NOTE 25. SHARE-BASED COMPENSATION PLANS

The 2006 Long-Term Incentive Plan (“2006 Plan”) authorized us to issue stock options, stock appreciation rights, restricted stock awards, stock units, performance-based awards and cash awards to officers and key employees, and was scheduled to terminate on October 2, 2016. On June 24, 2011 our shareholders approved an amendment and restatement of the 2006 Plan, resulting in the 2011 Long-Term Incentive Plan (the “LTIP”). The 2006 Plan originally authorized up to 5,349,000 shares of common stock for issuance, and the amendment authorized an additional 1,600,000 shares of common stock for issuance, for a total of 6,949,000, which includes all shares that have been issued under the 2006 Plan. The amendment also extended the expiration date of the LTIP to June 24, 2021, after which time no further awards may be made. As of December 31, 2012, 2,576,839 shares were available for future grants under the LTIP.



	Year Ended December 31, 2012
	Number of shares (thousands)	Weighted-average exercise price	Weighted-average remaining contractual term (years)	Aggregate intrinsic value (millions)
Option shares outstanding at beginning of period	2,024.2	$ 28.30
Options granted	510.2	49.26
Option adjustment for dividend	342.9	28.69
Option shares exercised	(545.6)	(22.34)		$ 16.3
Options forfeited	(20.7)	(37.83)
Option shares outstanding at end of period	2,311.0	$ 30.05	7.2	$ 47.8

Option shares exercisable at end of period	1,151.5	22.98	5.9	$ 32.0
Option shares vested and expected to vest	2,149.3	29.41	7.1	$ 45.8


	Year Ended December 31, 2011
	Number of shares (thousands)	Weighted-average exercise price	Weighted-average remaining contractual term (years)	Aggregate intrinsic value (millions)
Option shares outstanding at beginning of period	1,978.4	$ 24.02
Options granted	476.5	41.64
Option shares exercised	(359.5)	(21.33)		$ 8.7
Options forfeited	(66.1)	(34.89)
Options expired	(5.1)	(22.55)
Option shares outstanding at end of period	2,024.2	$ 28.30	7.0	$ 31.6

Option shares exercisable at end of period	1,149.1	23.08	5.6	$ 23.9
Option shares vested and expected to vest	1,953.2	27.94	6.9	$ 31.2

We have reserved sufficient authorized shares to allow us to issue new shares upon exercise of all outstanding options. Options generally become exercisable in two to four years and expire 10 years from the date of grant. When options are actually 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 total grant date fair value of options exercised during the year ended December 31, 2012 was $5.7 million. Cash proceeds received from options exercised for the year ended December 31, 2012 were $12.2 million.

The fair value of option grants was estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions for the years 2012, 2011 and 2010 are presented in the table below.



	2012	2011	2010
Weighted-average grant date fair value of options granted
(dollars per option)	$ 20.29	$ 17.32	$ 15.44

Assumptions
Risk free rate of return	1.2%	2.4%	2.8%
Expected volatility	41.4%	39.5%	38.1%
Expected term (in years)	6.1	6.0	6.1
Expected dividend yield	0.0%	0.0%	0.0%

The risk free rate of return is 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 option. Because reorganized Armstrong’s stock has only been trading since the fourth quarter of 2006, the expected volatility is established based on an average of the actual historical volatilities of the stock prices of a peer group of companies. The expected life is the midpoint of the average vesting period and the contractual life of the grant. For the same reasons mentioned earlier we are using an allowable simplified method to determine an appropriate expected term for our option valuation assumptions. The expected dividend yield is assumed to be zero because, at the time of each grant, we had no plans to declare a dividend. The assumptions outlined above are applicable to all option grants.

Under the terms of the LTIP, the Management Development and Compensation Committee of our Board of Directors is required to make equitable adjustments to stock option grants if there is a change in our capital structure. The special cash dividend in March 2012 qualified as a change to our capital structure under the terms of the LTIP. We used the Black-Scholes option pricing model to determine the fair value of the awards before and after the special cash dividend, using consistent assumptions for the risk free rate of return, expected term, expected volatility and expected dividend yield. The stock prices used in the before and after calculations were $57.38 (the New York Stock Exchange Volume Weighted Average Price (“NYSE VWAP”) on March 29, 2012, the day before the ex-dividend date) and $49.21 (NYSE VWAP on March 30, 2012, the ex-dividend date), respectively. For all option grants, the fair value of the award before and after the dividend remained the same. Therefore there was no incremental cost recognized in our financial statements due to the resulting award adjustments described in the table below.


