# Flowers Foods Inc: Form 10-Q for the period ended Oct 7, 2023

- Company: [Flowers Foods Inc](/companies/flo.md) (CIK 1128928)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 16:10 ET
- Period: 2023-10-07
- Accession: 0000950170-23-062044
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1128928/000095017023062044/flo-20231007.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1128928/000095017023062044/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-10-07.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-16 to 2023-10-07 | $1.20bn | us-gaap:Revenues |
| Revenue | 9 months, 2023-01-01 to 2023-10-07 | $3.96bn | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2023-07-16 to 2023-10-07 | $604.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-10-07 | $1.67bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-16 to 2023-10-07 | −$59.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-10-07 | $123.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-16 to 2023-10-07 | $8.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-10-07 | $28.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-16 to 2023-10-07 | −$16.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-10-07 | $23.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-16 to 2023-10-07 | −$46.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-10-07 | $87.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-16 to 2023-10-07 | −$0.22 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-10-07 | $0.41 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-16 to 2023-10-07 | −$0.22 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-10-07 | $0.41 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-16 to 2023-10-07 | 211,522,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-10-07 | 213,455,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-10-07 | $257.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-10-07 | $97.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-10-07 | $146.7m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-10-07 | $30.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-10-07 | $14.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-10-07 | $714.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-10-07 | $3.43bn | us-gaap:Assets |
| Current liabilities | at 2023-10-07 | $669.9m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-10-07 | $1.04bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-10-07 | $1.37bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 71,767 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 7, 2023 should be read in conjunction with the Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 7, 2023 | October 8, 2022 | For the Forty Weeks Ended October 7, 2023 | October 8, 2022 | Footnote Disclosure |
| --- | ---: | ---: | ---: | ---: | --- |
| Business process improvement costs | $5,814 | $8,144 | $18,621 | $28,866 | Note 1 |
| Restructuring charges | 179 | — | 6,873 | — | Note 3 |
| Severance and lease termination costs | — | — | — | 1,717 |  |
| Plant closure costs and impairment of assets | 1,034 | 6,835 | 1,034 | 7,825 | Note 1 |
| Legal settlements and related costs | 137,529 | 5,500 | 137,529 | 7,500 | Note 15 |
| Acquisition-related costs | — | 11,582 | 3,712 | 11,582 | Note 1, 4 |
|  | $144,556 | $32,061 | $167,769 | $57,490 |  |

- *Business process improvement costs related to the transformation strategy initiatives* In the second half of Fiscal 2020, we launched initiatives to transform our business, including upgrading our information system to a more robust platform, as well as investments in e-commerce, autonomous planning, and our "bakery of the future" initiatives. Implementation of the ERP upgrade is anticipated to be completed in Fiscal 2026. These initiatives are further discussed in the “Transformation Strategy Initiatives” section below. The expensed portion of costs incurred related to these initiatives, which was primarily consulting costs, was $5.8 million and $18.6 million during the twelve and forty weeks ended October 7, 2023, respectively. We recognized $8.1 million and $28.9 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 (Loss). We currently expect 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 2023.
- *Restructuring charges* In February 2023, to improve operational effectiveness, increase profitable sales, and better meet customer requirements, the company announced a restructuring of plant operation responsibilities from the sales function to the supply chain function. Employee termination benefits and other cash charges were primarily for the voluntary employee separation incentive plan (the "VSIP") and employee relocation costs. During the first quarter of Fiscal 2023, we recorded VSIP-related charges of $3.9 million and made VSIP-related payments of $0.5 million. In the second quarter of Fiscal 2023, we recorded reduction-in-force ("RIF") and VSIP charges of $2.2 million and made payments of $2.9 million. We made VSIP payments of $1.3 million in the third quarter of Fiscal 2023. Relocation costs incurred during the first,

second and third quarters of Fiscal 2023 were $0.3 million, $0.3 million and $0.2 million, respectively, and these and the VSIP and RIF costs are recorded in the restructuring charges line item of the Condensed Consolidated Statements of Income (Loss).

- *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 were completed by the end of Fiscal 2022.
- *Plant closure costs and impairment of assets* During the third quarter of Fiscal 2023, the company entered into an agreement to sell a warehouse classified as held for sale and recorded an impairment charge of $1.0 million. The company completed the sale of the impaired warehouse at the end of the third quarter of Fiscal 2023.

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.

- *Legal settlements and related costs* In the third quarter of Fiscal 2023, we reached an agreement to settle certain distributor-related litigation for a settlement payment, inclusive of plaintiffs’ attorney fees, of $55.0 million. The settlement also requires a phased repurchase of approximately 350 distribution rights in California and the company estimates this cost, along with the cost to repurchase approximately 50 other California distribution rights that are not part of the settlement, to be approximately $80.2 million. Additional costs of $2.3 million were recognized to fully impair held and used distribution rights classified as intangibles assets. The terms of the settlement require court approval. The legal settlement and related costs are higher than originally estimated in the Form 8-K filed by the company on September 1, 2023 due to the planned repurchase of the additional distribution rights that were not part of the settlement.

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. All of these amounts are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income (Loss).

- *Acquisition-related costs* On February 17, 2023, the company completed the acquisition of the Papa Pita bakery business ("Papa Pita") for total consideration of approximately $274.8 million, inclusive of a net working capital purchase price adjustment. The identifiable intangible assets, property and equipment, and certain financial assets and taxes are still under review. We funded the purchase price with cash on-hand and from our existing credit facilities. Papa Pita is a manufacturer and distributor of bagels, tortillas, breads, buns, English muffins, and flat breads with one production facility in West Jordan, Utah and, prior to the acquisition, Papa Pita co-manufactured certain products for us. Papa Pita has direct-store-delivery distribution in the western United States ("U.S."), expanding our geographic reach. We incurred additional acquisition costs during the forty weeks ended October 7, 2023 of $3.7 million and these costs are reflected in the selling, distribution, and administrative expenses line item of the Condensed Consolidated Statements of Income (Loss).

