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 October 7, 2006

OR

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

For the transition period from                      to                     

Commission file number 1-16247

FLOWERS FOODS, INC.

GEORGIA		58-2582379
(State or other jurisdiction		(I.R.S. Employer Identification
of incorporation or organization)		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, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

     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 NOVEMBER 10, 2006
Common Stock, $.01 par value with Preferred Share Purchase Rights		60,783,534

 

 

FLOWERS FOODS, INC.

INDEX

		PAGE
		NUMBER
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of October 7, 2006 and December 31, 2005			4
Condensed Consolidated Statements of Income for the Twelve and Forty Weeks Ended October 7, 2006 and October 8, 2005			5
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Forty Weeks Ended October 7, 2006			6
Condensed Consolidated Statements of Cash Flows for the Forty Weeks Ended October 7, 2006 and October 8, 2005			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			32
PART II. Other Information
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 6. Exhibits			33
SIGNATURES
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32 SECTION 906, CERTIFICATION OF THE CEO & CFO

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 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 31, 2005 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.

		OCTOBER 7, 2006				DECEMBER 31, 2005
ASSETS
Current Assets:
Cash and cash equivalents		$	29,228			$	11,001
Accounts and notes receivable, net of allowances of $1,188 and $162, respectively			137,765				120,751
Inventories, net:
Raw materials			13,138				11,042
Packaging materials			10,790				10,055
Finished goods			23,142				21,704
			47,070				42,801
Spare parts and supplies			25,131				23,241
Deferred taxes			3,954				7,561
Other			18,642				32,215
			261,790				237,570
Net Property, Plant and Equipment			463,774				451,921
Notes Receivable			71,939				70,357
Assets Held for Sale — Distributor Routes			25,103				16,382
Other Assets			2,771				2,667
Goodwill			76,244				58,567
Other Intangible Assets, net			24,661				13,605
		$	926,282			$	851,069
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and capital leases		$	4,836			$	4,652
Accounts payable			88,057				83,801
Other accrued liabilities			87,846				85,822
			180,739				174,275
Long-Term Debt and Capital Leases			107,733				74,403
Other Liabilities:
Post-retirement/post-employment obligations			9,266				9,728
Deferred taxes			39,560				42,569
Other			24,093				33,160
			72,919				85,457
Minority Interest in Variable Interest Entity			6,832				4,563
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock — $100 par value, 100,000 authorized and none issued
Preferred stock — $.01 par value, 900,000 authorized and none issued
Common stock — $.01 par value, 100,000,000 authorized shares, 67,775,496 shares and 67,775,496 shares issued, respectively			678				678
Treasury stock — 6,991,962 shares and 7,457,637 shares, respectively			(153,254	)			(148,747	)
Capital in excess of par value			481,008				474,708
Retained earnings			242,353				198,567
Unearned compensation			—				(898	)
Accumulated other comprehensive loss			(12,726	)			(11,937	)
			558,059				512,371
		$	926,282			$	851,069

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005				OCTOBER 7, 2006				OCTOBER 8, 2005
Sales		$	441,091			$	408,005			$	1,450,476			$	1,319,345
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)			222,683				205,955				726,043				661,230
Selling, marketing and administrative expenses			176,992				167,149				583,787				532,573
Depreciation and amortization			14,796				13,530				48,735				44,697
Gain on insurance recovery			(1,598	)			0				(2,252	)			0
Income from operations			28,218				21,371				94,163				80,845
Interest expense			1,222				755				3,634				2,604
Interest income			(2,273	)			(2,238	)			(7,492	)			(7,580	)
Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle			29,269				22,854				98,021				85,821
Income tax expense			10,425				8,257				35,760				32,370
Income from continuing operations before minority interest and cumulative effect of a change in accounting principle			18,844				14,597				62,261				53,451
Minority interest in variable interest entity			(1,784	)			(1,125	)			(3,217	)			(2,325	)
Income from continuing operations before cumulative effect of a change in accounting principle			17,060				13,472				59,044				51,126
Income (loss) from discontinued operations, net of income tax of $778 and income tax benefit of $997, respectively			5,509				(1,627	)			6,731				(1,627	)
Income before cumulative effect of a change in accounting principle			22,569				11,845				65,775				49,499
Cumulative effect of a change in accounting principle, net of income tax benefit of $362			0				0				(568	)			0
Net income		$	22,569			$	11,845			$	65,207			$	49,499
Net Income Per Common Share:
Basic:
Income from continuing operations before cumulative effect of a change in accounting principle		$	0.28			$	0.22			$	0.97			$	0.82
Income (loss) from discontinued operations, net of income tax			0.09				(0.03	)			0.11				(0.03	)
Cumulative effect of a change in accounting principle, net of income tax benefit			0.00				0.00				(0.01	)			0.00
Net income per share		$	0.37			$	0.19			$	1.07			$	0.79
Weighted average shares outstanding			60,790				60,691				60,927				62,112
Diluted:
Income from continuing operations before cumulative effect of a change in accounting principle		$	0.28			$	0.22			$	0.95			$	0.80
Income (loss) from discontinued operations, net of income tax			0.09				(0.03	)			0.11				(0.03	)
Cumulative effect of a change in accounting principle, net of income tax benefit			0.00				0.00				(0.01	)			0.00
Net income per share		$	0.37			$	0.19			$	1.05			$	0.77
Weighted average shares outstanding			61,576				62,389				61,862				63,923
Cash dividends paid per common share		$	0.125			$	0.10			$	0.350			$	0.283

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)

