ITEM 3 APPROVE THE ARMSTRONG WORLD INDUSTRIES, INC. 2016 DIRECTORS STOCK UNIT PLAN
Our Board is asking shareholders to approve the Armstrong World Industries, Inc. 2016 Directors Stock Unit Plan
(the 2016 Directors Stock Unit Plan). The Governance Committee and our Board previously approved the 2016 Directors Stock Unit Plan, subject to shareholder approval.
The 2016 Directors Stock Unit Plan is a new equity compensation plan for the members of the Board who are not our employees. The 2016 Directors Stock Unit Plan replaces the 2008 Directors Stock Unit Plan, which
does not have sufficient shares available for continued annual equity grants to our non-employee directors. No further grants will be made under the 2008 Directors Stock Unit Plan if the 2016 Directors Stock Unit Plan is approved by the
shareholders.
Shareholder approval of the 2016 Directors Stock Unit Plan is being sought in order to meet New York Stock Exchange
listing requirements and to confirm shareholder approval of the compensation to be provided under the 2016 Directors Stock Unit Plan. If approved by the shareholders, the 2016 Directors Stock Unit Plan will become effective on July 8, 2016.
The 2016 Directors Stock Unit Plan will enable us to continue our director compensation program, which is intended to attract, motivate and retain
experienced, highly-qualified non-employee directors who will contribute to our financial success. The 2016 Directors Stock Unit Plan is intended to align the interests of the non-employee directors with those of the shareholders through the grant
of stock unit awards.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
FOR
THE APPROVAL OF THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 DIRECTORS STOCK UNIT PLAN.
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24
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AWI 2016 Proxy Statement
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ITEM 3 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 DIRECTORS STOCK UNIT PLAN
(CONTINUED)
DETERMINATION OF SHARES TO BE AVAILABLE FOR ISSUANCE
If this Item 3 is approved by the shareholders at the Annual Meeting, the maximum aggregate number of shares that may be issued under the 2016 Directors Stock Unit
Plan shall be 250,000 shares of our Common Stock, subject to adjustments as provided in the 2016 Directors Stock Unit Plan.
When deciding on the number
of shares to be available for awards under the 2016 Directors Stock Unit Plan, the Board of Directors considered a number of factors, including the number of shares needed for future stock unit awards, the potential dilution effect of the 2016
Directors Stock Unit Plan, and input from shareholder advisory firms.
As of April 15, 2016, our capital structure consisted of 55,480,362 shares of
Common Stock outstanding. The proposed share authorization is a request for 250,000 shares to be available for awards under the 2016 Directors Stock Unit Plan. The 250,000 shares represent approximately 0.41% of fully diluted shares of our Common
Stock, including all shares that will be authorized under the 2016 Directors Stock Unit Plan and the 2016 LTIP (as defined in ITEM 4 APPROVE THE ARMSTRONG WORLD INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN below). The Board
believes that this number of shares of Common Stock under the 2016 Directors Stock Unit Plan represents a reasonable amount of potential equity dilution, which will allow us to continue awarding equity awards to our non-employee directors, and that
equity awards are an important component of the director compensation program.
Based on our current equity award practices, the Board estimates that
the authorized shares under the 2016 Directors Stock Unit Plan may be sufficient to provide stock unit awards for approximately five to eight years, in amounts determined appropriate by the Board or the Committee described below. This is only an
estimate, and circumstances could cause the share reserve to be used more quickly or more slowly.
DESCRIPTION OF THE 2016 DIRECTORS
STOCK UNIT PLAN
The following is a brief description of the material features of the 2016 Directors Stock Unit Plan. This description is qualified
in its entirety by reference to
the full text of the 2016 Directors Stock Unit Plan, a copy of which is attached to this Proxy Statement as Annex B.
SHARE AUTHORIZATION AND ANNUAL COMPENSATION LIMIT
The 2016 Directors Stock Unit Plan
authorizes up to 250,000 shares of our Common Stock for issuance, subject to adjustment as described below. If and to the extent stock units granted under the 2016 Directors Stock Unit Plan are forfeited, terminated, or otherwise are not paid in
full, the shares reserved for such grants shall again be available for purposes of the 2016 Directors Stock Unit Plan.
