Note 15.

Stock-Based Compensation

Flowers Foods' 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 ("EPIP"), authorizes the compensation committee of the Board of Directors to make awards of options to purchase our common stock, restricted stock, performance stock and units and deferred stock. The company's officers, key employees and non-employee directors (whose grants are generally approved by the full Board of Directors) are eligible to receive awards under the EPIP. The aggregate number of shares that may be issued or transferred under the EPIP is 27,937,500 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. The following is a summary of stock options, restricted stock, and deferred stock outstanding under the EPIP. Information relating to the company's stock appreciation rights which are not issued under the EPIP is also disclosed below.

Stock Options

The following non-qualified stock options ("NQSOs") have been granted under the EPIP since fiscal 2009. The Black-Scholes option-pricing model was used to estimate the grant date fair value (amounts in thousands, except price data and as indicated):


Grant date	2/10/2011		2/9/2010		2/9/2009
Shares granted		2,142		1,703		1,490
Exercise price($)		16.31		16.67		15.89
Vesting date		2/10/2014		2/9/2013		2/9/2012
Fair value per share($)		3.47		3.69		3.91
Dividend yield(%)(1)		3.00		3.00		2.20
Expected volatility(%)(2)		29.20		30.60		31.80
Risk-free interest rate(%)(3)		2.44		2.35		2.00
Expected option life (years)(4)		5.00		5.00		5.00
Outstanding at December 31, 2011		2,114		1,654		1,447

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

2.	Expected volatility — based on historical volatility over the expected term using daily stock prices.

3.	Risk-free interest rate — United States Treasury Constant Maturity rates as of the grant date over the expected term.

4.	Expected option life — The 2011, 2010 and 2009 grant assumptions are based on the simplified formula determined in accordance with Staff Accounting Bulletin No. 110, as the company does not have sufficient historical exercise behavior data to reasonably estimate the expected option life.

The stock option activity for fiscal years 2011, 2010 and 2009 pursuant to the EPIP is set forth below:


	Fiscal 2011					Fiscal 2010					Fiscal 2009
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
	(Amounts in thousands, except price data)
Outstanding at beginning of year		6,547		$	14.66		5,602		$	13.56		4,463		$	12.31
Granted		2,142		$	16.31		1,703		$	16.67		1,490		$	15.89
Exercised		(1,165	)	$	11.10		(731	)	$	10.79		(348	)	$	7.36
Forfeitures		(101	)	$	16.30		(27	)	$	16.38		(3	)	$	12.45

Outstanding at end of year		7,423		$	15.67		6,547		$	14.66		5,602		$	13.56

Exercisable at end of year		2,258					2,109					1,604

Weighted average fair value of options granted during the year	$	3.47				$	3.69				$	3.91

As of December 31, 2011, options outstanding under the EPIP had an average exercise price of $15.67, a weighted average remaining contractual life of 4.37 years, and an aggregate intrinsic value of $24.5 million.

As of December 31, 2011, there was $5.4 million of total unrecognized compensation expense related to nonvested stock options. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.70 years.

The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for fiscal years 2011, 2010 and 2009 are set forth below (amounts in thousands):


	Fiscal 2011		Fiscal 2010		Fiscal 2009
Cash received from option exercises	$	12,933	$	7,884	$	2,614
Cash tax windfall benefit, net	$	3,037	$	683	$	909
Intrinsic value of stock options exercised	$	11,632	$	4,409	$	2,948

Performance-Contingent Restricted Stock

Certain key employees have been granted performance-contingent restricted stock. The 2009 and 2010 awards generally vest two years from the date of grant (after filing of the company's Annual Report on Form 10-K) and the 2009 award performance condition required the "return on invested capital" to exceed the "weighted average cost of capital" by 2.5% (the "ROI Target") over the two fiscal years immediately preceding the vesting date. The 2010 and 2011 awards require the ROI Target to be 3.75% over the two fiscal years immediately preceding the vesting date. If the ROI Target is not met the awards are forfeited. Furthermore, each grant of performance-contingent restricted stock will be adjusted as set forth below:

•

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

•

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

•

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

•

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

In connection with the vesting during February 2011 of the performance-contingent restricted stock granted in February 2009, during the applicable measurement period, the Company TSR rank was less than the 50^th percentile and the grant was reduced by 20% of the award or 60,240 common shares. A total of 241,680 common shares were issued to plan participants for this award. Because the company achieved the ROI Target, the cost of the award was not reversed. The award that vested during February 2010 was increased by 20% or 62,985 common shares because the company exceeded the S&P TSR by the maximum amount. A total of 377,910 common shares were issued to plan participants for this award.

The performance-contingent restricted stock generally vests immediately if the grantee dies or becomes disabled. However, upon retirement at age 65 or later, the grantee will receive a pro-rata number of shares through the grantee's retirement date at the normal vesting date. In addition, the performance-contingent restricted stock will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to voting rights on the performance-contingent shares issued after February 2009. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest but will not exceed 100% of the award. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies' total stockholder returns. The inputs are based on historical capital market data.


