United States
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended July 12, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ____________ to ______________

FLOWERS FOODS, INC.

GEORGIA		58-2582379
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA

31757

229/226-9110

N/A

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ                       No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                       No þ

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

TITLE OF EACH CLASS		OUTSTANDING AT AUGUST 15, 2008
Common Stock, $.01 par value with Preferred Share Purchase Rights		94,173,334

 

 

FLOWERS FOODS, INC.

INDEX

				PAGE
				NUMBER
PART I. Financial Information
Item 1. Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of July 12, 2008 and December 29, 2007			4
		Condensed Consolidated Statements of Income for the Twelve and Twenty-Eight Weeks Ended July 12, 2008 and July 14, 2007			5
		Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Twenty-Eight Weeks Ended July 12, 2008			6
		Condensed Consolidated Statements of Cash Flows for the Twenty-Eight Weeks Ended July 12, 2008 and July 14, 2007			7
		Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition					21
Item 3. Quantitative and Qualitative Disclosures About Market Risk					30
Item 4. Controls and Procedures					31
PART II. Other Information
Item 1. Legal Proceedings					31
Item 1A. Risk Factors					31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds					31
Item 4. Submission of Matters to a Vote of Security Holders					32
Item 6. Exhibits					32
Signatures					33
Exhibit index					34
EX-21 SUBSIDIARIES OF FLOWERS FOODS, INC.
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-31.3 SECTION 302, CERTIFICATION OF THE CAO
EX-32 SECTION 906, CERTIFICATION OF THE CEO, CFO AND CAO

FORWARD-LOOKING STATEMENTS

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

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

	•		unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including changes in pricing, advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with our employees, independent distributors and third party service providers; and (vi) laws and regulations (including environmental and health-related issues), accounting standards or tax rates in the markets in which we operate;
	•		the loss or financial instability of any significant customer(s);
	•		our ability to execute our business strategy, which may involve integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values;
	•		our ability to operate existing, and any new, manufacturing lines according to schedule;
	•		the level of success we achieve in developing and introducing new products and entering new markets;
	•		changes in consumer behavior, trends and preferences, including health and whole grain trends;
	•		our ability to implement new technology as required;
	•		the credit and business risks associated with our independent distributors and customers which operate in the highly competitive retail food and foodservice industries, including the amount of consolidation in these industries;
	•		customer and consumer reaction to pricing actions; and
	•		any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events.

     The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Please refer to Part I, Item 1A., Risk Factors, in the company’s Form 10-K for the year ended December 29, 2007 for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

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

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		JULY 12, 2008				DECEMBER 29, 2007
ASSETS
Current Assets:
Cash and cash equivalents		$	19,532			$	19,978
Accounts and notes receivable, net of allowances of $649 and $131, respectively			164,865				137,682
Inventories, net:
Raw materials			16,344				14,257
Packaging materials			12,056				10,809
Finished goods			23,769				22,271
			52,169				47,337
Spare parts and supplies			29,679				28,574
Deferred taxes			6,228				1,863
Other			26,547				33,800
Total current assets			299,020				269,234
Property, Plant and Equipment, net of accumulated depreciation of $580,620 and $556,960, respectively			489,952				486,522
Notes Receivable			91,334				88,469
Assets Held for Sale — Distributor Routes			10,362				12,396
Other Assets			36,214				32,525
Goodwill			76,338				76,338
Other Intangible Assets, net			21,178				22,051
Total assets		$	1,024,398			$	987,535
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and capital leases		$	3,300			$	6,920
Accounts payable			111,016				98,302
Other accrued liabilities			95,945				108,423
Total current liabilities			210,261				213,645
Long-Term Debt and Capital Leases			29,372				22,508
Other Liabilities:
Deferred taxes			49,250				50,974
Other			37,918				36,391
Total other liabilities			87,168				87,365
Minority Interest in Variable Interest Entity			9,109				7,802
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock — $100 par value, 200,000 authorized and none issued
Preferred stock — $.01 par value, 800,000 authorized and none issued
Common stock — $.01 par value, 500,000,000 authorized shares, 101,659,924 shares and 101,659,924 shares issued, respectively			1,017				1,017
Treasury stock — 9,485,247 shares and 9,755,350 shares, respectively			(152,233	)			(154,801	)
Capital in excess of par value			485,963				484,472
Retained earnings			337,760				303,386
Accumulated other comprehensive income			15,981				22,141
Total stockholders’ equity			688,488				656,215
Total liabilities and stockholders’ equity		$	1,024,398			$	987,535

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
Sales		$	540,656			$	477,838			$	1,217,363			$	1,087,785
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)			293,594				244,942				643,564				551,894
Selling, marketing and administrative expenses			197,662				183,592				449,337				421,555
Depreciation and amortization			16,032				15,116				36,945				35,233
Gain on sale of assets			2,306				—				2,306				—
Gain on insurance recovery			686				—				686				—
Income from operations			36,360				34,188				90,509				79,103
Interest expense			(494	)			(740	)			(1,173	)			(2,149	)
Interest income			3,151				2,672				7,327				6,014
Income before income taxes and minority interest			39,017				36,120				96,663				82,968
Income tax expense			13,931				12,914				34,493				29,414
Income before minority interest			25,086				23,206				62,170				53,554
Minority interest in variable interest entity			(1,137	)			(1,016	)			(2,438	)			(2,871	)
Net income		$	23,949			$	22,190			$	59,732			$	50,683
Net Income Per Common Share:
Basic:
Net income per share		$	0.26			$	0.24			$	0.65			$	0.56
Weighted average shares outstanding			91,724				90,761				91,710				90,633
Diluted:
Net income per share		$	0.26			$	0.24			$	0.65			$	0.55
Weighted average shares outstanding			92,501				92,413				92,415				92,148
Cash dividends paid per common share		$	0.15			$	0.125			$	0.275			$	0.208