The 2016 Directors Stock Unit
Plan provides that the maximum grant date value of shares of Common Stock subject to grants of stock units made to any non-employee director during any one calendar year, taken together with any cash fees earned by such non-employee director for
services rendered during the calendar year, shall not exceed $600,000 in total value. The value of such grants shall be calculated based on the grant date fair value of such grants for financial reporting purposes.
ADMINISTRATION
The 2016 Directors Stock
Unit Plan is administered and interpreted by the Board or, if so delegated, to the Governance Committee. The Board has delegated administrative responsibility to the Governance Committee. References to the Committee mean the Governance Committee or
the Board, as applicable. Unless the 2016 Directors Stock Unit Plan is administered by the Board, each member of the Committee shall be a non-employee director within the meaning of Rule 16b-3(b)(3) of the Exchange Act. The Committee has
the discretionary authority to make such determinations and interpretations and to take such actions in connection with the 2016 Directors Stock Unit Plan and any awards granted under the 2016 Directors Stock Unit Plan as it deems necessary or
advisable.
STOCK UNITS
The
Committee may award stock units with respect to shares of our Common Stock to non-employee directors. Unless the Committee determines otherwise, each year, each non-employee director
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AWI 2016 Proxy Statement
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25
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ITEM 3 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 DIRECTORS STOCK UNIT PLAN
(CONTINUED)
shall be granted a number of stock units based on a formula approved by the Committee. If a non-employee director is
elected to the Board other than at the annual meeting of shareholders, the Committee may pro-rate the amount of the annual grant of stock units awarded to such director to correspond to the period of time to be served by the non-employee director
between such non-employee directors election and the next annual meeting of shareholders. Stock units may also be granted to non-employee directors at such times, in such amounts, and upon such terms and conditions as the Committee deems
appropriate. Each stock unit provides the right to receive a payment in shares of Common Stock upon the vesting of the stock unit, unless the non-employee director elects to defer payment of the stock units. The Committee determines the number of
stock units that will be awarded, as well as the other terms and conditions applicable to the stock units.
Unless the Committee determines otherwise,
the provisions described below apply to all grants made under the 2016 Directors Stock Unit Plan.
Stock units shall vest, contingent upon the
participants continued service as a director of our Board through the vesting date, on the first to occur of: (i) the date of the next annual shareholders meeting; (ii) the date on which the participant has a separation from service on account
of death or total and permanent disability; or (iii) the date of a change in control.
A change in control is deemed to have occurred under the 2016
Directors Stock Unit Plan if any of the following events have occurred:
(I)
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Any individual, entity, or group, other than our company, beneficially owns 35% or more of our voting stock;
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(II)
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Individuals who, as of July 8, 2016, constituted our Board (referred to as the incumbent board) cease to constitute at least a majority of our Board. Any individual who becomes a
director after such date by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended
shall be deemed members of the incumbent board. However, no individual who was initially elected as a member of our Board
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in connection with an actual or threatened election contest or settlement of an actual or threatened election contest will be considered to be a member of the incumbent board;
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(III)
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Consummation of a merger or consolidation of our company or any direct or indirect subsidiary with any other corporation, other than (i) a merger or consolidation immediately
following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the surviving company, the entity surviving such merger or consolidation or, if our company or the entity
surviving such merger is then a subsidiary, the ultimate parent thereof, or (ii) a merger or consolidation effected to implement a recapitalization of our company (or similar transaction) in which no individual or entity beneficially owns 35% or
more of the combined voting stock of our companys then outstanding securities resulting from the transaction;
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(IV)
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Shareholder approval of a liquidation or dissolution of our company; or
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(V)
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Consummation of a sale of all or substantially all of our companys assets.
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The Committee may provide a different definition of change of control in an award agreement if it determines a different definition is necessary or appropriate, including to comply with Section 409A of the Internal
Revenue Code.
A director may elect to defer payment of vested stock units that will be granted in a designated year, consistent with the requirements
of Section 409A of the Internal Revenue Code. The deferral election may provide for payment upon the first to occur of (i) the date of the directors separation from service for any reason other than cause or (ii) a change in control that meets
the requirements of a a change in the ownership or effective control, or a change in the ownership of a substantial portion of the assets, under Section 409A of the Internal Revenue Code. The elected deferred date is referred to as a
deferred payment date.
