SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Commission file number 1-16247

FLOWERS FOODS, INC.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

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

FLOWERS FOODS, INC.

INDEX

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FORWARD-LOOKING STATEMENTS:

     Statements contained in this filing and certain other written or oral statements made from time to time by the company and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our future financial condition and results of operations and are often identified by the use of words and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would,” “is likely to,” “is expected to” or “will continue,” or the negative of these terms or other comparable terminology.

     Forward-looking statements are based on current information, and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results to differ materially from those projected are discussed in this report and may include, but are not limited to:

•		unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including changes in pricing, advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability; (v) relationships with our employees and independent distributors; and (vi) laws and regulations (including health-related issues), accounting standards or tax rates in the markets in which we operate;
•		our ability to execute our business strategy, which may involve integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values;
•		our ability to operate existing, and any new, manufacturing lines according to schedule;
•		the level of success we achieve in developing and introducing new products and entering new markets;
•		the credit and business risks associated with our suppliers, and with our customers which operate in the highly competitive retail food industry, including the amount of consolidation in that industry; and
•		any business disruptions due to political instability, armed hostilities, incidents of terrorism or the responses to or repercussions from any of these or similar events or conditions.

     The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company.

     We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the SEC or in company press releases) on related subjects.

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FLOWERS FOODS, INC.

(See Accompanying Notes to Condensed Consolidated Financial Statements)

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FLOWERS FOODS, INC.

(See Accompanying Notes to Condensed Consolidated Financial Statements)

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FLOWERS FOODS, INC.

(See Accompanying Notes to Condensed Consolidated Financial Statements)

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FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

INTERIM FINANCIAL STATEMENTS — The accompanying unaudited condensed consolidated financial statements of Flowers Foods, Inc. (“the company”) have been prepared by the company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of April 24, 2004 and January 3, 2004 and the results of operations and cash flows for the sixteen week periods ended April 24, 2004 and April 19, 2003. The results of operations for the sixteen week periods ended April 24, 2004 and April 19, 2003 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004.

ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, allowance for doubtful accounts, derivative instruments, valuation of long-lived assets, goodwill and other intangibles, self-insurance reserves, deferred tax asset valuation allowances and pension obligations. These policies are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004.

REPORTING PERIODS — Fiscal 2004 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 24, 2004 (sixteen weeks), second quarter ending July 17, 2004 (twelve weeks), third quarter ending October 9, 2004 (twelve weeks) and fourth quarter ending January 1, 2005 (twelve weeks). Fiscal 2003 consisted of 53 weeks.

RECLASSIFICATIONS — Certain reclassifications of prior period data have been made to conform with the current period reporting. Between September 1996 and March 26, 2001, the independent distributor notes, made in connection with the purchase of the distributors’ territories (the “distributor notes”), were made directly between the distributor and a third party financial institution. The interest charged on the distributor notes was 12%. During this time, the third party paid the company approximately 5% of the interest on the distributor notes as a servicing fee for acting as the servicing agent of the distributor notes. The company reduced selling, marketing and administrative expenses as the fee covered administrative costs incurred by the company in collecting payments from the distributor and remitting the payments to the third party. Upon the purchase of the notes from the third party on March 26, 2001, the company consistently applied this allocation of the 12% interest received on the distributor notes to effectively offset its administrative expenses associated with administering the distributor notes. The remaining 7% was recorded as interest income. The company determined during the fourth quarter of fiscal 2003 that a reclassification of the 5% servicing fee from selling, marketing and administrative expenses to interest income is a more appropriate presentation. The reclassification for the first quarter of fiscal 2003 is $1.2 million. This reclassification does not effect sales or income from continuing operations.

STOCK SPLIT — On May 30, 2003, the board of directors declared a 3-for-2 stock split of the company’s common stock in the form of a 50% stock dividend. The record date for the split was June 13, 2003, and new shares were issued on June 27, 2003. Earnings (loss) per common share has been restated for the first quarter of fiscal 2003 giving retroactive effect to the stock split.

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SEGMENTS — On April 24, 2003, the company completed the sale of substantially all the assets of its Mrs. Smith’s Bakeries, LLC (“Mrs. Smith’s Bakeries”) frozen dessert business to The Schwan Food Company (“Schwan”). The company retained the frozen bread and roll portion of the Mrs. Smith’s Bakeries business. As a result, the frozen bread and roll business as well as the Birmingham, Alabama production facility, formerly a part of Flowers Foods Bakeries Group, LLC (“Flowers Bakeries”), became a part of our Flowers Snack, LLC (“Flowers Snack”) segment, with Flowers Snack being renamed Flowers Foods Specialty Group, LLC (“Flowers Specialty”). For purposes of this Form 10-Q, discussion will relate to Flowers Bakeries and Flowers Specialty as currently operated. The frozen dessert business of Mrs. Smith’s Bakeries that was sold is reported as a discontinued operation. Because the Mrs. Smith’s Bakeries frozen dessert and frozen bread and roll businesses historically shared certain administrative and division expenses, certain allocations and assumptions have been made in order to present historical comparative information. In most instances, administrative and division expenses have been allocated between Mrs. Smith’s Bakeries and Flowers Specialty based on cases of product sold. Management believes that the amounts are reasonable estimations of the costs that would have been incurred had the Mrs. Smith’s Bakeries frozen dessert and frozen bread and rolls businesses performed these functions as separate divisions.