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.

### Executive Overview

#### Business

Flowers is the second-largest producer and marketer of packaged bakery foods in the U.S. Our principal products include breads, buns, rolls, snack cakes, bagels, English muffins, 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. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization.

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: *Circana Total US MultiOutlet+C-Store 12 Weeks Ended 10/8/23)*
- Our branded retail sales comprised 64.1% of total sales for the forty weeks ended October 7, 2023 as compared to 65.5% for the forty weeks ended October 8, 2022.
- We completed the Papa Pita acquisition on February 17, 2023, as discussed above.
- As of October 7, 2023, we operated 46 bakeries, which produce fresh and frozen breads, buns, and rolls, as well as snack cakes, bagels, English muffins, and tortillas.
- We utilize a direct-store-delivery distribution model for fresh bakery foods, whereby product is sold by a network of independent distributor partners or company employees 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 $30 million to $35 million from these activities in Fiscal 2023. In the second quarter of Fiscal 2023, we completed the build phase of our ERP upgrade project and began the deployment, which is anticipated to be completed in Fiscal 2026. Additionally, we continue to implement our digital strategy initiatives as discussed further in the “Transformation Strategy Initiatives” section below.

#### Impact of the Inflationary Economic Environment and Other Macroeconomic Factors 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 conflict in Israel and Gaza on our business. Our results through the third quarter of Fiscal 2023 have continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. We have experienced significant input cost inflation for commodities and, to a lesser extent, for transportation and labor in the current and prior year periods which has partially offset the improved sales mix. We expect these inflationary pressures to continue throughout the remainder of Fiscal 2023. To mitigate the ongoing cost pressures, we implemented price increases during the first quarter of Fiscal 2023 and midway through the second quarter of Fiscal 2023.

Additionally, in both the current and prior year periods, we experienced supply chain disruptions resulting in lower production volumes and sales. These supply chain and other 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 and the conflict in Israel and Gaza have not impacted us directly, we are closely monitoring these conflicts' 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.

Our operations continued to be negatively impacted by labor shortages and turnover at some of our bakeries in Fiscal 2023. 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.

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” section below.

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

Sales increased 3.5% for the twelve weeks ended October 7, 2023 compared to the same quarter in the prior year, with price/mix contributing 6.3% and the Papa Pita acquisition contributing 1.3%, partially offset by volume declines of 4.1%. The benefits of inflation-driven pricing actions were partially offset by softer volumes. Inflationary pressure on consumer spending, targeted sales rationalization, and exiting certain lower margin business contributed to the volume decreases.

For the forty weeks ended October 7, 2023, sales increased 6.4% compared to the same period in the prior year. Price/mix contributed 11.3% and the Papa Pita acquisition contributed 1.1% to the sales growth, partially offset by volume declines of 6.0%. The benefits of inflation-driven pricing actions were partially offset by softer volumes. Volumes were impacted by inflationary pressure on consumer spending, targeted sales rationalization, and exiting certain lower margin business. For the forty weeks ended October 7, 2023, sales of our leading brands, *Nature's Own, DKB,* and *Canyon Bakehouse*, continued to increase due to positive price/mix, partially offset by lower volumes except for *DKB.*

For the twelve weeks ended October 7, 2023, loss from operations was $59.3 million compared to income from operations of $55.5 million in the prior year quarter. The loss in the current quarter resulted from legal settlements and related costs increasing $132.0 million as well as greater marketing investments, increased repairs and maintenance costs, and lower production volumes period over period. The loss was partially offset by sales increases from positive pricing actions, moderating ingredient costs, and the prior year plant closure and acquisition costs.

Income from operations for the forty weeks ended October 7, 2023 was $123.0 million compared to $239.1 million in the prior year period. The decline resulted from the $130.0 million increase in legal settlements and related costs, significant input cost inflation, lower production volumes, increased marketing investments, and higher maintenance costs in the current year period. Those factors were partially offset by price increases and lower consulting and acquisition-related costs year over year.

Net loss for the twelve weeks ended October 7, 2023 was $46.7 million compared to net income of $40.5 million in the prior year period. The change resulted primarily from the change in (loss) income from operations, as described above, and higher interest expense.

Net income for the forty weeks ended October 7, 2023 was $87.7 million compared to $179.8 million in the prior year period. The decrease resulted primarily from lower income from operations, as described above, and higher interest expense, net of a lower effective tax rate.

During the forty weeks ended October 7, 2023, we generated net cash flows from operations of $257.3 million, paid $274.8 million for the Papa Pita acquisition, inclusive of the net working capital purchase price adjustment, and invested $97.0 million in capital expenditures. We increased our indebtedness by $145.0 million primarily to fund the acquisition and paid $146.7 million in dividends to our shareholders. During the first quarter of Fiscal 2023, we terminated the accounts receivable securitization facility (the "securitization facility") and entered into a two-year $200.0 million trade receivable repurchase facility (the "repurchase facility"). During the forty weeks ended October 8, 2022, we generated net cash flows from operations of $291.5 million, invested $128.4 million in capital expenditures and paid $140.1 million in dividends to our shareholders.

During the second quarter of the prior year, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility. We made an additional investment of $2.0 million in Base Culture in the second quarter of Fiscal 2023. 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. These investments are being accounted for at cost as we do not control, nor do we have the ability to significantly influence Base Culture.

#### 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.

As discussed above, in February 2023, we announced a restructuring of plant operation responsibilities from the sales function to the supply chain function to improve operational effectiveness, increase profitable sales, and better meet customer requirements. This restructuring is ongoing.

#### 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 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 29 bakeries and plan to continue to invest in these new ways of working. Costs related to the digital initiatives are fluid and cannot be currently estimated.

