Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

v3.7.0.1
Stock-Based Compensation
12 Months Ended
Dec. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [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. Stock-based compensation expense in 2014, 2015 and until the Spin-off in 2016 was allocated to AFI based on direct allocation of expenses related to AFI employees and an allocation for employees that were providing services to both companies prior to the Spin-off.

In April 2016, AFI adopted the Armstrong Flooring, Inc. 2016 Long-Term Incentive Plan (the "2016 LTIP Plan") and the Armstrong Flooring, Inc. 2016 Directors' Stock Unit Plan (the "2016 Directors' Plan"), which collectively comprise 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. AFI's board of directors (the "Board") authorized 5,500,000 shares of common stock that may be issued pursuant to the 2016 LTIP Plan and 600,000 shares of common stock that may be issued pursuant to the 2016 Directors' Plan.

New Awards:

On April 11, 2016, the Management Development and Compensation Committee (the "Committee") of the Board granted the following awards under the 2016 LTIP Plan and the 2016 Directors' Plan:

PSAs: Long-term incentive awards in the form of PSAs were granted to the Company’s key executive employees. In total, five executives received these awards, four of which still hold these awards as of December 31, 2016. The PSAs are shares of restricted Company common stock that vest based on the achievement of certain performance conditions. 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. The PSAs are also indexed to the achievement of specified levels of absolute total shareholder return. If the performance conditions are met, the awards vest at the conclusion of the performance period on December 31, 2018. The fair value of PSAs was measured using a Monte-Carlo simulation option-pricing model.

NOTE 17. STOCK-BASED COMPENSATION (continued)
Assumptions used to measure fair value of PSAs granted were as follows:
Risk-free rate of return
 
0.8
%
Expected volatility
 
36.2
%
Dividend yield
 

Grant date stock price per share
 
$13.51


PSUs: PSUs were granted to certain management employees of the Company. The PSUs are units representing shares of Company common stock which are converted to shares of Company common stock at the end of the performance period if the associated performance conditions are achieved. The performance condition for 75.0% of the awards is based on 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. If the performance conditions are met, the awards vest at the conclusion of the performance period on December 31, 2018. The fair value of PSUs was measured using our stock price on the date of grant.

RSUs: RSUs were granted to certain management employees of the Company. The RSUs are units representing shares of Company common stock which are converted to shares of Company common stock at the end of the performance period. There are no performance conditions associated with these awards. Vesting occurs with one third of the awards vesting at the end of one, two and three years from 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 vest in approximately one year, and any dividends paid prior to vesting are forfeitable if the award does not vest. The fair value of non-employee director RSUs was measured using our stock price on the date of grant. At December 31, 2016 there were 69,612 restricted units outstanding under the 2016 Directors’ Plan. In 2016 we granted 76,511 RSUs to non-employee directors. As of December 31, 2016, 6,899 shares were vested, and distributed. The awards are generally payable six months following the director’s separation from service on the Board. The awards granted under the 2016 Directors’ Plan are not reflected in the Non-Vested RSUs table below.

Modified Awards:

Upon the Separation, 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 Separation under various AWI stock incentive plans. These awards included stock options, PSUs, and RSUs. 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. There were 93,428 RSUs outstanding as of December 31, 2016 related to non-employee directors. The modified RSUs for non-employee directors are not reflected in the Non-Vested RSUs table below.

PSUs: The modified PSUs were initially issued with performance conditions based on AWI's results. At modification, two of the three years of performance had occurred. For the third year, which occurred after Separation, award payout will be at the target level.




NOTE 17. STOCK-BASED COMPENSATION (continued)
Total Awards:

The following table summarizes activity related to the PSAs, PSUs, and RSUs:
 
 
Non-Vested PSAs and PSUs
 
Non-Vested 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)
Converted on April 1, 2016
 
52.4

 
$
14.60

 
363.4

 
$
14.75

Granted
 
930.5

 
12.73

 
118.0

 
13.73

Vested
 

 

 
(83.8
)
 
14.23

Forfeited
 
(181.0
)
 
12.61

 
(34.8
)
 
14.77

December 31, 2016
 
801.9

 
12.88

 
362.8

 
14.56



The table above contains 3,369 PSUs and 7,646 RSUs as of December 31, 2016 that are accounted for as liability awards as they may be settled in cash.

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
Converted on April 1, 2016
 
684.8

 
$
12.84

 
 
 
 
Exercised
 
(28.6
)
 
11.17

 
 
 
$
0.2

Forfeited
 
(17.1
)
 
14.55

 
 
 
 
Outstanding December 31, 2016
 
639.1

 
12.87

 
5.2
 
4.5

Options exercisable
 
581.4

 
12.70

 
5.0
 
4.2

Options expected to vest
 
57.1

 
14.59

 
7.0
 
0.3



Options generally become exercisable in one to three years and expire 10 years from the date of grant. When options are exercised, AFI 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. Cash proceeds received from options exercised for the year ended December 31, 2016 was $0.3 million.

Stock-based compensation expense is generally recognized on a straight-line basis over the vesting period and is recorded within the Resilient Flooring and Wood Flooring segments as components of SG&A. Total stock-based compensation expense included in the Consolidated Statements of Operations and Comprehensive Income (Loss) and the related tax effects are presented in the table below:
 
Year Ended December 31,
 
2016
 
2015
 
2014
Stock-based compensation expense
$
6.7

 
$
6.1

 
$
5.9

Income tax benefit
2.5

 
2.1

 
2.0



NOTE 17. STOCK-BASED COMPENSATION (continued)
The benefits of tax deductions in excess of grant-date fair value from the exercise of stock options and vesting of stock-based awards for the year ended December 31, 2016 was $0.3 million. 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 and Comprehensive Income (Loss). During 2016, $0.3 million of excess tax benefit is recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss).

As of December 31, 2016, $7.5 million of total unrecognized compensation expense related to the 2016 Grant is expected to be recognized over a weighted average period of 2.0 years. As of December 31, 2016, $1.5 million of total unrecognized compensation expense related to our modified awards is expected to be recognized over a weighted average period of 1.1 years.