SIGNIFICANT CUSTOMER — During the sixteen weeks ended April 24, 2004, sales to the company’s largest customer, Wal-Mart/Sam’s Club, represented 15.0% of the consolidated company’s sales with 12.9% attributable to Flowers Bakeries and 2.1% attributable to Flowers Specialty. During the sixteen weeks ended April 19, 2003, sales to the company’s largest customer, Wal-Mart/Sam’s Club, represented 12.2% of the consolidated company’s sales with 11.0% attributable to Flowers Bakeries and 1.2% attributable to Flowers Specialty.

STOCK BASED COMPENSATION — In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure, Amendment of FASB Statement No. 123.” SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” Furthermore, SFAS 148 mandates disclosures in both interim and year-end financial statements. The company has elected not to adopt the recognition provisions of SFAS 123, as amended by SFAS 148. However, as permitted by SFAS 123, the company continues to apply intrinsic value accounting for its stock option plans under Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Compensation cost for stock options, if any, is measured as the excess of the market price of the company’s common stock at the date of grant over the exercise price to be paid by the grantee to acquire the stock. The company’s pro forma net earnings and pro forma earnings per share based upon the fair value at the grant dates for awards under the company’s plans are disclosed below.

     If the company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under these plans, the company’s net income (loss) and net income (loss) per share would have been affected as follows (amounts in thousands except per share data):

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2. DISCONTINUED OPERATIONS

     On January 30, 2003, the company entered into an agreement to sell its Mrs. Smith’s Bakeries frozen dessert business to Schwan. Included in those assets were the Stilwell, Oklahoma and Spartanburg, South Carolina production facilities and a portion of the company’s Suwanee, Georgia property. On that date, the assets and liabilities related to the portion of the Mrs. Smith’s Bakeries business to be sold were classified as held for sale in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and recorded at estimable fair value less costs to dispose. On April 24, 2003, the company completed the sale of substantially all the assets of its Mrs. Smith’s Bakeries frozen dessert business to Schwan. The value received by the company was determined on the basis of arm’s length negotiations between the parties. The frozen dessert business sold to Schwan is presented as discontinued operations for the sixteen weeks ended April 24, 2004 and April 19, 2003. Accordingly, the operations and certain transaction costs are included in “Discontinued operations, net of income tax” in the Condensed Consolidated Statements of Income. An analysis of this line item is as follows (amounts in thousands):

     On April 24, 2003, in connection with the sale of the Mrs. Smith’s Bakeries frozen dessert business to Schwan, the company agreed to indemnify Schwan for certain customary matters such as breaches of representations and warranties, certain tax matters and liabilities arising prior to the consummation of the transaction. In most, but not all, circumstances the indemnity is limited to an 18 month period and a maximum liability of $70 million. The company purchased an insurance policy to cover claims that may arise under the indemnification. The fair value of the indemnification was determined to equal the insurance premium paid by the company, which was $2.7 million and the balance as of April 24, 2004 was $0.9 million. Subsequent to the sale, the company has paid various expenses related to its operation of the Mrs. Smith’s business, no single one of which was material to the financial condition of the company. During the first quarter of fiscal 2004, based on recent claim activity which the company continues to investigate, the company established a reserve of $5.1 million ($3.1 million, net of income tax) as an estimate of future expenses likely to be incurred attributable to these claims.

     There were no revenues recorded for the discontinued operations in the sixteen weeks ended April 24, 2004. Revenue related to the discontinued operations of $64.4 million was included in the operating loss above for the sixteen weeks ended April 19, 2003.

     The company’s former Senior Secured Credit Facility required that a substantial portion of the facility be repaid from the proceeds of the sale of the frozen dessert business of Mrs. Smith’s Bakeries. Interest expense was allocated to discontinued operations based on the ratio of the amount of debt required to be repaid to the amount of debt actually repaid (i.e. both required and on a voluntary basis) at April 24, 2003 in connection with the divestiture of the Mrs. Smith’s Bakeries frozen dessert business.

3. COMPREHENSIVE INCOME (LOSS)

     Other comprehensive income (loss) results from derivative financial instruments and additional minimum pension liabilities. Total comprehensive income, determined as net income (loss) adjusted by other comprehensive income (loss), was $12.9 million for the sixteen weeks ended April 24, 2004.

