FLOWERS FOODS INC (FLO) FY 2023 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:

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Executive overview — provides a summary of our operating performance and cash flows, industry trends, and our strategic initiatives.

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Critical accounting estimates — describes the accounting areas where management makes critical estimates to report our financial condition and results of operations.

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Results of operations — an analysis of the company’s consolidated results of operations for Fiscal 2023 compared to Fiscal 2022 as presented in the Consolidated Financial Statements. Refer to the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a discussion of the results of operations for Fiscal 2022 compared to Fiscal 2021.

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Liquidity, capital resources and financial position — an analysis of cash flow, contractual obligations, and certain other matters affecting the company’s financial position.

MATTERS AFFECTING COMPARABILITY

The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2023 and Fiscal 2022 each consisted of 52 weeks and Fiscal 2024 will also consist of 52 weeks. Furthermore, comparative results from quarter to quarter are impacted by the company's fiscal reporting calendar. Internal financial results and key performance indicators are reported on a weekly basis to ensure the same number of Saturdays and Sundays in comparable months to allow for consistent four-week progression analysis. This results in our first quarter consisting of sixteen weeks while the remaining three quarters have twelve weeks (except in cases where there is an extra week every five or six years in the fourth quarter). Accordingly, interim results may not be indicative of subsequent interim period results, or comparable to prior or subsequent interim period results, due to differences in the lengths of the interim periods.

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

Business process improvement costs related to the transformation strategy initiatives. In the second half of Fiscal 2020, we launched initiatives to transform our business, including upgrading our information system to a more robust platform, as well as investments in e-commerce, autonomous planning, and our “bakery of the future” initiatives. In the first quarter of Fiscal 2022, we launched the digital logistics and digital sales initiatives. Implementation of the ERP upgrade is anticipated to be completed in Fiscal 2026. These initiatives are further discussed in Item 1., Business, of this Form 10-K. The expensed portion of costs incurred related to these initiatives, which was primarily consulting costs, was $21.5 million in Fiscal 2023 and $33.2 million in Fiscal 2022, and is reflected in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

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Restructuring charges. In February 2023, to improve operational effectiveness, increase profitable sales, and better meet customer requirements, the company announced a restructuring of plant operation responsibilities from the sales function to the supply chain function. Employee termination benefits and other cash charges were primarily for the voluntary employee separation incentive plan (the "VSIP") and employee relocation costs. During Fiscal 2023, we recorded VSIP-related charges of $5.2 million and made VSIP-related payments of $3.8 million. Additionally, we recorded and paid reduction-in-force ("RIF") charges of $0.9 million and relocation costs of $1.0 million in Fiscal 2023. All of these costs are recorded in the restructuring charges line item of the Consolidated Statements of Income.

Plant closure costs and impairment of assets. During the third and fourth quarters of Fiscal 2023, the company entered into agreements to sell a warehouse and a closed bakery, respectively, both of which were classified as held for sale, and recorded as impairment charges totaling $1.8 million. The company completed the sale of the impaired warehouse at the end of the third quarter of Fiscal 2023 and anticipates completing the sale of the closed bakery in the first quarter of Fiscal 2024. Additionally, in the fourth quarter of Fiscal 2023, the company recognized an impairment of $5.5 million for its investment in Base Culture, an unconsolidated affiliate accounted for as a cost method investment. Base Culture is discussed in more detail below.

On July 19, 2022, the company announced the closure of the Holsum Bakery in Phoenix, Arizona. The bakery, which, produced bread and bun products, ceased production on October 31, 2022. This closure is part of our strategy to optimize our sales portfolio and improve supply chain and manufacturing efficiency. The company recognized severance costs of $1.7 million, multi-employer pension plan withdrawal costs of $1.3 million, and asset impairment and equipment relocation charges for bakery equipment of $3.8 million in the third quarter of Fiscal 2022. The severance payments were substantially complete as of December 31, 2022. As a result of the manufacturing line closures, the union participants of the IAM National Pension Fund (the "IAM Fund") at the Phoenix, Arizona bakery will withdraw from the IAM Fund. While this is our best estimate of the ultimate cost of the withdrawal from this plan, additional withdrawal liability may be incurred based on the final IAM Fund assessment or in the event of a mass withdrawal, as defined by statute, occurring anytime up to July 19, 2025.

