FLOWERS FOODS INC (FLO) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Item 1., Business, and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this Form 10-K. The following information contains forward-looking statements which involve certain risks and uncertainties. See Forward-Looking Statements at the beginning of this Form 10-K.

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

MATTERS AFFECTING COMPARABILITY

Detailed below are expense (recovery) items affecting comparability that will provide additional context while reading this discussion:

Business process improvement consulting costs related to the transformation strategy initiatives.  In the second half of Fiscal 2020, we launched initiatives to transform how we operate our business, which includes upgrading our information system to a more robust platform, as well as investments in e-commerce, autonomous planning, and our “bakery of the future” initiative.  These transformation strategy initiatives are further discussed in Item 1., Business, of this Form 10-K.  In Fiscal 2022, we currently expect costs for the upgrade of our ERP system (a portion of which may be expensed as incurred, capitalized, recognized as a cloud computing arrangement, or recognized as a prepaid service contract) to be approximately $85 million to $95 million. Costs related to our digital strategy initiatives are anticipated in Fiscal 2022, but these amounts cannot currently be estimated. The expensed portion of the consulting costs related to both the ERP upgrade and digital strategy initiatives incurred in Fiscal 2021 was $31.3 million and is reflected in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income. Initial road mapping costs for these initiatives were incurred in Fiscal 2020 and are included in the “ERP Road Mapping consulting costs” in the table above.

Project Centennial consulting costs.  During the second quarter of Fiscal 2016, we launched Project Centennial, an enterprise-wide business and operational review.  Key initiatives of the project were to enhance revenue growth, improve efficiencies, streamline operations, and make investments to strengthen our competitive position and improve margins over the long-term.   The project was completed at the end of Fiscal 2020.  Consulting costs associated with the project in Fiscal 2020 were $15.5 million and primarily related to further refining our organizational structure, portfolio and supply chain optimization initiatives, and improving our cake

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operations. These consulting costs are reflected in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income.

Consulting costs for planning the upgrade of our ERP platform and the broader digital strategy initiative.  As discussed above and in Item 1., Business, of this Form 10-K, we began planning for the upgrade of our ERP platform and other system related enhancements (the “ERP road mapping”) during the third quarter of Fiscal 2020.  We incurred consulting costs associated with these activities of $4.4 million and these costs are reflected in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income. We completed the initial road mapping activities in the fourth quarter of Fiscal 2020 and transitioned to the design phase of the project.

Restructuring and related impairment charges associated with Project Centennial.  The following table details charges recorded in Fiscal 2020 (amounts in thousands):

In Fiscal 2020, the company reevaluated its organizational structure in an effort to increase its focus on brand growth and product innovation and to improve underperforming bakeries.  The organizational structure changes resulted in employee termination benefits charges in Fiscal 2020 related to a voluntary employee separation plan (the “VSIP”) of $2.6 million and an involuntary reduction-in-force plan of $5.3 million. The VSIP and reduction-in-force plans together eliminated approximately 250 positions across different departments and job levels and all remaining payments related to the plans were paid in early Fiscal 2021.

During Fiscal 2020, the company sold three closed bakeries that were included in assets held for sale and certain idle equipment at other bakeries, resulting in the recognition of $5.7 million of impairment charges.  Additionally, the company recognized property, plant, and equipment impairment charges of $0.6 million for manufacturing line and distribution depot closures and an office building the company decided to sell, and $0.7 million for spare parts related to equipment the company no longer intended to use.

In order to optimize our distribution network, we vacated certain distribution depots during the third quarter of Fiscal 2020, some of which are owned and others that are leased.  These actions resulted in the recognition of lease termination charges and lease impairment charges totaling $13.5 million.

Additionally, in order to optimize sales and production of our organic products, the company decided to cease using the Alpine Valley brand, a finite-lived trademark, resulting in a $4.6 million impairment charge in the second quarter of Fiscal 2020.  The company decided to cease using one of its regional brands and recognized a $1.3 million impairment charge in the fourth quarter of Fiscal 2020.  Ingredient and packaging impairments of $1.2 million were also recognized as a result of brand rationalization initiatives.

Loss on inferior ingredients. In the fourth quarter of Fiscal 2021, the company issued a voluntary recall on certain Tastykake multi-pack cupcakes sold in eight states and certain Tastykake Krimpets distributed to retail customers throughout the U.S. due to the potential presence of tiny fragments of metal mesh wire.  The recall was initiated following notification by a vendor of the possible contamination in a supplied ingredient.  The company incurred costs of $1.8 million related to the recall in Fiscal 2021 and these costs are recorded in our Consolidated Statements of Income.  The company is seeking recovery of these losses.

In Fiscal 2020, we incurred costs of $1.0 million related to receiving inferior ingredients used in the production of certain of our gluten-free products.  In the first quarter of Fiscal 2021, we incurred an additional $0.1 million of costs related to the inferior gluten-free ingredients and in the third quarter of Fiscal 2021, we received reimbursements of approximately $1.0 million for these previously incurred costs.  These costs and reimbursements are recorded in the loss on inferior ingredients line item of the Consolidated Statements of Income.

In Fiscal 2020, in addition to the costs related to inferior gluten-free ingredients, we recognized an adjustment of $0.2 million related to previously recorded inferior yeast costs and received a $1.2 million reimbursement for the direct costs associated with receiving inferior yeast in a prior year. These direct costs and reimbursements of direct costs are included in our Consolidated Income Statements.  We also received a reimbursement of $3.9 million for indirect losses associated with receiving inferior yeast in a prior

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year and this amount is included in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

Non-restructuring lease termination gain.  In Fiscal 2021, the company purchased twenty-seven warehouses that were included in the company’s operating leased assets.  Two of the purchased properties were fully impaired in Fiscal 2020, resulting in the recognition of a $2.6 million gain upon completion of the purchase of these assets and this amount is included in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

In Fiscal 2020, due to a change in the contractual terms with a transportation entity that transports a significant portion of our fresh bakery products to allow for substitution of assets, among other changes to the terms, a reassessment of the embedded lease accounting treatment was triggered.  Based our analysis, we determined the contracts associated with the transportation entity no longer qualify for embedded lease treatment and, in unwinding these leases, the company recognized a noncash gain of $4.1 million in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income.

Pension plan settlement and curtailment loss.  In the company-sponsored defined benefit pension plan for union employees (“Plan No. 2”), retired and terminated vested pension plan participants not yet receiving their benefit payments have the option to elect to receive their benefit as a single lump sum payment.  In the fourth quarter of Fiscal 2021, a settlement charge of $0.4 million was triggered as a result of lump sum distributions paid in Fiscal 2021.

