NOTE 16. PENSION AND OTHER BENEFIT PROGRAMS

DEFINED CONTRIBUTION BENEFIT PLANS

We sponsor several defined contribution plans, which cover substantially all U.S. and non-U.S. employees. Eligible employees may defer a portion of their pre-tax covered compensation on an annual basis. We match employee contributions up to pre-defined percentages. Employee contributions are 100% vested. Employer contributions are vested based on pre-defined requirements. Costs for worldwide defined contribution benefit plans were $6.2 million in 2017, $5.6 million in 2016 and $5.7 million in 2015.

DEFINED BENEFIT PENSION PLANS

Benefits from defined benefit pension plans are based primarily on an employee's compensation and years of service. We fund our pension plans when appropriate.

Our U.S. defined benefit pension plans include both the qualified, funded RIP and the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code.

Our RIP was amended to freeze accruals for salaried non-production employees, effective December 31, 2017. The impact of this amendment resulted in a reduction to our December 31, 2016 projected benefit obligation with a corresponding increase to unrecognized loss, resulting in no curtailment gain or loss. The impact of this amendment has been reflected in the net periodic pension credit for 2017.

In 2017, certain RIP participants with deferred vested benefits were offered an opportunity to elect a lump sum distribution of the participant’s entire accrued benefit. These distributions resulted in a partial plan settlement necessitating a plan remeasurement as of August 31, 2017. Settlement losses of $12.5 million and $8.3 million were recorded as components of cost of goods sold and SG&A expenses, respectively, during the third quarter of 2017.

Effective December 31, 2017, AWI merged the Tectum, Inc. Pension Plan (the “Tectum Plan”) with and into the RIP. Tectum sponsored the Tectum Plan for the benefit of its eligible employees, which are limited to certain union employees at Tectum’s Newark, Ohio plant.

Our non-U.S. defined benefit pension plan represents an unfunded plan in Germany not acquired by Knauf in connection with the announced sale of our EMEA and Pacific Rim segments. This plan utilizes assumptions which are consistent with, but not identical to, those of the U.S. plans.

The following tables summarize the balance sheet impact of our defined benefit pension plans, as well as the related benefit obligations, assets, funded status and rate assumptions. We use a December 31 measurement date for all our defined benefit pension plans.

	U.S. Pension Plans						Non-U.S. Pension Plan
	2017			2016			2017			2016
Change in benefit obligation:
Benefit obligation as of beginning of period	$	1,522.4		$	1,918.1		$	2.5		$	2.5
Service cost		8.6			10.1			-			-
Interest cost		48.1			69.8			-			0.1
Partial settlement		(58.1	)		-			-			-
Foreign currency translation adjustment		-			-			0.4			(0.2	)
Actuarial loss (gain)		77.2			0.6			(0.1	)		0.2
Benefits paid		(103.2	)		(111.0	)		(0.1	)		(0.1	)
Merger of Tectum Plan		5.1			-			-			-
Separation of AFI		-			(365.2	)		-			-
Benefit obligation as of end of period	$	1,500.1		$	1,522.4		$	2.7		$	2.5

	U.S. Pension Plans						Non-U.S. Pension Plan
	2017			2016			2017			2016
Change in plan assets:
Fair value of plan assets as of beginning of period	$	1,512.9		$	1,837.2		$	-		$	-
Actual return on plan assets		170.8			144.7			-			-
Employer contribution		3.9			4.2			0.1			0.1
Partial settlement		(58.1	)		-			-			-
Benefits paid		(103.2	)		(111.0	)		(0.1	)		(0.1	)
Merger of Tectum Plan		3.4			-			-			-
Separation of AFI		-			(362.2	)		-			-
Fair value of plan assets as of end of period	$	1,529.7		$	1,512.9		$	-		$	-
Funded status of the plans	$	29.6		$	(9.5	)	$	(2.7	)	$	(2.5	)

