controlling interests in or sharing responsibility for management. In this event, we would not be in a position to exercise sole decision-making authority regarding the joint venture and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that our joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions, or block or delay necessary decisions. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.

In situations where acquisitions, divestitures or joint ventures are not successfully implemented or completed, or the expected benefits of such acquisitions or divestitures are not otherwise realized, the company’s business, results of operations or financial condition could be negatively impacted.

### Technology Risks

*We may be adversely impacted if our IT systems fail to perform adequately, including with respect to cybersecurity issues.*

The efficient operation of our business depends on our IT systems. We rely on our IT systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our IT systems (including those provided to us by third-parties) to perform as we anticipate could disrupt our business and could result in billing, collecting and ordering errors, processing inefficiencies, and the loss of sales and customers, causing our business, results of operations or financial condition to suffer.

In addition, our IT systems (including those provided to us by third parties) may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, security breaches or intrusions (including theft of customer, consumer or other confidential data), and viruses. Cyber-attacks and other cyber incidents are occurring more frequently in the United States and are becoming more sophisticated with a wide range of expertise and motives. Such cyber-attacks and cyber incidents can take many forms, including extortion, denial of service, or social engineering through phishing or malware emails. In addition, the risk of cyber-attacks has increased in connection with the military conflict between Russia and Ukraine and the resulting geopolitical conflict. In light of those and other geopolitical events, nation-state actors or their supporters may launch retaliatory cyber-attacks, and may attempt to cause supply chain and other third-party service provider disruptions, or take other geopolitically motivated retaliatory actions that may disrupt our business operations, result in data compromise, or both. These circumstances increase the likelihood of cyber-attacks and/or security breaches.

We may incur significant costs in protecting or remediating cyber-attacks or other cyber incidents. If we are unable to prevent physical and electronic break-ins, cyber-attacks and other information security breaches, we may suffer financial and reputational damage, be subject to litigation or incur remediation costs or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, suppliers or employees.

### Industry Risks

*Increases in costs and/or shortages of raw materials, fuels and utilities could adversely impact our profitability.*

Raw materials, such as flour, sweeteners, shortening, yeast, and water, which are used in our bakery products, are subject to price fluctuations. The cost of these inputs may fluctuate widely due to foreign and domestic government policies and regulations, inflation, weather conditions, domestic and international demand, availability due to supply chain conditions, or other unforeseen circumstances. The global economy has been negatively impacted by the military conflict between Russia and Ukraine. The Russia-Ukraine conflict is fast-moving and uncertain. Global grain markets have exhibited increased volatility as sanctions have been imposed on Russia by the United States, the United Kingdom, the European Union, and others in response to Russia’s invasion of Ukraine. While we do not expect our operations to be directly impacted by the conflict at this time, changes in global grain and commodity flows could impact the markets in which we operate, which may in turn negatively impact our business, results of operations, supply chain and financial condition. Any substantial change in the prices or availability of raw materials may have an adverse impact on our profitability. We enter into forward purchase agreements and other derivative financial instruments from time to time to manage the impact of such volatility in raw materials prices; however, these strategies may not be adequate to overcome increases in market prices or availability. Our failure to enter into hedging or fixed price arrangements or any decrease in the availability or increase in the cost of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

In addition, we are dependent upon natural gas or propane for firing ovens. The independent distributors and third-party transportation companies are dependent upon gasoline and diesel for their vehicles. The cost of these fuels may fluctuate widely due to economic and political conditions, government policy and regulation, war or other conflicts (including the current situation in Ukraine), or other unforeseen circumstances. Substantial future increases in prices for, or shortages of, these fuels could have a material adverse effect on our profitability, financial condition or results of operations. There can be no assurance that we can cover these potential cost increases through future pricing actions. Also, as a result of these pricing actions, consumers could purchase less or move from purchasing higher-margin products to lower-margin products.

Inflation may adversely affect us by increasing our costs of production, materials, and labor. In an inflationary environment, such as the current economic environment, depending on the market conditions of the baking industry and the raising of interest rates by the United States Federal Reserve, we may be unable to raise the prices of our products enough to keep up with the rate of inflation, which would reduce our profit margins, and continued inflationary pressures could impact our business, financial condition, and results of operations.

*We rely on several large customers for a significant portion of sales and the loss of one of our large customers or their decision to give higher priority to other brands could adversely affect our business, financial condition or results of operations.*

We have several large customers that account for a significant portion of sales, and the loss of one of our large customers could adversely affect our financial condition and results of operations. Our top ten customers accounted for 53.7% of sales during Fiscal 2021 and 54.5% of sales during the forty weeks ended October 8, 2022. Our largest customer, Walmart/Sam’s Club, accounted for 21.2% and 21.7% of sales, respectively, during these periods. These customers do not typically enter long-term sales contracts, and instead make purchase decisions based on a combination of price, product quality, consumer demand, and customer service performance. At any time, there is a risk that our customers will give higher priority to their own products or to the products of our competitors, resulting in less shelf space for our products. Additionally, our customers may face financial or other difficulties that may impact their operations and their purchases from us. Disputes with significant suppliers could also adversely affect our ability to supply products to our customers. If our sales to one or more of these customers are reduced, this reduction may adversely affect our business, financial condition or results of operations.

### Legal and Regulatory Risks

*Government regulation, including labeling or warning requirements, could adversely impact our results of operations and financial condition.*

As a producer and marketer of food items, our production processes, product quality, packaging, labeling, storage, and distribution, and the safety of food products and the health and safety of our employees, are subject to regulation by various federal, state and local government entities and agencies. In addition, the marketing and labeling of food products has come under increased scrutiny in recent years, and the food industry has been subject to an increasing number of legal proceedings and claims relating to alleged false or deceptive marketing and labeling under federal, state or local laws or regulations. Uncertainty regarding labeling standards has led to customer confusions and legal challenges. The imposition or proposed imposition of additional product labeling or warning requirements could reduce overall consumption of our products, lead to negative publicity (whether based in scientific fact or not) or leave consumers with the perception (whether or not valid) that our products do not meet their health and wellness needs. Such factors could adversely affect our sales and results of operations.

In addition, our operations are subject to extensive and increasingly stringent regulations administered by the Environmental Protection Agency related to the discharge of materials into the environment and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences, including civil and administrative penalties and negative publicity. Changes in applicable laws or regulations or evolving interpretations thereof, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, may result in increased compliance costs, capital expenditures, and other financial obligations for us, which could affect our profitability or impede the production or distribution of our products, and affect our sales.

Compliance with federal, state and local laws and regulations is costly and time consuming. Failure to comply with, or violations of, applicable laws and the regulatory requirements of one or more of these entities and agencies could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, any of which could result in increased operating costs and adversely affect our results of operations and financial condition. Legal proceedings or claims related to our marketing could damage our reputation and/or adversely affect our business or financial results.

Filed Nov 10, 2022.
Source: SEC EDGAR, the filing index for accession 0000950170-22-024470. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.