On September 28, 2018, the Board approved a resolution to terminate the Flowers Foods, Inc. Retirement Plan No. 1 (“Plan No. 1”), effective December 31, 2018.  In the first quarter of Fiscal 2020, the company distributed a portion of the pension plan assets to participants as lump sum payments and transferred the remaining obligations and assets to an insurance company in the form of a nonparticipating group annuity contract.  No cash contributions were required in Fiscal 2020 to support this transaction.  In Fiscal 2020, the company recognized $108.8 million of non-cash pension termination charges, comprised of a settlement charge of $104.5 million and a curtailment loss of $4.3 million, and an additional $0.1 million of cash charges for other pension termination charges in our Consolidated Statements of Income.

Acquisition consideration adjustment.  In connection with an acquisition completed in Fiscal 2012, the company agreed to make the selling shareholders whole for certain taxes incurred by the stakeholders on the sale.  There was recently a tax determination that the selling shareholders owed additional taxes.  Unless there is a successful appeal which overturns the determination, the company estimates that it will owe the shareholders approximately $3.4 million, and the Company has recorded this cost in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income in Fiscal 2021.

Legal settlements and related costs.  In Fiscal 2021, we reached an agreement to settle certain distributor-related litigation for a settlement payment, inclusive of plaintiffs’ attorney fees, of $16.5 million.  The settlement also requires a phased repurchase of approximately 75 distribution rights and the company estimates this cost to be approximately $6.6 million.  The terms of the settlement require court approval.  In Fiscal 2020, we reached agreements to settle distributor-related litigation in the aggregate amount of $7.3 million, including plaintiffs’ attorney fees and the company’s FICA obligations.  All amounts related to legal settlements and related costs are recorded in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income.  At January 1, 2022, $23.1 million of settlements were accrued (inclusive of obligations for repurchase of distribution rights).

Loss on extinguishment of debt. On April 8, 2021, we completed the early redemption of the Company’s $400.0 million of 4.375% senior notes due 2022 (the “2022 notes”) with proceeds received from the issuance of the Company’s $500.0 million of 2.400% senior notes due 2031 (the “2031 notes”) on March 9, 2021.  We recognized a loss on extinguishment of debt of $16.1 million comprised of a make-whole cash payment of $15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling $0.7 million.

Multi-employer pension plan withdrawal costs.  On September 22, 2021, the union participants of the Retail, Wholesale and Department Store Union Fund (the “Fund”) at our Birmingham, Alabama plant voted to withdraw from the Fund in the most recent collective bargaining agreement.  The withdrawal was effective, and the union participants became eligible to participate in the Flowers Foods, Inc. 401(k) Retirement Savings Plan, on December 1, 2021.  This resulted in the recognition of a pension plan withdrawal liability of $3.3 million (including transition payments) in our Consolidated Statements of Income.  The transition payments were paid in December 2021 and the withdrawal liability is anticipated to be paid in the first half of Fiscal 2022.  While this is our best estimate of the ultimate cost of the withdrawal from this Fund, additional withdrawal liability may be incurred based on the final Fund assessment or in the event of a mass withdrawal as defined by statute, occurring any time within the next three years following our complete withdrawal.

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Additional Items Impacting Comparability

Reporting Periods.    The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2021 consisted of 52 weeks and Fiscal 2020 consisted of 53 weeks.  Fiscal 2022 will consist of 52 weeks.

COVID-19.  On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide, which led to adverse impacts on the U.S. and global economies. Due to the drastic change in consumer buying patterns as a result of the COVID-19 pandemic, we experienced a favorable shift in sales mix to our branded retail products as consumers increased at-home consumption of food products resulting in significant growth in income from operations in Fiscal 2021 and 2020 as compared to Fiscal 2019.  As shutdowns and capacity restrictions imposed at the onset of the pandemic have eased, our sales volumes have declined in Fiscal 2021 as compared to the prior year, which included the peak period of demand for our branded retail products and an additional week.  Improved price/mix in Fiscal 2021 resulting from favorable pricing we have implemented and the continued favorable shift in mix from store branded retail to branded retail sales partially offset the volume declines.  For additional details on the impact of the COVID-19 pandemic to our business operations and results of operations, see the “Executive Overview – Impact of COVID-19 on Our Business,” “Results of Operations” and “Liquidity and Capital Resources” sections below.

Conversion of our Lynchburg, Virginia bakery to organic production. During Fiscal 2020, we converted our Lynchburg, Virginia bakery to an all-organic production facility.  The converted facility has increased production capacity for our DKB products, allowing the company to better serve east coast markets with fresher product and reduce distribution costs.  We incurred start-up costs related to the conversion of approximately $5.1 million in Fiscal 2020 and these costs are included in materials, supplies, labor and other production costs in our Consolidated Statements of Income.  The bakery resumed production at the end of the third quarter of Fiscal 2020.

EXECUTIVE OVERVIEW

We are the second-largest producer and marketer of packaged bakery foods in the U.S. with Fiscal 2021 sales of $4.3 billion.  We operate in the highly competitive fresh bakery market.  Our product offerings include a wide range of fresh breads, buns, rolls, snack cakes and tortillas, as well as frozen breads and rolls, which we produce at 46 plants in 18 states. Our products are sold under leading brands such as Nature’s Own, Dave’s Killer Bread, Canyon Bakehouse, Tastykake, Mrs. Freshley’s, and Wonder.  See Item 1., Business, of this Form 10-K for additional information regarding our customers and brands, business strategies, strengths and core competencies, and competition and risks.

Impact of COVID-19 on Our Business:

The COVID-19 pandemic has significantly impacted our business operations and results of operations during Fiscal 2021 and 2020, as further described under “Results of Operations” and “Liquidity and Capital Resources” below.  The resulting dramatic changes in consumer buying patterns has led to a significant rise in demand for our branded retail products due to increases in at-home dining.  Sales through our non-retail category, which includes foodservice, restaurant, institutional, vending, thrift stores, and contract manufacturing, declined substantially at the onset of the pandemic in March of Fiscal 2020, but as the pandemic has progressed and mandatory shutdowns and restaurant closures across the U.S. have eased, our non-retail sales have been recovering. Fiscal 2021 sales declined 1.3% mostly due to the additional week in the prior year which negatively impacted Fiscal 2021 sales 1.7%.  Although the prior year benefitted from the significant rise in demand for our branded retail products at the beginning of the COVID-19 pandemic, as well as positive shifts in mix throughout the year and the additional week, Fiscal 2021 benefitted from favorable pricing, a continued positive shift in mix from store branded retail to branded retail products, and a partial recovery in non-retail sales. Fiscal 2021 sales remained elevated compared to pre-pandemic levels as we continued to benefit from the positive mix shift to branded retail products during the ongoing pandemic and favorable pricing, partially offset by volume declines.