During the first quarter of Fiscal 2022, the company decided to sell two warehouses acquired at the end of Fiscal 2021 and recorded an impairment charge of $1.0 million. The company completed the sale of the impaired warehouse at the end of the first quarter of Fiscal 2022. The plant closure costs and impairment of assets are reflected in the Consolidated Statements of Income.

Gain on sale, severance costs, and lease termination (gain) loss. In the second quarter of Fiscal 2022, the company committed to a plan to outsource its aviation services and recorded severance and lease termination charges totaling $1.7 million. In the fourth quarter of Fiscal 2022, the company completed the lease buyouts and subsequent sale of two aircraft and recorded gains on these sales totaling $6.1 million. These amounts are reflected in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income. Lease termination costs were paid in the second quarter of Fiscal 2022 and the severance payments were completed in January 2023.

Food allergen compliance costs, net of recovery on inferior ingredients. In the fourth quarter of Fiscal 2022, the company recognized $2.0 million of compliance costs associated with the Food, Allergy Safety, Treatment, Education, and Research Act (the FASTER Act) signed into law on April 23, 2021 and effective on January 1, 2023. The FASTER Act declared sesame as the ninth major food allergen recognized by the U.S. and requires, among other things, all food products containing sesame (or products produced on the same equipment as products containing sesame) to list it in the ingredients statement or in a separate allergen statement on the packaging. The costs were mostly attributable to write-offs of obsolete packaging and are recorded in our Consolidated Statements of Income.

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 received a full reimbursement for the loss in the fourth quarter of Fiscal 2022. These costs and related reimbursements are recorded in our Consolidated Statements of Income.

Acquisition-related costs. On December 13, 2022, the company announced it had entered into a definitive agreement to acquire the Papa Pita bakery business ("Papa Pita") and, on February 17, 2023, completed the acquisition for total consideration of approximately $274.8 million, inclusive of a net working capital purchase price adjustment. The property and equipment, certain financial assets and taxes are still under review. We funded the purchase price with cash on-hand and from our existing credit facilities. Papa Pita is a manufacturer and distributor of bagels, tortillas, breads, buns, English muffins, and flat breads with one production facility in West Jordan, Utah and, prior to the acquisition, Papa Pita co-manufactured certain products for us. Papa Pita has direct-store-delivery distribution in the western U.S., expanding our geographic reach. We incurred acquisition-related costs of $3.7 million and $0.9 million in Fiscal 2023 and 2022, respectively.

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In the third quarter of Fiscal 2022, we incurred $11.6 million in costs from the pursuit of an acquisition that failed to materialize. In addition to customary acquisition costs, we incurred $8.4 million related to realized foreign currency exchange losses. Although the majority of the target company's sales were made in the U.S., the target company's foreign domicile required us to convert funds from U.S. dollars to complete the transaction. Following that conversion, a significant strengthening of the U.S. dollar relative to the target company's currency resulted in the foreign currency exchange loss upon conversion back into U.S. dollars following the failure of the deal.

Acquisition-related costs are recorded in the selling, distribution, and administrative expenses line item of the Consolidated Statements of Income.

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

During the second and third quarters of Fiscal 2022, we reached agreements to settle certain distributor-related litigation in the aggregate amount of $7.5 million, inclusive of attorney fees. The settlement accrued for in the second quarter of Fiscal 2022 was paid in the third quarter of Fiscal 2022 and the settlement accrued for in the third quarter of Fiscal 2022 was paid in Fiscal 2023.

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. As of December 30, 2023, $119.6 million of settlements were accrued (inclusive of obligations for the repurchase of distribution territories) and the remaining reserve for the related distributor notes receivable was $14.8 million.

EXECUTIVE OVERVIEW

We are the second-largest producer and marketer of packaged bakery foods in the U.S. with Fiscal 2023 sales of $5.1 billion. We operate in the highly competitive fresh bakery market. Our product offerings include a wide range of fresh breads, buns, rolls, snack items, bagels, English muffins, and tortillas, as well as frozen breads and rolls, which we produce at 46 plants in 19 states. Our products are sold under leading brands such as Nature’s Own, Dave’s Killer Bread ("DKB"), 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 the Inflationary Economic Environment and Other Macroeconomic Factors on Our Business

We continue to monitor the impact of the inflationary economic environment, supply chain disruptions, labor shortages, the conflict between Russia and Ukraine, and the conflict in the Middle East on our business as further discussed in Item 1., Business, of this Form 10-K.