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

														Capital								Accumulated
						Common Stock								in Excess								Other				Treasury Stock
		Comprehensive				Number of				Par				of Par				Retained				Comprehensive				Number of
		Income				Shares Issued				Value				Value				Earnings				Income				Shares				Cost				Total
														(Amounts in thousands, except for share data)
Balances at December 29, 2007							101,659,924			$	1,017			$	484,472			$	303,386			$	22,141				(9,755,350	)		$	(154,801	)		$	656,215
Net Income		$	59,732																59,732																59,732
Derivative instruments			(6,270	)																			(6,270	)											(6,270	)
Amortization of prior service costs			110																				110												110
Comprehensive income		$	53,572
Exercise of stock options															(1,588	)											252,426				4,027				2,439
Issuance of restricted stock award															(3,984	)											249,880				3,984				0
Issuance of deferred stock award															(294	)											24,045				386				92
Amortization of deferred and restricted stock awards															3,181																				3,181
Stock option compensation															2,318																				2,318
Tax benefits related to share based awards															1,858																				1,858
Stock repurchases																											(256,248	)			(5,829	)			(5,829	)
Dividends paid — $0.275 per common share																			(25,358	)															(25,358	)
Balances at July 12, 2008							101,659,924			$	1,017			$	485,963			$	337,760			$	15,981				(9,485,247	)		$	(152,233	)		$	688,488

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income		$	59,732			$	50,683
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation			6,678				10,478
Depreciation and amortization			36,945				35,233
Deferred income taxes			(2,232	)			(1,408	)
Provision for inventory obsolescence			492				497
Allowances for accounts receivable			901				662
Minority interest in variable interest entity			2,438				2,871
Other			(2,467	)			(225	)
Changes in assets and liabilities:
Accounts and notes receivable, net			(27,586	)			(8,509	)
Inventories, net			(5,324	)			(2,336	)
Other assets			(2,834	)			1,870
Accounts payable and other accrued liabilities			(10,662	)			13,198
NET CASH PROVIDED BY OPERATING ACTIVITIES			56,081				103,014
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(41,964	)			(33,445	)
Increase of notes receivable			(3,363	)			(10,130	)
Other			3,603				1,379
NET CASH DISBURSED FOR INVESTING ACTIVITIES			(41,724	)			(42,196	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid			(25,358	)			(19,099	)
Exercise of stock options			2,439				3,544
Income tax benefit related to stock awards			1,713				2,547
Stock repurchases			(5,829	)			—
Change in book overdraft			8,989				3,116
Proceeds from debt borrowings			30,000				110,500
Debt and capital lease obligation payments			(26,757	)			(162,076	)
NET CASH DISBURSED FOR FINANCING ACTIVITIES			(14,803	)			(61,468	)
Net decrease in cash and cash equivalents			(446	)			(650	)
Cash and cash equivalents at beginning of period			19,978				13,914
Cash and cash equivalents at end of period		$	19,532			$	13,264

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     INTERIM FINANCIAL STATEMENTS — The accompanying unaudited condensed consolidated financial statements of Flowers Foods, Inc. (“the company”) have been prepared by the company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the company’s financial position, the results of its operations and its cash flows. The results of operations for the twelve and twenty-eight week periods ended July 12, 2008 and July 14, 2007 are not necessarily indicative of the results to be expected for a full year. The balance sheet at December 29, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

     ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting estimates affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, derivative instruments, valuation of long-lived assets, goodwill and other intangibles, self-insurance reserves, income tax expense and accruals and pension obligations. These estimates are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

     REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2008 consists of 53 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 19, 2008 (sixteen weeks), second quarter ended July 12, 2008 (twelve weeks), third quarter ending October 4, 2008 (twelve weeks) and fourth quarter ending January 3, 2009 (thirteen weeks).

     SEGMENTS — The company consists of two business segments: direct-store-delivery (“DSD”), formerly referred to as Flowers Foods Bakeries Group, and warehouse delivery, formerly referred to as Flowers Foods Specialty Group. The DSD segment focuses on the production and marketing of bakery products to customers in the southeastern, southwestern and mid-Atlantic areas of the United States primarily through its direct-store-delivery system. The warehouse delivery segment produces snack cakes for sale to co-pack, retail and vending customers as well as frozen bread, rolls and buns for sale to retail and foodservice customers primarily through warehouse distribution.

     SIGNIFICANT CUSTOMER — Following is the effect our largest customer, Wal-Mart/Sam’s Club, had on the company’s sales for the twelve and twenty-eight weeks ended July 12, 2008 and July 14, 2007. No other customer accounted for 10% or more of the company’s sales.