In recognition and support of our frontline workers, in Fiscal 2021 and 2020, we paid $5.2 million and $12.3 million, respectively, in appreciation bonuses to eligible hourly and non-exempt employees, leased labor, and contract workers.  These appreciation bonuses are in addition to the company’s annual performance-based cash incentive plan, in which all Flowers employees participate. Although our branded retail sales volumes have moderated as the pandemic has continued, we cannot currently estimate when or if they will return to pre-pandemic levels.

On April 14, 2020, we temporarily ceased production at our Tucker, Georgia bakery and on July 9, 2020, we temporarily ceased production at our Savannah, Georgia bakery.  Both closures were due to an increase in the number of confirmed COVID-19 cases at these bakeries and the related increase in number of workers self-quarantining.  Production resumed at the Tucker bakery on April 27, 2020 and at the Savannah Bakery on July 17, 2020.  Although our other bakeries were able to assist with meeting production needs in these instances, the potential closure of several of our bakeries across the country at the same time – or in close succession – could negatively affect our ability to meet our production requirements, even if the interruption is temporary.  While we have had no

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temporary production interruptions in Fiscal 2021 due to COVID-19, such interruptions are possible due to the uncertainty of the pandemic.  Additionally, unforeseen disruptions in other areas of our operations, including but not limited to procurement of raw materials, transport of our products, or recovery by our foodservice customers, could negatively impact our operations, results of operations, cash flows, and liquidity.

We believe we have sufficient liquidity to satisfy our cash needs and we continue to take steps to preserve adequate liquidity during the ongoing pandemic as further discussed in the “Liquidity and Capital Resources” section below.  As discussed further in Item 1., Business, of this Form 10-K, we are continuing to move forward with the upgrade of our ERP system and other transformation strategy initiatives and do not anticipate the pandemic to materially alter the timing of these initiatives.

We continue to monitor the impact of the ongoing COVID-19 pandemic on our business operations, results of operations, and liquidity. Our operations may continue to experience disruption due to the continued uncertainty caused by the pandemic, including but not limited to additional variants of the COVID-19 virus, new geographic hotspots, changes in the number of COVID-19 cases, the rate of vaccination within the U.S. population and the efficacy of the vaccines, changes in the global and U.S. economic environment, and changes in pandemic safety policies.  Additionally, if there is a significant shift in mix from branded retail to store branded retail products, we expect that our results of operations, including our net sales, earnings, and cash flows, could be negatively impacted.

Our main focus throughout the pandemic has been and continues to be the health and safety of our team members and independent distributor partners. From the start of the pandemic, we have followed the guidance of the U.S. Centers for Disease Control and Prevention (CDC), taking a number of recommended steps to safeguard those in our facilities. These steps included, but are not limited to, monitoring the symptoms of everyone entering our facilities, requiring face coverings, maintaining (where possible) social distancing of six feet, conducting enhanced cleaning and sanitizing of common areas and frequently touched surfaces, performing decontamination of work areas and equipment when there is a confirmed or presumptive case of COVID-19 at a facility, and contact tracing. Company-wide bans on non-essential travel and non-essential visitors at all locations were put into place, corporate offices were closed, and office staff were directed to work remotely. In addition, the company issued regular communications about COVID-19 prevention steps. When COVID-19 vaccinations became available, we shared educational information with our team members and encouraged vaccination for those eligible.

We have followed the guidance issued by the CDC and the U.S. Occupational Safety and Health Administration (OSHA) and modified our face mask and wellness screening policies to align with local, state, and workplace safety regulations. We remain vigilant in reporting COVID-19 cases in our facilities and continue to evaluate our pandemic safety measures as the pandemic evolves. The majority of employees in non-production roles continue to work remotely. We intend to implement a work policy in 2022 addressing guidelines for three distinct work personas: full-time remote, full-time in office, or flex, a combination of the two. These plans may be impacted by, among other things, consideration of pandemic safety measures, the rate of vaccinations and the efficacy of the vaccines, the threat of additional COVID-19 variants, and the ability of office staff to work effectively from remote locations. Although the impact of these measures, or any other measures adopted by governmental authorities, on our business and workforce is uncertain, these requirements may result in increased costs and could have an adverse effect on our business, results of operations, and financial condition.

During Fiscal 2021, we experienced labor shortages at some of our bakeries. A number of factors may continue to adversely affect the labor force available to us, including high employment and government regulations. In addition, there also are factors that may negatively affect our ability to efficiently operate our production lines or run at full capacity. These might include, but are not limited to, a labor shortage or increased turnover rates within our workforce that could lead to increased labor costs, including additional overtime to meet demand and higher wage rates to attract and retain workers. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation could have a material adverse impact on the company’s operations, results of operations, liquidity, or cash flows.

Summary of Operating Results, Cash Flows and Financial Condition:

Sales decreased 1.3% in Fiscal 2021 compared to Fiscal 2020 mostly due to the additional week in the prior year.  Although the prior year benefitted from the significant rise in demand for our branded retail products at the beginning of the COVID-19 pandemic and the additional week, Fiscal 2021 benefitted from positive pricing and a continued positive shift in mix from store branded retail to branded retail products and a partial recovery in non-retail sales.

Income from operations for Fiscal 2021 was $294.9 million compared to $321.5 million in the prior year.  The decrease resulted from sales declines, input cost inflation, higher consulting costs and legal settlements, and greater investments in marketing in the current year, partially offset by prior year restructuring and related impairment charges, and higher short-term incentive compensation paid for appreciation bonuses and workforce-related performance-based cash incentive plans in the prior year.

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Net income was $206.2 million for Fiscal 2021, an increase of 35.4% as compared to the prior year.  The improvement in the current year resulted primarily from the $108.8 million non-cash pension plan settlement and curtailment loss ($81.6 million net of tax) in the prior year in connection with the termination of Plan No. 1, partially offset by the $16.1 million loss on extinguishment of debt ($12.1 million net of tax) recognized in the current year and decreased income from operations year over year.

