NOTE 21. SHARE-BASED COMPENSATION PLANS

The 2011 Long-Term Incentive Plan (“2011 LTIP”) 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 June 24, 2021. On July 8, 2016 our shareholders approved an amendment and restatement of the 2011 LTIP, resulting in the 2016 Long-Term Incentive Plan (the “2016 LTIP”). The 2011 LTIP originally authorized up to 6,949,000 shares of common stock for issuance, and the amendment authorized an additional 2,000,000 shares of common stock for issuance, for a total of 8,949,000, which includes all shares that have been issued under the 2011 and 2016 LTIPs. The amendment also extended the expiration date of the 2016 LTIP to July 8, 2026, after which time no further awards may be made. As of December 31, 2016, 2,845,479 shares were available for future grants under the 2016 LTIP.

The 2008 Directors Stock Unit Plan (“2008 Director’s Plan”) authorized us to issue stock units to non-employee directors until October 2017. On July 8, 2016 our shareholders approved an amendment and restatement of the 2008 Director’s Plan, resulting in the 2016 Director’s Stock Unit Plan (the “2016 Director’s Plan”). The 2008 Plan originally authorized up to 300,000 shares of common stock for issuance, and the amendment authorized an additional 250,000 shares of common stock for issuance, for a total of 550,000, which includes all shares that have been issued under the 2008 and 2016 Director’s Plans. As of December 31, 2016, 258,793 shares were available for future grants under the 2016 Director’s Plan.

In connection with the separation of AFI and under the terms of our 2011 Plan and our 2008 Director’s Plan, all outstanding stock options, restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) were modified using a formula designed to preserve the intrinsic value of awards immediately before and after the separation. Outstanding awards to employees and non-employee directors at the time of separation were converted into awards of the holder’s employer following separation. Modified outstanding awards will continue to vest over the original vesting periods.

Stock awards held upon separation were increased based on the ratio of AWI’s New York Stock Exchange (“NYSE”) volume weighted average closing stock price on April 1, 2016 ($48.10) to the NYSE volume weighted average opening stock price on April 4, 2016 ($42.11) as follows:

Stock options: The number of stock options outstanding were increased based on the ratio described above, with a corresponding decrease to the exercise price of outstanding awards in order to maintain the intrinsic value of outstanding stock options. The fair value of option grants was estimated immediately before and after the separation using the Black-Scholes option pricing model. The modification did not result in a change to the fair value of the awards, therefore, no incremental compensation expense was recorded upon modification.

RSUs (employee and director): The number of RSUs were increased based on the ratio described above to preserve the intrinsic value of awards immediately prior to the separation. Modification of these awards resulted in no incremental compensation expense.

PSUs: Upon separation, we had outstanding PSUs originally awarded in 2014 which had approximately one year remaining in their performance period. The amount of awards was fixed upon separation based on an assumed payout at target, with the final vesting year revised to a time-based vesting period. The number of PSUs were increased based on the ratio described above to preserve the intrinsic value of awards immediately prior to the separation. The probability of performance conditions being met was unchanged prior to and after modification, resulting in no incremental compensation expense.

The following table presents stock option activity for the year ended December 31, 2016:

	Number of shares (thousands)			Weighted-average exercise price			Weighted-average remaining contractual term (years)		Aggregate intrinsic value (millions)
Option shares outstanding, December 31, 2015		1,410.3		$	40.66
Option shares exercised		(25.6	)		(26.26	)
Options forfeited		(23.5	)		(45.68	)
Net impact as a result of AFI separation		(10.6	)		(44.21	)
Option shares outstanding, December 31, 2016		1,350.6		$	34.66			4.5	$	11.6
Option shares exercisable, December 31, 2016		1,276.7			33.94			4.5	$	11.6
Option shares vested and expected to vest, December 31, 2016		1,350.3			34.66			4.5	$	11.6

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 following table presents information related to stock option exercises:

	2016			2015		2014
Total intrinsic value of stock options exercised	$	0.4		$	3.5	$	17.1
Cash proceeds received from stock options exercised	$	0.7		$	6.4	$	17.8
Tax (expense) deduction realized from stock options exercised	$	(0.1	)	$	0.4	$	2.7

The fair value of option grants was estimated on the date of grant using the Black-Scholes option pricing model. There were no option grants in 2016 or 2015. The weighted average historical pre-modification assumptions for 2014 is presented in the table below.