														Capital								Accumulated
						Common Stock								in Excess								Other				Treasury Stock
		Comprehensive				Number of				Par				of Par				Retained				Comprehensive				Number of								Unearned
		Income				Shares Issued				Value				Value				Earnings				Income (Loss)				Shares				Cost				Compensation				Total
		(Amounts in thousands, except share data)
Balances at December 31, 2005							67,775,496			$	678			$	474,708			$	198,567			$	(11,937	)			(7,457,637	)		$	(148,747	)		$	(898	)		$	512,371
Reclassification due to change in accounting principle (Note 11)															(898	)																			898				0
Net income		$	65,207																65,207																				65,207
Derivative instruments			(789	)																			(789	)															(789	)
Comprehensive income		$	64,418
Stock repurchases																											(1,932,860	)			(53,176	)							(53,176	)
Exercise of stock options (includes income tax benefits of $8,046)															(5,110	)											937,793				19,132								14,022
Issuance and vesting of restricted stock awards (includes income tax benefits of $86)															(3,160	)											161,340				3,251								91
Reversion of restricted stock award															13												(600	)			(13	)							—
Restricted stock award compensation															2,313																								2,313
Stock option compensation															3,041																								3,041
Stock issued for acquisition															10,101												1,300,002				26,299								36,400
Dividends paid — $0.35 per common share																			(21,421	)																			(21,421	)
Balances at October 7, 2006							67,775,496			$	678			$	481,008			$	242,353			$	(12,726	)			(6,991,962	)		$	(153,254	)		$	0			$	558,059

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

		FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income		$	65,207			$	49,499
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash (income) expense related to discontinued operations			(5,509	)			625
Cumulative effect of a change in accounting principle			930				—
Stock based compensation			6,715				3,534
Income tax benefit related to stock awards			—				10,863
Depreciation and amortization			48,735				44,697
Deferred income taxes			(3,052	)			11,670
Reserve for distributor notes			—				837
Provision for inventory obsolescence			675				544
Allowances for accounts receivable			881				1,793
Minority interest in variable interest entity			3,217				2,325
Other			(789	)			(103	)
Changes in assets and liabilities:
Accounts and notes receivable, net			(13,618	)			(11,450	)
Inventories, net			(3,954	)			(6,570	)
Other assets			15,800				(13,054	)
Pension contributions			(14,000	)			(25,000	)
Accounts payable and other accrued liabilities			1,237				(1,047	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			102,475				69,163
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(45,686	)			(31,670	)
(Purchase of) proceeds from notes receivable			(2,204	)			327
Acquisitions, net of cash acquired			(887	)			(9,825	)
Other			(3,153	)			(2,776	)
NET CASH DISBURSED FOR INVESTING ACTIVITIES			(51,930	)			(43,944	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid			(21,421	)			(17,587	)
Exercise of stock options			5,981				6,168
Income tax benefit related to stock awards			8,132				—
Stock repurchases			(53,176	)			(110,055	)
Change in book overdraft			(1,146	)			6,925
Payment of financing fees			(391	)			—
Proceeds from debt borrowings			303,600				117,000
Debt and capital lease obligation payments			(273,897	)			(63,681	)
NET CASH DISBURSED FOR FINANCING ACTIVITIES			(32,318	)			(61,230	)
Net increase (decrease) in cash and cash equivalents			18,227				(36,011	)
Cash and cash equivalents at beginning of period			11,001				47,458
Cash and cash equivalents at end of period		$	29,228			$	11,447

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

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 forty week periods ended October 7, 2006 and October 8, 2005 are not necessarily indicative of the results to be expected for a full year. The balance sheet at December 31, 2005 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 31, 2005.

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, income tax expense and accruals, pension obligations and distributor accounting. These policies are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. In addition to these critical accounting policies, the company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share Based Payment (“SFAS 123R”) on January 1, 2006. SFAS 123R requires that the value of stock options and similar awards be expensed. Prior to the adoption of SFAS 123R, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), the company applied intrinsic value accounting for its stock option plans under Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. The company applied the disclosure-only provisions of SFAS 123 and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure — an Amendment of FASB Statement No. 123 (“SFAS 148”).

REPORTING PERIODS — Fiscal 2006 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 22, 2006 (sixteen weeks), second quarter ended July 15, 2006 (twelve weeks), third quarter ended October 7, 2006 (twelve weeks) and fourth quarter ending December 30, 2006 (twelve weeks).

SEGMENTS — The company consists of two business segments: Flowers Foods Bakeries Group, LLC (“Flowers Bakeries”) and Flowers Foods Specialty Group, LLC (“Flowers Specialty”). Flowers Bakeries 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. Flowers Specialty 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 forty weeks ended October 7, 2006 and October 8, 2005. No other customer accounted for 10% or more of the company’s sales.

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005				OCTOBER 7, 2006				OCTOBER 8, 2005
		(Percent of Sales)								(Percent of Sales)
Flowers Bakeries			16.6	%			15.1	%			16.3	%			14.5	%
Flowers Specialty			2.6				3.2				2.6				2.8
Total			19.2	%			18.3	%			18.9	%			17.3	%

STOCK BASED COMPENSATION — In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R. SFAS 123R requires that the value of stock options and similar awards be expensed. The company adopted SFAS 123R on January 1, 2006 and applied the modified prospective transition method. This method requires the company to expense the remaining unrecognized portion of unvested awards outstanding at the effective date and any awards granted or modified after the effective date, but does not require restatement of prior periods. See Note 11 for information relating to the company’s stock-based compensation. Prior to the adoption of SFAS 123R, as permitted by SFAS No. 123, the company applied intrinsic value accounting for its stock option plans under APB 25. Compensation cost for stock options, if any, was 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 applied the disclosure-only provisions of SFAS 123 and SFAS 148.