In Fiscal 2021, we generated net cash flows from operations of $344.6 million, invested $136.0 million in capital expenditures, and purchased a portfolio of leased warehouses for $64.7 million.  Additionally, we paid $175.9 million in dividends to our shareholders and decreased our total indebtedness by $81.9 million.  On March 9, 2021, we issued the 2031 notes and used the net proceeds from the offering to complete the early redemption of our outstanding 2022 notes and for other debt repayments. Throughout Fiscal 2021, we continued to maintain higher levels of cash on hand compared to pre-pandemic levels in order to ensure future liquidity, although we do not have any presently anticipated need for this additional liquidity. Our cash and cash equivalents balance as of January 1, 2022 was $185.9 million.  In Fiscal 2021, we amended senior unsecured revolving credit facility (the “credit facility”) and our accounts receivable securitization facility (the “AR facility”) to, among other things, extend the maturity dates to July 30, 2026 and September 27, 2023, respectively.

In Fiscal 2020, we generated net cash flows from operations of $454.5 million and invested $97.9 million in capital expenditures.  We increased our total indebtedness by $92.5 million and paid $167.3 million in dividends to our shareholders in Fiscal 2020.  During the first quarter of Fiscal 2020, we borrowed an additional amount under the credit facility in order to ensure future liquidity in response to the uncertainty caused by the pandemic and cash and cash equivalents at January 2, 2021 were $307.5 million.

Critical Accounting Estimates

The company’s discussion and analysis of its results of operations and financial condition are based upon the Consolidated Financial Statements of the company, which have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these financial statements requires the company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues, expenses, and cash flows during the reporting period. On an ongoing basis, the company evaluates its estimates, including those related to customer programs and incentives, bad debts, raw materials, inventories, long-lived assets, leased assets, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The selection and disclosure of the company’s critical accounting estimates have been discussed with the company’s audit committee. Note 2, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements of this Form 10-K includes a summary of the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.  The following table lists, in no particular order of importance, areas of critical assumptions and estimates used in the preparation of the Consolidated Financial Statements.  Additional detail can be found in the following notes:

Revenue Recognition.    Revenue is recognized when obligations under the terms of a contract with our customers are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.  The company records both direct and estimated reductions to gross revenue for customer programs and incentive offerings at the time the incentive is offered or at the time of revenue recognition for the underlying transaction that results in progress by the customer towards earning the incentive. These allowances include price promotion discounts, coupons, customer rebates, cooperative advertising, and product returns. Consideration payable to a customer is recognized at the time control transfers and is a reduction to revenue.   The recognition of costs for promotion programs involves the use of judgment related to performance and redemption

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estimates. Estimates are made based on historical experience and other factors. Price promotion discount expense is recorded as a reduction to gross sales when the discounted product is sold to the customer.

Derivative Financial Instruments.    The company’s cost of primary raw materials is highly correlated to certain commodities markets. Raw materials, such as our baking ingredients, experience price fluctuations. If actual market conditions become significantly different than those anticipated, raw material prices could increase significantly, adversely affecting our results of operations. We enter into forward purchase agreements and other derivative financial instruments qualifying for hedge accounting to manage the impact of volatility in raw material prices. The company measures the fair value of its derivative portfolio using 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. When quoted market prices for identical assets or liabilities are not available, the company bases fair value on internally developed models that use current market observable inputs, such as exchange-quoted futures prices and yield curves. Refer to Item 7A., Quantitative and Qualitative Disclosures About Market Risk, of this Form 10-K for additional information about our derivative financial instruments, including a sensitivity analysis of the company’s potential exposure to commodity price risk.

Valuation of Long-Lived Assets, Goodwill and Other Intangible Assets.    The company records an impairment charge to property, plant and equipment, goodwill and intangible assets in accordance with applicable accounting standards when, based on certain indicators of impairment, it believes such assets have experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of these underlying assets could result in losses or an inability to recover the carrying value of the asset that may not be reflected in the asset’s current carrying value, thereby possibly requiring impairment charges in the future. Impairment charges recorded in Fiscal 2020 are discussed above in the “Matters Affecting Comparability” section.

Flowers has concluded it has one operating segment based on the nature of products that Flowers sells, an intertwined production and distribution model, the internal management structure and information that is regularly reviewed by the CEO, who is the chief operating decision maker, for the purpose of assessing performance and allocating resources. The company also determined we have one reporting unit.

The company evaluates the recoverability of the carrying value of its goodwill on an annual basis or at a time when events occur that indicate the carrying value of the goodwill may be impaired. We have elected not to perform the qualitative approach, but instead perform a quantitative analysis by comparing the fair value of the reporting unit with which the goodwill is associated to the carrying amount of the reporting unit.  If the fair value is less than the carrying value, the goodwill is written down to the extent the carrying amount exceeds the fair value.

Our annual evaluation of goodwill impairment requires management judgment and the use of estimates and assumptions to determine the fair value of our reporting unit. Fair value is estimated using standard valuation methodologies incorporating market participant considerations and management’s assumptions on revenue, revenue growth rates, operating margins, discount rates, and EBITDA (defined as earnings before interest, taxes, depreciation and amortization). Our estimates can significantly affect the outcome of the test. We perform the fair value assessment using the income and market approach. Changes in our forecasted operating results and other assumptions could materially affect these estimates. This test is performed in the fourth quarter of each fiscal year unless circumstances require this analysis to be completed sooner. The income approach is tested using a sensitivity analysis to changes in the discount rate and yield a sufficient buffer to significant variances in our estimates.  The estimated fair value of our reporting unit exceeded its carrying value in excess of $4.0 billion in Fiscal 2021. A 1% decrease in the discount rate would increase the fair value of the reporting unit by $1.1 billion and a 1% increase in the discount rate would decrease the fair value by $0.8 billion. Based on management’s evaluation, no impairment charges relating to goodwill were recorded for Fiscal 2021 or 2020.

In connection with acquisitions, the company has acquired trademarks, customer lists, and non-compete agreements, a portion of which are amortizable. The company evaluates these assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The undiscounted future cash flows of each intangible asset are compared to the carrying amount, and if less than the carrying value, the intangible asset is written down to the extent the carrying amount exceeds the fair value. The fair value is computed using the same approach described above for goodwill and includes the same risks and estimates. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment. We use the multi-period excess earnings and relief from royalty methods to value these intangibles. The method used for impairment testing purposes is consistent with the valuation method employed at acquisition of the intangible asset.  No impairment charges related to amortizing intangible assets were recorded in Fiscal 2021.  Impairment charges recorded in Fiscal 2020 related to amortizable intangible assets totaled $5.9 million and are discussed above in the “Matters Affecting Comparability” section.

