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Stock Based Compensation | 4 Months Ended
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Apr. 20, 2013
Stock Based Compensation | 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. Stock Options The following non-qualified stock options (“NQSOs”) 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 |
Shares granted |  |  | 2,142 |
Exercise price($) |  |  | 16.31 |
Vesting date |  |  | 2/10/2014 |
Fair value per share($) |  |  | 3.47 |
Dividend yield(%)(1) |  |  | 3.00 |
Expected volatility(%)(2) |  |  | 29.20 |
Risk-free interest rate(%)(3) |  |  | 2.44 |
Expected option life (years)(4) |  |  | 5.00 |
Outstanding at April 20, 2013 |  |  | 2,095 |
(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 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 stock option activity for the sixteen weeks ended April 20, 2013 pursuant to the EPIP is set forth below (amounts in thousands, except price data):
|  | Options |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Term (Years) |  |  | Aggregate Intrinsic Value |
Outstanding at December 29, 2012 |  |  | 6,360 |  |  | $ | 16.08 |  |  |  |  |  |  |  |  |
Granted |  |  | — |  |  | $ | — |  |  |  |  |  |  |  |  |
Exercised |  |  | (9 | ) |  | $ | 16.20 |  |  |  |  |  |  |  |  |
Forfeited |  |  | (9 | ) |  | $ | 16.48 |  |  |  |  |  |  |  |  |
Outstanding at April 20, 2013 |  |  | 6,342 |  |  | $ | 16.08 |  |  |  | 3.44 |  |  | $ | 102,377 |
Exercisable at April 20, 2013 |  |  | 4,253 |  |  | $ | 15.96 |  |  |  | 2.76 |  |  | $ | 69,071 |
As of April 20, 2013, there was $1.3 million of total unrecognized compensation expense related to unvested stock options. This expense is expected to be recognized over a weighted-average period of 0.8 years. The cash received, the windfall tax benefit, and intrinsic value from stock option exercises for the sixteen weeks ended April 20, 2013 and April 21, 2012 were as follows (amounts in thousands):
|  | April 20, 2013 |  |  | April 21, 2012 |
Cash received from option exercises |  | $ | 146 |  |  | $ | 233 |
Cash tax windfall, net |  | $ | 29 |  |  | $ | 23 |
Intrinsic value of stock options exercised |  | $ | 109 |  |  | $ | 124 |
Generally, if the employee dies, becomes disabled or retires at normal retirement age (age 65 or later), the nonqualified stock options immediately vest and must be exercised within two years. In addition, nonqualified stock options will vest if the company undergoes a change in control. Performance-Contingent 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), and the shares become non-forfeitable if, and to the extent that on that date, the vesting conditions are satisfied. As a result of the delay in the grant of the 2012 awards the 2012 awards vest approximately 17 months from the date of grant. The 2013 awards vest two years from the date of grant. 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, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later on the normal vesting date, the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. 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 |  | 1/1/13 |  |  | 7/16/2012 |
Shares granted |  |  | 276.1 |  |  |  | 137.5 |
Vesting date |  |  | 3/1/2015 |  |  |  | 2/28/2014 |
Fair value per share |  | $ | 25.83 |  |  | $ | 23.18 |
As of April 20, 2013, there was $7.7 million of total unrecognized compensation cost related to nonvested TSR Shares granted under the EPIP. That cost is expected to be recognized over a weighted-average period of 1.6 years. The July 16, 2012 grant vests over one and a half years because it was granted in the middle of the year. 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), and the shares become non-forfeitable if, and to the extent that on that date, the vesting conditions are satisfied. As a result of the delay in the grant of the 2012 awards the 2012 awards vest approximately 17 months from the date of grant. The 2013 awards vest two years from the date of grant. 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 year performance period. The 2012 award is a 17 month performance period and the 2013 award is a two year performance period. 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, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC shares will immediately vest at the target level. Dividends declared during the vesting period will accrue and will be paid at vesting for the shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. 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 quarter ended April 20, 2013, we expensed the 2012 awards assuming 125% attainment of the ROI Target and the 2013 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 |  | 1/1/13 |  |  | 7/16/2012 |
Shares granted |  |  | 276.1 |  |  |  | 137.5 |
Vesting date |  |  | 3/1/2015 |  |  |  | 2/28/2014 |
Fair value per share |  | $ | 23.27 |  |  | $ | 21.56 |