	U.S. Pension Plans						Non-U.S. Pension Plan
	2017			2016			2017			2016
Weighted-average assumptions used to determine benefit obligations at end of period:
Discount rate		3.63	%		4.12	%		1.50	%		1.40	%
Rate of compensation increase		3.05	%		3.10	%		-			-
Weighted-average assumptions used to determine net periodic benefit cost for the period:
Discount rate		4.12	%		4.40	%		1.40	%		2.00	%
Expected return on plan assets		6.50	%		6.75	%		-			-
Rate of compensation increase		3.10	%		3.10	%		-			-

Basis of Rate-of-Return Assumption

Long-term asset class return assumptions for the RIP are determined based on input from investment professionals on the expected performance of the asset classes over 10 to 30 years. The forecasts were averaged to come up with consensus passive return forecasts for each asset class. Incremental components were added for the expected return from active management and asset class rebalancing based on historical information obtained from investment consultants.

These forecasted gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 6.50% and 6.75% for the years ended December 31, 2017 and 2016, respectively.

The accumulated benefit obligation for the U.S. defined benefit pension plans was $1,496.4 million and $1,518.0 million as of December 31, 2017 and 2016, respectively. The accumulated benefit obligation for the non-U.S. defined benefit pension plan was $2.7 million and $2.5 million as of December 31, 2017 and 2016, respectively.

	U.S. Pension Plans				Non-U.S. Pension Plan
	2017		2016		2017		2016
Pension plans with benefit obligations in excess of assets
Projected benefit obligation, December 31	$	58.5	$	58.2	$	2.7	$	2.5
Accumulated benefit obligation, December 31		58.5		58.1		2.7		2.5

The components of the pension (credit) cost are as follows:

	U.S. Pension Plans									Non-U.S. Pension Plan
	2017			2016			2015			2017			2016			2015
Service cost of benefits earned during the period	$	8.6		$	10.1		$	16.3		$	2.2		$	2.2		$	2.4
Interest cost on projected benefit obligation		48.1			69.8			80.9			5.4			6.9			8.3
Expected return on plan assets		(98.7	)		(110.6	)		(140.3	)		(6.8	)		(7.8	)		(9.0	)
Amortization of prior service cost		1.5			1.6			1.9			-			-			-
Recognized net actuarial loss		17.5			48.3			72.8			1.3			1.2			2.8
Partial settlement		20.8			-			-			-			-			-
Net periodic pension (credit) cost	$	(2.2	)	$	19.2		$	31.6		$	2.1		$	2.5		$	4.5
Less: Discontinued operations		-			2.2			11.0			2.0			2.4			4.4
Net periodic pension (credit) cost, continuing operations	$	(2.2	)	$	17.0		$	20.6		$	0.1		$	0.1		$	0.1

The change in amortization of net actuarial loss for the U.S. defined-benefit plans for 2017 in comparison to 2016 was due to a reduction in active plan participants due to the separation of AFI. During 2016, actuarial gains and losses were amortized into future earnings over the expected remaining service period of plan participants, which was approximately 8 years for our U.S. defined-benefit pension plans. For 2017, actuarial gains and losses were amortized over the remaining life expectancy of plan participants, which was approximately 19 years for our U.S. defined-benefit pension plans.

Investment Policies

U.S. Pension Plans

The RIP’s primary investment objective is to maintain the funded status of the plan such that the likelihood that we will be required to make significant contributions to the plan is limited. This objective is expected to be achieved by (a) investing a substantial portion of the plan assets in high quality corporate bonds whose duration is at least equal to that of the plan’s liabilities, (b) investing in publicly traded equities in order to increase the ratio of plan assets to liabilities over time, (c) limiting investment return volatility by diversifying among additional asset classes with differing expected rates of return and return correlations, and (d) using derivatives to either implement investment positions efficiently or to hedge risk but not to create investment leverage.

