Note 16.

Stock-Based Compensation

On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”). The Omnibus Plan was approved by our shareholders on May 21, 2014. The Omnibus Plan authorizes the compensation committee of the Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other awards for the purpose of providing our officers, key employees, and non-employee directors’ incentives and rewards for performance. The Omnibus Plan replaced the Flowers Foods’ 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (“EPIP”), the stock appreciation right plan, and the bonus plan. All outstanding equity awards that were made under the EPIP will continue to be governed by the EPIP; however, all equity awards granted after May 21, 2014 are governed by the Omnibus Plan. No additional awards will be issued under the EPIP. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares.

The EPIP authorized 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) were eligible to receive awards under the EPIP. Over the life of the EPIP, the company issued options, restricted stock and deferred stock.

The following is a summary of stock options, restricted stock, and deferred stock outstanding under the plans described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below.

Stock Options

The company issued non-qualified stock options (“NQSOs”) during fiscal years 2011 and prior that have no additional service period remaining. All outstanding NQSOs have vested and are exercisable on January 3, 2015.

The stock option activity for fiscal years 2014, 2013, and 2012 pursuant to the EPIP is set forth below:


	Fiscal 2014					Fiscal 2013					Fiscal 2012
	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		8,112		$	10.89		9,541		$	10.71		11,135		$	10.45
Exercised		(1,921	)	$	10.94		(1,415	)	$	9.67		(1,570	)	$	8.84
Forfeitures		—		$	—		(14	)	$	10.99		(24	)	$	10.88

Outstanding at end of year		6,191		$	10.88		8,112		$	10.89		9,541		$	10.71

Exercisable at end of year		6,191					4,978					3,973

As of January 3, 2015, options outstanding under the EPIP had an average exercise price of $10.88, a weighted average remaining contractual life of 2.27 years, and an aggregate intrinsic value of $51.1 million.

The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for fiscal years 2014, 2013, and 2012 are set forth below (amounts in thousands):


	Fiscal 2014		Fiscal 2013		Fiscal 2012
Cash received from option exercises	$	21,014	$	13,685	$	13,881
Cash tax windfall benefit, net	$	4,572	$	5,622	$	2,343
Intrinsic value of stock options exercised	$	16,725	$	18,132	$	9,965

Performance-Contingent Restricted Stock Awards

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

Since 2012, certain key employees have been granted performance-contingent restricted stock under the EPIP 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 (July as opposed to January) in the grant of the 2012 awards, the 2012 awards vested during the first quarter of 2014, 18 months from the grant date. The 2013 and 2014 awards (granted during the first quarters of their respective years) 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 2012 award actual attainment was 195% of target.

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 has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to estimate 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, 2014		January 1, 2013
Shares granted		366		414
Assumed vesting date		3/1/2016		3/1/2015
Fair value per share	$	23.97	$	17.22

As of January 3, 2015, there was $4.3 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 one year.

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

Since 2012, certain key employees have been granted performance-contingent restricted stock under the EPIP 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 (July as opposed to January) in the grant of the 2012 awards, the 2012 awards vested during the first quarter of 2014, 18 months from the grant date. The 2013 and 2014 awards (granted during the first quarters of their respective years) vest two years from the date of grant. Return on Invested Capital is calculated by dividing our profit, as defined, by the invested capital (“ROIC”). Generally, the performance condition requires the company’s average ROIC to exceed its average weighted cost of capital (“WACC”) by between 1.75 to 4.75 percentage points (the “ROI Target”) over the two fiscal year performance period. If the lowest 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 percentage points;

•

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

•

ROIC above WACC by 3.75 percentage points pays 100% of Target; or

•

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

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The 2012 award actual attainment was 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. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on 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. 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, 2014		January 1, 2013
Shares granted		366		414
Assumed vesting date		3/1/2016		3/1/2015
Fair value per share	$	21.47	$	15.51

As of January 3, 2015, there was $4.0 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 one year.

Performance-Contingent Restricted Stock

In connection with the vesting of the performance-contingent restricted stock granted in July 2012, during fiscal 2014, an additional 193,756 common shares were issued because the company exceeded the median TSR of its peer group and payout was 195% of the target grant (“TSR modifier”) and an additional 50,939 common shares were issued because the company’s ROIC exceeded its WACC by the maximum amount and payout was 125% of the target grant (“ROIC modifier”). At vesting the company paid accumulated dividends of $0.4 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 2014, 2013 and 2012 is set forth below:


	Fiscal 2014					Fiscal 2013					Fiscal 2012
	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		1,229		$	15.88		888		$	12.61		864		$	11.11
Initial grant		732		$	22.72		828		$	16.37		412		$	14.91
Supplemental grant for exceeding ROIC modifier		51		$	14.37		—		$	—		—			—
Supplemental grant for exceeding the TSR modifier		194		$	15.45		95		$	10.62		—			—
Vested		(759	)	$	16.11		(571	)	$	10.62		(320	)	$	11.72
Grant reduction for not achieving the TSR modifier		—		$	—		—		$	—		(65	)	$	11.72
Forfeitures		(43	)	$	19.73		(11	)	$	15.88		(3	)	$	11.44

Balance at end of year		1,404		$	19.09		1,229		$	15.88		888		$	12.61

As of January 3, 2015, there was $8.3 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 one year. The fair value of performance-contingent restricted share awards that vested during fiscal 2014 was $13.6 million. There was a tax windfall of $2.7 million on the vesting (issuance) of performance-contingent awards during fiscal 2014.