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

		FOR THE TWELVE WEEKS				FOR THE FORTY WEEKS
		ENDED OCTOBER 8 , 2005				ENDED OCTOBER 8 , 2005
Net income, as reported		$	11,845			$	49,499
Deduct: Stock-based employee compensation cost, net of income tax, that would have been included in net income under fair value method			(375	)			(1,546	)
Pro forma net income		$	11,470			$	47,953
Basic net income per share
as reported		$	0.19			$	0.79
pro forma		$	0.19			$	0.77
Diluted net income per share
as reported		$	0.19			$	0.77
pro forma		$	0.18			$	0.75

2. DISCONTINUED OPERATIONS

     On January 30, 2003, the company entered into an agreement to sell its Mrs. Smith’s Bakeries frozen dessert business (“Mrs. Smith’s”) to The Schwan Food Company (“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 Mrs. Smith’s 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 Mrs. Smith’s. Subsequent to the sale, the company paid various expenses related to its operation of Mrs. Smith’s, no single one of which was material to the financial condition or results of operations of the company. During the first quarter of fiscal 2004, based on claim activity, 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 by the company in connection with Mrs. Smith’s. The balance of this reserve as of October 7, 2006 and December 31, 2005 was $0.1 million and $0.7 million, respectively. Included in this reserve was $1.8 million, net of income tax benefit, regarding a settlement of a class action lawsuit related to pie shells produced by Mrs. Smith’s. Additional costs of $0.2 million, net of income tax benefit, were recorded as part of discontinued operations during the third quarter of fiscal 2005 relating to this settlement. During the first quarter of fiscal 2006, the company received an insurance recovery of $2.0 million ($1.2 million, net of income tax) relating to this settlement.

     During the third quarter of fiscal 2006, the Internal Revenue Service (“IRS”) finalized its audit of the company’s tax years 2000 and 2001. Based upon the results of this audit, the company reversed previously established tax reserves in the amount of $6.0 million related to the deductibility of certain transaction costs incurred in connection with the divestiture of the company’s Keebler investment in 2001. A deduction was allowed for a majority of these costs; therefore, the reserve was reversed through discontinued operations in the third quarter of fiscal 2006.

     The IRS also finalized the results of its audit of the company’s fiscal 2003 income tax return during the third quarter of fiscal 2006. Based on the results of this audit, the company accrued $0.5 million of income tax expense related to Mrs. Smith’s. This adjustment is also recorded in discontinued operations in the condensed consolidated statement of income for the twelve and forty weeks ended October 7, 2006.

     There were no revenues or results of operations recorded for the discontinued operations in the twelve or forty weeks ended October 7, 2006 and October 8, 2005.

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 adjusted by other comprehensive income (loss), was $16.3 million and $64.4 million for the twelve and forty weeks ended October 7, 2006, respectively. Total comprehensive income was $13.6 million and $56.4 million for the twelve and forty weeks ended October 8, 2005, respectively.

     During the forty weeks ended October 7, 2006, changes to accumulated other comprehensive loss, net of income tax, were as follows (amounts in thousands):

		2006
Accumulated other comprehensive loss, December 31, 2005		$	(11,937	)
Derivative transactions:
Net deferred gains on closed contracts, net of income tax of $501			802
Reclassified to earnings, net of income tax benefit of $(779)			(1,245	)
Effective portion of change in fair value of hedging instruments, net of income tax benefit of $(216)			(346	)
Accumulated other comprehensive loss, October 7, 2006		$	(12,726	)

4. GOODWILL AND OTHER INTANGIBLE ASSETS

     The change in the carrying amount of goodwill for the forty weeks ended October 7, 2006 is as follows (amounts in thousands):

		Flowers Bakeries				Flowers Specialty				Total
Balance as of December 31, 2005		$	54,891			$	3,676			$	58,567
Acquisition (1)			17,677				—				17,677
Segment restructuring (2)			(1,896	)			1,896				—
Balance as of October 7, 2006		$	70,672			$	5,572			$	76,244

     The changes in the carrying amount of intangible assets, which consist primarily of trademarks, customer-related intangibles and non-compete agreements, for the forty weeks ended October 7, 2006 are as follows (amounts in thousands):

		Flowers Bakeries				Flowers Specialty				Total
Balance as of December 31, 2005		$	8,373			$	5,232			$	13,605
Amortization expense			(1,077	)			(567	)			(1,644	)
Acquisition (1)			13,602				—				13,602
Reclassification (2)			(902	)			—				(902	)
Segment restructuring (3)			(1,074	)			1,074				—
Balance as of October 7, 2006		$	18,922			$	5,739			$	24,661

     In October 2002, the company acquired Ideal Baking Company in Batesville, Arkansas. As part of this acquisition, the Ideal trademark was recorded as an indefinite-lived intangible asset, with a carrying value of $1.9 million. In September 2001, the company acquired Kotarides Baking Company in Norfolk, Virginia, which distributes breads and buns under the Mary Jane brand. The company recorded this trademark as an indefinite-lived intangible asset, with a carrying value of $3.3 million. In December 2005, as a result of the company’s growth of its Nature’s Own trademark, the company determined that these trademarks should be recorded as definite-lived intangibles with estimated lives of 20 years for the Ideal trademark and 25 years for the Mary Jane trademark. Amortization of these trademarks began in the first quarter of fiscal 2006.

     Estimated amortization expense for fiscal 2006, fiscal 2007, fiscal 2008, fiscal 2009 and fiscal 2010 is $2.1 million, $2.0 million, $1.5 million, $1.5 million and $1.4 million, respectively.

5. NEW ACCOUNTING PRONOUNCEMENTS

     Inventory Costs. In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an Amendment of ARB No. 43, Chapter 4. (“SFAS 151”) SFAS 151 clarified the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS 151 is effective for fiscal years beginning after June 15, 2005, the company’s fiscal 2006, which began January 1, 2006. This pronouncement did not have a material effect on the company’s results of operations or financial condition.

     Stock Based Compensation. As discussed in Note 1, in December 2004, the FASB issued SFAS 123R, which requires the value of stock options and similar awards be expensed. The company adopted the standard on January 1, 2006, and applied the modified prospective transition method. This method requires the company to expense the remaining unrecognized portion of unvested awards outstanding at the effective date and any awards granted or modified after the effective date but does not require restatement of prior periods. See Note 11 for information relating to the company’s stock-based compensation.

