STOCK BASED COMPENSATION | 6 Months Ended |
Jul. 12, 2014 |
STOCK BASED COMPENSATION | ' |
12. STOCK BASED COMPENSATION |
On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”) that was approved by 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. As a result, no additional awards will be issued under the EPIP as of the approval date of the Omnibus Plan. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares. The first grant under the Omnibus Plan was the Director Deferred Shares, described below, on May 21, 2014. |
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. |
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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 July 12, 2014. |
The stock option activity for the twenty-eight weeks ended July 12, 2014 pursuant to the EPIP is set forth below (amounts in thousands, except price data): |
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| | Options | | | Weighted | | | Weighted | | | Aggregate | |
Average | Average | Intrinsic |
Exercise | Remaining | Value |
Price | Contractual | |
| Term (Years) | |
Outstanding at December 28, 2013 | | | 8,112 | | | $ | 10.89 | | | | | | | | | |
Exercised | | | (635 | ) | | $ | 10.85 | | | | | | | | | |
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Outstanding at July 12, 2014 | | | 7,477 | | | $ | 10.9 | | | | 2.44 | | | $ | 74,714 | |
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Exercisable at July12, 2014 | | | 7,477 | | | $ | 10.9 | | | | 2.44 | | | $ | 74,714 | |
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The cash received, the windfall tax benefit, and intrinsic value from stock option exercises for the twenty-eight weeks ended July 12, 2014 and July 13, 2013 were as follows (amounts in thousands): |
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| | July 12, | | | July 13, | | | | | | | | | |
2014 | 2013 | | | | | | | | |
Cash received from option exercises | | $ | 6,888 | | | $ | 9,289 | | | | | | | | | |
Cash tax windfall, net | | $ | 1,799 | | | $ | 3,740 | | | | | | | | | |
Intrinsic value of stock options exercised | | $ | 6,234 | | | $ | 12,067 | | | | | | | | | |
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 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. 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: |
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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 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): |
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Grant date | | January 1, 2014 | | | January 1, 2013 | | | | | | | | | |
Shares granted | | | 366 | | | | 414 | | | | | | | | | |
Assumed vesting date | | | 3/1/16 | | | | 3/1/15 | | | | | | | | | |
Fair value per share | | $ | 23.97 | | | $ | 17.22 | | | | | | | | | |
As of July 12, 2014, there was $8.1 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 1.3 years. |
Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”) |
Since 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 (July as opposed to January) in the grant of the 2012 awards, the 2012 awards vested during the first quarter of 2014. 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: |
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| • | | 0% payout if ROIC exceeds WACC by less than 1.75 percentage points; | | | | | | | | | | | | | |
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| • | | ROIC above WACC by 1.75 percentage points pays 50% of Target; or | | | | | | | | | | | | | |
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| • | | ROIC above WACC by 3.75 percentage points pays 100% of Target; or | | | | | | | | | | | | | |
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| • | | 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 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 2012 award actual attainment was 125% of Target. The following performance-contingent ROIC Shares have been granted under the EPIP and have service period remaining (amounts in thousands, except price data): |
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Grant date | | January 1, 2014 | | | January 1, 2013 | | | | | | | | | |
Shares granted | | | 366 | | | | 414 | | | | | | | | | |
Vesting date | | | 3/1/16 | | | | 3/1/15 | | | | | | | | | |
Fair value per share | | $ | 21.47 | | | $ | 15.51 | | | | | | | | | |
As of July 12, 2014, there was $7.7 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 1.3 years. |
Performance-Contingent Restricted Stock Issuance |
In connection with the vesting of the performance-contingent restricted stock granted in July 2012, during the twenty-eight weeks ended July 12, 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. The tax windfall at vesting of these awards was $2.7 million. |
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The company’s performance-contingent restricted stock activity during the quarter ended July 12, 2014, is presented below (amounts in thousands, except price data): |
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| | Shares | | | Weighted | | | | | | | | | |