As of April 20, 2013, there was $7.3 million of total unrecognized compensation cost related to nonvested ROIC Shares granted under the EPIP. That cost is expected to be recognized over a weighted-average period of 1.6 years. The July 16, 2012 grant vests over one and a half years because it was granted in the middle of the year. These grants normally vest in two years. Performance-Contingent Restricted Stock Prior to 2012 certain key employees were 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 2011, during the sixteen weeks ended April 20, 2013, an additional 63,233 common shares were issued in the aggregate to these certain key employees because the company exceeded the S&P TSR by the maximum amount. At vesting the company paid accumulated dividends of $0.4 million. The tax windfall at vesting of these awards was $2.1 million. The company’s performance-contingent restricted stock activity during the quarter ended April 20, 2013, is presented below (amounts in thousands, except price data):
|  | Shares |  |  | Weighted Average Grant Date Fair Value |
Nonvested at December 29, 2012 |  |  | 592 |  |  | $ | 18.92 |
Initial grant |  |  | 552 |  |  | $ | 24.55 |
Grant increase for exceeding the S&P TSR |  |  | 63 |  |  | $ | 15.93 |
Vested |  |  | (381 | ) |  | $ | 15.93 |
Forfeited |  |  | (2 | ) |  | $ | 23.44 |
Nonvested at April 20, 2013 |  |  | 824 |  |  | $ | 23.83 |
As of April 20, 2013, there was $15.0 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 1.61 years. The total intrinsic value of shares vested during the period ended April 20, 2013 was $10.6 million. 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 at the date of conversion. During the first quarter of fiscal 2013, an aggregate of 24,100 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 sixteen weeks ending April 20, 2013, a total of 24,060 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 at the date of grant. Compensation expense is recorded on this deferred stock over the one year minimum vesting period. During the sixteen weeks ending April 20, 2013, there were no deferred shares awards exercised for annual grant awards. The deferred stock activity for the sixteen weeks ended April 20, 2013 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 29, 2012 |  |  | 252 |  |  | $ | 17.24 |  |  |  |  |  |  |  |  |
Deferred stock issued |  |  | 24 |  |  | $ | 21.60 |  |  |  |  |  |  |  |  |
Deferred stock exercised |  |  | (24 | ) |  | $ | 16.22 |  |  |  |  |  |  |  |  |
Balance at April 20, 2013 |  |  | 252 |  |  | $ | 17.76 |  |  |  | 0.24 |  |  | $ | 8,121 |
Outstanding vested at April 20, 2013 |  |  | 160 |  |  | $ | 15.98 |  |  |  |  |  |  | $ | 5,167 |
Outstanding unvested at April 20, 2013 |  |  | 92 |  |  | $ | 20.86 |  |  |  | 0.66 |  |  | $ | 2,954 |
Shares vesting during the quarter ended April 20, 2013 |  |  | 24 |  |  | $ | 16.22 |  |  |  |  |  |  | $ | 776 |
As of April 20, 2013, there was $0.7 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 chair 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 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 liability for these rights at April 20, 2013 and December 29, 2012 was $2.9 million and $1.7 million, respectively, and is recorded in other long-term liabilities. The fair value of the rights at April 20, 2013 ranged from $19.33 to $24.60. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at April 20, 2013: dividend yield 2.7%; expected volatility 28.0%; risk-free interest rate 0.24% and expected life of 0.35 years to 1.55 years. The rights activity for the sixteen weeks ended April 20, 2013 is set forth below (amounts in thousands except price data):
|  | Rights |  |  | Weighted Average Fair Value |  |  | Weighted Average Remaining Contractual Term (Years) |  |  | Aggregate Intrinsic Value |
Outstanding at December 29, 2012 |  |  | 130 |  |  | $ | 10.52 |  |  |  |  |  |  |  |  |
Rights exercised |  |  | — |  |  |  | — |  |  |  |  |  |  |  |  |
Rights forfeited |  |  | — |  |  |  | — |  |  |  |  |  |  |  |  |
Outstanding at April 20, 2013 |  |  | 130 |  |  | $ | 10.52 |  |  |  | 1.82 |  |  | $ | 2,899 |
The following table summarizes the company’s stock based compensation expense for the sixteen weeks ended April 20, 2013 and April 21, 2012 (amounts in thousands):
|  | For the Sixteen Weeks Ended |
|  | April 20, 2013 |  |  | April 21, 2012 |
Stock options |  | $ | 636 |  |  | $ | 1,202 |
Performance-contingent restricted stock awards |  |  | 3,794 |  |  |  | 1,005 |
Deferred stock |  |  | 454 |  |  |  | 433 |
Stock appreciation rights |  |  | 1,191 |  |  |  | 424 |
Total stock based compensation |  | $ | 6,075 |  |  | $ | 3,064 |

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- Definition The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Staff Accounting Bulletin (SAB) -Number Topic 14 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5070-113901 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 50 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6406099&loc=d3e25284-112666 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5047-113901 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Statement of Position (SOP) -Number 93-6 -Paragraph 53 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 40 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6418621&loc=d3e17540-113929 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 123R -Paragraph 64, 65, A240 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5444-113901 + Details
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