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
		(Percent of Sales)								(Percent of Sales)
DSD			18.3	%			17.6	%			18.1	%			17.1	%
Warehouse delivery			2.8				2.6				2.5				2.7
Total			21.1	%			20.2	%			20.6	%			19.8	%

2. COMPREHENSIVE INCOME (LOSS)

     Other comprehensive income (loss) results from derivative financial instruments and amortization of prior service costs related to the company’s defined benefit and postretirement plans pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R (“SFAS 158”). Total comprehensive income, determined as net income adjusted by other comprehensive income (loss), was $1.4 million and $53.6 million for the twelve and twenty-eight weeks ended July 12, 2008, respectively. Total comprehensive income was $25.1 million and $54.5 million for the twelve and twenty-eight weeks ended July 14, 2007, respectively.

     During the twenty-eight weeks ended July 12, 2008, changes to accumulated other comprehensive income, net of income tax, were as follows (amounts in thousands):

Accumulated other comprehensive income, December 29, 2007		$	22,141
Derivative transactions:
Net deferred gains on closed contracts, net of income tax of $(958)			(1,530	)
Reclassified to earnings, net of income tax of $182			291
Effective portion of change in fair value of hedging instruments, net of income tax of $(3,149)			(5,031	)
Amortization of prior service costs, net of income tax of $69			110
Accumulated other comprehensive income, July 12, 2008		$	15,981

3. GAIN ON SALE OF ASSETS

     During the second quarter of fiscal 2008 the company completed the sale and closure of a plant in Atlanta, Georgia resulting in a gain of $2.3 million. The company incurred $1.3 million of cost of goods sold expenses primarily for employee severance, obsolete inventory, and equipment relocation costs. An additional $0.3 million is included in selling, marketing and administrative expenses.

4. GOODWILL AND OTHER INTANGIBLES

     There were no changes in the carrying amount of goodwill for the twenty-eight weeks ended July 12, 2008. The balance as of July 12, 2008 is as follows (amounts in thousands):

DSD		$	71,861
Warehouse delivery			4,477
Total		$	76,338

     As of July 12, 2008 and December 29, 2007, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

		July 12, 2008												December 29, 2007
						Accumulated												Accumulated
Asset		Cost				Amortization				Net Value				Cost				Amortization				Net Value
Trademarks		$	12,208			$	1,040			$	11,168			$	12,208			$	826			$	11,382
Customer relationships			13,434				4,090				9,344				13,434				3,426				10,008
Non-compete agreements			1,874				1,208				666				1,874				1,213				661
Total		$	27,516			$	6,338			$	21,178			$	27,516			$	5,465			$	22,051

     In connection with the sale of Mrs. Smith’s Bakeries frozen dessert business in April 2003, the company entered into a 5-year non-compete agreement (“agreement”) with Schwan valued at $3.0 million recorded as an intangible liability. The company recognized income related to this agreement as a reduction of amortization expense over the life of the agreement. The carrying amount of this liability at December 29, 2007 was $0.2 million and was fully accreted to income during the twenty-eight weeks ended July 12, 2008.

     Aggregate amortization expense for the twelve weeks ended July 12, 2008 and July 14, 2007 were as follows (amounts in thousands):

		2008				2007
Amortizable intangible assets expense		$	393			$	539
Amortizable intangible liabilities (income)			(12	)			(138	)
Other			(10	)			(11	)
Total		$	371			$	390

     Aggregate amortization expense for the twenty-eight weeks ended July 12, 2008 and July 14, 2007 were as follows (amounts in thousands):

		2008				2007
Amortizable intangible assets expense		$	873			$	1,259
Amortizable intangible liabilities (income)			(196	)			(323	)
Other			(23	)			(25	)
Total		$	654			$	911

     Estimated amortization of intangibles for each of the next five years is as follows (amounts in thousands):

		Amortization of
		Intangibles
Remainder of 2008		$	777
2009			1,658
2010			1,633
2011			1,633
2012			1,633

5. RECENT ACCOUNTING PRONOUNCEMENTS

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective December 30, 2007, did not have a material impact on our consolidated financial position and results of operations. Please refer to Note 5 Derivative Financial Instruments for a detailed discussion.

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141R is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of SFAS No. 141R on its consolidated balance sheet and statements of income.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in unconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The company is currently assessing the impact of SFAS No. 160 on its consolidated financial position and results of operations.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The company is currently evaluating the requirements of SFAS No. 161. The adoption of SFAS No. 161 is not expected to have an impact on the company’s financial position, results of operations or cash flows as the pronouncement addresses disclosure requirements only.

     In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not anticipate that the adoption of SFAS 162 will materially impact the company.

     In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The company does not expect adoption of FSP EITF No. 03-6-1 to have a material effect on its results of operations or earnings per share.

6. DERIVATIVE FINANCIAL INSTRUMENTS

     In the first fiscal quarter of fiscal 2008 the company began measuring the fair value of its derivative portfolio using common definitions under SFAS No. 157, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. Under SFAS No. 157, measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1:		Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets

Level 2:		Modeled fair value with model inputs that are all observable market values

Level 3:		Modeled fair value with at least one model input that is not an observable market value

     This change in measurement technique had no material impact on the reported value of our derivative portfolio.

COMMODITY PRICE RISK

     The company enters into commodity derivatives, designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity input to production.

