12. 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.

Performance-Contingent Total Shareholder Return Shares (“TSR Shares”)

Certain key employees have been granted performance-contingent restricted stock. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K). The total shareholder return (“TSR”) is the percent change in the company’s stock price over the measurement period plus the dividends paid to shareholders. Once the TSR is determined for the company (“Company TSR”), it is compared to the TSR of our food company peers (“Peer Group TSR”). The Company TSR compared to the Peer Group TSR will determine the payout as set forth below:


Percentile		Payout as % of Target
90^th		200%

70^th		150%

50^th		100%

30^th		50%

Below 30th		0%

The TSR shares vest immediately if the grantee dies or becomes disabled. However, at retirement the grantee will receive a pro-rata number of shares through the grantee’s retirement date at the normal vesting date. In addition, the TSR shares 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. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.

The following performance-contingent TSR Shares have been granted under the EPIP and have service period remaining (amounts in thousands, except price data):


Grant date	7/16/2012
Shares granted		137.5
Approximate vesting date		2/28/2014
Fair value per share	$	23.18

As of October 6, 2012, there was $2.7 million of total unrecognized compensation cost related to nonvested TSR Shares granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 1.3 years.

Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”)

Certain key employees have been granted performance-contingent restricted stock. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K). Return on Invested Capital is calculated by dividing our profit by the invested capital. Generally, the performance condition requires the company’s “return on invested capital” (“ROIC”) to exceed its weighted average “cost of capital” (“WACC”) between 1.75% to 4.75% (the “ROI Target”) over the two fiscal years immediately preceding the vesting date. If the ROI Target is not met the awards are forfeited. The shares can be earned based on a range from 0% to 125% of target as defined below:

•

0% payout if ROIC exceeds WACC by less than 1.75%;

•

ROIC above WACC by 1.75% pays 50% of ROI Target; or

•

ROIC above WACC by 3.75% pays 100% of target; or

•

ROIC above WACC by 4.75% pays 125% of target.

The ROIC shares vest immediately if the grantee dies or becomes disabled. However, at retirement the grantee will receive a pro-rata number of shares through the grantee’s retirement date at the normal vesting date. In addition, the ROIC shares 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. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest. The fair value of the award is equal to the stock price on the grant date of $21.56. Since these awards have a performance condition feature the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. For the twelve and forty weeks ended October 6, 2012, we expensed these awards assuming 100% attainment of the ROI Target.

The following performance-contingent ROIC Shares have been granted under the EPIP and have service period remaining (amounts in thousands, except price data):


Grant date	7/16/2012
Shares granted		137.5
Approximate vesting date		2/28/2014
Fair value per share	$	21.56

As of October 6, 2012, there was $2.5 million of total unrecognized compensation cost related to nonvested ROIC Shares granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 1.3 years.

Performance-Contingent Restricted Stock

Certain key employees have been granted performance-contingent restricted stock. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K) and the performance condition requires the company’s “return on invested capital” to exceed its weighted average “cost of capital” by 3.75% (the “ROI Target”) over the two fiscal years immediately preceding the vesting date. If the ROI Target is not met the awards are forfeited. 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 of the performance-contingent restricted stock granted in February 2010, during the forty weeks ended October 6, 2012, the Company TSR rank was less than the 37th percentile and the grant was reduced by 16.9% of the award or 43,490 common shares. The total amount of shares that vested to plan participants was 213,271. Because the company achieved the ROI Target, the cost for the portion of the award that did not vest was not reversed.

The performance-contingent restricted stock generally vests immediately if the grantee dies or becomes disabled. However, at normal retirement 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. 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 performance-contingent restricted stock granted in February 2010 paid accumulated dividends upon vesting of $0.2 million. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.

The following performance-contingent restricted stock awards have been granted under the EPIP and have service period remaining (amounts in thousands, except price data):


Grant date	2/10/2011
Shares granted		324
Approximate vesting date		2/10/2013
Fair value per share	$	15.93

A summary of the status of all of the company’s nonvested shares for performance-contingent restricted stock as of October 6, 2012, and changes during the forty weeks ended October 6, 2012, is presented below (amounts in thousands, except price data):


	Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term		Aggregate Current Intrinsic Value
Nonvested at December 31, 2011		576	$	16.67
Vested		(213)	$	17.59
Granted		275	$	22.37
Grant reduction for not achieving the S&P TSR		(43)	$	17.59
Forfeited		(2)	$	16.50

Nonvested at October 6, 2012		593	$	18.92		0.96	$	11,362

As of October 6, 2012, there was $6.1 million of total unrecognized compensation cost related to nonvested restricted stock granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 1.1 years. The total fair value of shares vested during the forty weeks ended October 8, 2011 was $3.4 million.