Each asset class utilized by the RIP has defined asset allocation targets and allowable ranges. The table below shows the asset allocation targets and the December 31, 2017 and 2016 positions for each asset class:

	Target
	Weight at
	December 31,			Position at December 31,
Asset Class	2017			2017 ⁽¹⁾			2016
Long duration bonds		59.0	%		59.0	%		55.0	%
Equities		30.0	%		28.0	%		26.0	%
High yield bonds and real assets		6.0	%		3.0	%		7.0	%
Real estate and private equity		4.0	%		4.0	%		5.0	%
Other		1.0	%		6.0	%		7.0	%

⁽¹⁾	Investments in collective trust funds as of December 31, 2017 have been categorized within the asset classes above based on the underlying investments in those funds.

Pension plan assets are required to be reported and disclosed at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Three levels of inputs may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following table sets forth by level within the fair value hierarchy a summary of the RIP plan assets measured at fair value on a recurring basis:

	Value at December 31, 2017
Description	Level 1		Level 2		Level 3		Total
Bonds	$	-	$	879.5	$	-	$	879.5
Collective trust fund		-		561.6		-		561.6
Other investments		-		-		2.7		2.7
Cash and other short-term investments		1.7		20.7		-		22.4
Net assets measured at fair value	$	1.7	$	1,461.8	$	2.7	$	1,466.2
Investments measured at net asset value								63.5
Net assets							$	1,529.7

	Value at December 31, 2016
Description	Level 1		Level 2		Level 3		Total
Bonds	$	-	$	831.7	$	-	$	831.7
Equities		329.0		60.1		-		389.1
High yield bonds		-		67.6		-		67.6
Real assets		-		32.5		-		32.5
Other investments		-		-		2.8		2.8
Cash and other short-term investments		34.2		78.2		-		112.4
Net assets measured at fair value	$	363.2	$	1,070.1	$	2.8	$	1,436.1
Investments measured at net asset value								76.8
Net assets							$	1,512.9

RIP Level 3 assets remained relatively unchanged from December 31, 2016 to December 31, 2017, with the change in Level 3 assets during 2017 due primarily to unrealized gains and losses.

The RIP has investments in alternative investment funds as of December 31, 2017 and December 31, 2016 which are reported at fair value. Certain investments that are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in the tables above are intended to permit reconciliation of the fair value hierarchy to the total fair value of plan assets. We have concluded that the NAV reported by the underlying fund approximates the fair value of the investment. These investments are redeemable at NAV under agreements with the underlying funds. However, it is possible that these redemption rights may be restricted or eliminated by the funds in the future in accordance with the underlying fund agreements. Due to the nature of the investments held by the funds, changes in market conditions and the economic environment may significantly impact the NAV of the funds and, consequently, the fair value of the U.S. defined benefit pension plan asset’s interest in the funds. Furthermore, changes to the liquidity provisions of the funds may significantly impact the fair value of the U.S. defined benefit pension plan asset’s interest in the funds. As of December 31, 2017, there were no restrictions on redemption of these investments.

The following table sets forth a summary of the RIP’s investments measured at NAV:

	Value at December 31, 2017
Description	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Real estate	$	59.9	$	2.2	Quarterly	45-90 Days
Other investments		3.6		0.9	None	None
Investments measured at net asset value	$	63.5	$	3.1

	Value at December 31, 2016
Description	Fair Value		Unfunded Commitments		Redemption Frequency	Redemption Notice Period
Real estate	$	73.3	$	2.2	Quarterly	45-90 Days
Other investments		3.5		0.9	None	None
Investments measured at net asset value	$	76.8	$	3.1

Following is a description of the valuation methodologies used for assets measured at fair value and at NAV.

Bonds: Consists of registered investment funds and common and collective trust funds investing in fixed income securities tailored to institutional investors. There are no readily available market quotations for registered investment company funds. The fair value of investment funds and common and collective trust funds have been classified as Level 2 assets above as their values were derived based on the underlying securities in the fund’s portfolio which is typically the amount which the fund might reasonably expect to receive for the security upon a current sale. Investments in individual bonds were measured at fair value based on the closing price reported in the active market in which the bond is traded and investments in pooled funds traded in a non-active market were valued at bid price and classified as Level 2 assets above.