As of January 1, 2022, the company also owns a trademark acquired through an acquisition with a carrying value of $127.1 million that is an indefinite-lived intangible asset not subject to amortization. The company evaluates the recoverability of intangible assets not subject to amortization by comparing the fair value to the carrying value on an annual basis or at a time when events occur that indicate the carrying value may be impaired. In addition, the assets are evaluated to determine whether events and circumstances continue to support an indefinite life. The fair value is compared to the carrying value of the intangible asset, and if less than the carrying value, the intangible asset is written down to fair value. There are certain inherent risks included in our expectations about the

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performance of acquired trademarks and brands. If we are unable to implement our growth strategies for these acquired intangible assets as expected, it could adversely impact the carrying value of the brands. The fair value of the trademarks could be less than our carrying value if any of our four material assumptions in our fair value analysis: (a) weighted average cost of capital; (b) long-term sales growth rates; (c) forecasted operating margins; and (d) market multiples do not meet our expectations, thereby requiring us to record an asset impairment.

Leases.    The company’s leases consist of the following types of assets: two bakeries, corporate office space, warehouses, bakery equipment, transportation, and IT equipment. The company uses the applicable incremental borrowing rate at lease commencement to perform the lease classification tests on lease components and to measure the lease liabilities and right-of-use assets in situations when discount rates implicit in leases cannot be readily determined.

Self-Insurance Reserves.    We are self-insured for various levels of general liability, auto liability, workers’ compensation, and employee medical and dental coverage. Insurance reserves are calculated on a combination of an undiscounted basis based on actual claims data and estimates of incurred but not reported claims developed utilizing historical claims trends.  Projected settlements of incurred but not reported claims are estimated based on pending claims, historical trends, industry trends related to expected losses and actual reported losses, and key assumptions, including loss development factors and expected loss rates. Though the company does not expect them to do so, actual settlements and claims could differ materially from those estimated. Material differences in actual settlements and claims could have an adverse effect on our financial condition and results of operations.

A sensitivity analysis has been prepared to quantify the impact of changes in claim severity and frequency on the estimated unpaid losses on the company’s workers’ compensation liabilities.  We estimate a 1% change in the claim severity and frequency would result in immaterial changes in the workers’ compensation liability.

Income Tax Expense and Accruals.    The annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Changes in statutory rates and tax laws in jurisdictions in which we operate may have a material effect on the annual tax rate. The effect of these changes, if any, would be recognized as a discrete item upon enactment.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid.

Our income tax expense, deferred tax assets and liabilities, and reserve for uncertain tax benefits reflect our best assessment of future taxes to be paid in the jurisdictions in which we operate. The company records a valuation allowance to reduce its deferred tax assets if we believe it is more likely than not that some or all of the deferred assets will not be realized. While the company considers future taxable income and ongoing prudent and feasible tax strategies in assessing the need for a valuation allowance, if these estimates and assumptions change in the future, the company may be required to adjust its valuation allowance, which could result in a charge to, or an increase in, income in the period such determination is made.

Periodically, we face audits from federal and state tax authorities, which can result in challenges regarding the timing and amount of income or deductions. We provide reserves for potential exposures when we consider it more likely than not that a taxing authority may take a sustainable position on a matter contrary to our position. We evaluate these reserves on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements that may impact the ultimate payment of such potential exposures. While the ultimate outcome of audits cannot be predicted with certainty, we do not currently believe that current or future audits will have a material adverse effect on our consolidated financial condition or results of operations. The company is no longer subject to federal examination for years prior to Fiscal 2018.

Postretirement Plans.    The company records pension costs and benefit obligations related to its defined benefit plans based on actuarial valuations. These valuations reflect key assumptions determined by management, including the discount rate, expected long-term rate of return on plan assets and mortality. Material changes in pension costs and in benefit obligations may occur in the future due to experience that is different than assumed and changes in these assumptions.  A sensitivity analysis of pension costs has been prepared to quantify the impact of changes in the discount rate.  We estimate a 0.25% change in the discount rate would result in approximately $0.1 million change in pension costs on a pre-tax basis.

The company sponsors a defined benefit pension plan for union employees, Plan No. 2, and a frozen nonqualified plan covering former Tasty executives.

We use a spot rate approach (“granular method”) to estimate the service cost and interest cost components of benefit cost by applying the specific spot rates along the yield curve to the relevant projected cash flows, as we believe this provides the best estimate of service and interest costs.

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The pension plan’s investment committee, which consists of certain members of management, establishes investment guidelines and regularly monitors the performance of the plan’s assets.  The investment committee is responsible for executing these strategies and investing the pension assets in accordance with ERISA and fiduciary standards.  The investment objective of the pension plan is to preserve the plan’s capital and maximize investment earnings within acceptable levels of risk and volatility.  The investment committee meets on a regular basis with its investment advisors to review the performance of the plan’s assets.  Based upon performance and other measures and recommendations from its investment advisors, the investment committee rebalances the plan’s assets to the targeted allocation when considered appropriate.  The asset allocation for Plan No. 2 as of December 31, 2021 is equal to 0-80% equity securities, 20-100% fixed-income securities, and 0-10% short-term investments and cash. For the details of our pension plan assets, see Note 20, Postretirement Plans, of Notes to Consolidated Financial Statements of this Form 10-K.

In developing the expected long-term rate of return on plan assets at each measurement date, the company considers the plan assets’ historical actual returns, targeted asset allocations, and the anticipated future economic environment and long-term performance of the individual asset classes, based on the company’s investment strategy.  While appropriate consideration is given to recent and historical investment performance, the assumption represents management’s best estimate of the long-term prospective return.  Further, pension costs do not include an explicit expense assumption, and therefore the return on assets rate reflects the long-term expected return, net of expenses.  Based on these factors, the long-term rate of return assumption for Plan No. 2 was set at 5.7% for Fiscal 2021 and 5.9% for Fiscal 2022.

The company utilizes the Society of Actuaries’ (“SOA”) published mortality tables and improvement scales in developing their best estimates of mortality. In October 2019, the SOA published its final report on their “standard” mortality table (“Pri-2012”).  For purposes of measuring pension benefit obligations of Plan No. 2, the company used a blue color adjustment to the Pri-2012 base table and a projection scale of MP-2020.  No other collar adjustments are applied for any other plans.  In addition, contingent annuitant mortality rates are applied for surviving spouses after the death of the original retiree.