     As of July 12, 2008, the company’s commodity hedge portfolio contained derivatives with a fair value of $13.9 million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

		Level 1				Level 2				Level 3				Total
Assets:
Other current		$	10.9			$	2.9			$	—			$	13.8
Other long-term			0.0				0.1				—				0.1
Total			10.9				3.0				—				13.9
Liabilities:
Other current			—				—				—				—
Other long-term			—				—				—				—
Total			—				—				—				—
Net Fair Value		$	10.9			$	3.0			$	—			$	13.9

     The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2009. Under SFAS 133, these instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. The company held no commodity derivatives at July 12, 2008 or December 29, 2007 that did not qualify for hedge accounting under SFAS 133. During the twenty-eight weeks ended July 12, 2008, an immaterial amount was recorded to income due to changes in fair value of these instruments.

     As of July 12, 2008, the balance in accumulated other comprehensive income related to commodity derivative transactions was $13.3 million. Of this total, approximately $7.6 million and $0.9 million were related to instruments expiring in 2008 and 2009, respectively, and $4.8 million was related to deferred gains on cash flow hedge positions.

INTEREST RATE RISK

     On July 9, 2008, the company entered an interest rate swap with a notional amount of $85.0 million to fix the interest rate on a portion of the $150 million term loan secured on August 1, 2008 to fund the acquisitions of ButterKrust Bakery and Holsum Bakery, Inc.

     The interest rate swap agreement results in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amount. The interest rate differential to be paid or received will be recorded as interest expense. Under SFAS 133, this swap transaction is designated as a cash-flow hedge. Accordingly, the effective portion of the change in the fair value of the swap transaction is recorded each period in other comprehensive income. Any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses.

     As of July 12, 2008, the fair value of the interest rate swap was $(0.1) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

		Level 1				Level 2				Level 3				Total
Assets:
Other current		$	—			$	—			$	—			$	—
Other long-term			—				0.5				—				0.5
Total			—				0.5				—				0.5
Liabilities:
Other current			—				(0.6	)			—				(0.6	)
Other long-term			—				—				—				—
Total			—				(0.6	)			—				(0.6	)
Net Fair Value		$	—			$	(0.1	)		$	—			$	(0.1	)

During the twenty-eight weeks ended July 12, 2008, interest expense was not impacted by periodic settlements of the swaps.

     As of July 12, 2008, the balance in accumulated other comprehensive income related to interest rate derivative transactions was $(0.05) million. Of this total, approximately $(0.15) million, $(0.35) million, $0.05 million, $0.17 million, $0.17 million and $0.06 million, were related to instruments expiring in 2008 through 2013, respectively.

7. DEBT AND OTHER OBLIGATIONS

     Long-term debt and capital leases consisted of the following at July 12, 2008 and December 29, 2007 (amounts in thousands):

		JULY 12, 2008				DECEMBER 29, 2007
Unsecured credit facility		$	6,000			$	—
Capital lease obligations			22,854				23,796
Other notes payable			3,818				5,632
			32,672				29,428
Less current maturities			3,300				6,920
Total long-term debt and capital leases		$	29,372			$	22,508

     The company has a five-year, $250.0 million unsecured revolving loan facility (the “credit facility”) expiring October 5, 2012. The company may request to increase its borrowings under the credit facility up to an aggregate of $350.0 million upon the satisfaction of certain conditions. Proceeds from the credit facility may be used for working capital and general corporate purposes, including acquisition financing, refinancing of indebtedness and share repurchases. The credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the credit facility and can meet presently foreseeable financial requirements. As of July 12, 2008 and December 29, 2007, the company was in compliance with all restrictive financial covenants under its credit facility.

     Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as rates offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 0.30% for base rate loans and from 0.40% to 1.275% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.35% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. Outstanding borrowings under the credit facility were $6.0 million at July 12, 2008. There were no outstanding borrowings under the credit facility at December 29, 2007. Subsequent to the end of the second quarter of fiscal 2008, the company borrowed $19.6 million under the credit facility to partially fund the acquisitions of ButterKrust and Holsum that closed during the third quarter of fiscal 2008 (see Note 15). As of August 15, 2008, the amount outstanding under the credit facility was $15 million.

     The company paid financing costs of $0.3 million during fiscal 2007 in connection with an amendment of its credit facility. These costs, along with unamortized financing costs on the company’s former credit facility of $0.6 million, were deferred and are being amortized over the term of the credit facility.

     Currently, the company’s credit ratings by Standard and Poor’s and Fitch Ratings are BBB- and BBB, respectively. During the first quarter of fiscal 2008, Moody’s Investor Services revised the company’s credit rating up to Baa2. Changes in the company’s credit ratings do not trigger a change in the company’s available borrowings or costs under the credit facility, but could affect future credit availability.

     Included in accounts payable in the condensed consolidated balance sheets are book overdrafts of $21.2 million and $12.2 million as of July 12, 2008 and December 29, 2007, respectively.

8. VARIABLE INTEREST ENTITY

     The company maintains a transportation agreement with a thinly capitalized entity. This entity transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualifies as a Variable Interest Entity (“VIE”), but not a Special Purpose Entity and under FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, the company is the primary beneficiary. In accordance with FIN 46, the company consolidates this entity. The VIE has collateral that is sufficient to meet its capital lease and other debt obligations, and the owner of the VIE personally guarantees the obligations of the VIE. The VIE’s creditors have no recourse against the general credit of the company.