A vested stock unit will be paid in shares of Common Stock, with one share of Common Stock delivered for each vested
stock unit within 60 days after the date of vesting or within 60 days after a deferred payment date, as applicable.
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26
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AWI 2016 Proxy Statement
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ITEM 3 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 DIRECTORS STOCK UNIT PLAN
(CONTINUED)
If an award of stock units is outstanding as of the record date for determining the shareholders entitled to receive
a cash dividend on outstanding shares of Common Stock, each director shall be credited with dividend equivalents with respect to the directors outstanding stock units. Dividend equivalents will vest at the same time as the underlying stock
units. Unless the Committee determines otherwise, dividend equivalents on unvested stock units will be paid in cash at the time of vesting, and dividend equivalents on vested stock units that have been deferred will be paid in cash on the dividend
payment dates. If the underlying stock units are forfeited, all related dividend equivalents shall also be forfeited. No interest shall accrue on dividend equivalents.
If a director has a separation from service for cause, as determined by the Committee, all stock units that have not been paid, whether or not vested, shall be forfeited. Upon the effective date of a separation
from service for any reason other than cause, all unvested stock units shall be forfeited.
If a participant ceases serving as a non-employee director
and, immediately thereafter, is employed by us, then such participant will not be deemed to have ceased service for purposes of the 2016 Directors Stock Unit Plan at that time. The participants continued employment with us will be deemed to be
continued service for purposes of the 2016 Directors Stock Unit Plan; provided, however, that such service shall cease as of the date of a separation from service under Section 409A of the Internal Revenue Code, and such former director will not be
eligible for additional grants of stock units under the 2016 Directors Stock Unit Plan.
ADJUSTMENTS
Awards under the 2016 Directors Stock Unit Plan and any agreements evidencing such awards, the maximum number of shares of Common Stock that may be issued under the
2016 Directors Stock Unit Plan and the maximum number of shares of Common Stock with respect to which stock units may be made to any one person during any calendar year are subject to mandatory adjustment or substitution, as determined by the
Committee in its sole discretion, as to the number, price or kind of a share of Common Stock or other consideration subject to such stock unit or as otherwise determined by the Committee to be equitable (i) in the event of changes in the
outstanding Common
Stock or in our capital structure by reason of stock or extraordinary cash dividends, stock splits, reverse stock splits, spinoffs, recapitalization, reorganizations, mergers, consolidations,
combinations, exchanges, or other relevant changes in capitalization occurring after the date of grant of any such benefit, or (ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in
any substantial dilution or enlargement of the rights awarded to, or available for, participants, or which otherwise warrants equitable adjustment because it interferes with the intended operation of the 2016 Directors Stock Unit Plan.
STOCK OWNERSHIP POLICY
Unless the Committee
determines otherwise, non-employee directors who are subject to our stock ownership policy must hold a portion of the net after-tax shares received upon payment of stock units under the 2016 Directors Stock Unit Plan until the applicable stock
ownership guidelines are met, in accordance with our stock ownership policy.
CLAWBACK POLICY
All awards made under the 2016 Directors Stock Unit Plan are subject to the applicable provisions of clawback or recoupment policies, share trading policies and
other policies that may be implemented and approved by the Board, as such policy may be in effect from time to time.
AMENDMENT AND
TERMINATION OF THE PLAN
The Board may amend or terminate the 2016 Directors Stock Unit Plan at any time, subject to shareholder approval if such
approval is required under the applicable laws or stock exchange requirements. The 2016 Directors Stock Unit Plan will terminate on July 7, 2026, unless the 2016 Directors Stock Unit Plan is terminated earlier by the Board or is extended by the
Board with the approval of the shareholders.