Grant date	2/10/2011		2/9/2010		2/9/2009
Shares granted		324		268		306
Vesting date		2/10/2013		2/9/2012		2/9/2011
Fair value per share	$	15.93	$	17.59	$	16.64

The performance-contingent restricted stock activity for fiscal years 2011, 2010 and 2009 is set forth below:


	Fiscal 2011					Fiscal 2010					Fiscal 2009
	Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value
	(Amounts in thousands, except price data)
Balance at beginning of year		568		$	17.08		621		$	17.34		648		$	15.95
Initial grant		324		$	15.93		268		$	17.59		306		$	16.64
Supplemental grant for exceeding the S&P TSR		—			—		63		$	18.02		—			—
Vested		(242	)	$	16.64		(378	)	$	15.02		(333	)	$	13.99
Grant reduction for not achieving the S&P TSR		(60	)	$	16.64		—		$	—		—		$	—
Forfeitures		(14	)	$	16.82		(6	)	$	17.25		—		$	—

Balance at end of year		576		$	16.67		568		$	17.08		621		$	17.34

As of December 31, 2011, there was $3.1 million of total unrecognized compensation cost related to nonvested restricted stock granted under the EPIP. That cost is expected to be recognized over a weighted-average period of 1.03 years. The fair value of performance-contingent restricted share awards that vested during fiscal 2011 was $3.4 million.

Deferred Stock

Pursuant to the EPIP, the company allows non-employee directors to convert their retainers into deferred stock. The deferred stock has a minimum two year vesting period and will be distributed to the individual (along with accumulated dividends) at a time designated by the individual at the date of conversion. During the first quarter of fiscal 2011 an aggregate of 25,440 shares were converted. The company records compensation expense for this deferred stock over the two-year minimum vesting period based on the closing price of the company's common stock on the date of conversion. During fiscal 2011 a total of 32,025 shares were exercised for non-employee director retainer conversions.

Pursuant to the EPIP, non-employee directors also receive annual grants of deferred stock. This deferred stock vests over one year from the grant date. During the second quarter of fiscal 2011, non-employee directors were granted an aggregate of 50,400 shares of deferred stock. The deferred stock will be distributed (along with accumulated dividends) to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one year minimum vesting period. During fiscal 2011 a total of 52,732 shares were exercised for deferred shares issued under the fiscal 2010 grant.

The deferred stock activity for fiscal years 2011, 2010, and 2009 is set forth below:


	Fiscal 2011					Fiscal 2010					Fiscal 2009
	Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value
	(Amounts in thousands, except price data)
Balance at beginning of year		240		$	15.11		195		$	14.60		152		$	15.53
Issued		76		$	19.35		96		$	15.41		72		$	13.39
Exercised		(85	)	$	15.31		(51	)	$	13.71		(29	)	$	16.48

Balance at end of year		231		$	16.43		240		$	15.11		195		$	14.60

Outstanding vested at end of year		128		$	15.11		124		$	15.00		104		$	15.46

Outstanding unvested at end of year		103		$	18.07		116		$	15.23		91		$	13.61

Shares vesting during the year		70		$	15.73		71		$	13.39		118		$	15.83

As of December 31, 2011, there was $0.6 million of total unrecognized compensation cost related to deferred stock awards granted under the EPIP. This cost is expected to be recognized over a weighted-average period of 0.62 years. The intrinsic value of deferred stock awards that vested during fiscal 2011 was $1.3 million.

Stock Appreciation Rights

Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chairman fees into rights. These rights vest after one year and can be exercised over nine years. The company records compensation expense for these rights at the measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model. The liability for these rights at December 31, 2011 and January 1, 2011 was $2.3 million and $4.2 million, respectively, and is recorded in other long-term liabilities. During the fiscal year ended January 2, 2010, the company paid out the accrued dividends for those rights granted after 2003. Future dividends on vested rights granted after 2003 are paid out at the time dividends are paid to other common shareholders.

The fair value of the rights at December 31, 2011 ranged from $7.07 to $18.14. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at December 31, 2011: dividend yield 3.0%; expected volatility 29.0%; risk-free interest rate 0.83%; and expected life of 0.45 years to 2.20 years.

The rights activity for fiscal years 2011, 2010, and 2009 is set forth below:


	Fiscal 2011			Fiscal 2010		Fiscal 2009
	(Amounts in thousands, except price data)
Balance at beginning of year		348			348		348
Rights exercised		(161	)		—		—

Balance at end of year		187			348		348

Weighted average — grant date fair value	$	11.02		$	7.42	$	7.42

The following table summarizes the company's stock based compensation expense for fiscal years 2011, 2010 and 2009:


	Fiscal 2011		Fiscal 2010		Fiscal 2009
	(Amounts in thousands)
Stock options	$	6,803	$	6,931	$	5,070
Restricted stock		4,700		4,727		5,359
Stock appreciation rights		656		683		63
Deferred stock		1,479		1,337		1,363

Total stock based compensation	$	13,638	$	13,678	$	11,855