Deferred and Restricted Stock

Pursuant to the EPIP, the company allowed non-employee directors to convert their annual board retainers into deferred stock equal in value to 130% of the cash payments these directors would have otherwise received. The deferred stock had 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. In January 2014, cash pay was converted into an aggregate of 36,425 shares. The company recorded compensation expense for this deferred stock over the two-year minimum vesting period. During fiscal 2014, a total of 18,330 previously deferred shares were distributed under the EPIP. Following the May 2014 Board of Directors meeting and the adoption of the Omnibus plan, annual board retainers converted into deferred stock and issued under the Omnibus plan are equal in value to 100% of the cash payments directors would otherwise receive and the vesting period is a one-year period to match the period of time that cash would have been received if no conversion existed. On January 2, 2015, during our fiscal 2014, annual board retainers for certain directors were converted into an aggregate of 19,852 shares that will be amortized over one year under the Omnibus plan. Going forward, under the Omnibus Plan, non-employee directors may elect to convert their annual board retainers into deferred stock equal to 100% of the cash payments they otherwise would have received. The deferred stock so converted will have a one-year pro-rated vesting period. Accumulated dividends are paid upon delivery of the shares.

Pursuant to the Omnibus Plan and 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 2014, non-employee directors were granted an aggregate of 60,300 shares of deferred stock pursuant to the Omnibus Plan. 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 2014, a total of 27,075 previously deferred shares were distributed.

A total of 105,621 shares of previously vested and deferred awards were also distributed during fiscal 2014 for a director who retired on May 21, 2014 and the cumulative deferred shares (including retainer conversions and annual grants) were issued at that time. An additional 46,364 shares of previously vested and deferred awards were also distributed during fiscal 2014 for a director who retired on December 31, 2014 and the cumulative deferred shares (including retainer conversions and annual grants) were issued at that time.

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 and the award value does not exceed 0.5% of our cumulative EBITDA over the vesting period. Vesting will also occur in the event of the CEO’s death or disability, but not his retirement. Dividends will accrue on the award and will be paid to the CEO on the vesting date for all shares that vest. There were 58,500 shares issued for this award at a fair value of $22.25 per share.

The deferred and restricted stock activity for fiscal years 2014, 2013, and 2012 is set forth below:


	Fiscal 2014					Fiscal 2013					Fiscal 2012
	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)
Nonvested shares at beginning of year		177		$	18.92		138		$	13.04		155		$	12.05
Granted		117		$	20.24		149		$	20.32		99		$	13.85
Vested		(123	)	$	17.81		(110	)	$	13.41		(116	)	$	12.42
Forfeited		(20	)	$	18.93		—		$	—		—		$	—

Nonvested shares at end of year		151		$	21.06		177		$	18.92		138		$	13.04

Vested and deferred shares at end of year		169					92					102

As of January 3, 2015, there was $1.8 million of total unrecognized compensation cost related to deferred and restricted stock awards granted under the EPIP. This cost is expected to be recognized over a weighted-average period of 1.46 years. The intrinsic value of deferred stock awards that vested during fiscal 2014 was $2.5 million. There was a tax windfall of $0.7 million on the exercise of deferred share awards during fiscal 2014.

Stock Appreciation Rights

Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chair fees into rights. These rights vested 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 January 3, 2015 and December 28, 2013 was $0.3 million and $2.0 million, respectively, and is recorded in other long-term liabilities. The company paid $1.4 million at the exercise of 112,215 shares during fiscal 2014.

The fair value of the rights at January 3, 2015 ranged from $10.61 to $10.97. The following assumptions were used to determine the fair value of the rights discussed above using the Black-Scholes option-pricing model at January 3, 2015: dividend yield 2.4%; expected volatility 22.00%; risk-free interest rate 0.25% and expected life of 0.50 years to 0.70 years.

The rights activity for fiscal years 2014, 2013, and 2012 is set forth below:


	Fiscal 2014			Fiscal 2013			Fiscal 2012
	(Amounts in thousands, except price data)
Balance at beginning of year		141			195			281
Rights exercised		(112	)		(54	)		(86	)

Balance at end of year		29			141			195

Weighted average — grant date fair value	$	8.47		$	7.20		$	7.01

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 2014, 2013 and 2012:


	Fiscal 2014			Fiscal 2013		Fiscal 2012
	(Amounts in thousands)
Stock options	$	197		$	1,776	$	3,374
Performance — contingent restricted stock awards		16,544			11,180		4,615
Deferred stock awards		2,176			1,769		1,384
Stock appreciation rights (income) expense		(255	)		1,218		743

Total stock based compensation expense	$	18,662		$	15,943	$	10,116