The company determines the fair value of substantially all of its plans’ assets utilizing market quotes rather than developing “smoothed” values, “market related” values, or other modeling techniques.  Plan asset gains or losses in a given year are included with other actuarial gains and losses due to remeasurement of the plans’ projected benefit obligations (“PBO”). If the total unrecognized gain or loss exceeds 10% of the larger of (i) the PBO or (ii) the market value of plan assets, the excess of the total unrecognized gain or loss is amortized over the expected average remaining service period of active covered employees (or average future lifetime of participants if the plan is inactive or frozen).  Prior service cost or credit, which represents the effect on plan liabilities due to plan amendments, is amortized over the average remaining service period of active covered employees (or average future lifetime if the plan is inactive or frozen).

In Fiscal 2022, the company expects to make a $1.0 million voluntary cash contribution to Plan No. 2 and expects to pay $0.3 million in nonqualified pension benefits from corporate assets.

Stock-based compensation.    Stock-based compensation expense for all share-based payment awards granted is determined based on the grant date fair value. The company recognizes these compensation costs net of an estimated forfeiture rate, and recognizes compensation cost only for those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the share-based payment award.

We grant performance stock awards that separately have a market and performance condition. The expense computed for the total shareholder return shares (“TSR”) is fixed and recognized on a straight-line basis over the vesting period. The expense computed for the return on invested capital (“ROIC”) shares can change depending on the expected attainment of performance condition goals. The expense for the ROIC shares can be within a range of 0% to 125% of the target. There is a possibility that this expense component will change in subsequent quarters depending on how the company performs relative to the ROIC target. Additionally, there are time-based stock awards that vest over a period of three years.  See Note 18, Stock-Based Compensation, of Notes to Consolidated Financial Statements of this Form 10-K for additional information.  In early Fiscal 2022, the company granted stock awards to certain employees and stock-based compensation expense is expected to increase approximately $2 million to $3 million as compared to Fiscal 2021. In addition, the payout for the Fiscal 2020 grant is currently trending at 125% of target and as a result, we anticipate an additional $1.7 million of expense will be recognized in the first quarter of Fiscal 2022.

Commitments and contingencies.  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, including lawsuits related to the independent distributors, which are being handled and defended in the ordinary course of business.  Loss contingencies are recorded at the time it is probable an asset is impaired or a liability has been incurred and the amount can be reasonably estimated.  For litigation claims, the company considers the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the loss.  Losses are recorded in the selling, distribution and administrative expenses line item of the Consolidated Statements of Income.

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Results of Operations

Consolidated Results - Fiscal 2021 compared to Fiscal 2020

The company’s results of operations, expressed as a percentage of sales, are set forth below for Fiscal 2021 and Fiscal 2020:

NM – the computation is not meaningful

Percentages may not add due to rounding.

Sales

(The table above presents certain sales by category that have been reclassified from amounts previously reported to conform to the current period presentation.)

The change in sales was attributable to the following:

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Sales decreased year over year primarily due to the additional week in the prior year and significant declines in store branded retail sales, partially offset by positive pricing implemented during Fiscal 2021 across all sales categories and recovery of non-retail and other sales.  In Fiscal 2021, the company has experienced a favorable sales mix of branded retail sales even as away-from-home dining returned to more normal levels.  The mix of branded retail sales to total sales remained consistent with Fiscal 2020 which benefitted from increased demand for our branded retail products as consumers shifted to greater at-home consumption due to the pandemic.  In Fiscal 2019, branded retail sales comprised 60.1% of total sales which is significantly lower than 66.4% for Fiscal 2021 and 2020.  We continued to invest in our brands in Fiscal 2021, including targeting the e-commerce channel which has experienced significant growth during the ongoing pandemic.  Improved promotional efficiency (measurement of a promotion’s impact on operating performance) in the current year also mitigated the sales decrease.  The promotional environment remained relatively stable during Fiscal 2021, however the sustainability of this trend is uncertain.

Branded retail sales declined year over year primarily due to the additional week in the prior year.  Positive pricing actions and favorable mix shifts in Fiscal 2021 mostly offset volume declines.  We experienced a significant increase in prior year volumes as a result of the onset of the pandemic and the impact of the additional week.  Sales of our branded traditional loaf breads experienced the largest declines as we focused production on these items in the prior year to quickly meet heightened customer demand caused by the shift to mostly at-home consumption at the onset of the pandemic.  Both our DKB organic products and Canyon Bakehouse gluten-free products continued to experience volume growth in Fiscal 2021 which partially offset the branded retail sales decline. Fiscal 2021 volumes were still significantly higher than our historical pre-pandemic levels.

Store branded retail sales declined significantly due to decreased volume for store branded breads, buns and rolls as consumers continued to shift to branded retail products and the impact of the additional week in the prior year.  These decreases were partially offset by increased sales of store branded cake and gluten-free products.  Sales of our store branded retail products had been declining prior to the pandemic and we have experienced an acceleration of this trend during the pandemic, partly due to executing on our strategy to prioritize a more favorable sales mix of branded retail sales.

As discussed above, our non-retail sales recovered during Fiscal 2021 compared to the significant declines experienced in the prior year period due to restaurant and school closures and shutdowns but have not returned to pre-pandemic levels.  Increased foodservice volumes and to a lesser extent, positive price/mix drove the increase, partially offset by the impact of the additional week in the prior year and declines in sales of unsold products through our outlet stores.

We anticipate our Fiscal 2022 sales will be positively impacted by the benefit of price increases implemented during Fiscal 2021 and at the beginning of Fiscal 2022, however, this could potentially be offset to some extent by changes in consumer buying patterns which are unpredictable.

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

Overall, input cost inflation was mostly mitigated by pricing actions implemented in Fiscal 2021 and the continued shift in mix away from lower margin store branded retail products to higher margin branded retail products.  The positive shift in mix resulted from the ongoing COVID-19 pandemic and executing on our strategy to be a more brand-focused company.  Additionally, we realized improvement in our cake operations. Ingredient and packaging costs were significantly higher as percent of sales due to higher input prices, mostly notably for non-organic flour, oils, bread bags, and corrugated packaging.  Reduced outside purchases of product (sales with no associated ingredient costs) also contributed to the increase in ingredient and packaging costs and these are reflected in the Other line item in the table above.  Workforce-related costs decreased as a percent of sales due to lower incentive compensation costs in Fiscal 2021, partly due to decreases in appreciation bonuses for frontline workers of $4.5 million, and the prior year included $5.1 million of start-up costs incurred for the conversion of our Lynchburg, Virginia plant to an organic bakery. These start-up costs were largely workforce-related.  The conversion began in the first quarter of Fiscal 2020 and the bakery resumed production at the end of the third quarter.  As discussed above, the labor market is highly competitive and the company continues to face labor shortages. We anticipate this trend to continue in Fiscal 2022.

