Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

v3.20.1
Stock-Based Compensation
12 Months Ended
Dec. 31, 2019
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation STOCK-BASED COMPENSATION
Prior to the Spin-off, AWI issued stock-based compensation awards to employees and directors that became employees or directors of AFI. These awards included employee stock options, employee and director RSUs, and employee PSUs.

In April 2016, AFI adopted the Armstrong Flooring, Inc. 2016 Long-Term Incentive Plan (the "2016 LTIP") and the Armstrong Flooring, Inc. 2016 Directors' Stock Unit Plan (the "2016 Directors' Plan"), which collectively comprised a new compensation program that allows for the grant to certain employees and non-employee directors of AFI different forms of benefits, including PSAs, PSUs, and RSUs. On June 2, 2017, our stockholders approved an amendment and restatement of the 2016 LTIP. Under the 2016 LTIP, our board of directors initially authorized up to 5,500,000 shares of common stock for issuance and the amendment authorized an additional 2,100,000 shares of common stock for issuance. Our board of directors authorized up to 600,000 shares of common stock that may be issued pursuant to the 2016 Directors' Plan. As of December 31, 2019, 1,863,537 shares and 188,351 shares were available for future grants under the 2016 LTIP and the 2016 Directors' Plan, respectively.

New Awards

The Management Development and Compensation Committee of the Board of Directors granted the following awards under the 2016 LTIP Plan and the 2016 Directors' Plan:

PSAs, PSUs and Performance-Based Restricted Stock Units ("PBRSUs") — PSAs, PSUs and PBRSUs were granted to key executive employees and certain management employees of AFI. The PSAs, PSUs and PBRSUs are units of restricted Company common stock that vest based on the achievement of certain performance conditions.

PSA and PSUs — The performance condition for 75.0% of the awards is based on earnings before interest, taxes, depreciation and amortization ("EBITDA"). The performance condition for the remaining 25.0% of the awards is based on cumulative free cash flow, defined as cash flow from operations, less cash used in investing activities.

Performance awards issued to key executive employees in 2017 are also indexed to the achievement of specified levels of absolute total shareholder return, and the fair value was measured using a Monte-Carlo simulation on the date of grant. For performance awards that are not indexed to the achievement of specified levels of absolute total shareholder return, the fair value was measured using our stock price on the date of grant. If the performance conditions are met, the awards vest at the conclusion of the performance period, which is generally at the end of the third fiscal year following the date of grant.

The following table summarizes the assumptions used to measure the fair value of the annual grant of performance awards that are also indexed to the achievement of specified levels of absolute total shareholder return.
 
2017
Weighted-average grant-date fair value
$
15.41

 
 
Assumptions
 
Risk-free rate of return
1.6
%
Expected volatility
31.4
%
Expected term (in years)
3.0

Expected dividend yield



We did not issue any such awards in 2019 or 2018.

The risk free rate of return was determined based on the implied yield available on zero-coupon U.S. Treasury bills at the time of grant with a remaining term equal to the expected term of the award.  The expected volatility was based on peer volatility since, as of the valuation date, we did not have a sufficient number of trading days to rely on our own trading history. The expected term represented the performance period on the underlying award. The expected dividend yield was assumed to be zero because, at the time of each grant, we had no plans to declare a dividend. 

PBRSUs PBRSUs were issued to the CEO on September 11, 2019. The number of shares earned is based upon the achievement of five stock price hurdles over the period from September 11, 2019 through September 11, 2024. The five per share stock price hurdles are $10.50, $12.25, $14.00, $15.75 and $17.50. A Monte-Carlo valuation was performed to simulate possible future stock prices for AFI over the time remaining period of the award.

The following table summarized the Monte-Carlo inputs and grant-date fair value price used for the PBRSUs.

 
2019
Grant-date stock price (AFI closing stock price on September 11, 2019)
$
7.43

 
 
Assumptions
 
Risk-free rate of return
1.59
%
Expected volatility
41.45
%
Expected dividend yield



The Monte-Carlo valuation provided a fair value for each of the five per share stock price hurdles discussed above, respectively: $5.93, $5.28, $4.70, $4.20, and $3.75, and provided derived service periods of three years for the first two hurdles and four years for the remaining three hurdles.

We did not issue any such awards in 2018 or 2017.

The risk free rate of return was determined based on the implied yield available on zero-coupon U.S. Treasury bills at the time of grant with a remaining term equal the expected term of the award. The expected volatility was based on a weighted average of the volatility of AFI and the average volatility of our compensation peer group's volatilities. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.

RSUs RSUs were granted to key executive employees and certain management employees of AFI. The RSUs are units representing shares of Company common stock which are converted to shares of Company common stock at the end of the service period. There are no performance conditions associated with these awards. Generally, vesting occurs with one third of the awards vesting at the end of one, two and three years from the date of grant. The fair value of RSUs was measured using our stock price on the date of grant.