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     During the sixteen weeks ended April 24, 2004, changes to accumulated other comprehensive loss, net of income tax, were as follows (amounts in thousands):

4. GOODWILL AND OTHER INTANGIBLE ASSETS

     The changes in the carrying amount of goodwill for the sixteen weeks ended April 24, 2004 are as follows (amounts in thousands):

     The changes in the carrying amount of intangible assets, which consist primarily of trademarks, customer lists and non-compete agreements, for the sixteen weeks ended April 24, 2004 are as follows (amounts in thousands):

5. NEW ACCOUNTING PRONOUNCEMENTS

     Variable Interest Entities. In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, FIN 46R was issued and deferred the effective date until periods ending after March 15, 2004 for entities that have interests in a variable interest entity (“VIE”) or a potential VIE and the VIE is not a special purpose entity (“SPE”). The company maintains a transportation agreement with a thinly capitalized entity, in which the company represents a significant portion of the entity’s revenue. This entity qualifies as a VIE but not an SPE and, under FIN 46, the company is the primary beneficiary. In accordance with FIN 46, the company has consolidated this entity effective with the first quarter of fiscal 2004. There was no cumulative effect recorded. This entity transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company recorded $18.1 million of assets, or 2.2% of total assets, consisting primarily of $13.0 million of transportation equipment recorded as capital lease obligations. Sales of $3.0 million, or 0.6%, and income from continuing operations before income taxes and minority interest of $1.1 million, or 3.8%, were recorded for the sixteen weeks ended April 24, 2004 resulting from this consolidation. The VIE has sufficient collateral and the owner of the VIE personally guarantees the obligations of the VIE. Therefore the VIE’s creditors have no recourse against the general credit of the company.

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     Pensions. In December 2003, SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” was revised to include various additional disclosure requirements. SFAS 132R is effective for fiscal years ending after December 15, 2003.

     Revenue Recognition. In December 2003, the SEC released Staff Accounting Bulletin No. 104 (“SAB 104”). SAB 104 clarifies existing guidance regarding revenue recognition. The adoption of SAB 104 did not have an impact on the company’s financial statements.

6. DERIVATIVE FINANCIAL INSTRUMENTS

     The company enters into commodity derivatives, designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sugar, and shortening, along with pulp and paper and petroleum-based packaging products.

     As of April 24, 2004 and January 3, 2004, the company’s hedge portfolio contained commodity derivatives with a fair value of $5.2 million and $6.6 million, respectively, which are recorded primarily in other current assets and other long-term assets. The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2005. Under SFAS 133, these instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income, and any ineffective portion of the change in fair value is recorded in the current period earnings as a selling, marketing and administrative expense. The company held no commodity derivatives at April 24, 2004 that do not qualify for hedge accounting under SFAS 133.

7. DEBT AND OTHER OBLIGATIONS

     Long-term debt consisted of the following at April 24, 2004 and January 3, 2004 (amounts in thousands):

     On October 24, 2003, the company executed a $150.0 million unsecured credit agreement (the “credit facility”). The credit facility is a three-year revolving loan facility that provides for total borrowings of up to $150.0 million through October 24, 2006.

     Interest is due quarterly on any outstanding borrowings under the credit facility at the Eurodollar rate or base rate plus the applicable margin. The underlying rate is defined as either rates offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin is based on the company’s leverage ratio and can range from 0.0% to 1.45% for the revolving loan facility. In addition, a facility fee ranging from 0.125% to 0.30% is due quarterly on all commitments not utilized under the credit facility.

     The credit facility includes certain restrictions, which, among other things, require maintenance of financial covenants and limits encumbrance of assets, creation of indebtedness, capital expenditures, repurchase of common shares and dividends that can be paid. Restrictive financial covenants include such ratios as a minimum interest coverage ratio, a minimum tangible net worth and a maximum leverage ratio.

     There were no amounts outstanding under the credit facility at April 24, 2004 and January 3, 2004. The company paid financing costs of $0.6 million in connection with the credit facility. These costs were deferred and are being amortized over the term of the credit facility. As of April 24, 2004, the company was in compliance with all financial covenants under the credit facility.

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     Interest expense related to the debt and lease obligations required to be repaid as a part of the sale of the Mrs. Smith’s Bakeries frozen dessert business to Schwan of $5.5 million for the sixteen weeks ended April 19, 2003 is included in discontinued operations.

     Included in accounts payable in the condensed consolidated balance sheet are book overdrafts of $17.3 million and $14.9 million as of April 24, 2004 and January 3, 2004, respectively.

8. FACILITY CLOSING COSTS AND SEVERANCE

     The company has continuing obligations in connection with certain plant closings completed in the prior fiscal years. Activity with respect to these obligations was as follows (amounts in thousands):