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 2010. 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 December 29, 2012		2,100		1,654

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

The stock option activity for fiscal years 2012, 2011 and 2010 pursuant to the EPIP is set forth below:


	Fiscal 2012					Fiscal 2011					Fiscal 2010
	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		7,423		$	15.67		6,547		$	14.66		5,602		$	13.56
Granted		—		$	—		2,142		$	16.31		1,703		$	16.67
Exercised		(1,047	)	$	13.25		(1,165	)	$	11.10		(731	)	$	10.79
Forfeitures		(16	)	$	16.33		(101	)	$	16.30		(27	)	$	16.38

Outstanding at end of year		6,360		$	16.08		7,423		$	15.67		6,547		$	14.66

Exercisable at end of year		2,638					2,258					2,109

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

As of December 29, 2012, options outstanding under the EPIP had an average exercise price of $16.08, a weighted average remaining contractual life of 3.75 years, and an aggregate intrinsic value of $43.6 million.

As of December 29, 2012, there was $2.0 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 1.04 years.

The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for fiscal years 2012, 2011 and 2010 are set forth below (amounts in thousands):


	Fiscal 2012		Fiscal 2011		Fiscal 2010
Cash received from option exercises	$	13,881	$	12,933	$	7,884
Cash tax windfall benefit, net	$	2,343	$	3,037	$	683
Intrinsic value of stock options exercised	$	9,965	$	11,632	$	4,409

Performance Based Restricted Stock Awards

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

Beginning in 2012, certain key employees have been granted performance-contingent restricted stock in the form of TSR Shares. 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
90th		200	%
70th		150	%
50th		100	%
30th		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
Vesting date		2/28/2014
Fair value per share	$	23.18

As of December 29, 2012, there was $2.2 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 1.05 years. This grant vests over one and a half years since it was not granted until July 2012. These grants normally vest in two years.

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

Beginning in 2012, certain key employees have been granted performance-contingent restricted stock in the form of ROIC Shares. 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 fiscal 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
Vesting date		2/28/2014
Fair value per share	$	21.56

As of December 29, 2012, there was $2.1 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 1.05 years. This grant vests over one and a half years since it was not granted until July 2012. These grants are normally two years.

Performance-Contingent Restricted Stock

Prior to 2012, certain key employees have been granted performance-contingent restricted stock. These 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 in 2012 of the performance-contingent restricted stock granted in February 2010, the Company TSR rank was less than the 37th percentile and the grant was reduced by 16.9% of the award or 43,490 shares of common stock. 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.


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

A summary of the status of all of the company’s nonvested shares for performance-contingent restricted stock (including the TSR Shares and the ROIC Shares) for fiscal 2012, 2011 and 2010 is set forth below:


	Fiscal 2012					Fiscal 2011					Fiscal 2010
	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		576		$	16.67		568		$	17.08		621		$	17.34
Initial grant		275		$	22.37		324		$	15.93		268		$	17.59
Supplemental grant for exceeding the S&P TSR		—			—		—			—		63		$	18.02
Vested		(214	)	$	17.59		(242	)	$	16.64		(378	)	$	15.02
Grant reduction for not achieving the S&P TSR		(43	)	$	17.59		(60	)	$	16.64		—		$	—
Forfeitures		(2	)	$	17.16		(14	)	$	16.82		(6	)	$	17.25

Balance at end of year		592		$	18.92		576		$	16.67		568		$	17.08

As of December 29, 2012, there was $4.6 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 0.99 years. The fair value of performance-contingent restricted share awards that vested during fiscal 2012 was $4.1 million. There was a tax shortfall of $0.2 million on the vesting (issuance) of performance-contingent awards during fiscal 2012.

Deferred Stock awards

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 fiscal 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 fiscal 2012, there were 25,200 deferred share awards exercised for annual grant awards.

The deferred stock activity for fiscal years 2012, 2011, and 2010 is set forth below:


	Fiscal 2012					Fiscal 2011					Fiscal 2010
	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		231		$	16.43		240		$	15.11		195		$	14.60
Issued		66		$	20.62		76		$	19.35		96		$	15.41
Exercised		(45	)	$	18.01		(85	)	$	15.31		(51	)	$	13.71

Balance at end of year		252		$	17.24		231		$	16.43		240		$	15.11

Outstanding vested at end of year		160		$	15.98		128		$	15.11		124		$	15.00

Outstanding unvested at end of year		92		$	19.45		103		$	18.07		116		$	15.23

Shares vesting during the year		77		$	18.62		70		$	15.73		71		$	13.39

As of December 29, 2012, 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 0.58 years. The intrinsic value of deferred stock awards that vested during fiscal 2012 was $1.8 million. There was a tax windfall of $0.1 million on the exercise of deferred share awards during fiscal 2012.

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 29, 2012 and December 31, 2011 was $1.7 million and $2.3 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. Payments on rights exercised in fiscal 2012 were $1.3 million.

The fair value of the rights at December 29, 2012 ranged from $10.36 to $15.86. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at December 29, 2012: dividend yield 2.9%; expected volatility 29.0%; risk-free interest rate 0.27%; and expected life of 0.50 years to 1.70 years.

The rights activity for fiscal years 2012, 2011, and 2010 is set forth below:


	Fiscal 2012			Fiscal 2011			Fiscal 2010
	(Amounts in thousands, except price data)
Balance at beginning of year		187			348			348
Rights exercised		(57	)		(161	)		—

Balance at end of year		130			187			348

Weighted average — grant date fair value	$	10.52		$	11.02		$	7.42

The following table summarizes the company’s stock based compensation expense, all of which was recognized in selling, distribution, and administration expense, for fiscal years 2012, 2011 and 2010:


	Fiscal 2012		Fiscal 2011		Fiscal 2010
	(Amounts in thousands)
Stock options	$	3,374	$	6,803	$	6,931
Performance - contingent restricted stock awards		4,615		4,700		4,727
Deferred stock awards		1,384		1,479		1,337
Stock appreciation rights		743		656		683

Total stock based compensation	$	10,116	$	13,638	$	13,678