     Following is the effect of the VIE during the twelve and twenty-eight weeks ended July 12, 2008 and July 14, 2007:

		TWELVE WEEKS ENDED																TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008								JULY 14, 2007								JULY 12, 2008								JULY 14, 2007
						% OF								% OF								% OF								% OF
		VIE				TOTAL				VIE				TOTAL				VIE				TOTAL				VIE				TOTAL
		(Dollars in thousands)
Assets as of respective quarter ends		$	33,421				3.3	%		$	31,634				3.4	%		$	33,421				3.3	%		$	31,634				3.4	%
Sales		$	2,698				0.5	%		$	3,247				0.7	%		$	5,498				0.5	%		$	6,455				0.6	%
Income before income taxes and minority interest		$	1,137				2.9	%		$	1,016				2.8	%		$	2,438				2.5	%		$	2,871				3.5	%

     The assets consist primarily of $23.0 million and $22.8 million as of July 12, 2008 and July 14, 2007, respectively, of transportation equipment recorded as capital lease obligations.

9. LITIGATION

     The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, including personal injury, commercial, contract, environmental, antitrust, product liability, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.

10. EARNINGS PER SHARE

     The following table calculates basic earnings per common share and diluted earnings per common share for the twelve and twenty-eight weeks ended July 12, 2008 and July 14, 2007 (amounts in thousands, except per share data):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
Basic Earnings Per Common Share:
Net income		$	23,949			$	22,190			$	59,732			$	50,683
Basic weighted average shares outstanding			91,724				90,761				91,710				90,633
Basic earnings per common share		$	0.26			$	0.24			$	0.65			$	0.56
Diluted Earnings Per Common Share:
Net income		$	23,949			$	22,190			$	59,732			$	50,683
Basic weighted average shares outstanding			91,724				90,761				91,710				90,633
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock			777				1,652				705				1,515
Diluted weighted average shares outstanding			92,501				92,413				92,415				92,148
Diluted earnings per common share		$	0.26			$	0.24			$	0.65			$	0.55

     Stock options to purchase 850,200 shares of common stock were not included in the computation of diluted earnings per share for the twelve and twenty-eight weeks ended July 12, 2008 and stock options to purchase 831,525 shares were not included in the computation of diluted earnings per share for the twelve and twenty-eight weeks ended July 14, 2007 because their effect would have been anti-dilutive.

11. STOCK BASED COMPENSATION

     The company accounts for its stock-based compensation in accordance with SFAS 123R, Share-Based Payment (“SFAS 123R”).

     Flowers Foods’ 2001 Equity and Performance Incentive Plan (“EPIP”) authorizes the compensation committee of the board of directors to make awards of options to purchase our common stock, restricted stock, performance stock and performance units and deferred stock. Our officers, key employees and non-employee directors (whose grants are generally approved by the full board of directors) are eligible to receive awards under the EPIP. The aggregate number of shares that may be issued or transferred under the EPIP is 14,625,000 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. Options granted prior to January 3, 2006 may not be exercised later than ten years after the date of grant, and become exercisable four years from the date of grant and generally vest at that time or upon death, disability or retirement of the optionee or upon change in control of Flowers Foods. Options granted on January 3, 2006 and thereafter may not be exercised later than seven years after the date of grant, become exercisable three years from the date of grant, generally vest at that time or upon death, disability or retirement of the optionee or upon change in control of Flowers Foods. In order to exercise these options the optionees are required to pay the market value calculated as the average high/low trading value at date of grant for pre-2007 awards and the closing market price on the date of grant for post-2006 awards. Non-employee director options generally become exercisable one year from the date of grant and vest at that time. The following is a summary of stock options, restricted stock, and deferred stock outstanding under the EPIP. Information relating to the company’s stock appreciation rights which are not issued under the EPIP is also disclosed below.

Stock Options

     The following non-qualified stock options (“NQSOs”) have been granted under the EPIP with service period remaining. The Black-Scholes option-pricing model was used to estimate the grant date fair value (amounts in thousands, except price data):

Grant date		1/3/2006				2/5/2007				2/4/2008
Shares granted			656				832				850
Exercise price			18.68				19.57				24.75

Vesting date		1/3/2009				2/5/2010				2/4/2011
Fair value per share ($)			6.20				6.30				5.80
Dividend yield (%)(1)			1.60				1.70				1.90
Expected volatility (%)(2)			36.00				33.90				27.30
Risk-free interest rate (%)(3)			4.25				4.74				2.79
Expected option life (years)(4)			5.00				5.00				5.00
Outstanding at July 12, 2008			647				826				850

     The stock option activity for the twenty-eight weeks ended July 12, 2008 pursuant to the EPIP is set forth below (amounts in thousands, except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Options				Exercise Price				Contractual Term				Intrinsic Value
Outstanding at December 29, 2007			2,417			$	15.15
Granted			850			$	24.75
Exercised			(252	)		$	9.65
Outstanding at July 12, 2008			3,015			$	18.31				5.41			$	33,267
Exercisable at July 12, 2008			694			$	8.58				4.68			$	14,397

     As of July 12, 2008, all options outstanding under the EPIP had an average exercise price of $18.31 and a weighted average remaining contractual life of 5.41 years.

     During the twenty-eight weeks ended July 12, 2008 and July 14, 2007, the company recorded stock-based compensation expense of $2.3 million and $2.9 million, respectively, relating to NQSOs using the Black-Scholes option-pricing model. During the twelve weeks ended July 12, 2008 and July 14, 2007, the company recorded stock-based compensation expense of $1.0 and $1.3 million, respectively.

     As of July 12, 2008, there was $7.3 million of total unrecognized compensation expense related to outstanding stock options. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 2.2 years.