Director Awards RSUs were granted to our non-employee directors under the 2016 Directors' Plan. These awards generally have a vesting period of one year, and any dividends paid prior to vesting are forfeitable if the award does not vest. The awards are generally payable six months following the director’s separation from service on the board. The fair value of non-employee director RSUs was measured using our stock price on the date of grant. The following table summarizes activity related to the non-employee director RSUs.
 
2019
 
2018
Vested and not yet delivered as of December 31
203,261

 
174,442
Granted
57,012

 
67,288
Outstanding as of December 31
260,273

 
241,730


Modified Awards

In connection with the Spin-off, in accordance with the Employee Matters Agreement between AFI and AWI, certain executives, employees and non-employee directors were entitled to receive equity compensation awards of AFI in replacement of previously outstanding awards granted prior to the Spin-off under various AWI stock incentive plans. These awards included stock options, RSUs, and PSUs. In connection with the Spin-off, these awards were converted into new AFI equity awards using a formula designed to preserve the intrinsic value of the awards immediately prior to the Spin-off on April 1, 2016. The modification did not result in a change to the value of the awards. Therefore, no additional compensation expense related to the award modification was recorded. The terms and conditions of the AWI awards were replicated and, as necessary, adjusted to ensure that the vesting schedule and economic value of the awards was unchanged by the conversion.

The following table summarizes information about AFI's modified stock options:
 
 
Number of Shares (in thousands)
 
Weighted-Average Exercise Price (per share)
 
Weighted-Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2018
 
453.5

 
$
12.89

 
3.6
 
$
0.2

Exercised
 
(5.7
)
 
13.98

 
 
 
 
Cancelled
 
(5.7
)
 
14.55

 
 
 
 
Outstanding as of December 31, 2019
 
442.1

 
12.85

 
2.7
 

Options exercisable
 
442.1

 
12.85

 
2.7
 



The options expire between 2020 and 2024. When options are exercised, we may issue new shares, use treasury shares (if available), acquire shares held by investors, or a combination of these alternatives in order to satisfy the option exercises.

The following table presents information related to stock option exercises:
 
Year Ended December 31,
 
2019
 
2018
Total intrinsic value of stock options exercised
$

 
$
0.3

Cash proceeds received from stock options exercised
0.1

 
0.8



Total Awards

The table below summarizes activity related to the PSAs, PSUs, PBRSUs, and RSUs. The non-employee director activity is not reflected in the RSU activity below.
 
 
PSAs, PSUs and PBRSUs
 
RSUs
 
 
Number of Shares (in thousands)
 
Weighted-Average Grant-Date Fair Value (per share)
 
Number of Shares (in thousands)
 
Weighted-Average Grant-Date Fair Value (per share)
Non-vested as of December 31, 2018
 
1,102.5

 
$
13.88

 
324.6

 
$
16.13

Granted
 
572.3

 
7.75

 
622.8

 
7.39

Vested
 
(108.8
)
 
19.90

 
(116.9
)
 
15.82

Cancelled
 
(437.5
)
 
12.73

 

 

Forfeited
 
(260.2
)
 
13.76

 
(159.7
)
 
15.18

Non-vested as of December 31, 2019
 
868.3

 
10.53

 
670.8

 
8.28



The table above contains 4,174 and 6,895 PSUs as of December 31, 2019 and 2018, respectively, which are accounted for as liability awards as they may be settled in cash. The table above contains 14,118 and 6,825 RSUs as of December 31, 2019 and 2018, respectively, which are accounted for as liability awards as they may be settled in cash.

In 2019, the weighted-average per share grant-date fair value of performance-based awards and RSUs granted was $7.75 and $7.39, respectively. The fair value of performance-based awards and RSUs that vested in 2019 was $2.2 million and $1.8 million, respectively.

In 2018, the weighted-average per share grant-date fair value of performance-based awards and RSUs granted was $13.94 and $16.12, respectively. No PSAs and PSUs vested in 2018. The fair value of RSU's that vested in 2018 was $2.1 million.

Stock-based compensation expense is generally recognized on a straight-line basis over the vesting period and is recorded as a component of SG&A. Total stock-based compensation expense included in the Consolidated Statements of Operations and the related tax effects are presented in the table below:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Stock-based compensation expense
$
1.2

 
$
4.7

 
$
1.5

Income tax benefit

 
1.1

 
0.8



To the extent the vesting-date fair value is greater than the grant-date fair value, the excess tax benefit is recorded as an income tax benefit in the Consolidated Statements of Operations. For the years ended December 31, 2019, 2018 and 2017 the income tax expense was $0.1 million, $0.1 million, and the income tax benefit $0.5 million, respectively related to grant-date fair value from the exercise of stock options and vesting of stock-based awards.

As of December 31, 2019, $5.2 million of total unrecognized compensation expense related to non-vested stock-based compensation arrangements is expected to be recognized over a weighted-average period of 3.2 years.