Summary of Operating Results, Cash Flows and Financial Condition:

Our results in Fiscal 2023 continued to benefit from a more optimized sales mix of branded retail products as compared to pre-pandemic periods. However, we experienced significant input cost inflation for commodities and, to a lesser extent, for transportation and labor, in Fiscal 2023 and Fiscal 2022. To mitigate these cost pressures, we implemented price increases in the first and second quarters of Fiscal 2023. Additionally, we incurred significant costs associated with a legal settlement in Fiscal 2023.

Sales increased 5.9% in Fiscal 2023 compared to Fiscal 2022. Price/mix contributed 10.1% to the sales growth and the Papa Pita acquisition contributed 1.1%, partially offset by volume declines of 5.3%. The benefits of inflation-driven pricing actions were partially offset by volume softness and consumer trade down to store branded products. Our volumes were impacted by targeted sales rationalization, exiting certain lower margin business, and overall softness in the fresh packaged bread category resulting from inflationary pressure on consumer spending and shifts in consumer behavior and preferences. Sales of our leading brands, Nature's Own, DKB, and Canyon Bakehouse, continued to increase from positive price/mix but volumes were lower except for DKB.

Income from operations for Fiscal 2023 was $172.9 million compared to $303.2 million in Fiscal 2022. The decrease resulted primarily from an increase in legal settlements and related costs of $130.0 million, input cost inflation, decreases in production volumes,

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increased marketing investments, and higher maintenance costs in the current year. Those factors were partially offset by price increases, reduced outside purchases of product, and lower acquisition-related and consulting costs year over year.

Net income was $123.4 million for Fiscal 2023 compared to $228.4 million in the prior year. The decrease year over year resulted primarily from lower income from operations, as described above, and higher net interest expense, partially offset by a lower effective tax rate.

In Fiscal 2023, we generated net cash flows from operations of $349.4 million, paid $274.8 million for the Papa Pita acquisition, inclusive of the net working capital purchase price adjustment, and invested $129.1 million in capital expenditures (inclusive of $27.8 million for the ongoing ERP upgrade). Additionally, we made stock repurchases of $45.8 million and paid $195.2 million in dividends to our shareholders. Our cash and cash equivalents balance as of December 30, 2023 was $22.5 million. In Fiscal 2023, we terminated the accounts receivable securitization facility (the "securitization facility") and entered into a two-year $200.0 million trade receivable repurchase facility (the "repurchase facility").

In Fiscal 2022, we generated net cash flows from operations of $360.9 million and invested $169.1 million in capital expenditures (inclusive of $61.3 million for the ongoing ERP upgrade) and $9.0 million in a cost-method investment as further discussed below. Additionally, we made $34.6 million in stock repurchases and paid $186.5 million in dividends to our shareholders in Fiscal 2022.

During the second quarter of Fiscal 2022, we invested $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility. We made an additional investment of $2.0 million in Base Culture in the second quarter of Fiscal 2023. Base Culture's product offerings include better-for-you, gluten-free, and grain-free sliced breads and baked goods and are all-natural, 100% Paleo-certified, kosher-certified, dairy-free, soy-free, and non-GMO verified. As discussed above, in the fourth quarter of Fiscal 2023, the company recognized a $5.5 million impairment related to this investment.

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

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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 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 certain raw materials is highly correlated to underlying 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 2023 and Fiscal 2022 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 $3.4 billion in Fiscal 2023. A 1% decrease in the discount rate would increase the fair value of the reporting unit by $0.9 billion and a 1% increase in the discount rate would decrease the fair value by $0.7 billion. Based on management’s evaluation, no impairment charges relating to goodwill were recorded for Fiscal 2023 or Fiscal 2022.

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. In Fiscal 2023, we recorded a $2.3 million charge to fully impair held and used distribution rights classified as intangibles assets. This was in conjunction with costs related to a California legal settlement. No impairment charges related to amortizing intangible assets were recorded in Fiscal 2022.