Non-Qualified Stock Options

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


Grant date	2/10/2011		2/9/2010
Shares granted		2,142		1,703
Exercise price		16.31		16.67
Vesting date		2/10/2014		2/9/2013
Fair value per share ($)		3.47		3.69
Dividend yield (%)(1)		3.00		3.00
Expected volatility (%)(2)		29.20		30.60
Risk-free interest rate (%)(3)		2.44		2.35
Expected option life (years)(4)		5.00		5.00
Outstanding at October 6, 2012		2,100		1,629

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

The summary of the shares granted and outstanding for NQSO activity for the forty weeks ended October 6, 2012 pursuant to the EPIP is set forth below (amounts in thousands, except price data):


	NQSO		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2011		7,423	$	15.67
Exercised		(690)	$	13.20
Forfeited		(15)	$	16.33

Outstanding at October 6, 2012		6,718	$	15.93		3.82	$	21,707

Exercisable at October 6, 2012		2,982	$	15.27		2.46	$	11,642

As of October 6, 2012, there was $2.7 million of total unrecognized compensation expense related to outstanding NQSO. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.2 years.

The cash received, the windfall tax benefits, and intrinsic value from NQSO exercises for the forty weeks ended October 6, 2012 and October 8, 2011 were as follows (amounts in thousands):


	October 6, 2012		October 8, 2011
Cash received from exercises	$	9,112	$	12,721
Cash tax windfall, net	$	1,491	$	3,025
Intrinsic value of NQSO exercised	$	6,472	$	11,542

Generally, if the employee dies, becomes disabled or retires at normal retirement age (age 65 or later), the NQSO immediately vest and must be exercised within two years. In addition, NQSO will vest if the company undergoes a change in control.

Deferred Stock

Pursuant to the EPIP, the company allows non-employee directors to convert their annual board 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. During the first quarter of fiscal 2012 an aggregate of 18,330 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 the forty weeks ending October 6, 2012, a total of 20,205 deferred shares were exercised for 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 2012, non-employee directors were granted an aggregate of 47,800 shares of deferred stock. The deferred stock will be distributed to the grantee at a time designated by the grantee. Compensation expense is recorded on this deferred stock over the one year minimum vesting period. During the forty weeks ending October 6, 2012, there were 25,200 deferred shares awards exercised for annual grant awards.

The deferred stock activity for the forty weeks ended October 6, 2012 is set forth below (amounts in thousands, except price data):


	Shares		Weighted Average Fair Value		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Balance at December 31, 2011		231	$	16.43
Deferred stock issued		66	$	20.62
Deferred stock exercised		(45)	$	18.00

Balance at October 6, 2012		252	$	17.24		0.24	$	4,827

Outstanding vested at October 6, 2012		160	$	15.98			$	3,071

Outstanding unvested at October 6, 2012		92	$	19.45		0.67	$	1,755

Shares vesting during the quarter ended October 6, 2012		77	$	18.62			$	1,483

As of October 6, 2012, there was $0.9 million of total unrecognized compensation cost related to deferred stock awards granted under the EPIP.

Stock Appreciation Rights

Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chairman fees into stock appreciation rights (“rights”). These rights vest after one year and can be exercised over nine years. The company records compensation expense for these rights at a measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model.

The fair value of the rights at October 6, 2012 ranged from $6.99 to $18.88. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 6, 2012: dividend yield 3.0%; expected volatility 29.0%; risk-free interest rate 0.23% and expected life of 0.05 years to 1.85 years.

The rights activity for the forty weeks ended October 6, 2012 is set forth below (amounts in thousands except price data):


	Rights		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term		Aggregate Current Intrinsic Value
Outstanding at December 31, 2011		187	$	12.03
Rights exercised		(35)	$	15.61

Outstanding at October 6, 2012		152	$	11.19		2.06	$	1,524

Share-Based Payments Compensation Expense Summary

The following table summarizes the company’s stock based compensation expense (income) for the twelve and forty week periods ended October 6, 2012 and October 8, 2011, respectively (amounts in thousands):


	For the Twelve Weeks Ended				For the Forty Weeks Ended
	October 6, 2012		October 8, 2011		October 6, 2012		October 8, 2011
Stock options	$	694	$	1,002	$	2,680	$	5,684
Performance-contingent restricted stock		1,509		1,048		3,094		3,598
Stock appreciation rights		(410)		(568)		178		776
Deferred stock		325		333		1,060		1,145

Total stock based compensation	$	2,118	$	1,815	$	7,012	$	11,203