     Cash received from option exercises for the twenty-eight weeks ended July 12, 2008 and July 14, 2007 was $2.4 million and $3.5 million, respectively. The cash tax benefit realized for the tax deductions from option exercises was $2.0 million and $2.5 million, respectively, for the twenty-eight weeks ended July 12, 2008 and July 14, 2007. The total intrinsic value of stock options exercised was $3.7 million and $6.6 million for the twenty-eight weeks ended July 12, 2008 and July 14, 2007, respectively.

Restricted Stock

     On January 4, 2004, the effective date of his election as Chief Executive Officer, George Deese was granted 112,500 shares of restricted stock pursuant to the EPIP. The fair value of these restricted shares on the date of grant was approximately $1.3 million. These shares became fully vested on January 4, 2008. The company recorded $0.0 million and $0.1 million in compensation expense during the twelve weeks ended July 12, 2008 and July 14, 2007, respectively, related to this restricted stock. The company recorded $0.0 million and $0.2 million in compensation expense during the twenty-eight weeks ended July 12, 2008 and July 14, 2007, respectively, related to this restricted stock.

     During the second quarter of fiscal 2006, non-employee directors were granted an aggregate of 38,460 shares of restricted stock. The fair value of these restricted shares on the date of grant was $0.7 million. These shares fully vested on the first anniversary of the date of grant. The company recorded $0.1 million in compensation expense during the twelve weeks ended July 14, 2007 and $0.3 million during the twenty-eight weeks ended July 14, 2007 related to this restricted stock.

     Certain key employees have been granted restricted stock. Vesting generally occurs two years from the date of grant for the 2006 and 2007 awards if, on this date, the company’s average “return on invested capital” over the vesting period equals or exceeds its weighted average “cost of capital” for the same period (the “ROI Target”). The 2008 awards require the “return on invested capital” to

exceed the weighted average “cost of capital” by 2.5% for the same period. Furthermore, each grant of performance-contingent restricted stock will be adjusted as set forth below:

•

if the ROI Target is satisfied, then the performance-contingent restricted stock grant may be adjusted based on the company’s total return to shareholders (“Company TSR”) percent rank as compared to the total return to shareholders of the S&P Packaged Food & Meat Index (“S&P TSR”) in the manner set forth below:

•

If the Company TSR rank is equal to the 50th percentile of the S&P TSR, then no adjustment;

•

If the Company TSR rank is less than the 50th percentile of the S&P TSR, the grant shall be reduced by 1.3% for each percentile that the Company TSR is less than the 50th percentile of S&P TSR, but in no event shall the reduction exceed 20%; or

•

If the Company TSR rank is greater than the 50th percentile of the S&P TSR, the grant shall be increased by 1.3% for each percentile that Company TSR is greater than the 50th percentile of S&P TSR, but in no event shall such increase exceed 20%.

     If the grantee dies, becomes disabled or retires, the performance-contingent restricted stock generally vests immediately. In addition, the performance-contingent restricted stock will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to dividend and voting rights on the restricted shares. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.

     The following restricted stock awards have been granted under the EPIP (amounts in thousands, except price data):

Grant date		1/3/2006				2/5/2007				2/4/2008
Shares granted			204				224				210
Vesting date			1/3/2008				2/5/2009				2/4/2010
Fair value per share		$	19.44			$	20.98			$	27.03
Expense during the twelve weeks ended July 12, 2008		$	—			$	509			$	655
Expense during the twelve weeks ended July 14, 2007		$	453			$	542			$	—
Expense during the twenty-eight weeks ended July 12, 2008		$	—			$	1,189			$	1,310
Expense during the twenty-eight weeks ended July 14, 2007		$	1,056			$	1,085			$	—

     A summary of the status of the company’s nonvested shares as of July 12, 2008, and changes during the twenty-eight weeks ended July 12, 2008, is presented below (amounts in thousands, except price data):

						Weighted Average
		Shares				Grant Date Fair Value
Nonvested at December 29, 2007			537			$	18.42
Granted			210			$	27.03
Vested			(314	)		$	16.59
Forfeited			—			$	—
Nonvested at July 12, 2008			433			$	23.92

     As of July 12, 2008, there was $5.6 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 1.0 years. The fair value of restricted share awards that vested during fiscal 2008 was $7.1 million on the vesting date.

Stock Appreciation Rights

     The company previously awarded stock appreciation rights (“rights”) to key employees throughout the company. These rights vest at the end of four years and are payable in cash equal to the difference between the grant price and the fair market value of the rights on the vesting date. On July 16, 2007 (the company’s third quarter), 448,350 rights granted in 2003 vested. The company recorded compensation expense for these rights on measurement dates based on changes between the grant price and an estimated fair value of

the rights using the Black-Scholes option-pricing model. During the twelve weeks ended July 12, 2008 and July 14, 2007, respectively, the company recorded expense of $0.0 million and $1.1 million related to these rights. During the twenty-eight weeks ended July 12, 2008 and July 14, 2007, respectively, the company recorded expense of $0.0 million and $3.7 million related to these rights.

     Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chairman fees into rights. These rights vest after one year and can be exercised over nine years. The company records compensation expense for these rights at a measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model. During the twelve weeks ended July 12, 2008 and July 14, 2007, respectively, the company recorded expense of $0.8 million and $0.2 million related to these rights. During the twenty-eight weeks ended July 12, 2008 and July 14, 2007, respectively, the company recorded expense of $1.2 million and $1.0 million related to these rights.