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As of December 30, 2023, the company also owns trademarks acquired through acquisitions with a total carrying value of $127.1 million that are indefinite-lived intangible assets 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 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 an approximately $0.6 million change 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 2020, and with limited exceptions, for years prior to 2019 in state jurisdictions.

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.

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The company sponsors a defined benefit pension plan for union employees, the Flowers Foods, Inc. Retirement Plan No. 2 ("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.

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, 2023 is equal to 23% equity securities, 75% fixed-income securities, and 2% short-term investments and cash. For the details of our pension plan assets, see Note 21, 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 is set at 5.9% (net of investment and administrative fees, assumed to be 0.4% per annum) for Fiscal 2024.

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 the Pri-2012 base table with blue collar adjustment, and 117.1% multiplier, and a projection scale of MP-2021. 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 2024, the company does not expect to make any cash contributions 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 19, Stock-Based Compensation, of Notes to Consolidated Financial Statements of this Form 10-K for additional information. In early Fiscal 2024, the company granted stock awards to certain employees. The company expects stock-based compensation expense for Fiscal 2024 to be relatively consistent with Fiscal 2023. This estimate is inclusive of an additional $2.0 million of expense anticipated to be recognized in the first quarter of Fiscal 2024 due to the payout for the Fiscal 2022 grant currently trending since the grant date at 125% of target.

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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.

Results of Operations

Consolidated Results - Fiscal 2023 compared to Fiscal 2022

The company’s results of operations, expressed as a percentage of sales, are set forth below for Fiscal 2023 and Fiscal 2022:

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.)

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The change in sales was attributable to the following:

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

Sales increased year over year due to positive pricing actions implemented in the first quarter of Fiscal 2023 and midway through the second quarter of Fiscal 2023 and Fiscal 2022, to mitigate cost inflation, and the Papa Pita acquisition contribution. These increases were partially offset by volume declines. The price increases implemented in the first quarter of Fiscal 2023 were focused on our store branded and non-retail sales, whereas the price increases implemented in the second quarter of Fiscal 2023 predominately targeted branded retail sales. Volume decreases were most significant for non-retail items and, to a lesser extent, branded retail traditional loaf breads and branded retail cake products. Our mix of Branded Retail sales to total sales of 64.1% decreased as compared to 65.3% for Fiscal 2022, but continued to exceed pre-pandemic levels (60.1% for Fiscal 2019). Year over year, the promotional environment remained relatively stable, however, promotional activity was higher in the second half of Fiscal 2023 as compared to the same period in the prior year.

We anticipate our Fiscal 2024 sales will be positively impacted by the benefit of price increases implemented during Fiscal 2023 however, this benefit could be offset by changes in consumer buying patterns, changes in promotional activity, and from cycling certain exits of lower margin business that occurred in Fiscal 2023.

Branded Retail Sales

Branded retail sales increased 3.9% year over year due to favorable price/mix resulting from inflation-driven pricing actions in the second quarters of both Fiscal 2022 and Fiscal 2023 and the acquisition contribution, partially offset by volume declines. Branded retail sales in the prior year period benefitted from strong demand at the beginning of the year as a result of increased COVID-19 cases. The largest volume declines occurred in branded traditional loaf breads and branded cake. Inflationary pressure on consumer spending contributed to lower volumes. Additionally, declines in branded cake resulted from market share declines and targeted sales rationalization, partially offset by supply chain disruptions and labor shortages in the prior year.

Sales of our leading brands, Nature's Own, DKB, and Canyon Bakehouse, increased year over year from inflation-driven price increases, partially offset by volume declines with the exception of DKB which experienced volume growth. We experienced capacity constraints for production of our Canyon Bakehouse products during Fiscal 2023 which contributed to the lower sales volumes. New product introductions, such as Nature's Own Keto bread and Hawaiian loaf bread along with DKB organic snack bars and Organic Everything Bread, all introduced within the last two years, contributed to the branded retail sales increase. The DKB snack bars, which rolled out nationally in Fiscal 2023, and snack bites, which were sold in test markets in Fiscal 2023, are part of an initiative to extend our presence beyond the traditional bread category and into the snacking category.