     Accounting Changes and Error Corrections. In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”). SFAS 154 requires that, when a company changes its accounting policies, it must apply the change retrospectively to all prior periods presented instead of a cumulative effect adjustment in the period of the change. SFAS 154 may also apply when the FASB issues new rules requiring changes in accounting. However if the new rule allows cumulative effect treatment, it would take precedence over SFAS 154. This statement is effective for accounting changes and error corrections for the company’s fiscal year 2006 which began on January 1, 2006.

     Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No.109. FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with FASB Statement No 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, which will be the company’s fiscal 2007 beginning December 31, 2006. The company is currently assessing the impact FIN 48 will have on its financial statements.

     Financial Statement Misstatements. On September 13, 2006 the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”), Financial Statement Misstatements. SAB 108 expresses the SEC staff’s views regarding the process of quantifying financial statement misstatements. The interpretations in SAB 108 are being issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006, which is the company’s fiscal 2006. SAB 108 is not expected to have an effect on the company’s financial statements.

     Fair Value Measurements. On September 15, 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some entities, the application of SFAS 157 will change current practice. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The company will assess the effect of this pronouncement on its financial statements, but at this time, no material effect is expected.

     Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans. On September 29, 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”). SFAS 158 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 FASB Statement No. 87, Employers’ Accounting for Pensions (“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 is effective for public companies for fiscal years ending after December 15, 2006. The company will adopt the balance sheet recognition provisions of SFAS 158 at December 30, 2006, the end of its fiscal year 2006. The adoption of SFAS 158 is expected to reduce the company’s stockholders’ equity and increase its post-retirement obligation liability at December 30, 2006 by approximately $9 million to $10 million. 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 currently uses a September 30 measurement date for its postretirement benefit plans. The company is currently reviewing how and when it will transition to a fiscal year end measurement date.

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, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity input to production.

     As of October 7, 2006, the company’s hedge portfolio contained commodity derivatives with a fair value of $3.7 million, which is recorded in other current and long-term assets and liabilities. 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 October 7, 2006 or December 31, 2005 that did not qualify for hedge accounting under SFAS 133.

7. DEBT AND OTHER OBLIGATIONS

     Long-term debt and capital leases consisted of the following at October 7, 2006 and December 31, 2005 (amounts in thousands):

		OCTOBER 7, 2006				DECEMBER 31, 2005
Unsecured credit facility		$	77,000			$	50,000
Capital lease obligations			28,892				24,866
Other notes payable			6,677				4,189
			112,569				79,055
Less current maturities			4,836				4,652
Total long-term debt and capital leases		$	107,733			$	74,403

     On June 6, 2006, the company further amended and restated its credit facility (the “new credit facility”), which was previously amended and restated on October 29, 2004 (“the former credit facility”). The new credit facility is a five-year, $250.0 million unsecured revolving loan facility that provides for lower rates on future borrowings than the company’s former credit facility through June 6, 2011. The company may request to increase its borrowings under the new credit facility up to an aggregate of $350.0 million upon the satisfaction of certain conditions.

     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 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 ranges from 0.0% to 0.20% for base rate loans and from 0.40% to 1.075% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.30% is due quarterly on all commitments under the

new credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. There were $77.0 million in outstanding borrowings under the new credit facility at October 7, 2006.

     The new 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 new credit facility and can meet presently foreseeable financial requirements. As of October 7, 2006, the company was in compliance with all restrictive financial covenants under the new credit facility.

     The company paid financing costs of $0.4 million in connection with its new credit facility. These costs were deferred and, along with unamortized costs of $0.5 million relating to the company’s former credit facility are being amortized over the term of the new credit facility.

     On October 29, 2004, the company amended and restated its then existing credit facility. The former credit facility was in effect at December 31, 2005 and was a five-year, $150.0 million unsecured revolving loan facility. The company could request to increase its borrowings under the former credit facility up to an aggregate of $225.0 million upon the satisfaction of certain conditions. Interest on the former credit facility was due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate was 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 ranged from 0.0% to 0.20% for base rate loans and from 0.625% to 1.20% for Eurodollar loans. In addition, a facility fee ranging from 0.125% to 0.30% was due quarterly on all commitments under the former credit facility. Both the interest margin and the facility fee were based on the company’s leverage ratio. Financial covenants and other restrictions under the former credit facility were the same as those under the new credit facility.

     Included in accounts payable in the condensed consolidated balance sheets are book overdrafts of $18.5 million and $19.6 million as of October 7, 2006 and December 31, 2005, 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 consolidated this entity effective with the first quarter of fiscal 2004. 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 forty weeks ended October 7, 2006 and October 8, 2005:

		TWELVE WEEKS								TWELVE WEEKS								FORTY WEEKS								FORTY WEEKS
		ENDED OCTOBER 7, 2006								ENDED OCTOBER 8, 2005								ENDED OCTOBER 7, 2006								ENDED OCTOBER 8, 2005
						% OF								% OF								% OF								% OF
		VIE				TOTAL				VIE				TOTAL				VIE				TOTAL				VIE				TOTAL
		(Dollars in thousands)
Assets as of respective quarter ends		$	32,453				3.5	%		$	26,708				3.1	%		$	32,453				3.5	%		$	26,708				3.1	%
Sales		$	3,671				0.8	%		$	2,898				0.7	%		$	10,185				0.7	%		$	9,439				0.7	%
Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle		$	1,784				6.1	%		$	1,125				4.9	%		$	3,217				3.3	%		$	2,325				2.7	%

     The assets consist primarily of $24.2 million and $20.1 million as of October 7, 2006 and October 8, 2005, 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 forty weeks ended October 7, 2006 and October 8, 2005 (amounts in thousands, except per share data):

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005				OCTOBER 7, 2006				OCTOBER 8, 2005
Basic Earnings Per Common Share:
Income from continuing operations before cumulative effect of a change in accounting principle		$	17,060			$	13,472			$	59,044			$	51,126
Basic weighted average shares outstanding			60,790				60,691				60,927				62,112
Basic earnings per common share		$	0.28			$	0.22			$	0.97			$	0.82
Diluted Earnings Per Common Share:
Income from continuing operations before cumulative effect of a change in accounting principle		$	17,060			$	13,472			$	59,044			$	51,126
Basic weighted average shares outstanding			60,790				60,691				60,927				62,112
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock			786				1,698				935				1,811
Diluted weighted average shares outstanding			61,576				62,389				61,862				63,923
Diluted earnings per common share		$	0.28			$	0.22			$	0.95			$	0.80

     Stock options to purchase 435,400 shares of common stock were not included in the computation of diluted earnings per share for the twelve and forty weeks ended October 7, 2006 because their effect would have been anti-dilutive.