#### 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. We completed the initial planning and road mapping phase of the ERP upgrade at the end of Fiscal 2020. In the first quarter of Fiscal 2021, we transitioned into the design phase and engaged a leading, global consulting firm to assist us in designing and implementing the upgrade of our ERP platform and to serve as the system integrator for the project. We transitioned into the build phase at the beginning of Fiscal 2022 and during the second quarter of Fiscal 2023, we began deploying the ERP upgrade. We plan to continue the deployment across the organization over the next few years.

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 $350 million (of which approximately 34% has been or is anticipated to be capitalized) and anticipate the upgrade to be completed in 2026. As of October 7, 2023, we have incurred costs related to the project of approximately $201 million.

### CRITICAL ACCOUNTING POLICIES:

Our financial statements are prepared in accordance with generally accepted accounting principles in the U.S. ("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 7, 2023 and October 8, 2022, respectively, are set forth in the table below (dollars in thousands):

|  | For the Twelve Weeks Ended October 7, 2023 | October 8, 2022 | Percentage of Sales October 7, 2023 | October 8, 2022 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $1,199,260 | $1,158,169 | 100.0 | 100.0 | $41,091 | 3.5 |
| Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) | 617,468 | 615,621 | 51.5 | 53.2 | 1,847 | 0.3 |
| Selling, distribution and administrative expenses | 603,954 | 447,363 | 50.4 | 38.6 | 156,591 | 35.0 |
| Restructuring charges | 179 | — | 0.0 | — | 179 | NM |
| Plant closure costs and impairment of assets | 1,034 | 6,835 | 0.1 | 0.6 | (5,801) | NM |
| Depreciation and amortization | 35,974 | 32,899 | 3.0 | 2.8 | 3,075 | 9.3 |
| (Loss) income from operations | (59,349) | 55,451 | (4.9) | 4.8 | (114,800) | (207.0) |
| Other components of net periodic pension and postretirement benefit plans credit | (62) | (178) | (0.0) | (0.0) | 116 | NM |
| Interest expense, net | 4,010 | 1,342 | 0.3 | 0.1 | 2,668 | 198.8 |
| (Loss) income before income taxes | (63,297) | 54,287 | (5.3) | 4.7 | (117,584) | (216.6) |
| Income tax (benefit) expense | (16,567) | 13,759 | (1.4) | 1.2 | (30,326) | (220.4) |
| Net (loss) income | $(46,730) | $40,528 | (3.9) | 3.5 | $(87,258) | (215.3) |
| Comprehensive (loss) income | $(48,056) | $46,489 | (4.0) | 4.0 | $(94,545) | (203.4) |

|  | For the Forty Weeks Ended October 7, 2023 | October 8, 2022 | Percentage of Sales October 7, 2023 | October 8, 2022 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales | $3,961,803 | $3,723,152 | 100.0 | 100.0 | $238,651 | 6.4 |
| Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) | 2,044,417 | 1,926,297 | 51.6 | 51.7 | 118,120 | 6.1 |
| Selling, distribution and administrative expenses | 1,671,813 | 1,440,665 | 42.2 | 38.7 | 231,148 | 16.0 |
| Restructuring charges | 6,873 | — | 0.2 | — | 6,873 | NM |
| Plant closure costs and impairment of assets | 1,034 | 7,825 | 0.0 | 0.2 | (6,791) | NM |
| Depreciation and amortization | 114,693 | 109,244 | 2.9 | 2.9 | 5,449 | 5.0 |
| Income from operations | 122,973 | 239,121 | 3.1 | 6.4 | (116,148) | (48.6) |
| Other components of net periodic pension and postretirement benefit plans credit | (207) | (594) | (0.0) | (0.0) | 387 | NM |
| Interest expense, net | 12,147 | 4,947 | 0.3 | 0.1 | 7,200 | 145.5 |
| Income before income taxes | 111,033 | 234,768 | 2.8 | 6.3 | (123,735) | (52.7) |
| Income tax expense | 23,293 | 54,971 | 0.6 | 1.5 | (31,678) | (57.6) |
| Net income | $87,740 | $179,797 | 2.2 | 4.8 | $(92,057) | (51.2) |
| Comprehensive income | $87,596 | $178,005 | 2.2 | 4.8 | $(90,409) | (50.8) |

NM - the computation is not meaningful.

Percentages may not add due to rounding.

TWELVE WEEKS ENDED OCTOBER 7, 2023 COMPARED TO TWELVE WEEKS ENDED OCTOBER 8, 2022

### Sales (dollars in thousands)

|  | For the Twelve Weeks Ended October 7, 2023 | October 8, 2022 | Percentage of Sales October 7, 2023 | October 8, 2022 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Branded retail | $771,165 | $748,474 | 64.3 | 64.6 | $22,691 | 3.0 |
| Other | 428,095 | 409,695 | 35.7 | 35.4 | 18,400 | 4.5 |
| Total | $1,199,260 | $1,158,169 | 100.0 | 100.0 | $41,091 | 3.5 |

(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: | Branded Retail Favorable (Unfavorable) | Other | Total |
| --- | ---: | ---: | ---: |
| Pricing/Mix\* | 2.8 | 10.4 | 6.3 |
| Volume\* | (1.1) | (7.4) | (4.1) |
| Acquisition | 1.3 | 1.5 | 1.3 |
| Total percentage change in sales | 3.0 | 4.5 | 3.5 |
| \* Computations above are calculated as follows: |  |  |  |
| Price/Mix $ = Current year period units x change in price per unit |  |  |  |
| Price/Mix % = Price/Mix $ ÷ Prior year period Sales $ |  |  |  |
| Volume $ = Prior year period price per unit x change in units |  |  |  |
| Volume % = Volume $ ÷ Prior year period Sales $ |  |  |  |

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

Sales increased quarter over quarter due to positive pricing actions implemented during the first quarter of Fiscal 2023 and midway through the second quarter of Fiscal 2023 to mitigate considerable cost inflation, and, to a lesser extent, the Papa Pita acquisition contribution. These increases were partially offset by volume declines. Price increases implemented during the first quarter of Fiscal 2023 were focused on store branded and non-retail sales, whereas the price increases implemented in the second quarter were predominantly targeted to branded retail sales. Volume decreases were most significant for non-retail items, and, to a lesser extent, branded retail traditional loaf breads. Our promotional activity increased in the third quarter of Fiscal 2023 as compared to the same quarter in the prior year, largely due to inflationary pressure on consumer spending, but remained lower than pre-pandemic levels.

