NOTE 21. 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, 2014, 1,795,453 shares were available for future grants under the LTIP.



	Year Ended December 31, 2014
	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	2,204.6	$ 35.60
Options granted	318.9	53.93
Option shares exercised	(640.8)	(27.80)		$ 17.1
Options forfeited	(228.8)	(48.03)
Options expired	(52.7)	(43.49)
Option shares outstanding at end of period	1,601.2	$ 40.33	6.9	$ 18.2

Option shares exercisable at end of period	1,015.3	34.12	6.0	$ 17.3
Option shares vested and expected to vest	1,579.6	40.17	6.9	$ 18.2


	Year Ended December 31, 2013
	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	2,311.0	$ 30.05
Options granted	382.4	51.75
Option shares exercised	(438.3)	(19.65)		$ 15.1
Options forfeited	(41.3)	(42.81)
Options expired	(9.2)	(40.40)
Option shares outstanding at end of period	2,204.6	$ 35.60	7.0	$ 48.5

Option shares exercisable at end of period	1,255.9	28.59	6.1	$ 36.4
Option shares vested and expected to vest	2,038.6	34.89	6.9	$ 46.3

We have reserved sufficient authorized shares to allow us to issue new shares upon exercise of all outstanding options. Options generally become exercisable in three years and expire 10 years from the date of grant. 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 total grant date fair value of options exercised during the year ended December 31, 2014 was $7.7 million. Cash proceeds received from options exercised for the years ended December 31, 2014, 2013 and 2012 were $17.8 million, $8.6 million and $12.2 million, respectively.

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 2014, 2013 and 2012 are presented in the table below.



	2014	2013	2012
Weighted-average grant date fair value of options granted
(dollars per option)	$ 24.93	$ 21.62	$ 20.29

Assumptions
Risk free rate of return	1.9%	1.2%	1.2%
Expected volatility	46.5%	42.4%	41.4%
Expected term (in years)	6.0	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. During 2014 we established the expected volatility based on Armstrong’s stock since it has now been traded a sufficient amount of time since our emergence from bankruptcy to produce valid results. Prior to 2014, we established the expected volatility 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. 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.

We have also granted restricted stock and restricted stock units. The restricted stock awards entitle the recipient to a specified number of shares of Armstrong’s common stock provided the prescribed service period is fulfilled. These awards generally had vesting periods of three years at the grant date. A summary of the 2014 and 2013 activity related to these awards follows:


	Non-Vested Stock Awards
	Number of shares	Weighted-average fair value at grant date
December 31, 2012	127,886	$ 43.32
Granted	59,356	51.97
Vested	(25,794)	(38.10)
Forfeited	(7,871)	(47.19)
December 31, 2013	153,577	$ 47.34
Granted	93,711	52.57
Vested	(61,902)	(41.61)
Forfeited	(9,784)	(52.08)
December 31, 2014	175,602	$ 51.89

The table above contains 18,925 and 17,060 restricted stock units at December 31, 2014 and 2013, respectively, that are accounted for as liability awards as they are able to be settled in cash.

We have also granted performance restricted stock and performance restricted stock units. 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 the performance period. These awards generally had

vesting periods of three years at the grant date. A summary of the 2014 and 2013 activity related to these awards follows:


	Non-Vested Performance Stock Awards
	Number of shares	Weighted-average fair value at grant date
December 31, 2012	293,475	$ 45.24
Granted	139,597	51.80
Vested	(19,979)	(37.54)
Forfeited	(22,412)	(48.14)
December 31, 2013	390,681	$ 47.81
Granted	129,858	53.88
Vested	(78,125)	(41.69)
Forfeited	(108,051)	(46.37)
December 31, 2014	334,363	$ 52.07

The table above contains 12,207 and 11,622 performance stock units at December 31, 2014 and 2013, respectively, that are accounted for as liability awards as they are able to be settled in cash.

In addition to the equity awards described above, as of December 31, 2014 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 had vesting periods of one to three years. The awards are generally payable six months following the director’s separation from service on the Board of Directors. The total liability recorded for these shares as of December 31, 2014 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, 2014 and 2013, there were 174,478 and 153,216 restricted units, respectively, outstanding under the 2008 Directors Stock Unit Plan. In 2014 and 2013, we granted 21,262 and 25,527 restricted stock units, respectively, to non-employee directors. These awards generally have a vesting period of one year, and as of December 31, 2014 and 2013, 153,216 and 128,333 shares, respectively, were vested but not yet delivered. The awards are generally payable six months following the director’s separation from service on the Board of Directors. 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 $12.8 million ($8.5 million net of tax benefit) in 2014; $16.5 million ($11.1 million net of tax benefit) in 2013, and $16.2 million ($11.2 million net of tax benefit) in 2012. Share-based compensation expense is recorded within the Corporate Unallocated segment 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, 2014 and 2013 was $3.3 million and $4.2 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. During 2014, we recognized $8.4 million as a credit to APIC as a result of excess tax benefits reducing income tax currently payable.

As of December 31, 2014, there was $12.9 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.