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Raw materials, such as our baking ingredients, periodically experience price fluctuations. The cost of these inputs may fluctuate significantly due to government policy and regulation, weather conditions, domestic and international demand and supply, or other unforeseen circumstances. We enter into forward purchase agreements and other derivative financial instruments in an effort to manage the impact of such volatility in raw material prices, but some organic and specialty ingredients do not offer the same hedging opportunities to reduce the impact of price volatility. Any decrease in the availability of these agreements could increase the effective price of these raw materials to us and significantly affect our earnings. We currently anticipate ingredient costs to be significantly higher in Fiscal 2022 relative to Fiscal 2021.

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

Workforce-related costs decreased slightly as a percent of sales compared to the prior year primarily due to lower workforce-related incentive costs, including a $2.6 million decrease in appreciation bonuses paid to frontline workers, mostly offset by wage inflation and a competitive labor market.  The appreciation bonuses are in addition to the company’s annual performance-based cash incentive plan in which all Flowers employees participate. Stock-based compensation expense increased in Fiscal 2021 due to an increase in the number of awards outstanding as compared to Fiscal 2020 and partially offset the overall decrease in workforce-related costs.

Distributor distribution fees decreased as a percent of sales due to the shift in sales mix to include a larger percentage of non-retail and other sales resulting in a smaller portion of our sales being made through IDPs.  Non-retail and other sales experienced a partial recovery in Fiscal 2021 after the significant decline in Fiscal 2020 due to the pandemic.  The decrease in distributor distribution fees was offset by higher transportation costs which are reflected in the Other line item in the table above.

Increases in marketing investments, higher consulting costs, legal settlements, and transportation costs, and the prior year reimbursement of indirect losses for inferior yeast of $3.9 million primarily resulted in the increase in the Other line item in the table above.  We continued to invest in our brands through our marketing efforts, including through broadcast advertising and e-commerce investments, among others.  We incurred $31.3 million of business process improvement consulting costs during Fiscal 2021 associated with ongoing transformation strategy initiatives compared to $15.5 million of Project Centennial consulting costs and $4.4 million of ERP Road Mapping consulting costs both incurred in the prior year.  For additional details regarding these consulting costs and the reimbursement related to inferior ingredients, see the “Matters Affecting Comparability” section above.  In the current year, we incurred $23.1 million of legal settlement and related charges and $3.4 million for the acquisition consideration adjustment compared to $7.3 million of legal settlements in the prior year, as discussed in the “Matters Affecting Comparability” section above.  Additionally, See Note 22, Commitments and Contingencies, of Notes to Consolidated Financial Statements of this Form 10-K for additional information regarding legal settlements.  Higher prices for scrap dough sales in the current year partially offset the overall increase in costs.

Loss on Inferior Ingredients, Restructuring and Related Impairment Charges, and Multi-Employer Pension Plan Withdrawal Costs

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

Depreciation and Amortization Expense

Depreciation and amortization expense was lower in dollars and unchanged as a percent of sales primarily due to a change in the contractual terms with a transportation entity that transports a significant portion of our fresh bakery products no longer qualifying for treatment as an embedded lease as of the end of Fiscal 2020.

Income from Operations

The decrease in income from operations year over year in dollars and as a percent of sales resulted from sales declines, input cost inflation, higher selling, distribution, and administrative expenses, and current year multi-employer pension plan withdrawal costs, as discussed above.  The decrease was partially offset by the prior year restructuring and related impairment charges.

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Pension Plan Settlement and Curtailment Loss

As discussed in the “Matters Affecting Comparability” section above, we recognized $0.4 million of non-cash pension plan settlement charges in Fiscal 2021 associated with Plan No. 2 and $108.8 million of non-cash pension plan settlement and curtailment charges in Fiscal 2020 composed of a settlement charge of $104.5 million and a curtailment loss of $4.3 million associated with Plan No. 1.

Net Interest Expense

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

Loss on Extinguishment of Debt

In the first quarter of Fiscal 2021, we completed the redemption of the outstanding 2022 notes and incurred a loss of $16.1 million due to the make-whole provision of $15.4 million and the write-off of unamortized debt discount and debt issuance costs totaling $0.7 million as further discussed in the “Matters Affecting Comparability” section above.

Income Tax Expense

The effective tax rate for Fiscal 2021 was 23.9% compared to 24.1% in the prior year.  The decrease in the rate year over year was primarily due to state income taxes.

For the current year and prior year, the primary differences in the effective rate and statutory rate related to state income taxes. The Consolidated Appropriations Act, 2021 (CAA Act), American Rescue Plan Act (“ARPA”), and Infrastructure Investment and Jobs Act (“IIJA”) did not have a material impact on the effective tax rate for Fiscal 2021 and there is no anticipated material impact on the effective tax rate in future periods.

Comprehensive Income

The decrease in comprehensive income year over year resulted primarily from recognizing the pension plan settlement and curtailment loss in earnings in the prior year in conjunction with the termination of Plan No. 1 and changes in the fair value of derivatives, net of the increase in net earnings.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION

Strategy

We believe our ability to consistently generate cash flows from operating activities to meet our liquidity needs is one of our key financial strengths.  Furthermore, we strive to maintain a conservative financial position as we believe it allows us flexibility to make investments and acquisitions and is a strategic competitive advantage.  Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures, and obligated debt repayments.  We believe we currently have access to available funds and financing sources to meet our short and long-term capital requirements.  The company’s strategy for use of its excess cash flows includes:

Although there has been no material adverse impact on the company’s results of operations, liquidity or cash flows in Fiscal 2021, the COVID-19 pandemic could significantly impact our ability to generate future cash flows and we continue to evaluate various potential COVID-19-related business risks.  Those potential risks include the possibility of future economic downturns which could result in a significant shift away from our branded retail products to store branded products, foodservice business continuity as customers have experienced disruptions that negatively impacted their sales and could affect their ability to meet their obligations,

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including to the company, an extension of days of sales outstanding as customers shift to work-from-home operations, and possible further impacts to production, among other risks.