11. STOCK BASED COMPENSATION

     Effective January 1, 2006, the company adopted SFAS 123R, which requires that the value of stock options and similar awards be expensed. SFAS 123R applies to any unvested awards that were outstanding on the effective date and to all new awards granted or modified after the effective date. The company adopted SFAS 123R using the modified prospective transition method. This method requires the company to expense the remaining unrecognized portion of unvested awards outstanding at the effective date and any awards granted or modified after the effective date, but does not require restatement of prior periods. Therefore, the company’s income statements for the twelve and forty weeks ended October 8, 2005 have not been restated to reflect the impact of SFAS 123R. See Note 1 for disclosure of pro forma results for these reporting periods. Under this transition method, compensation expense recognized during the twelve and forty weeks ended October 7, 2006 included: (i) compensation expense for share-based awards granted prior to, but not vested as of, December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (ii) compensation expense for share-based awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

     In accordance with FASB Staff Position FAS 123R-3, Transition Election to Accounting for the Tax Effects of Share Based Payment Awards, the company applied the short-cut method for determining its Capital in Excess of Par Value Pool (“APIC Pool”). This includes simplified methods to establish the beginning balance of the APIC Pool related to the tax effects of share-based

compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of share-based awards that are outstanding upon adoption of SFAS 123R.

     Flowers Foods’ 2001 Equity and Performance Incentive Plan as amended and restated as of February 11, 2005 (“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 9,750,000 shares. Over the life of the EPIP, the company has only issued options and restricted stock. Options granted prior to January 1, 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 change in control of Flowers Foods. Options granted on January 3, 2006 may not be exercised later than seven years after the date of grant and become exercisable three years from the date of grant and generally vest at that time or upon change in control of Flowers Foods. 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 each of the stock-based awards outstanding under the EPIP:

Stock Options

     On January 3, 2006 and during fiscal 2003 and fiscal 2001, non-qualified stock options (“NQSOs”) to purchase 437,300 shares, 2,138,175 shares and 3,445,200 shares, respectively were granted to eligible employees pursuant to the EPIP. In fiscal 2001, NQSOs to purchase 303,750 shares were granted to non-employee directors. The optionees are required to pay the market value, determined as of the grant date, which was $28.02 for the fiscal 2006 grant, $14.01 for the fiscal 2003 grant and $6.31 for the fiscal 2001 grant, to exercise these options. During fiscal 2005, the employee options awarded in fiscal 2001 vested. As of October 7, 2006, there were 302,388 NQSOs outstanding with an exercise price of $6.31, 2,055,000 NQSOs outstanding with an exercise price of $14.01, which will vest in July 2007, and 435,400 NQSOs outstanding with an exercise price of $28.02, which will vest in January 2009.

     The stock option activity for the forty weeks ended October 7, 2006 pursuant to the EPIP is set forth below (amounts in thousands except price data):

						Weighted Average
		Options				Exercise Price
Outstanding at December 31, 2005			3,306			$	11.14
Granted			437			$	28.02
Exercised			(937	)		$	6.37
Forfeitures			(13	)		$	16.12
Outstanding at October 7, 2006			2,793			$	15.36
Exercisable at October 7, 2006			661
Weighted average exercise price of options granted during the forty weeks ended October 7 , 2006		$	28.02

     As of October 7, 2006, all options outstanding under the EPIP had an average exercise price of $15.36 and a weighted average remaining contractual life of 6.4 years.

     During the twelve and forty weeks ended October 7, 2006 and October 8, 2005, the company recorded stock-based compensation expense of $0.9 million and $0 million, respectively, and $3.0 million and $0 million, respectively relating to stock options using the Black-Scholes option-pricing model applying the following assumptions:

		2003 Grant				2006 Grant
Weighted average fair value per share ($)			6.15				9.30
Dividend yield (%)			1.61				1.60
Expected volatility (%)			36.89				36.00
Risk-free interest rate (%)			4.35				4.25
Expected option life (years)			10.00				5.00

The following is a description of the methods used to arrive at the above assumptions:

2003 Grant:

Dividend yield — estimated dividend yield based on an annual dividend of $0.27.

Expected volatility — based on historical volatility over two years using daily stock prices.

Risk-free interest rate — United States Treasury Constant Maturity rates as of July 16, 2003 (grant date).

Expected option life — equals expected life of grant.

2006 Grant:

Dividend yield — estimated yield based on the historical dividend payment for the four most recent dividend payments prior to the grant date.

Expected volatility — based on historical volatility over five years using daily stock prices.

Risk-free interest rate — United States Treasury Constant Maturity rates as of January 3, 2006 (grant date).

Expected option life — assumption is based on simplified formula determined in accordance with Staff Accounting Bulletin No. 107, Share-Based Payment.

     As of October 7, 2006, there was $5.0 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 1.7 years.

     Cash received from option exercises for the forty weeks ended October 7, 2006 and October 8, 2005 was $6.0 million and $6.2 million, respectively. The cash tax benefit realized for the tax deductions from option exercises was $8.1 million and $10.9 million, respectively, for the forty weeks ended October 7, 2006 and October 8, 2005. The total intrinsic value of stock options exercised was $20.6 million and $27.7 million for the forty weeks ended October 7, 2006 and October 8, 2005, respectively.