#### Branded Retail Sales

Branded retail sales increased 3.0% quarter over quarter due to favorable price/mix resulting from inflation-driven pricing actions taken in the second quarter of the current year and improved mix from greater branded organic product sales along with the acquisition contribution. Volume declines partially offset the increase, partly due to lapping increased hurricane-related demand in the prior year period. The largest volume declines were in branded traditional loaf breads, partially offset by increases for branded organic products and branded Keto bread. Our *Nature's Own* and *DKB* brands continued to perform well benefiting from inflation-driven price increases and growth in recently introduced products, such as *Nature's Own* Keto bread, introduced in Fiscal 2023, and Hawaiian loaf bread, introduced in Fiscal 2022, and *DKB* snack bars. *Nature's Own* did experience volume declines quarter over quarter largely due to inflationary pressure on consumer spending and cycling increased hurricane-related demand in the prior year period. We are continuing the nationwide rollout of certain varieties of the *DKB* snack bars, which commenced in January 2023.

#### Other Sales

Sales in the Other sales category grew 4.5% due to substantial price increases to mitigate inflationary pressures implemented at the beginning of Fiscal 2023, and the acquisition contribution, partially offset by volume declines. Store branded retail sales comprised a larger portion of our total sales as compared to the prior year quarter largely due to significantly higher price/mix, partly offset by softer volumes. The largest volume declines were in store branded retail cake. Non-retail sales increased quarter over quarter due to inflation-driven pricing actions and the acquisition contribution, partially offset by volume declines. Foodservice and vending drove most of the volume decrease, largely due to exiting certain lower margin business and targeted sales rationalization. Increased contract manufacturing volume partially mitigated the non-retail volume decline.

### 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 7, 2023 % of Sales | October 8, 2022 % of Sales | Increase (Decrease) as a % of Sales |
| --- | ---: | ---: | ---: |
| Ingredients and packaging | 32.1 | 32.9 | (0.8) |
| Workforce-related costs | 13.9 | 13.5 | 0.4 |
| Other | 5.5 | 6.8 | (1.3) |
| Total | 51.5 | 53.2 | (1.7) |

Materials, supplies, labor and other production costs as a percent of sales decreased quarter over quarter due to the impact of inflation-driven pricing actions more than offsetting input cost inflation, the impact of lower production volumes, increased product returns, and higher maintenance and labor costs. Although costs for certain ingredients have moderated compared to the prior year period, prices of other ingredients remain elevated. However, sales price increases more than offset higher ingredient and packaging costs as a percent of sales. Additionally, certain products purchased from Papa Pita in the prior year period were reflected as outside purchases of product (sales with no associated ingredient costs) in the Other line item. The decrease in the Other line item mostly reflects the reduction in outside purchases of product and the impact of mix shift in product inventories, partially offset by increased bakery maintenance costs. We anticipate this shift in expense between cost categories will impact comparability for the remainder of Fiscal 2023. Wage inflation and lower production volumes resulted in the increase in workforce-related costs as a percent of sales. We expect the impact of lower production volumes and the competitive labor market to continue to negatively impact our operations.

Prices of ingredient and packaging materials fluctuate due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances, and we monitor these markets closely. Ingredient and packaging costs continued to experience volatility in the current quarter and are expected to remain volatile for the remainder of Fiscal 2023. 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 7, 2023 % of Sales | October 8, 2022 % of Sales | Increase (Decrease) as a % of Sales |
| --- | ---: | ---: | ---: |
| Workforce-related costs | 11.0 | 10.3 | 0.7 |
| Distributor distribution fees | 14.1 | 14.5 | (0.4) |
| Other | 25.3 | 13.8 | 11.5 |
| Total | 50.4 | 38.6 | 11.8 |

Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. This decrease was more than offset by the increase in workforce-related costs as a percent of sales. Additionally, a competitive labor market contributed to the increase in workforce-related costs. We anticipate a continued shift from distributor distribution fees to workforce-related costs as the company completes a phased repurchase of the California distribution rights and converts to an employee-based model in that state in Fiscal 2024. The increase in the Other line item mostly reflects the $132.0 million increase in legal settlements and related costs (1,110 basis point impact), and to a lesser extent, greater marketing investments and increased amortization of cloud-based applications. These items were partially offset by acquisition costs incurred in the prior year period. Transportation cost increases were mostly offset by sales price increases. See the “Matters Affecting Comparability” section above for a discussion of the legal settlement and related-costs and acquisition-related costs.

### Restructuring Charges and Plant Closure Costs and Impairment of Assets

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

### Depreciation and Amortization Expense

Depreciation and amortization expense for the third quarter of Fiscal 2023 increased in dollars and as a percent of sales as compared to the prior year period due to assets being placed in service and the Papa Pita assets acquired in the first quarter of Fiscal 2023, net of certain assets becoming fully depreciated. We anticipate depreciation and amortization expense to be higher than the prior year period for the remainder of Fiscal 2023 as a result of the ERP-related assets being placed in service and the Papa Pita acquired assets.

### (Loss) Income from Operations

Loss from operations for the twelve weeks ended October 7, 2023 was $59.3 million compared to income of $55.5 million for the twelve weeks ended October 8, 2022. The decrease was due primarily to increased selling, distribution, and administrative expenses, as discussed above, partially offset by sales increases from positive pricing actions to mitigate cost inflation and the prior year plant closure costs.