Collective Trust Fund: Consists of separately managed accounts comprised of equity investments, fixed income securities, commodity future contracts, cash and other short-term securities. The fair value of collective trust funds have been classified as Level 2 assets above as their values were derived based on the underlying securities in the fund’s portfolio which is typically the amount which the fund might reasonably expect to receive for the security upon a current sale.

Equities: Consists of domestic and international investments in common and preferred stocks as well as investments in registered investment funds investing in equities tailored to institutional investors. Individual common and preferred stocks are valued at the closing price reported on the active market on which the individual securities are traded and classified as Level 1 assets above. There are no readily available market quotations for registered investment company funds. The fair value, classified as Level 2 assets above, is based on the underlying securities in the fund’s portfolio which is typically the amount which the fund might reasonably expect to receive for the security upon a current sale.

High yield bonds: Consists of an investment in a registered investment fund investing in fixed income securities tailored to institutional investors. There are no readily available market quotations for registered investment company funds. The fair value is based on the underlying securities in the fund’s portfolio which is typically the amount which the fund might reasonably expect to receive for the security upon a current sale.

Real assets: Consists of a fund that has underlying investments in commodity futures contracts, as well as cash and fixed income instruments used as collateral instruments against the commodity future contracts. The futures contracts are considered real assets as the underlying securities include natural resources such as oil or precious metals, livestock, or raw agricultural products. The fair value is based on the underlying securities in the fund’s portfolio which is typically the amount which the fund might reasonably expect to receive for the security upon a current sale.

Real estate: Consists of both open-end and closed-end funds. There are no readily available market quotations for these real estate funds. These investments were measured at fair value using the NAV practical expedient.

Other investments: Consists of investments in a group insurance annuity contract and a limited partnership. Investments in the group insurance annuity contract were classified as Level 3 assets and measured at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations while considering the credit-worthiness of the issuer. The investments in the limited partnership were measured at fair value using the NAV practical expedient.

Cash and other short-term investments: Cash and short term investments consist primarily of cash and cash equivalents, and plan receivables/payables. The carrying amounts of cash and cash equivalents and receivables/payables approximate fair value due to the short-term nature of these instruments. Other payable and receivables consist primarily of margin on an account for a fund, accrued fees and receivables related to investment positions liquidated for which proceeds had not been received as of December 31.

U.S. DEFINED BENEFIT RETIREE HEALTH AND LIFE INSURANCE PLANS

We fund postretirement benefits on a pay-as-you-go basis, with the retiree paying a portion of the cost for health care benefits by means of deductibles and contributions.

The following tables summarize the balance sheet impact of the U.S. postretirement benefit pension plan, as well as the related benefit obligations, funded status and rate assumptions. We use a December 31 measurement date for all our defined benefit postretirement benefit plans.

	2017			2016
U.S. defined-benefit retiree health and life insurance plans
Change in benefit obligation:
Benefit obligation as of beginning of period	$	93.1		$	190.3
Service cost		0.4			0.4
Interest cost		3.0			4.7
Plan participants' contributions		2.8			3.2
Plan amendments		(1.1	)		-
Actuarial (gain)		(1.3	)		(7.7	)
Benefits paid		(10.3	)		(11.5	)
Separation of AFI		-			(86.3	)
Benefit obligation as of end of period	$	86.6		$	93.1

	2017			2016
Change in plan assets:
Fair value of plan assets as of beginning of period	$	-		$	-
Employer contribution		7.5			8.3
Plan participants' contributions		2.8			3.2
Benefits paid		(10.3	)		(11.5	)
Fair value of plan assets as of end of period	$	-		$	-

Funded status of the plans	$	(86.6	)	$	(93.1	)

	2017			2016
U.S. defined-benefit retiree health and life insurance plans
Weighted-average discount rate used to determine benefit obligations at end of period		3.60	%		4.10	%
Weighted-average discount rate used to determine net periodic benefit cost for the period		4.11	%		4.17	%

The components of postretirement benefit (credit) cost are as follows:

	2017			2016			2015
U.S. defined-benefit retiree health and life insurance plans
Service cost of benefits earned during the period	$	0.4		$	0.4		$	0.9
Interest cost on accumulated postretirement benefit obligation		3.0			4.7			8.1
Amortization of prior service (credit)		-			(0.3	)		(0.6	)
Amortization of net actuarial gain		(3.6	)		(6.1	)		(7.8	)
Net periodic postretirement benefit (credit) cost	$	(0.2	)	$	(1.3	)	$	0.6
Less: Discontinued operations		-			(0.2	)		0.8
Net periodic postretirement benefit (credit), continuing operations	$	(0.2	)	$	(1.1	)	$	(0.2	)

For measurement purposes, an average rate of annual increase in the per capita cost of covered health care benefits of 8.0% for pre-65 retirees and 9.2% to 10.9% for post-65 retirees (depending on plan type) was assumed for 2017, decreasing ratably to an ultimate rate of 4.5% in 2026. Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:

	One percentage point
	Increase			Decrease
U.S. defined benefit retiree health and life insurance benefits plans
Effect on total service and interest cost components	$	(0.1	)	$	0.1
Effect on postretirement benefit obligation		(0.8	)		0.7

Amounts recognized in assets (liabilities) on the consolidated balance sheets at year end consist of:

	U.S. Pension Plans						Non-U.S. Pension Plan						Retiree Health and Life Insurance Benefits
	2017			2016			2017			2016			2017			2016
Prepaid pension costs	$	88.3		$	48.7		$	-		$	-		$	-		$	-
Accounts payable and accrued expenses		(4.1	)		(3.9	)		(0.1	)		-			(7.4	)		(8.3	)
Postretirement benefit liabilities		-			-			-			-			(79.2	)		(84.8	)
Pension benefit liabilities		(54.6	)		(54.3	)		(2.6	)		(2.5	)		-			-
Net amount recognized	$	29.6		$	(9.5	)	$	(2.7	)	$	(2.5	)	$	(86.6	)	$	(93.1	)

Pre-tax amounts recognized in accumulated other comprehensive (loss) income at year end consist of:

	U.S. Pension Plans						Non-U.S. Pension Plan						Retiree Health and Life Insurance Benefits
	2017			2016			2017			2016			2017		2016
Net actuarial (loss) gain	$	(520.2	)	$	(553.5	)	$	(8.9	)	$	(22.4	)	$	49.5	$	51.7
Prior service (cost) credit		-			(1.5	)		(0.5	)		(0.6	)		1.1		0.1
Accumulated other comprehensive (loss) income	$	(520.2	)	$	(555.0	)	$	(9.4	)	$	(23.0	)	$	50.6	$	51.8

For U.S. pension plans, we expect to amortize $20.1 million of previously unrecognized prior service cost and net actuarial losses into pension cost in 2018 and expect to contribute $4.0 million in 2018.

For our non-U.S. pension plan, we do not expect to amortize any previously unrecognized net actuarial losses or unrecognized prior service cost into pension cost in 2018 and do not expect to contribute any amounts in 2018.

For our U.S. postretirement benefit plans, we expect to amortize $5.3 million of previously unrecognized net actuarial gains and prior service credits into postretirement benefit cost in 2018 and expect to contribute $7.4 million in 2018.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years for our U.S. and non-U.S plans:

	U.S. Pension Benefits⁽¹⁾		Non-U.S. Pension Benefits		Retiree Health and Life Insurance Benefits, Net
2018	$	106.4	$	0.1	$	7.4
2019		105.3		0.1		7.4
2020		104.4		0.1		7.1
2021		102.4		0.1		6.9
2022		101.5	0.1			6.6
2023 - 2027		482.6		0.6		28.8

⁽¹⁾

We were not required and did not make contributions to the RIP during 2017, 2016 or 2015 as, based on guidelines established by the Pension Benefit Guaranty Corporation, the RIP had sufficient assets to fund its distribution obligations. Benefit payments to participants have been made directly from the RIP to participants from the assets of the plan.