Restricted Stock

     On January 4, 2004, the effective date of his election as Chief Executive Officer, George Deese was granted 75,000 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 become fully vested on the fourth anniversary of the date of grant. The company recorded $0.1 million and $0.3 million in compensation expense during the twelve and forty weeks ended October 7, 2006, respectively, and $0.1 million and $0.3 million for the twelve and forty weeks ended October 8, 2005, respectively, related to this restricted stock.

     During the second quarter of fiscal 2006, the second quarter of fiscal 2005 and the first quarter of fiscal 2005 non-employee directors were granted an aggregate of 25,640 shares, 29,340 shares and 1,404 shares, respectively, of restricted stock. The fair value of these restricted shares on the date of grant was $0.7 million, $0.6 million and $0.1 million, respectively. These shares become fully vested on the first anniversary of the date of grant. The company recorded $0.2 million and $0.2 million in compensation expense during the twelve weeks ended October 7, 2006 and October 8, 2005, respectively, and $0.6 million and $0.4 million of compensation expense during the forty weeks ended October 7, 2006 and October 8, 2005, respectively, related to this restricted stock.

     On January 3, 2006, certain key employees were granted 135,700 shares of restricted stock, which contain certain performance and market conditions, at a grant date price of $28.02. These shares vest on January 3, 2008. In order for these shares to vest and become nonforfeitable on this date, the following performance measure must be achieved by the company: the company’s average return on invested capital calculated on continuing operations for the cumulative two year vesting period (fiscal 2006 and fiscal 2007) must equal or exceed its weighted average cost of capital for the same two year period. In the event this performance measure is achieved, the awards vest. However, the number of awards exercisable will be adjusted according to achievement of a management objective based on the relative performance of the company’s total return to shareholders (“company’s TSR”) determined for its 2006 and 2007 fiscal years compared to the total return to shareholders of the Standard & Poor’s 500 Packaged Food and Meat Index (“S&P TSR”) for the same, or approximately the same, period (a market condition). Based on this comparison, the grant will be modified as follows: (i) if the company’s TSR is equal to the fiftieth percentile S&P TSR, there will be no adjustment; (ii) if the company’s TSR is less than the S&P TSR, the grant will be reduced by 1.3% for each percentile below the fiftieth by which the company’s TSR is less than the S&P TSR at the fiftieth percentile, but in no event will the reduction exceed twenty percent; and (iii) if the company’s TSR

exceeds the S&P TSR at the fiftieth percentile, the grant will be increased by 1.3% for each percentile above the fiftieth by which the company’s TSR exceeds the S&P TSR at the fiftieth percentile, but in no event will the increase exceed twenty percent. The estimated fair value of this restricted stock is $29.16, and the company recorded expense of $0.5 million and $1.6 million, respectively, for the twelve and forty weeks ended October 7, 2006 related to this restricted stock. 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 restricted stock activity for the forty weeks ended October 7, 2006 is set forth below (amounts in thousands, except price data):

						Weighted average fair
		Number of shares				value
Beginning balance at December 31, 2005			106			$	18.67
Granted			162			$	29.17
Forfeited			(1	)		$	29.16
Vested			(31	)		$	22.15
Ending balance at October 7, 2006			236			$	25.38

     As of October 7, 2006, there was $3.3 million of total unrecognized compensation expense related to unvested restricted stock. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.2 years.

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. In accordance with SFAS 123R, the company records 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 and forty weeks ended October 7, 2006, the company recorded expense of $0.1 million and $1.2 million, respectively, and during the twelve and forty weeks ended October 8, 2005, the company recorded expense of $1.1 million and $1.9 million, respectively, related to these rights.

     The company also allows 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 and forty weeks ended October 7, 2006 the company recorded a credit of $0.1 million and expense of $0.1 million, respectively, and during the twelve and forty weeks ended October 8, 2005, the company recorded expense of $0.4 million and $0.9 million, respectively, related to these rights.

     The fair value of the rights at October 7, 2006 ranged from $28.99 to $40.24. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 7, 2006: dividend yield 1.70%; expected volatility 35.00%; risk-free interest rate 4.69% and expected life of 0.80 years to 5.20 years.

     The rights activity for the forty weeks ended October 7, 2006 is set forth below (amounts in thousands, except price data):

Beginning balance at December 31, 2005			623
Rights granted			25
Rights exercised			(29	)
Ending balance at October 7, 2006			619
Weighted average — grant date fair value		$	14.68

     As a result of the adoption of SFAS 123R on January 1, 2006, the company recorded as an expense a cumulative effect of a change in accounting principle of $0.9 million ($0.6 million, net of income tax benefit) relating to its stock appreciation rights. This was a result of the liability as of January 1, 2006 (the day of adoption of SFAS 123R) as computed using the Black-Scholes pricing model being greater than the recorded liability on that day. Prior to the adoption of SFAS 123R, the company computed expense on the

vested portion of the rights as the difference between the grant date market value of its stock and the market value of its stock at the end of the respective reporting period.

Stock-Based Compensation Expense Summary under SFAS 123R

     Stock-based compensation expense recognized during the twelve and forty weeks ended October 7, 2006 is set forth below (amounts in thousands, except per share data):

		TWELVE WEEKS				FORTY WEEKS
Total stock-based compensation expense included in selling, marketing and administrative expenses		$	1,690			$	6,715
Income tax effect			602				2,450
Total stock-based compensation expense included in income from continuing operations before cumulative effect of a change in accounting principle		$	1,088			$	4,265
Impact on earnings per share on income from continuing operations before cumulative effect of a change in accounting principle:
Basic		$	(0.02	)		$	(0.07	)
Diluted		$	(0.02	)		$	(0.07	)

12. POST-RETIREMENT PLANS

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 October 7, 2006, 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. The company uses a September 30 measurement date for its plans.

     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.

     During the first quarter of fiscal 2006, the company made a voluntary cash contribution to its defined benefit pension plan of $14.0 million. This contribution was not required to be made by the minimum funding requirements of ERISA, but the company believed, due to its strong cash flow and balance sheet, it was an appropriate time to make the contribution to reduce the amount of future contributions. The company does not intend to make further contributions to the pension plan for the remainder of fiscal 2006.