### Net Interest Expense

Net interest expense increased in dollars and as a percent of sales as compared to the prior year quarter primarily due to higher average amounts outstanding under our borrowing arrangements primarily from funding the Papa Pita acquisition and increased interest rates on our variable rate debt.

### Income Tax (Benefit) Expense

The effective tax rate for the twelve weeks ended October 7, 2023 was 26.2% compared to 25.3% in the prior year quarter. The increase in the rate quarter over quarter was primarily due to larger net favorable discrete items including windfall tax benefits on stock-based compensation when applied to the loss in the current year quarter. The primary differences in the effective rate and statutory rate for the current year period were state income taxes and windfall benefits on stock-based compensation, while the primary differences for the prior year period were state income taxes.

### Comprehensive (Loss) Income

The change in comprehensive (loss) income quarter over quarter resulted primarily from the change in net earnings and changes in the fair value of derivatives.

FORTY WEEKS ENDED OCTOBER 7, 2023 COMPARED TO FORTY WEEKS ENDED OCTOBER 8, 2022

### Sales (dollars in thousands)

|  | Forty Weeks Ended October 7, 2023 | October 8, 2022 | Percentage of Sales October 7, 2023 | October 8, 2022 | Increase (Decrease) Dollars% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Branded retail | $2,538,711 | $2,439,739 | 64.1 | 65.5 | $98,972 | 4.1 |
| Other | 1,423,092 | 1,283,413 | 35.9 | 34.5 | 139,679 | 10.9 |
| Total | $3,961,803 | $3,723,152 | 100.0 | 100.0 | $238,651 | 6.4 |

(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: | Branded Retail Favorable (Unfavorable) | Other | Total |
| --- | ---: | ---: | ---: |
| Pricing/Mix\* | 6.3 | 18.3 | 11.3 |
| Volume\* | (3.3) | (8.7) | (6.0) |
| Acquisition | 1.1 | 1.3 | 1.1 |
| Total percentage change in sales | 4.1 | 10.9 | 6.4 |
| \* Computations above are calculated as follows: |  |  |  |
| Price/Mix $ = Current year period units x change in price per unit |  |  |  |
| Price/Mix % = Price/Mix $ ÷ Prior year period Sales $ |  |  |  |
| Volume $ = Prior year period price per unit x change in units |  |  |  |
| Volume % = Volume $ ÷ Prior year period Sales $ |  |  |  |

45

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

Sales increased year over year due to positive pricing actions implemented in the first quarter of Fiscal 2023 and midway through both the second quarter of Fiscal 2023 and Fiscal 2022, to mitigate cost inflation, combined with the Papa Pita acquisition contribution. These increases were partially offset by volume declines. The price increases implemented in the first quarter of Fiscal 2023 were focused on our store branded and non-retail sales, whereas the price increases implemented in the second quarter of Fiscal 2023 predominately targeted branded retail sales. Volume decreases were most significant for non-retail items and, to a lesser extent, branded retail traditional loaf breads and branded retail cake products. Year over year, the promotional environment remained relatively stable, however, promotional activity was higher in the third quarter of Fiscal 2023 as compared to the same quarter in the prior year.

We anticipate our Fiscal 2023 sales will be higher than Fiscal 2022 sales due to pricing actions taken midway through Fiscal 2022 and during the current year to date period and sales attributed to the Papa Pita acquisition, somewhat offset by softer sales volumes.

#### Branded Retail Sales

Branded retail sales increased 4.1% year over year due to favorable price/mix resulting from inflation-driven pricing actions in the second quarter of both Fiscal 2022 and Fiscal 2023 and the acquisition contribution, partially offset by volume declines. Branded retail sales in the prior year period benefitted from strong demand at the beginning of the year as a result of increased COVID-19 cases. The largest volume declines occurred in branded traditional loaf breads and branded cake. Declines in branded cake resulted from market share declines and targeted sales rationalization, partially offset by supply chain disruptions and labor shortages in the prior year period. Sales of our leading brands, *Nature's Own, DKB,* and *Canyon Bakehouse*, benefitted from inflation-driven price increases, partially offset by volume declines due to inflationary pressure on consumer spending with the exception of *DKB* which had volume gains. *Nature's Own* Keto bread and Hawaiian loaf bread along with *DKB* organic snack bars and Organic Everything Bread, all introduced within the last two years, contributed to the branded retail sales increase. As announced in December 2022, we are continuing the nationwide rollout of certain varieties of *DKB* snack bars.

#### Other Sales

The significant increase in the Other sales category was due to price increases implemented in the second quarter of Fiscal 2022 and in the first quarter of Fiscal 2023 to mitigate inflationary pressures, and the acquisition contribution, partially offset by volume declines. Store branded retail sales increased year over year, largely from inflation-driven price increases, and comprised a larger portion of our total sales as compared to the prior year period. 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 year over year from positive price/mix, mostly due to inflation-driven pricing actions, and the acquisition contribution, partially offset by volume declines. Foodservice and vending drove most of the volume decrease, primarily due to exiting certain lower margin business and targeted sales rationalization. Supply chain disruptions experienced in both periods negatively impacted sales volumes. These volume declines were partially offset by increased contract manufacturing volume.