Other Sales

Sales in the Other category increased 9.7% due to significant price increases implemented in the second quarter of Fiscal 2022 and in the first quarter of Fiscal 2023 to mitigate inflationary pressures, and the acquisition contribution, partially offset by volume declines. Store branded retail sales increased year over year from inflation-driven price increases, and, to a lesser extent, the acquisition contribution, partially offset by volume declines, with the largest decline in cake items. Store branded retail sales comprised a larger portion of our total sales as compared to the prior year, but remained a smaller portion of our total sales mix relative to pre-pandemic levels. Non-retail sales increased year over year from positive price/mix, mostly due to inflation-driven pricing actions, and the acquisition contribution, partially offset by volume declines. Foodservice and vending drove most of the volume decrease, primarily

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due to exiting certain lower margin business and targeted sales rationalization. Supply chain disruptions experienced in both years negatively impacted sales volumes. These volume declines were partially offset by increased contract manufacturing volume.

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

Materials, supplies, labor and other production costs as a percent of sales decreased year over year due to implementing inflation-driven pricing actions to combat considerable input cost inflation experienced over the past two years. Increased product returns, lower production volumes, and increased bakery maintenance costs partially offset the overall improvement. We experienced supply chain disruptions in both periods. Costs for certain ingredients moderated in Fiscal 2023 relative to the prior year but overall were still higher than the prior year as a percent of sales. Additionally, certain products purchased from Papa Pita in the prior year period and up until the acquisition date were reflected as outside purchases of product (sales with no associated ingredient costs) in the Other line item. This shift in expense between cost categories impacted comparability year over year. Workforce-related costs were unchanged as a percent of sales. Sales increases outpaced wage inflation however, lower production volumes and the competitive labor market impacted our operations and we expect this trend to continue. The decrease in the Other line item mostly reflects lower outside purchases of product, mostly due to the Papa Pita acquisition, net of higher bakery maintenance costs.

Prices of ingredient and packaging materials fluctuate due to various factors including, but not limited to, government policy and regulation, weather conditions, domestic and international demand, or other unforeseen circumstances, and we monitor these markets closely. Ingredient and packaging costs were volatile in both Fiscal 2023 and 2022 but are expected to be more favorable in Fiscal 2024. We enter into forward purchase agreements and other financial instruments to manage the impact of volatility in certain raw material prices. Any decrease in the availability of these agreements and instruments could increase the price of these raw materials and significantly affect our earnings.

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

Workforce-related costs were higher as a percent of sales largely due to a shift from distributor distribution fees as a result of a smaller portion of our sales being made through IDPs. The workforce-related costs increase was partially offset by sales increases outpacing wage inflation. We anticipate this shift between these and other cost categories, such as transportation, to continue as we convert to an employment model in California. The increase in the Other line item mostly reflects the $130.0 million increase in legal settlements and related costs (260 basis point impact), greater marketing investments, and increased amortization of cloud-based applications, net of the $8.8 million decrease in acquisition-related costs and reduced consulting costs. Transportation cost increases were mostly offset by sales price increases. See the “Matters Affecting Comparability” section above for a discussion of legal settlements and related costs, project-related consulting costs, and acquisition-related costs. Additionally, See Note 23, Commitments and Contingencies, of Notes to Consolidated Financial Statements of this Form 10-K for additional information regarding legal settlements.

Restructuring Charges; FASTER Act, net of Recovery on Inferior Ingredients; and Plant Closure Costs and Impairment of Assets

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

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Depreciation and Amortization Expense

Depreciation and amortization expense increased in dollars as compared to the prior year period due to assets being placed in service, including assets associated with the ERP upgrade, and the Papa Pita assets acquired, net of assets becoming fully depreciated. We anticipate higher depreciation and amortization expense in Fiscal 2024 mostly due to the ERP-related assets being placed in service during the second quarter of Fiscal 2023.

Income from Operations

Income from operations decreased year over year as a percent of sales mostly due to significant increases in selling, distribution, and administrative costs combined with lower production volumes, partially offset by inflation-driven sales price increases.