	2014
Weighted-average grant date fair value of options granted (dollars per option)	$	24.93
Assumptions
Risk free rate of return		1.9	%
Expected volatility		46.5	%
Expected term (in years)		6.0
Expected dividend yield		0.0	%

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 option. The expected volatility was based on Armstrong’s stock prices. The expected term represented the midpoint of the average vesting period and the contractual life of the grant was based on an allowable simplified method. The expected dividend yield was assumed to be zero because, at the time of each grant, we had no plans to declare a dividend.

We have also granted non-vested stock awards in the form of restricted stock, RSUs, performance restricted stock and PSUs. As of December 31, 2016 and 2015, we have no outstanding restricted stock or performance restricted stock. A summary of the 2016 activity related to these awards follows:

	Non-Vested Stock Awards
	RSUs						PSUs
	Number of shares (thousands)			Weighted- average fair value at grant date			Number of shares (thousands)			Weighted- average fair value at grant date
December 31, 2015		413.3		$	54.66			216.9		$	52.84
Granted		114.3			41.53			254.4			39.23
Vested		(171.5	)		(52.83	)		(61.6	)		(51.79	)
Forfeited		(57.0	)		(48.31	)		(110.5	)		(52.12	)
Net impact as a result of AFI separation		(74.6	)		(40.32	)		(8.8	)		(45.74	)
December 31, 2016		224.5		$	44.94			290.4		$	40.29

RSUs entitle the recipient to a specified number of shares of AWI’s common stock provided the prescribed service period is fulfilled. PSUs 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. RSUs and PSUs generally had vesting periods of three years at the grant date. RSUs and PSUs earn dividends during the vesting period that are forfeitable if the awards do not vest.

The table above contains 9,581 and 17,545 RSUs as of December 31, 2016 and 2015, respectively, which are accounted for as liability awards as they are able to be settled in cash. The table above contains 720 and 6,537 PSUs as of December 31, 2016 and 2015, respectively, which are accounted for as liability awards as they are able to be settled in cash.

RSUs and PSUs with non-market based performance conditions are measured at fair value based on the closing price of our stock on the date of grant. In 2016, we granted 158,790 PSUs with market based performance conditions that are valued through the use of a Monte Carlo simulation. The weighted average assumptions for PSUs measured at fair value through the use of a Monte Carlo simulation is presented in the table below.

	2016
Weighted-average grant date fair value of market based PSUs granted (dollars per award)	$	37.75
Assumptions
Risk free rate of return		0.8	%
Expected volatility		28.0	%
Expected term (in years)		2.7
Expected dividend yield		0.0	%

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 PSUs. The expected volatility was based on an average of the actual historical volatilities of the stock prices of AWI and a peer group of companies. We elected to not rely solely on AWI’s actual historical stock price volatility due to the separation of AFI. The expected life 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.

In addition to the equity awards described above, as of December 31, 2016 we had 23,546 fully-vested phantom shares outstanding for non-employee directors under the 2006 Phantom Stock Unit Plan not reflected in the non-vested stock awards table above. 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, 2016 was $1.8 million which includes associated non-forfeitable dividends. The 2006 Phantom Stock Unit Plan is still in place; however, no additional shares will be granted under the plan.

As of December 31, 2016 and 2015, there were 189,237 and 197,475 RSUs, respectively, outstanding under the 2016 Directors Stock Unit Plan not reflected in the Non-Vested Stock Awards table above. In 2016 and 2015, we granted 25,714 and 22,997 restricted stock units, respectively, to non-employee directors. These awards generally have a vesting period of one year, and as of December 31, 2016 and 2015, 163,523 and 174,478 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 and earn dividends during the vesting period that are non-forfeitable.

We recognize share-based compensation expense on a straight-line basis over the vesting period. Share-based compensation cost was $12.1 million ($7.9 million net of tax benefit) in 2016; $10.9 million ($7.2 million net of tax benefit) in 2015, and $10.3 million ($6.9 million net of tax benefit) in 2014.

As of December 31, 2016, there was $12.3 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.