In light of the potential risks associated with the ongoing pandemic, the company has taken actions to safeguard its capital position.  We continue to maintain higher levels of cash on hand compared to pre-pandemic levels and, in the first quarter of Fiscal 2021, we issued the 2031 notes and used the net proceeds from the offering to redeem in full the outstanding 2022 notes, extending the earliest maturity date of our non-revolving debt to 2026.  Additionally, we repaid the outstanding balances on both the AR facility and the credit facility with proceeds from the issuance of the 2031 notes and from cash flows from operations.  The ongoing COVID-19 pandemic remains fluid and its future impact on the company’s business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty.  If the company experienced a significant reduction in revenues, the company would have additional alternatives to maintain liquidity, including amounts available on our debt facilities, capital expenditure reductions, adjustments to its capital allocation policy, and cost reductions. Although we do not currently anticipate a need, we also believe that we could access the capital markets to raise additional funds. We believe the fundamentals of the company remain strong and that we have sufficient liquidity on hand to continue business operations during the pandemic. The company had total available liquidity of $872.0 million as of January 1, 2022, consisting of cash on hand and the available balances under the credit facility and the AR facility.

We expect the transformation strategy initiatives will require significant capital investment and expense over the next several years.  We currently anticipate the upgrade of our ERP system will cost approximately $275 million (of which approximately 40% is expected to be capitalized) and anticipate the upgrade to be completed in 2026.  As of January 1, 2022, we had incurred costs related to the project of approximately $47 million. Costs related to the digital initiatives are more fluid and cannot currently be estimated.

The company leases certain property and equipment under various financing and operating lease arrangements. Most of the operating leases provide the company with the option, after the initial lease term, to purchase the property at the then fair value, renew the lease at the then fair value, or return the property. The financing leases provide the company with the option to purchase the property at a fixed price at the end of the lease term. The company believes the use of leases as a financing alternative places the company in a more favorable position to fulfill its long-term strategy for the use of its cash flow. See Note 13, Leases, of Notes to Consolidated Financial Statements of this Form 10-K for detailed financial information regarding the company’s lease arrangements.

Key items impacting our liquidity, capital resources and financial position in Fiscal 2021 and 2020:

Fiscal 2021:

Fiscal 2020:

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Liquidity Discussion

Flowers Foods’ cash and cash equivalents were $185.9 million at January 1, 2022 and $307.5 million at January 2, 2021. The cash and cash equivalents were derived from the activities presented in the table below (amounts in thousands):

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

Net cash for working capital requirements and pension plan contributions included the following items (amounts in thousands):

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Cash Flows Disbursed for Investing Activities.    The table below presents net cash disbursed for investing activities for Fiscal 2021 and 2020 (amounts in thousands):

Cash Flows Disbursed for Financing Activities.    The table below presents net cash disbursed for financing activities for Fiscal 2021 and 2020 (amounts in thousands):

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Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows at January 1, 2022 and January 2, 2021. For a detailed description of our debt and right-of-use lease obligations and information regarding our distributor arrangements, deferred compensation, and guarantees and indemnification obligations, see Note 13, Leases, and Note 14, Debt and Other Commitments, of Notes to Consolidated Financial Statements of this Form 10-K:

Total stockholders’ equity was as follows at January 1, 2022 and January 2, 2021:

On March 9, 2021, the company issued $500.0 million of senior notes with a maturity date of March 15, 2031.  The company pays semiannual interest on the 2031 notes on each March 15 and September 15 and the notes bear interest at 2.400% per annum.  The net proceeds received of $494.3 million (before expenses and net of debt discount at issuance of $2.4 million and underwriting discount of $3.3 million) from the issuance of the 2031 notes were used for the early redemption of the outstanding 2022 notes and repayments on the AR facility and the credit facility. The early redemption of the 2022 notes resulted in cash payments of $415.4 million (inclusive of a make-whole amount of $15.4 million) which is classified as a financing cash outflow in the Consolidated Statement of Cash Flows.  We recognized a loss on extinguishment of debt of $16.1 million comprised of the make-whole cash payment of $15.4 million and non-cash charges of $0.7 million for the write-off of unamortized debt discount and debt issuance costs.

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The credit facility and AR facility are generally used for short term liquidity needs. The company has historically entered into amendments and extensions approximately one year prior to the maturity of these facilities.  During the third quarter of Fiscal 2021, we amended the credit facility to, among other things, extend the maturity date to July 30, 2026 and amended the AR facility to, among other things, extend the maturity date to September 27, 2023.  The following table details the amounts available under the AR facility and credit facility and the highest and lowest balances outstanding under these arrangements during Fiscal 2021:

Amounts outstanding under the credit facility can vary daily.  Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 10, Derivative Financial Instruments, of Notes to Consolidated Financial Statements of this Form 10-K.  During Fiscal 2021, the company borrowed $10.0 million in revolving borrowings under the credit facility and repaid $60.0 million in revolving borrowings. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

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

Restrictive financial covenants for our borrowings include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. Our debt may also contain certain customary representations and warranties, affirmative and negative covenants, and events of default.  The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the debt agreements and can meet its presently foreseeable financial requirements. As of January 1, 2022 and January 2, 2021, the company was in compliance with all restrictive covenants under our debt agreements.

The company has debt exposure to LIBOR and sufficient LIBOR successor rate provisions to cover the discontinuance of LIBOR.  The company continues to monitor the progression of LIBOR discontinuation and the recommendation for an alternative interest rate benchmark.

Special Purpose Entities.  At January 1, 2022 and January 2, 2021, the company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Guarantees.  In the event the company ceases to utilize the independent distribution form of doing business or exits a geographic market, the company is contractually required to purchase the distribution rights from the independent distributor.

Stock Repurchase Plan.    The Board has approved a plan that currently authorizes share repurchases of up to 74.6 million shares of the company’s common stock. At the close of the company’s fourth quarter on January 1, 2022, 5.8 million shares remained under the existing authorization. Under the plan, the company may repurchase its common stock in open market or privately negotiated transactions or under an accelerated repurchase program at such times and at such prices as determined to be in the company’s best interest. These purchases may be commenced or suspended without prior notice depending on then-existing business or market conditions and other factors.  During Fiscal 2021, 0.41 million shares of the company’s common stock were repurchased under the plan at a cost of $9.5 million and during Fiscal 2020, 0.04 million shares were repurchased under the plan at a cost of $0.8 million. From the inception of the plan through January 1, 2022, 68.8 million shares, at a cost of $652.9 million, have been repurchased.  There were no repurchases of the company’s common stock during the fourth quarter of Fiscal 2021.

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New Accounting Pronouncements Not Yet Adopted

See Note 3, Recent Accounting Pronouncements, of Notes to Consolidated Financial Statements of this Form 10-K regarding this information.