Net Interest Expense

Net interest expense increased in dollars and as a percent of sales as compared to the prior year period due to higher average amounts outstanding under our borrowing arrangements, primarily due to funding the Papa Pita acquisition, and lower interest income year over year. We anticipate higher net interest expense in Fiscal 2024 due to funding payments associated with the legal settlement and related costs accrued in Fiscal 2023 and lower interest income resulting from decreases in distributor notes receivable outstanding.

Income Tax Expense

The effective tax rate for Fiscal 2023 was 21.4% compared to 23.5% in the prior year. The decrease in the rate year over year was primarily due to tax credits and windfalls on stock-based compensation awards that vested in Fiscal 2023. For both periods presented, the primary differences in the effective rate and the statutory rate relate to state income taxes, windfalls on the vesting of stock-based compensation awards, and benefits recognized from tax credits.

The Inflation Reduction Act ("IRA") did not have a material impact on the effective tax rate for Fiscal 2023 or 2022 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 decreased net income.

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:

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implementing our strategic priorities, including our transformation strategy initiatives;

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paying dividends to our shareholders;

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maintaining a conservative financial position;

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making strategic acquisitions; and

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repurchasing shares of our common stock.

Although there has been no material adverse impact on the company’s results of operations, liquidity or cash flows in Fiscal 2023, volatility in global and U.S. economic environments, including as a result of, among other things, the inflationary economic environment, supply chain disruptions, labor shortages, the conflict between Russia and Ukraine, and the conflict in the Middle East, could significantly impact our ability to generate future cash flows and we continue to evaluate these various potential business risks. Those potential risks include the possibility of future economic downturns that could result in a significant shift away from our branded retail

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products to store branded products, supply chain disruptions that have impacted, and could continue to impact, the procurement of raw materials and packaging items, and the workforce available to us, among other risks.

The macroeconomic-related factors discussed above remain fluid and the future impact on our business, results of operations, liquidity or capital resources cannot be reasonably estimated with any degree of certainty. If the company were to experience 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. During the first quarter of Fiscal 2023, we terminated the securitization facility and entered into the repurchase facility, a two-year $200.0 million trade receivable repurchase facility. The earliest maturity date of our non-revolving debt is 2026. We believe the fundamentals of the company remain strong and that we have sufficient liquidity on hand to continue business operations during the volatile global and U.S. economic environments. The company had total available liquidity of $559.1 million as of December 30, 2023, consisting of cash on hand and the available balances under the credit facility (as defined below) and the repurchase 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 $350 million (of which approximately 34% has been or is anticipated to be capitalized) and anticipate the upgrade to be completed in 2026. Previously, these costs were estimated to be approximately $275 million. The increase in estimated costs resulted from expanding the project scope and anticipation of greater reliance on external resources for bakery deployments due to labor constraints. As of December 30, 2023, we have incurred costs related to the project of approximately $214 million. In Fiscal 2024, we 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 $25 million to $35 million. Costs related to our digital initiatives are more fluid and cannot currently be estimated. See Item 1A., Risk Factors, “We may experience difficulties in designing and implementing the upgrade of our ERP system.”

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 14, 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 2023 and 2022:

Fiscal 2023:

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Generated $349.4 million of net cash from operating activities.

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Completed the Papa Pita acquisition on February 17, 2023 for $274.8 million in cash (inclusive of a net working capital purchase price adjustment).

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Paid dividends to our shareholders of $195.2 million.

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Invested in our business through capital expenditures of $129.1 million (inclusive of $27.8 million of capital expenditures, including amounts recognized in accounts payable at year end, for the ERP upgrade).

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Repurchased $45.8 million of our common stock.

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Incurred business process improvement costs of $21.5 million related to the ongoing transformation strategy initiatives (exclusive of capitalized or deferred costs).

Fiscal 2022:

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Generated $360.9 million of net cash from operating activities.

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Paid dividends to our shareholders of $186.5 million.

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Invested in our business through capital expenditures of $169.1 million (inclusive of $61.3 million of capital expenditures, including amounts recognized in accounts payable at year end, for the ERP upgrade).

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Repurchased $34.6 million of our common stock.

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Incurred business process improvement costs of $33.2 million related to the ongoing transformation strategy initiatives (exclusive of capitalized or deferred costs).