Average | | | | | | | | |
Grant Date | | | | | | | | |
Fair Value | | | | | | | | |
Nonvested at December 28, 2013 | | | 1,229 | | | $ | 15.88 | | | | | | | | | |
Initial 2014 grant at target | | | 732 | | | $ | 22.72 | | | | | | | | | |
Incremental shares issued for the 2012 ROIC modifier | | | 51 | | | $ | 14.37 | | | | | | | | | |
Incremental shares issued for the 2012 TSR modifier | | | 194 | | | $ | 15.45 | | | | | | | | | |
2012 Vested | | | (653 | ) | | $ | 15.03 | | | | | | | | | |
Forfeited | | | (32 | ) | | $ | 19.42 | | | | | | | | | |
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Nonvested at July 12, 2014 | | | 1,521 | | | $ | 19.35 | | | | | | | | | |
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As of July 12, 2014, there was a total of $15.9 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 1.3 years. The total intrinsic value of shares vested during the period ended July 12, 2014 was $13.6 million. |
Deferred and Restricted Stock |
Pursuant to the Omnibus Plan and the preceding EPIP, the company allows 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 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 twenty-eight weeks ended July 12, 2014, cash pay was converted into an aggregate of 36,425 shares. 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 twenty-eight weeks ended July 12, 2014, a total of 18,330 previously deferred shares were distributed. |
Pursuant to the Omnibus Plan and the preceding 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. 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 twenty-eight weeks ended July 12, 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 the twenty-eight weeks ended July 12, 2014. A director retired on May 21, 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 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 and restricted stock activity for the twenty-eight weeks ended July 12, 2014 is set forth below (amounts in thousands, except price data): |
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| | Shares | | | Weighted | | | Weighted | | | Aggregate | |
Average | Average | Intrinsic |
Fair | Remaining | Value |
Value | Contractual | |
| Term (Years) | |
Nonvested shares at December 28, 2013 | | | 177 | | | $ | 18.92 | | | | | | | | | |
Deferred stock granted | | | 97 | | | $ | 20.47 | | | | | | | | | |
Deferred stock vested | | | (78 | ) | | $ | 19.06 | | | | | | | | | |
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Nonvested at July 12, 2014 | | | 196 | | | $ | 19.87 | | | | 1.66 | | | $ | 4,074 | |
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As of July 12, 2014, there was $2.5 million of total unrecognized compensation cost related to deferred stock awards granted under the EPIP that will be recognized over a weighted-average period of 1.66 years. There was a tax windfall of $0.6 million on the distribution of deferred share awards during the twenty-eight weeks ended July 12, 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 fair value of the rights at July 12, 2014 ranged from $12.09 to $14.51. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at July 12, 2014: dividend yield 2.20%; expected volatility 22.0%; risk-free interest rate 0.11% and expected life of 0.25 years to 1.00 years. |
There were 21,768 shares exercised during the twenty-eight weeks ended July 12, 2014 for a total value of $0.3 million. |
The rights activity for the twenty-eight weeks ended July 12, 2014 is set forth below (amounts in thousands except price data): |
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| | Rights | | | Weighted | | | Aggregate | | | | | |
Average | Liability | | | | |
Fair | | | | | |
Value | | | | | |
Outstanding at December 28, 2013 | | | 141 | | | $ | 7.26 | | | $ | 1,982 | | | | | |
Rights exercised | | | (22 | ) | | $ | 6.25 | | | | | | | | | |
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Outstanding at July 12, 2014 | | | 119 | | | $ | 7.44 | | | $ | 1,591 | | | | | |
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Share-Based Payments Compensation Expense Summary |
The following table summarizes the company’s stock based compensation expense for the twelve and twenty-eight week periods ended July 12, 2014 and July 13, 2013, respectively (amounts in thousands): |
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| | For the | | | For the | |
Twelve Weeks Ended | Twenty-Eight Weeks Ended |
| | July 12, 2014 | | | July 13, 2013 | | | July 12, 2014 | | | July 13, 2013 | |
Stock options | | $ | — | | | $ | 380 | | | $ | 197 | | | $ | 1,017 | |
Performance-contingent restricted stock awards | | | 4,430 | | | | 2,453 | | | | 9,187 | | | | 6,247 | |
Deferred and restricted stock | | | 519 | | | | 422 | | | | 1,181 | | | | 876 | |
Stock appreciation rights | | | 42 | | | | 359 | | | | (91 | ) | | | 1,550 | |
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Total stock based compensation | | $ | 4,991 | | | $ | 3,614 | | | $ | 10,474 | | | $ | 9,690 | |
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