### 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 7, 2023 % of sales | October 8, 2022 % of sales | Increase (Decrease) as a % of sales |
| --- | ---: | ---: | ---: |
| Ingredients and packaging | 32.2 | 31.6 | 0.6 |
| Workforce-related costs | 13.6 | 13.7 | (0.1) |
| Other | 5.8 | 6.4 | (0.6) |
| Total | 51.6 | 51.7 | (0.1) |

Materials, supplies, labor and other production costs as a percent of sales decreased slightly year over year due to inflation-driven pricing actions that mostly offset considerable input cost inflation, increased product returns and lower production volumes. We experienced supply chain disruptions in both periods. In the current year period, ingredient costs continued to be impacted by the highly inflationary environment. Costs for certain ingredients began to moderate in the third quarter of Fiscal 2023 as compared to the prior year third quarter. Additionally, certain products purchased from Papa Pita in the prior year period and up until the acquisition date were reflected as outside purchases of product (sales with no associated ingredient costs) in the Other line item. We anticipate this shift in expense between cost categories will impact comparability for the remainder of Fiscal 2023. Workforce-related costs were slightly lower as a percent of sales due to sales increases outpacing wage inflation. However, lower production volumes and the competitive labor market impacted our operations and we expect this trend to continue. The decrease in the Other line item mostly reflects lower outside purchases of product, partly due to the Papa Pita acquisition.

Prices of ingredient and packaging materials fluctuate due to government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances, and we monitor these markets closely. Ingredient and packaging costs continued to experience volatility in the current quarter and are expected to remain volatile for the remainder of Fiscal 2023. 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 7, 2023 % of sales | October 8, 2022 % of sales | Increase (Decrease) as a % of sales |
| --- | ---: | ---: | ---: |
| Workforce-related costs | 10.8 | 10.8 | — |
| Distributor distribution fees | 14.1 | 14.7 | (0.6) |
| Other | 17.3 | 13.2 | 4.1 |
| Total | 42.2 | 38.7 | 3.5 |

Distributor distribution fees decreased as a percent of sales primarily due to a smaller portion of our sales being made through IDPs. We anticipate this trend to continue as we convert to an employee-based model in California. Workforce-related costs were unchanged as a percent of sales as the increase from the shift from distributor distribution fees was more than offset by lower employee compensation costs and sales increases outpacing wage inflation. The increase in the Other line item mostly reflects the $130.0 million increase in legal settlements and related costs (330 basis point impact), greater marketing investments, and increased amortization of cloud-based applications, net of the $7.9 million decrease in acquisition-related costs and reduced consulting costs. Transportation cost increases were mostly offset by sales price increases. See the “Matters Affecting Comparability” section above for a discussion of legal settlements and related costs, project-related consulting costs, and acquisition-related costs.

### Restructuring Charges and Plant Closure Costs and Impairment of Assets

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

### Depreciation and Amortization Expense

Depreciation and amortization expense for the forty weeks ended October 7, 2023 increased in dollars as compared to the prior year period due to assets being placed in service and the Papa Pita assets acquired, net of assets becoming fully depreciated. We anticipate higher depreciation and amortization expense for the remainder of Fiscal 2023 due to the ERP-related assets being placed in service during the second quarter of Fiscal 2023 and the Papa Pita assets acquired.

### Income from Operations

Income from operations decreased year over year as a percent of sales mostly due to the significant increase in selling, distribution, and administrative expenses, substantial input cost inflation, and lower production volumes. These items were partially offset by inflation-driven sales price increases.

### Net Interest Expense

Net interest expense increased in dollars and as a percent of sales as compared to the prior year period due to higher average amounts outstanding under our borrowing arrangements primarily due to funding the Papa Pita acquisition, and increased interest rates on our variable rate debt.

### Income Tax Expense

The effective tax rate for the forty weeks ended October 7, 2023 was 21.0% compared to 23.4% in the prior year period. The decrease in the rate was primarily due to year over year differences in the impact of the net favorable discrete items. For both periods presented, the primary differences in the effective rate and the statutory rate were state income taxes including the recognition of discrete tax credits and windfall tax benefits on stock-based compensation.

### Comprehensive Income

The decrease in comprehensive income year over year resulted primarily from decreased net income.

### LIQUIDITY AND CAPITAL RESOURCES:

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

We believe that 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 that 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 our results of operations, liquidity or cash flows for the forty weeks ended October 7, 2023, 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 conflict in Israel and Gaza, 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 inflation.

The macroeconomic-related factors discussed above remain fluid and the future impact on our business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. If we experienced a significant reduction in revenues, we would have additional alternatives to maintain liquidity, including amounts available on our debt facilities, capital expenditure reductions, adjustments to our 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. During the first quarter of Fiscal 2023, we terminated the securitization facility and entered into the repurchase facility, a two-year $200.0 million trade receivable repurchase facility. We believe that we have sufficient liquidity on hand to continue business operations during this time of volatility in the global and U.S. economic environments. We had total available liquidity of $561.2 million as of October 7, 2023, consisting of cash on hand and the available balances under the senior unsecured revolving credit facility (the "credit facility") and repurchase facility.

### Liquidity Discussion for the Forty Weeks Ended October 7, 2023 and October 8, 2022

Cash and cash equivalents were $14.6 million at October 7, 2023 and $165.1 million at December 31, 2022. 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 7, 2023 | October 8, 2022 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by operating activities | $257,318 | $291,534 | $(34,216) |
| Cash disbursed for investing activities | (366,535) | (119,256) | (247,279) |
| Cash disbursed for financing activities | (41,356) | (177,034) | 135,678 |
| Effect of exchange rates on cash | — | (8,371) | 8,371 |
| Total change in cash | $(150,573) | $(13,127) | $(137,446) |

48

*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 7, 2023 | October 8, 2022 | Change |
| --- | ---: | ---: | ---: |
| Depreciation and amortization | $114,693 | $109,244 | $5,449 |
| Loss on foreign currency exchange rates | — | 8,371 | (8,371) |
| Impairment of assets | 3,347 | 3,897 | (550) |
| Loss (gain) reclassified from accumulated other comprehensive income to net income | 2,426 | (5,625) | 8,051 |
| Allowances for accounts receivable | 10,071 | 5,811 | 4,260 |
| Stock-based compensation | 21,382 | 20,124 | 1,258 |
| Deferred income taxes | (44,256) | 11,519 | (55,775) |
| Other non-cash items | 4,151 | 4,173 | (22) |
| Net non-cash adjustment to net income | $111,814 | $157,514 | $(45,700) |