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

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005				OCTOBER 7, 2006				OCTOBER 8, 2005
Service cost		$	58			$	1,444			$	1,754			$	4,814
Interest cost			3,615				3,698				12,140				12,326
Expected return on plan assets			(4,798	)			(4,220	)			(15,994	)			(14,066	)
Amortization of prior service cost			—				11				—				36
Amortization of net loss			6				460				20				1,534
Curtailment costs			—				244				—				244
Total net periodic benefit costs		$	(1,119	)		$	1,637			$	(2,080	)		$	4,888

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 expense for the company includes the following components (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005				OCTOBER 7, 2006				OCTOBER 8, 2005
Service cost		$	74			$	62			$	248			$	208
Interest cost			98				80				305				266
Amortization of prior service cost			77				77				256				256
Amortization of net loss			5				—				16				—
Total net periodic benefit costs		$	254			$	219			$	825			$	730

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. Generally, the cost and contributions for those 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 and forty weeks ended October 7, 2006, the total cost and contributions were $2.7 million and $9.6 million, respectively. During the twelve and forty weeks ended October 8, 2005 the total cost and contributions were $1.3 million and $4.7 million, respectively.

13. SEGMENT REPORTING

     Flowers Bakeries produces fresh and frozen packaged bread and rolls and Flowers Specialty produces frozen bread and rolls and 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. Information regarding the operations in these reportable segments is as follows (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7 , 2006				OCTOBER 8 , 2005				OCTOBER 7 , 2006				OCTOBER 8 , 2005
SALES:
Flowers Bakeries		$	359,344			$	329,842			$	1,179,683			$	1,057,542
Flowers Specialty			100,881				98,400				338,011				322,156
Eliminations: Sales from Flowers Specialty to Flowers Bakeries			(13,782	)			(12,408	)			(49,604	)			(41,427	)
Sales from Flowers Bakeries To Flowers Specialty			(5,352	)			(7,829	)			(17,614	)			(18,926	)
		$	441,091			$	408,005			$	1,450,476			$	1,319,345
DEPRECIATION AND AMORTIZATION:
Flowers Bakeries		$	11,806			$	10,904			$	38,797			$	35,924
Flowers Specialty			3,023				2,687				10,093				8,782
Unallocated			(33	)			(61	)			(155	)			(9	)
		$	14,796			$	13,530			$	48,735			$	44,697

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005				OCTOBER 7, 2006				OCTOBER 8, 2005
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE:
Flowers Bakeries		$	29,465			$	23,779			$	100,471			$	82,041
Flowers Specialty			4,154				3,924				12,869				19,475
Unallocated			(5,401	)			(6,332	)			(19,177	)			(20,671	)
Interest income, net			1,051				1,483				3,858				4,976
		$	29,269			$	22,854			$	98,021			$	85,821

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

		For the 12 Weeks Ended October 7, 2006												For the 12 Weeks Ended October 8, 2005
		Flowers Bakeries				Flowers Specialty				Total				Flowers Bakeries				Flowers Specialty				Total
Branded Retail		$	206,723			$	19,035			$	225,758			$	188,625			$	21,003			$	209,628
Store Branded Retail			47,925				6,548				54,473				41,805				5,467				47,272
Foodservice and Other			99,344				61,516				160,860				91,583				59,522				151,105
Total		$	353,992			$	87,099			$	441,091			$	322,013			$	85,992			$	408,005

		For the 40 Weeks Ended October 7, 2006												For the 40 Weeks Ended October 8, 2005
		Flowers Bakeries				Flowers Specialty				Total				Flowers Bakeries				Flowers Specialty				Total
Branded Retail		$	683,770			$	67,160			$	750,930			$	608,305			$	64,680			$	672,985
Store Branded Retail			148,965				21,187				170,152				128,446				17,318				145,764
Foodservice and Other			329,334				200,060				529,394				301,865				198,731				500,596
Total		$	1,162,069			$	288,407			$	1,450,476			$	1,038,616			$	280,729			$	1,319,345

14. ACQUISITIONS

     On February 18, 2006, the company acquired Derst Baking Company (“Derst”), a Savannah, Georgia-based bakery. Derst, with annual sales of approximately $50 million, produces breads and rolls distributed to customers and consumers in South Carolina, eastern Georgia and north Florida. (See Note 4)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     The following discussion of the financial condition and results of operations of the company as of and for the twelve and forty week periods ended October 7, 2006 should be read in conjunction with the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

OVERVIEW:

     Flowers Foods, Inc. is one of the nation’s leading producers and marketers of packaged bakery foods for retail and foodservice customers. The company produces breads, buns, rolls, snack cakes and pastries that are distributed fresh in the Southeast, Southwest and Mid-Atlantic regions and frozen to customers nationwide. Our businesses are organized into two reportable segments. Flowers Bakeries produces fresh and frozen packaged bread and rolls and Flowers Specialty produces frozen bread and rolls, as well as fresh snack products. This organizational structure is the basis of the operating segment data presented in this report.

     Our mission is to build value for our shareholders. We accomplish this by developing long-term strategies that help us maintain competitive advantages. Our strategies are based on the production, distribution and marketing requirements of the distribution channels we serve as one of the nation’s leading producers and marketers of bakery products. Our operating strategies are:

	§		Grow sales — both organically and through acquisition;
	§		Develop bakery products to meet our customers’ and our consumers’ needs;
	§		Strong brand recognition;

	§		Provide extraordinary service for our customers;
	§		Operate the country’s most efficient bakeries;
	§		Innovate to improve our business; and
	§		Offer a work environment that embraces diversity, fosters team spirit and encourages professional growth.

