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 originally could be issued or transferred under the EPIP was 41,906,250 shares. As of December 28, 2013, 3,130,104 shares remain available for issuance. 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 2011 and have 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	February 10, 2011
Shares granted		3,213
Exercise price($)		10.87
Vesting date		2/10/2014
Fair value per share($)		2.31
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 December 28, 2013		3,142

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, 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 2013, 2012, and 2011 pursuant to the EPIP is set forth below:


	Fiscal 2013					Fiscal 2012					Fiscal 2011
	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		9,541		$	10.71		11,135		$	10.45		9,820		$	9.77
Granted		—		$	—		—		$	—		3,213		$	10.87
Exercised		(1,415	)	$	9.67		(1,570	)	$	8.84		(1,747	)	$	7.40
Forfeitures		(14	)	$	10.99		(24	)	$	10.88		(151	)	$	10.86

Outstanding at end of year		8,112		$	10.89		9,541		$	10.71		11,135		$	10.45

Exercisable at end of year		4,978					3,973					3,387

Weighted average fair value of options granted during the year	$	—				$	—				$	2.31

As of December 28, 2013, options outstanding under the EPIP had an average exercise price of $10.89, a weighted average remaining contractual life of 3.00 years, and an aggregate intrinsic value of $84.7 million.

As of December 28, 2013, there was $0.2 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 0.12 years.

The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for fiscal years 2013, 2012, and 2011 are set forth below (amounts in thousands):


	Fiscal 2013		Fiscal 2012		Fiscal 2011
Cash received from option exercises	$	13,685	$	13,881	$	12,933
Cash tax windfall benefit, net	$	5,622	$	2,343	$	3,037
Intrinsic value of stock options exercised	$	18,132	$	9,965	$	11,632

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 (June as opposed to January) 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. The performance payout is calculated at the end of each of the last four quarters (averaged) in the measurement period. 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	%

For performance between the levels described above, the degree of vesting is interpolated on a linear basis.

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) TSR 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’ TSR. 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	January 1, 2013		July 16, 2012
Shares granted		414		206
Vesting date		3/1/2015		2/28/2014
Fair value per share ($)	$	17.22	$	15.45

As of December 28, 2013, there was $3.9 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 1.1 years. These grants normally vest in two years. The July 16, 2012 grant vests over one and a half years because it was granted in the middle of the year.

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 (June as opposed to January) 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 (“ROIC”). Generally, the performance condition requires the company’s average ROIC to exceed its average weighted “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 ROI Target; or

•

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

For performance between the levels described above, the degree of vesting is interpolated on a linear basis.

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 fiscal 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 2012 award actual attainment was 125%.

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	January 1, 2013		July 16, 2012
Shares granted		414		206
Vesting date		3/1/2015		2/28/2014
Fair value per share ($)	$	15.51	$	14.37

As of December 28, 2013, there was $3.6 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 1.1 years. These grants normally vest in two years. The July 16, 2012 grant vests over one and a half years because it was granted in the middle of the year.

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 fiscal 2013, an additional 94,777 of 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.

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 2013, 2012 and 2011 is set forth below:


	Fiscal 2013					Fiscal 2012					Fiscal 2011
	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		888		$	12.61		864		$	11.11		851		$	11.39
Initial grant		828		$	16.37		412		$	14.91		486		$	10.62
Supplemental grant for exceeding the S&P TSR		95		$	10.62		—			—		—			—
Vested		(571	)	$	10.62		(320	)	$	11.72		(362	)	$	11.09
Grant reduction for not achieving the S&P TSR		—		$	—		(65	)	$	11.72		(90	)	$	11.09
Forfeitures		(11	)	$	15.88		(3	)	$	11.44		(21	)	$	11.21

Balance at end of year		1,229		$	15.88		888		$	12.61		864		$	11.11

As of December 28, 2013, there was $7.5 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 1.1 years. The fair value of performance-contingent restricted share awards that vested during fiscal 2013 was $10.6 million. There was a tax windfall of $2.1 million on the vesting (issuance) of performance-contingent awards during fiscal 2013.

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 at the date of conversion. During the first quarter of fiscal 2013, an aggregate of 36,150 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 2013, a total of 36,088 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 2013, non-employee directors were granted an aggregate of 54,150 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 fiscal 2013, there were 45,088 deferred share awards exercised for annual grant awards.

On May 31, 2013, the company’s Chief Executive Officer (“CEO”) received a time-based restricted stock award of approximately $1.3 million of restricted stock pursuant to the EPIP. This award will vest 100% on the fourth anniversary of the date of grant provided the CEO remains employed by the company during this period. Dividends will accrue on the award and will be paid to the CEO on the vesting date on all shares that vest. There were 58,500 shares issued for this award at a fair value of $22.25 per share.

The deferred stock activity for fiscal years 2013, 2012, and 2011 is set forth below:


	Fiscal 2013					Fiscal 2012					Fiscal 2011
	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		378		$	11.49		347		$	10.95		360		$	10.07
Issued		149		$	20.32		99		$	13.74		114		$	12.90
Exercised		(81	)	$	12.91		(68	)	$	12.01		(127	)	$	10.20

Balance at end of year		446		$	14.19		378		$	11.49		347		$	10.95

Outstanding vested at end of year		269		$	11.08		240		$	10.66		192		$	10.07

Outstanding unvested at end of year		177		$	18.92		138		$	12.96		155		$	12.05

Shares vesting during the year		110		$	13.37		116		$	12.42		133		$	10.30

As of December 28, 2013, there was $1.9 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 2.3 years. The intrinsic value of deferred stock awards that vested during fiscal 2013 was $2.3 million. There was a tax windfall of $0.1 million on the exercise of deferred share awards during fiscal 2013.

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 December 28, 2013 and December 29, 2012 was $2.0 million and $1.7 million, respectively, and is recorded in other long-term liabilities. The company paid $1.0 million at the exercise of 54,168 shares during fiscal 2013.

The fair value of the rights at December 28, 2013 ranged from $12.63 to $16.45. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at December 28, 2013: dividend yield 2.1%; expected volatility 23.0%; risk-free interest rate 0.40% and expected life of 0.01 years to 1.20 years.

The rights activity for fiscal years 2013, 2012, and 2011 is set forth below:


	Fiscal 2013			Fiscal 2012			Fiscal 2011
	(Amounts in thousands, except price data)
Balance at beginning of year		195			281			522
Rights exercised		(54	)		(86	)		(241	)

Balance at end of year		141			195			281

Weighted average — grant date fair value	$	7.20		$	7.01		$	7.35

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 2013, 2012 and 2011:


	Fiscal 2013		Fiscal 2012		Fiscal 2011
	(Amounts in thousands)
Stock options	$	1,776	$	3,374	$	6,803
Performance - contingent restricted stock awards		11,180		4,615		4,700
Deferred stock awards		1,769		1,384		1,479
Stock appreciation rights		1,218		743		656

Total stock based compensation expense	$	15,943	$	10,116	$	13,638