- Refer to the *Plant closure costs and impairment of assets* discussion in the “Matters Affecting Comparability” section above for additional information regarding this item.
- The increase in the allowances for accounts receivable period over period correlates with the increase in accounts receivable from sales increases.
- For the forty weeks ended October 7, 2023, deferred income tax activity was comprised of changes year over year, including the impact of the capitalization of research and development and certain information technology costs, the vesting of stock equity awards, and accrued legal settlements and related costs. For the forty weeks ended October 8, 2022, deferred income tax activity was composed of changes year over year, including the impact of the vesting of stock equity awards and legal settlement payments.
- Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs (including $0.3 million related to the write-off of unamortized loan costs upon the early extinguishment of the securitization facility in the first quarter of Fiscal 2023) 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 7, 2023 | October 8, 2022 | Change |
| --- | ---: | ---: | ---: |
| Changes in accounts receivable | $(17,364) | $(71,882) | $54,518 |
| Changes in inventories | (13,552) | (33,476) | 19,924 |
| Changes in hedging activities | (332) | 2,654 | (2,986) |
| Changes in other assets and accrued liabilities | 107,800 | (20,424) | 128,224 |
| Changes in accounts payable | (17,788) | 78,351 | (96,139) |
| Qualified pension plan contributions | (1,000) | (1,000) | — |
| Net changes in working capital and pension plan contributions | $57,764 | $(45,777) | $103,541 |

- Changes in accounts receivable were mainly attributable to significant price increases period over period. Changes in inventories resulted from volatility in input costs. Changes in accounts payable were mainly attributable to higher capital spending in the prior year period largely due to the upgrade of the ERP system and volatility in input costs.
- 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. We expect these changes will continue to occur as part of our hedging program, though the degree and financial impact cannot be currently estimated.
- The change in other assets primarily resulted from changes in prepaid assets and income tax receivables in each respective period. Changes in employee compensation, insurance reserves, and legal settlement accruals primarily resulted in the change in other accrued liabilities. During the first quarter of Fiscal 2023 and Fiscal 2022, we paid $32.1 million and $43.8 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plans. An additional $2.2 million and $1.8 million was paid during the first quarter of Fiscal 2023 and Fiscal 2022, 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 7, 2023, the company recorded a legal settlement and related costs of $137.5 million (of which $120.3 million is included in other accrued liabilities, $14.9 million as a contra account to other assets, and $2.3 million was a non-cash impairment charge) and paid a $5.5 million legal settlement that had been accrued for in a prior period. Additionally, the company accrued $7.5 million related to an insurance liability claim in the current year period. During

the forty weeks ended October 8, 2022, the company accrued $7.5 million of legal settlements and paid a $2.0 million legal settlement accrued during that period and a $16.5 million settlement that had been accrued for in Fiscal 2021.

- The company made voluntary defined benefit pension plan contributions of $1.0 million to Plan No. 2 in the third quarter of Fiscal 2023 and Fiscal 2022.

*Cash Flows Disbursed for Investing Activities*. The table below presents net cash disbursed for investing activities for the forty weeks ended October 7, 2023 and October 8, 2022, respectively (amounts in thousands):

|  | For the Forty Weeks Ended October 7, 2023 | October 8, 2022 | Change |
| --- | ---: | ---: | ---: |
| Purchases of property, plant, and equipment | $(97,003) | $(128,372) | $31,369 |
| Principal payments from notes receivable, net of repurchases of independent distribution rights | 4,863 | 14,379 | (9,516) |
| Proceeds from sale of property, plant and equipment | 2,278 | 3,335 | (1,057) |
| Acquisition of business | (274,755) | — | (274,755) |
| Investment in unconsolidated affiliate | (1,981) | (9,000) | 7,019 |
| Other | 63 | 402 | (339) |
| Net cash disbursed for investing activities | $(366,535) | $(119,256) | $(247,279) |

- We currently anticipate capital expenditures of $135.0 million to $145.0 million for Fiscal 2023 (inclusive of expenditures for the ERP upgrade of $25.0 million to $35.0 million). Capital expenditures were higher in the prior year period mostly due to spending for the ERP upgrade.
- As discussed in the Executive Overview section above, on February 17, 2023, we completed the Papa Pita acquisition for $274.8 million in cash (inclusive of a net working capital purchase price adjustment). Papa Pita operates one manufacturing facility in West Jordan, Utah.
- As discussed in the Executive Overview section above, we made an initial investment of $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility, in the second quarter of Fiscal 2022. We made an additional investment of $2.0 million in the second quarter of Fiscal 2023.

*Cash Flows Disbursed for Financing Activities*. The table below presents net cash disbursed for financing activities for the forty weeks ended October 7, 2023 and October 8, 2022, respectively (amounts in thousands):

|  | For the Forty Weeks Ended October 7, 2023 | October 8, 2022 | Change |
| --- | ---: | ---: | ---: |
| Dividends paid | $(146,726) | $(140,052) | $(6,674) |
| Payment of financing fees | (533) | (273) | (260) |
| Stock repurchases | (30,891) | (34,586) | 3,695 |
| Change in bank overdrafts | (6,693) | (817) | (5,876) |
| Net change in debt obligations | 145,000 | — | 145,000 |
| Payments on financing leases | (1,513) | (1,306) | (207) |
| Net cash disbursed for financing activities | $(41,356) | $(177,034) | $135,678 |