	Pre-Dividend Grant Terms		Post-Dividend Grant Terms
Year Granted	Number of Shares	Exercise Price	Number of Shares	Exercise Price
2006	262,418	$ 22.55	305,992	$ 19.34
2007	83,452	30.62	97,306	26.26
2008	171,792	21.85	200,318	18.74
2009	100,209	10.34	116,851	8.87
2010	608,278	26.21 – 29.23	709,309	22.48 – 25.07
2011	434,674	38.65 – 47.47	506,873	33.15 – 40.71
2012	403,750	50.38	470,805	43.21

The special cash dividend in December 2010 also qualified as a change to our capital structure under the terms of the 2006 Plan. We used the Black-Scholes option pricing model to determine the fair value of the awards before and after the special cash dividend, using consistent assumptions for the risk free rate of return, expected term, expected volatility and expected dividend yield. The stock prices used in the before and after calculations were $52.86 (the NYSE VWAP on December 10, 2010, the day before the ex-dividend date) and $40.59 (the NYSE VWAP on December 13, 2010, the ex-dividend date), respectively. For all option grants, the fair value of the award before and after the dividend remained the same. Therefore, there was no incremental cost recognized in our financial statements due to these award modifications. The following changes were made to the options outstanding as a result of this change:

	Pre-Dividend Grant Terms		Post-Dividend Grant Terms
Year Granted	Number of Shares	Exercise Price	Number of Shares	Exercise Price
2006	707,535	$ 29.37	921,281	$ 22.55
2007	64,100	39.88	83,452	30.62
2008	151,904	28.45 – 36.74	197,834	21.85 – 28.21
2009	107,779	13.46	140,371	10.34
2010	502,682	34.13 – 38.06	654,673	26.21 – 29.23

We have also granted restricted stock and restricted stock units. These awards generally had vesting periods of three to four years at the grant date. A summary of the 2012 and 2011 activity related to these awards follows:


	Non-Vested Stock Awards
	Number of shares	Weighted-average fair value at grant date
December 31, 2010	72,951	$ 36.52
Granted	72,104	41.56
Vested	(13,482)	(36.38)
Forfeited	(3,396)	(41.47)
December 31, 2011	128,177	$ 39.20
Granted	51,470	50.30
Vested	(39,444)	(38.17)
Forfeited	(12,317)	(46.01)
December 31, 2012	127,886	$ 43.32

In addition to options and restricted stock and restricted stock units, we have also granted performance restricted stock and performance restricted stock units. These awards generally had vesting periods of two to four years at the grant date. A summary of the 2012 and 2011 activity related to these awards follows:


	Non-Vested Performance Stock Awards
	Number of shares	Weighted-average fair value at grant date
December 31, 2010	272,027	$ 38.09
Granted	162,756	41.66
Vested	(3,311)	(40.67)
Forfeited	(63,093)	(38.67)
December 31, 2011	368,379	$ 39.54
Granted	140,400	50.33
Vested	(179,056)	(38.40)
Forfeited	(36,248)	(40.85)
December 31, 2012	293,475	$ 45.24

In 2012 and 2011, we granted both restricted stock awards and performance based awards to the participants in our long term incentive plan. The restricted stock awards entitle the recipient to a specified number of shares of Armstrong’s common stock provided the prescribed three year service period is fulfilled. The performance based stock awards entitle the recipient to a specified number of shares of Armstrong’s common stock provided the defined financial targets are achieved at the end of 2014 and 2013, respectively. In addition to these awards, in 2010, we granted our Chief Executive Officer performance restricted stock units vesting equally on December 31, 2012 and 2013, provided that specified stock price targets are achieved. During 2011, the performance target for the grant vesting December 31, 2012 was achieved. Additionally, in January 2013, the performance target for the grant vesting December 31, 2013 was achieved.

In addition to the equity awards described above, as of December 31, 2012 we had 20,616 fully-vested phantom shares outstanding for non-employee directors under the 2006 Phantom Stock Unit Plan. These awards are settled in cash and generally had vesting periods of one to three years. The awards are generally payable six months following the director’s separation from service. The total liability recorded for these shares as of December 31, 2012 was $1.8 million which includes associated dividends. The awards under the 2006 Phantom Stock Unit Plan are not reflected in the Non-Vested Stock Awards tables above. The 2006 Phantom Stock Unit Plan is still in place; however, no additional shares will be granted under the plan.

During 2008, we adopted the 2008 Directors Stock Unit Plan. At December 31, 2012 and 2011, there were 127,689 and 105,427 restricted units, respectively, outstanding under the 2008 Directors Stock Unit Plan. In 2012 and 2011, we granted 22,262 and 22,590 restricted stock units, respectively, to non-employee directors. These awards generally have a vesting period of one year, and as of December 31, 2012 and 2011, 97,427 and 68,879 shares, respectively, were vested but not yet delivered. The awards are generally payable six months following the director’s separation from service. During 2011, we released 28,884 shares to five retired directors. Additionally, as a result of these retirements, the directors forfeited 8,042 shares in 2011. The awards granted under the 2008 Directors Stock Unit Plan are not reflected in the Non-Vested Stock Awards table above.

We recognize share-based compensation expense on a straight-line basis over the vesting period. Share-based compensation cost was $16.2 million ($11.2 million net of tax benefit) in 2012; $11.2 million ($7.5 million net of tax benefit) in 2011, and $5.6 million ($3.7 million net of tax benefit) in 2010. Share-based compensation expense is recorded as a component of SG&A expenses. The benefits of tax deductions in excess of grant date fair value from the exercise of stock options and vesting of share-based awards for the years ended December 31, 2012 and 2011 was $3.7 million and $3.0 million, respectively. To the extent the vesting date value is greater than the grant date value, the excess tax benefit is a credit to additional paid in capital (“APIC”), but only if it reduces income tax currently payable. Due to our NOL, the credit to APIC will be suspended until the NOL is fully utilized.

As of December 31, 2012, there was $16.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.8 years.