     The fair value of the rights at July 12, 2008 ranged from $14.45 to $25.69. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at July 12, 2008: dividend yield 2.2%; expected volatility 28.0%; risk-free interest rate 3.3% and expected life of 1.55 years to 3.95 years.

     The rights activity for the twenty-eight weeks ended July 12, 2008 is set forth below (amounts in thousands except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Rights				Exercise Price				Contractual Term (Years)				Intrinsic Value
Outstanding at December 29, 2007			231			$	11.14
Rights exercised			—				—
Rights forfeited			—				—
Outstanding at July 12, 2008			231			$	11.14				5.40			$	4,228

Deferred Stock

     The company allows non-employee directors to convert their retainers into deferred stock. The deferred stock has a minimum two year vesting period and will be distributed to the individual after that time at a designated time selected by the individual at the date of conversion. During the first quarter of fiscal 2007 and 2008 an aggregate of 20,520 and 22,160 shares, respectively, were converted. The company records compensation expense for this deferred stock over the two-year minimum vesting period based on the closing price of the company’s common stock on the date of conversion.

     During the second quarter of fiscal 2007 and 2008, non-employee directors were granted an aggregate of 34,350 and 35,800 shares, respectively, of deferred stock that has a minimum one year vesting period. The deferred stock will be distributed to the grantee after that time at a designated time selected by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one year minimum vesting period.

     The deferred stock activity for the twenty-eight weeks ended July 12, 2008 is set forth below (amounts in thousands, except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Shares				Grant Price				Contractual Term (Years)				Intrinsic Value
Outstanding at December 29, 2007			55			$	21.03
Deferred stock issued			58			$	25.22
Deferred stock exercised			(24	)			21.91
Outstanding at July 12, 2008			89			$	23.53				1.37			$	516

     The following table summarizes the company’s stock based compensation expense for the twelve and twenty-eight week periods ended July 12, 2008 and July 14, 2007, respectively (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
Stock options		$	1,047			$	1,303			$	2,318			$	2,930
Restricted stock			1,164				1,128				2,498				2,604
Stock appreciation rights			759				1,313				1,181				4,736
Deferred stock			310				161				681				208
Total stock based compensation		$	3,280			$	3,905			$	6,678			$	10,478

12. POST-RETIREMENT PLANS

     On September 29, 2006, the FASB issued SFAS No. 158, which requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS 106”) that have not yet been recognized through net periodic benefit costs will be recognized in accumulated other comprehensive income, net of tax benefits, until they are amortized as a component of net periodic cost. SFAS 158 does not change how pensions and other postretirement benefits are accounted for and reported in the income statement. Companies will continue to follow the existing guidance in SFAS 87, FASB Statement No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits and SFAS 106. SFAS 158 was effective for public companies for fiscal years ending after December 15, 2006. The company adopted the balance sheet recognition provisions of SFAS 158 at December 30, 2006, the end of its fiscal year 2006. SFAS 158 also requires that employers measure the benefit obligation and plan assets as of the fiscal year end for fiscal years ending after December 15, 2008 (the company’s fiscal 2008). In fiscal 2006 and earlier, the company used a September 30 measurement date for its pension and other postretirement benefit plans. The company eliminated the early measurement date in fiscal 2007 and applied the remeasurement alternative in accordance with SFAS 158. Under this alternative, postretirement benefit income measured for the three-month period October 1, 2006 to December 31, 2006 (determined using the September 2006 measurement date) was credited to beginning 2007 retained earnings. As result, the company increased retained earnings $0.7 million, net of taxes of $0.5 million and increased the postretirement benefit asset and liability by $1.3 million and $0.1 million, respectively. The funded status of the company’s postretirement benefit plans was then remeasured at January 1, 2007, resulting in an adjustment to the balance sheet asset, liability and accumulated other comprehensive income. As a result, the postretirement benefit asset was increased $7.4 million and the postretirement benefit liability was decreased $0.7 million, with an offsetting credit to accumulated other comprehensive income of $5.0 million, net of taxes of $3.1 million.

     The following summarizes the company’s balance sheet related pension and other postretirement benefit plan accounts at July 12, 2008 as compared to accounts at December 29, 2007 (amounts in thousands):

		AS OF
		JULY 12,				DECEMBER 29,
		2008				2007
Noncurrent benefit asset		$	38,348			$	34,471
Current benefit liability		$	403			$	403
Noncurrent benefit liability		$	7,036			$	6,599
Accumulated other comprehensive income		$	2,735			$	2,625

Defined Benefit Plans

     The company has trusteed, noncontributory defined benefit pension plans covering certain employees. The benefits are based on years of service and the employees’ career earnings. The plans are funded at amounts deductible for income tax purposes but not less than the minimum funding required by the Employee Retirement Income Security Act of 1974 (“ERISA”). As of July 12, 2008, the assets of the plans included certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities, private and public real estate partnerships, other diversifying strategies and annuity contracts. Effective January 1, 2006, the company curtailed the defined benefit plan that covers the majority of its workforce. Benefits under this plan were frozen, and no future benefits will accrue under this plan. The company continues to maintain a plan that covers a small number of certain union employees.