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Liquidity Discussion

Flowers Foods’ cash and cash equivalents were $22.5 million at December 30, 2023 and $165.1 million at December 31, 2022. 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):

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Refer to the Acquisition-related costs (loss on foreign currency exchange rates) and Plant closure costs and impairment of assets discussion in the “Matters Affecting Comparability” section above regarding these items.

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For Fiscal 2023, deferred income tax activity was comprised of changes year over year, including the impact of the capitalization of research and development and certain information technology costs and accrued legal settlements and related costs. For Fiscal 2022, deferred income tax activity was primarily composed of changes in temporary differences year over year.

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Other non-cash items include non-cash interest expense for the amortization of debt discounts and deferred financing costs (including $0.3 million related to the write-off of unamortized costs upon the early extinguishment of the securitization facility in the first quarter of Fiscal 2023), activity in the allowances for inventory obsolescence, and gains or losses on the sale of assets.

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

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Changes in accounts receivable were mainly attributable to significant price increases period over period. Changes in inventories resulted from volatility in input costs. Changes in accounts payable were mainly attributable to higher capital spending in the prior year largely due to the upgrade of the ERP system and volatility in input costs.

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Hedging activities change from market movements that affect the fair value and required collateral of positions and the timing and recognition of deferred gains or losses. We expect these changes will continue to occur as part of our hedging program, though the degree and financial impact cannot be currently estimated.

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The change in other assets primarily resulted from changes in prepaid assets, service contracts, and income tax receivable balances in each respective period. Changes in accruals for employee compensation, insurance, legal settlements, and payroll tax deferrals under the CARES Act primarily resulted in the change in other accrued liabilities. In Fiscal 2023, we accrued $137.5 million of legal settlements (inclusive of distribution rights repurchase obligations) and paid $5.5 million of legal settlements that had been accrued for in the prior year. In Fiscal 2022, we accrued $7.5 million of legal settlements and paid $18.5 million, of which $16.5 million had been accrued for in the prior year. Additionally, during Fiscal 2022, we repurchased distribution rights as required by a prior year legal settlement totaling $4.3 million. We anticipate making payments of approximately $31.4 million, including our share of employment taxes, in performance-based cash awards under our cash incentive plans in the first quarter of Fiscal 2024. During Fiscal 2023 and Fiscal 2022, we paid $32.1 million and $43.8 million, respectively, including our share of employment taxes, in performance-based cash awards under our bonus plans. An additional $2.2 million and $1.8 million were paid in Fiscal 2023 and Fiscal 2022, respectively, for our share of employment taxes on the vesting of performance-contingent restricted stock awards in each respective year. Under the CARES Act, the company deferred approximately $30.0 million of the employer share of Social Security tax for the period from the beginning of the second quarter of Fiscal 2020 through December 31, 2020 and paid approximately $15.0 million in December 2021 and the remainder in December 2022.

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During both Fiscal 2023 and Fiscal 2022, we made voluntary defined benefit pension plan cash contributions of $1.0 million to Plan No 2. At this time, we do not expect to make any voluntary cash contributions to our pension plans in Fiscal 2024 and expect to pay $0.3 million in nonqualified pension benefits from corporate assets. The company believes its cash flow and balance sheet will allow it to fund future pension needs without adversely affecting the business strategy of the company.

Cash Flows Disbursed for Investing Activities. The table below presents net cash disbursed for investing activities for Fiscal 2023 and 2022 (amounts in thousands):

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The company currently estimates capital expenditures of approximately $120.0 million to $130.0 million (inclusive of expenditures for the ERP upgrade of $3.0 million to $6.0 million) in Fiscal 2024.

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Decreases in principal payments received combined with increased repurchases of independent distributor territories resulted in the change year over year. We anticipate this trend to continue due to the agreement to settle the California distributor-related litigation, reached in Fiscal 2023.

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As discussed in the Executive Overview section above, on February 17, 2023, we completed the Papa Pita acquisition for $274.8 million in cash (inclusive of a net working capital purchase price adjustment). Papa Pita operates one manufacturing facility in West Jordan, Utah.