     We aim to achieve consistent and sustainable growth in sales and earnings by focusing on improvement in the operating results of our existing businesses and, after detailed analysis acquiring businesses that add value to the company. As discussed in Note 14 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q, during February 2006, the company acquired Derst Baking Company in Savannah, Georgia, adding markets in South Carolina, eastern Georgia and north Florida. In October 2005, the company purchased land and a building in Newton, North Carolina and converted the building into a bakery facility. This facility began producing buns in May 2006 and expects to begin producing bread in the spring of 2007.

CRITICAL ACCOUNTING POLICIES:

     Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). These principles are numerous and complex. Our significant accounting policies are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. 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. In our Form 10-K for the fiscal year ended December 31, 2005, we discuss the areas where we believe that the estimates, judgments or interpretations that we have made, if different, would have yielded the most significant differences in our financial statements and we urge you to review that discussion. In addition to these critical accounting policies, the company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share Based Payment (“SFAS 123R”) on January 1, 2006. SFAS 123R requires that the value of stock options and similar awards be expensed. Prior to the adoption of SFAS 123R, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), the company applied intrinsic value accounting for its stock option plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The company applied the disclosure-only provisions of SFAS 123 and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123.

MATTERS AFFECTING ANALYSIS:

     Insurance Proceeds from Losses Incurred from Hurricane Katrina. On August 29, 2005, Hurricane Katrina struck the Gulf Coast of the United States and caused catastrophic damage to the area, particularly New Orleans, Louisiana. The company operates a bakery in New Orleans that was affected by the hurricane. The New Orleans bakery was out of operation until December 8, 2005 due to the many problems in the New Orleans area that were not within the company’s control.

     The company received insurance payments of $5.5 million during fiscal 2005 relating to damage associated with Hurricane Katrina. During the second quarter of fiscal 2006, the company received additional insurance proceeds of $1.7 million primarily for business interruption during the first two quarters of fiscal 2006. Of these proceeds, $1.0 million and $0.7 million were allocated to materials, supplies, labor and other production costs and to selling, marketing and administrative expenses, respectively. During the third quarter of fiscal 2006, the company received further proceeds of $2.0 million, of which $1.6 million was reimbursement for property damage (reported as a gain on insurance recovery) and $0.4 million was reimbursement for extra transportation costs and therefore allocated to selling, marketing and administrative expenses. The company has filed additional insurance claims with its insurance provider relating to losses incurred from Hurricane Katrina. At this time, the company is unable to determine the amount and timing of any additional proceeds to be received.

     During the third quarter of fiscal 2005, the company incurred costs of $5.7 million relating to the hurricane. A preliminary insurance payment of $1.5 million was received, therefore, the net effect of costs incurred in the third quarter of fiscal 2005 related to the hurricane was $4.2 million.

RESULTS OF OPERATIONS:

     Results of operations, expressed as a percentage of sales, for the twelve and forty week periods ended October 7, 2006 and October 8, 2005, are set forth below:

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 7, 2006				OCTOBER 8, 2005				OCTOBER 7, 2006				OCTOBER 8, 2005
Sales			100.00	%			100.00	%			100.00	%			100.00	%
Gross margin			49.52				49.52				49.94				49.88
Selling, marketing and administrative expenses			40.13				40.97				40.25				40.37
Depreciation and amortization			3.35				3.31				3.36				3.39
Gain on insurance recovery			(0.36	)			—				(0.16	)			—
Interest income, net			(0.24	)			(0.36	)			(0.27	)			(0.38	)
Income from continuing operations before income taxes, minority interest and cumulative effect of a change in accounting principle			6.64				5.60				6.76				6.50
Income tax expense			2.36				2.02				2.47				2.45
Minority interest in variable interest entity			(0.40	)			(0.28	)			(0.22	)			(0.18	)
Discontinued operations			1.25				(.40	)			0.46				(0.12	)
Cumulative effect of a change in accounting principle			—				—				(0.04	)			—
Net income			5.13	%			2.90	%			4.49	%			3.75	%

CONSOLIDATED AND SEGMENT RESULTS

TWELVE WEEKS ENDED OCTOBER 7, 2006 COMPARED TO TWELVE WEEKS ENDED OCTOBER 8, 2005

     Consolidated Sales.

		For the 12 Weeks Ended								For the 12 Weeks Ended
		October 7, 2006								October 8, 2005
		$				%				$				%				% Increase
		(Amounts in								(Amounts in
		thousands)								thousands)
Branded Retail		$	225,758				51.2	%		$	209,628				51.4	%			7.7	%
Store Branded Retail			54,473				12.4				47,272				11.6				15.2	%
Foodservice and Other			160,860				36.4				151,105				37.0				6.5	%
Total		$	441,091				100.0	%		$	408,005				100.0	%			8.1	%

     The 8.1% increase in sales was attributable to price increases of 6.2% and favorable product mix shifts of 2.6%, partially offset by unit volume declines of 0.7%. The 1.9% increase in mix, net of the decrease in volume, resulted from the expansion of the company’s DSD system into new markets and new products, which contributed 0.5% and the February 2006 acquisition of Derst Baking Company, which contributed 3.0%, partially offset by a volume decrease of 1.6%, primarily as a result of decreases in Flowers Specialty discussed below. The increase in branded retail sales was due primarily to the acquisitions and increases in pricing. The company’s branded white bread labels and its Nature’s Own products were the key components of these sales. The increase in store branded retail sales was due to price and volume increases. The increase in foodservice and other sales was primarily due to price increases and favorable product mix shifts, partially offset by a decrease in volume, primarily contract manufacturing.

     Flowers Bakeries Sales.

		For the 12 Weeks Ended								For the 12 Weeks Ended
		October 7, 2006								October 8, 2005
		$				%				$				%				% Increase
		(Amounts in								(Amounts in
		thousands)								thousands)
Branded Retail		$	206,723				58.4	%		$	188,625				58.6	%			9.6	%
Store Branded Retail			47,925				13.5				41,805				13.0				14.6	%
Foodservice and Other			99,344				28.1				91,583				28.4				8.5	%
Total		$	353,992				100.0	%		$	322,013				100.0	%			9.9	%