     The net periodic pension income for the company’s plans include the following components (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
Service cost		$	68			$	60			$	158			$	140
Interest cost			3,920				3,770				9,146				8,796
Expected return on plan assets			(5,649	)			(5,307	)			(13,180	)			(12,383	)
Total net periodic benefit income		$	(1,661	)		$	(1,477	)		$	(3,876	)		$	(3,447	)

Post-retirement Benefit Plan

     The company provides certain medical and life insurance benefits for eligible retired employees. The medical plan covers eligible retirees under the active medical plan. The plan incorporates an up-front deductible, coinsurance payments and retiree contributions at COBRA premium levels. Eligibility and maximum period of coverage is based on age and length of service. The life insurance plan offers coverage to a closed group of retirees.

     The net periodic postretirement benefit cost for the company includes the following components (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
Service cost		$	88			$	70			$	206			$	163
Interest cost			99				90				232				210
Amortization of prior service cost			77				77				179				179
Total net periodic benefit cost		$	264			$	237			$	617			$	552

401(k) Retirement Savings Plan

     The Flowers Foods 401(k) Retirement Savings Plan (“the Plan”) covers substantially all of the company’s employees who have completed certain service requirements. The cost and contributions for certain employees who also participate in the defined benefit pension plan is 25% of the first $400 contributed by the employee. Prior to January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan was 2% of compensation and 50% of the employees’ contributions, up to 6% of compensation. Effective January 1, 2006, the costs and contributions for employees who do not participate in the defined benefit pension plan increased to 3% of compensation and 50% of the employees’ contributions, up to 6% of compensation. During the twelve weeks ended July 12, 2008 and July 14, 2007, the total cost and contributions were $3.3 million and $3.0 million, respectively. During the twenty-eight weeks ended July 12, 2008 and July 14, 2007, the total cost and contributions were $8.1 million and $7.8 million, respectively.

13. INCOME TAXES

     The company’s effective tax rate for the twelve and twenty-eight weeks ended July 12, 2008 was 35.7 % for both periods. This rate is down slightly from the 2007 annual effective tax rate of 35.9%, due to favorable discrete items recognized during the twenty-eight weeks ended July 12, 2008. The difference in the effective rate and the statutory rate is primarily due to state income taxes, the non-taxable earnings of the consolidated variable interest entity and the Section 199 qualifying production activities deduction.

     During the twelve and twenty-eight weeks ended July 12, 2008, the company’s activity with respect to its FIN 48 reserve and related interest expense accrual was immaterial. At this time, we do not anticipate significant changes to the amount of gross unrecognized tax benefits over the next twelve months.

14. SEGMENT REPORTING

     The DSD segment produces fresh and frozen packaged bread and rolls and the warehouse delivery segment produces frozen bread and rolls and fresh and frozen snack products. The company evaluates each segment’s performance based on income or loss before interest and income taxes, excluding unallocated expenses and charges which the company’s management deems to be an overall corporate cost or a cost not reflective of the segments’ core operating businesses. During the second quarter of fiscal 2008, the company’s Tucker, Georgia operation was transferred from the DSD segment to the warehouse delivery segment. Prior period information has been reclassified to reflect this change. Information regarding the operations in these reportable segments is as follows (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
SALES:
DSD		$	445,065			$	389,071			$	1,003,139			$	880,948
Warehouse delivery			122,921				110,434				276,736				256,817
Eliminations:
Sales from warehouse delivery to DSD			(23,067	)			(18,867	)			(54,056	)			(44,258	)
Sales from DSD to warehouse delivery			(4,263	)			(2,800	)			(8,456	)			(5,722	)
		$	540,656			$	477,838			$	1,217,363			$	1,087,785
DEPRECIATION AND AMORTIZATION:
DSD		$	12,153			$	11,931			$	28,111			$	27,849
Warehouse delivery			3,656				3,216				8,378				7,473
Unallocated			223				(31	)			456				(89	)
		$	16,032			$	15,116			$	36,945			$	35,233

		FOR THE TWELVE WEEKS ENDED								FOR THE TWENTY-EIGHT WEEKS ENDED
		JULY 12, 2008				JULY 14, 2007				JULY 12, 2008				JULY 14, 2007
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST:
DSD		$	36,387			$	33,454			$	89,779			$	78,523
Warehouse delivery			6,461				6,782				14,720				14,961
Unallocated			(6,488	)			(6,048	)			(13,990	)			(14,381	)
Interest income, net			2,657				1,932				6,154				3,865
		$	39,017			$	36,120			$	96,663			$	82,968

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

		For the twelve weeks ended July 12, 2008												For the twelve weeks ended July 14, 2007
		DSD				Warehouse delivery				Total				DSD				Warehouse delivery				Total
Branded Retail		$	264,527			$	27,765			$	292,292			$	229,517			$	22,882			$	252,399
Store Branded Retail			63,831				13,013				76,844				54,596				10,694				65,290
Foodservice and Other			112,444				59,076				171,520				102,158				57,991				160,149
Total		$	440,802			$	99,854			$	540,656			$	386,271			$	91,567			$	477,838

		For the twenty-eight weeks ended July 12, 2008												For the twenty-eight weeks ended July 14, 2007
		DSD				Warehouse delivery				Total				DSD				Warehouse delivery				Total
Branded Retail		$	594,227			$	58,758			$	652,985			$	517,271			$	51,974			$	569,245
Store Branded Retail			136,590				27,512				164,102				116,575				24,804				141,379
Foodservice and Other			263,866				136,410				400,276				241,380				135,781				377,161
Total		$	994,683			$	222,680			$	1,217,363			$	875,226			$	212,559			$	1,087,785