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As discussed in the Executive Overview section above, we made an initial investment of $9.0 million in Base Culture, a Clearwater, Florida-based company with one manufacturing facility, in the second quarter of Fiscal 2022. We made an additional investment of $2.0 million in the second quarter of Fiscal 2023.

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Cash Flows Disbursed for Financing Activities. The table below presents net cash disbursed for financing activities for Fiscal 2023 and 2022 (amounts in thousands):

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Our annual dividend rate increased from $0.88 per share in Fiscal 2022 to $0.92 per share in Fiscal 2023. While there are no requirements to increase our dividend rate, we have shown a recent historical trend to do so. We anticipate funding future dividend payments from cash flows from operations.

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In Fiscal 2023, we paid financing fees associated with executing the repurchase facility and for the amendment to the credit facility. In Fiscal 2022, we paid additional financing costs associated with the Fiscal 2021 amendment of the credit facility and for the amendment of the securitization facility.

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Stock repurchase decisions are made based on our stock price, our belief of relative value, and our cash projections at any given time. See Note 18, Stockholders’ Equity, of Notes to Consolidated Financial Statements of this Form 10-K for additional information. A portion of these shares were acquired to satisfy employees’ tax withholding and payment obligations in connection with the vesting of restricted stock awards, which are repurchased by the company based on the fair market value on the vesting date.

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See the discussion below under the “Capital Structure” section regarding changes in debt obligations.

Capital Structure

Long-term debt and right-of-use lease obligations and stockholders’ equity were as follows as of December 30, 2023 and December 31, 2022. 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 14, Leases, and Note 15, Debt and Other Commitments, of Notes to Consolidated Financial Statements of this Form 10-K:

Total stockholders’ equity was as follows at December 30, 2023 and December 31, 2022:

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The company has historically entered into amendments and extensions approximately one year prior to the maturity of its debt facilities. On February 13, 2023, we amended the securitization facility and then on April 14, 2023, terminated the securitization facility and entered into the repurchase facility, a two-year $200.0 million accounts receivable repurchase facility. Additionally, on April 12, 2023, we completed the eighth amendment to the senior unsecured revolving credit facility (the "credit facility") to, among other things, replace the benchmark rate at which borrowings bear interest under the credit facility from LIBOR to Term SOFR and to allow for entry into permitted accounts receivable repurchase facilities. The repurchase facility and the credit facility are generally used for short-term liquidity needs.

The following table details the amounts available under the repurchase facility, securitization facility, and credit facility as of December 30, 2023 and the highest and lowest balances outstanding under these arrangements during Fiscal 2023:

(1)
Amount excludes a provision in the agreement which allows the company to request an additional $200.0 million in additional revolving commitments.

Amounts outstanding under the credit facility can vary daily. Changes in the gross borrowings and repayments can be caused by cash flow activity from operations, capital expenditures, acquisitions, dividends, share repurchases, and tax payments, as well as derivative transactions which are part of the company’s overall risk management strategy as discussed in Note 11, Derivative Financial Instruments, of Notes to Consolidated Financial Statements of this Form 10-K. During Fiscal 2023, the company borrowed $540.0 million in revolving borrowings under the credit facility and repaid $540.0 million in revolving borrowings. The amount available under the credit facility is reduced by $8.4 million for letters of credit.

The repurchase 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.

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 December 30, 2023 and December 31, 2022, the company was in compliance with all restrictive covenants under our debt agreements.

Special Purpose Entities. At December 30, 2023 and December 31, 2022, 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 distributors.

Stock Repurchase Plan. Previously, our Board had approved a plan that authorized share repurchases of up to 74.6 million shares of the company’s common stock. On May 26, 2022, the company announced that the Board increased the company's share repurchase authorization by 20.0 million shares. At the close of the company’s fourth quarter on December 30, 2023, 22.5 million shares remained under the existing authorization. Under the share repurchase 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 2023, 1.9 million shares of the company’s common stock were repurchased under the plan at a cost of $45.8 million and during Fiscal 2022, 1.3 million shares were repurchased under the plan at a cost of $34.6 million. From the inception of the plan

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through December 30, 2023, 72.0 million shares have been repurchased, at a cost of $733.3 million. See Item 5., Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, of this Form 10-K for repurchases of the company’s common stock during the fourth quarter of Fiscal 2023.

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.