- Our Board of Directors declared the following quarterly dividends during the forty weeks ended October 7, 2023 (amounts in thousands, except per share data):

| Date Declared | Record Date | Payment Date | Dividend per Common Share | Dividends Paid |
| --- | --- | --- | ---: | ---: |
| August 18, 2023 | September 1, 2023 | September 15, 2023 | $0.2300 | $48,603 |
| May 25, 2023 | June 8, 2023 | June 22, 2023 | $0.2300 | $48,741 |
| February 17, 2023 | March 3, 2023 | March 17, 2023 | $0.2200 | $46,602 |

Additionally, we paid dividends of $2.8 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 7, 2023, we paid financing fees associated with executing the repurchase facility and for the amendment to the credit facility. In the prior year period, we paid financing costs associated with the Fiscal 2021 amendment of the credit facility.
- 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 7, 2023 and October 8, 2022, we repurchased 1,198,729 and 1,321,117 shares of our common stock for $30.9 million and $34.6 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.
- Changes in debt obligations primarily related to drawdowns made to fund the Papa Pita acquisition in the first quarter of Fiscal 2023. See the discussion below under the “Capital Structure” section for additional details regarding changes in debt obligations.

### Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at October 7, 2023 and December 31, 2022, respectively. For additional information regarding our debt and right-of-use lease obligations, see Note 5, *Leases*, and Note 13, *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 7, 2023 | December 31, 2022 | Fixed or Variable Rate | Final Maturity |
| --- | ---: | ---: | --- | --- |
| 2031 notes | $494,555 | $493,994 | Fixed Rate | 2031 |
| 2026 notes | 398,288 | 397,848 | Fixed Rate | 2026 |
| Unsecured credit facility | — | — | Variable Rate | 2026 |
| Accounts receivable securitization facility | — | — | Variable Rate |  |
| Accounts receivable repurchase facility | 145,000 | — | Variable Rate | 2025 |
| Right-of-use lease obligations | 271,614 | 282,862 |  | 2036 |
|  | 1,309,457 | 1,174,704 |  |  |
| Less: Current maturities of long-term debt and right- of-use lease obligations | (49,727) | (45,769) |  |  |
| Long-term debt and right-of-use lease obligations | $1,259,730 | $1,128,935 |  |  |
| **Total stockholders' equity** |  |  |  |  |
| Total stockholders' equity | $1,374,651 | $1,443,290 |  |  |

The repurchase facility and the credit facility are generally used for short-term liquidity needs. On February 13, 2023, we amended the securitization facility and then on April 14, 2023, terminated the securitization facility and entered into the repurchase facility, a two-year $200.0 million trade receivable repurchase facility. Additionally, on April 12, 2023, we amended the credit facility to, among other things, replace the benchmark rate at which borrowings bear interest under the credit facility from LIBOR to Term SOFR and to allow for entry into permitted accounts receivable repurchase facilities. See Note 13, *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 conflict in Israel and Gaza on our business. There is no current portion payable over the next year for our debt obligations. Amounts available for withdrawal under the repurchase facility are determined as the lesser of the total facility limit and a formula derived amount based on qualifying trade receivables.

The following table details the amounts available under the repurchase facility, the securitization facility, and the credit facility and the highest and lowest balances outstanding under these arrangements during the forty weeks ended October 7, 2023:

*(Amounts in thousands)*

| Facility | Amount Available for Withdrawal at October 7, 2023 |  | For the Forty Weeks Ended October 7, 2023 Highest Balance | Lowest Balance |
| --- | ---: | --- | ---: | ---: |
| Accounts receivable repurchase facility | $55,000 |  | $180,000 | $— |
| Accounts receivable securitization facility | — | \* | 28,000 | — |
| Unsecured credit facility (1) | 491,600 |  | 174,000 | — |
|  | $546,600 |  |  |  |
| \* The securitization facility was terminated on April 14, 2023. |  |  |  |  |

(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 9, *Derivative Financial Instruments,* of Notes to Condensed Consolidated Financial Statements of this Form 10-Q. During the forty weeks ended October 7, 2023, the company made $527.1 million in revolving borrowings and $527.1 million in payments on revolving borrowings under the credit facility primarily to fund the Papa Pita acquisition. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

The securitization facility, the repurchase facility, and the credit facility are variable rate debt, and provide us the greatest direct exposure to changing interest rates. In periods of rising interest rates, such as we are currently experiencing, the cost of using these facilities has and will result in increased interest expense.

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 7, 2023, the company was in compliance with all restrictive covenants under our debt agreements.

At October 7, 2023, 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 the 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 7, 2023, 1,198,729 shares, at a cost of $30.9 million, of the company’s common stock were repurchased under the share repurchase plan. From the inception of the share repurchase plan through October 7, 2023, 71.3 million shares, at a cost of $718.4 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, 1,826 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 7, 2023, the company’s hedge portfolio contained commodity derivatives with a fair value (liability) of $(0.3) million, based on quoted market prices. Of this amount, approximately $(0.2) million relates to instruments that will be utilized in Fiscal 2023 and $(0.1) million in Fiscal 2024.

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 7, 2023, a hypothetical ten percent increase (decrease) in commodity prices would increase (decrease) the fair value of the derivative portfolio by $2.6 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, 2,211 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 Securities Exchange Act of 1934, as amended (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

During the second quarter of Fiscal 2023, we began deploying an upgrade to our ERP system which is anticipated to enhance our operating and financial processes. This upgrade will be deployed in phases over the next few years. Processes and internal controls have been updated with the implementation, and we have evaluated the operating effectiveness of related key controls. Throughout the deployment schedule, control processes will be evaluated to give appropriate consideration of modifications needed to maintain the effectiveness of internal controls over financial reporting.

Except as described above, there were no other changes in internal control over financial reporting that occurred during the fiscal quarter ended October 7, 2023 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

## Risk factors

As filed, 469 characters.

Refer to Part I, Item 1A., Risk Factors, in the Form 10-K for information regarding 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.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-062044. Last ingested by Listed: Nov 4, 2026, 09:33 ET. No prices; not investment advice.