U.S. FEDERAL INCOME TAX IMPLICATIONS OF THE 2016 DIRECTORS STOCK UNIT PLAN
The U.S. federal income tax consequences arising with respect to stock units are described briefly below. From the recipients standpoint, as a
general rule, ordinary income will be recognized at the time of payment of cash or delivery of shares. Future
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AWI 2016 Proxy Statement
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27
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ITEM 3 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 DIRECTORS STOCK UNIT PLAN
(CONTINUED)
appreciation on shares held beyond the ordinary income recognition event will be taxable at capital gains rates when
the shares are sold. The Company, as a general rule, will be entitled to a tax deduction that corresponds in time and amount to the ordinary income recognized by the recipient, and the Company will not be entitled to any tax deduction in respect of
capital gain income recognized by the recipient.
An award may be taxable at 20 percentage points above ordinary income tax rates at the time it becomes
vested, even if that is prior to the delivery of the cash or stock in settlement of the award, if the award constitutes deferred compensation under Section 409A of the Internal Revenue Code, and the requirements of Section 409A of the
Internal Revenue Code are not satisfied.
The foregoing provides only a general description of the application of U.S. federal income tax laws to stock
units granted to U.S. taxpayers under the 2016 Directors Stock Unit Plan. This discussion is intended for the information of shareholders considering how to vote at the Annual Meeting and not as tax guidance to participants in the 2016 Directors
Stock Unit Plan, as the tax consequences may vary with the identity of the recipients and the method of payment or settlement. This summary does not address the effects of other federal taxes (including possible golden parachute excise
taxes) or taxes imposed under state, local, or foreign tax laws.
NEW PLAN BENEFITS UNDER THE 2016 DIRECTORS STOCK UNIT PLAN
At the present time, nine non-employee directors are eligible to receive stock units under the 2016 Directors Stock Unit Plan. The table below shows, as to each of
the Companys non-employee directors nominated for election at the Annual Meeting, the stock units that are expected to be granted in July 2016 to non-employee directors if the shareholders approve the 2016 Directors Stock Unit Plan. The last
reported sale price of a share of our Common Stock on April 15, 2016 was $42.14 per share.
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Name and Title
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Expected 2016
Stock Units
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Mr. Askren
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2,492
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Mr. Huang
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2,492
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Mr. McWilliams
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2,492
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Mr. Roberts
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2,492
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Mr. Melville
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2,492
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Mr. Spivy
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2,492
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Mr. OConnor
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4,390
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Ms. Thomas
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2,492
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AWI 2016 Proxy Statement
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ITEM 4 APPROVE THE ARMSTRONG WORLD INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
The Board is asking shareholders to approve the Armstrong World Industries, Inc. 2016 Long-Term Incentive Plan (the
2016 LTIP). The Compensation Committee and the Board previously approved the 2016 LTIP, subject to shareholder approval.
The 2016 LTIP is a
new equity compensation plan for our employees. The 2016 Long-Term Incentive Plan replaces the Armstrong World Industries, Inc. 2011 Long-Term Incentive Plan (the 2011 LTIP), which does not have sufficient shares available for continued
equity awards to our employees. No further awards will be made under the 2011 LTIP if the 2016 LTIP is approved by the shareholders.
Shareholder
approval of the 2016 LTIP is being sought in order to (i) meet New York Stock Exchange listing requirements, (ii) permit (but not require) certain awards under the 2016 LTIP to qualify for an exemption from the $1 million
deduction limit under Section 162(m) of the Internal Revenue Code, and (iii) allow incentive stock options to meet the requirements of the Internal Revenue Code.
The 2016 LTIP will enable us to continue our compensation program, which is intended to attract, motivate and retain experienced, highly-qualified officers and
other employees who will contribute to our financial success, and to align the interests of the officers and other employees with those of our shareholders through the grant of stock-based and cash-based awards. The 2016 LTIP is intended to serve as
the plan for all of our stock-based incentive compensation programs for officers and other employees.
The approval of the 2016 LTIP will not affect our
ability to make stock-based or cash-based awards outside of the 2016 LTIP to the extent consistent with applicable law and NYSE rules.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
FOR
THE APPROVAL OF THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN.
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AWI 2016 Proxy Statement
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29
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
DETERMINATION OF SHARES TO BE AVAILABLE FOR ISSUANCE
If this Item 4 is approved by our shareholders at the Annual Meeting, the maximum aggregate number of shares of our Common Stock that may be issued under the 2016
LTIP will be equal to the sum of (i) 2,000,000 shares of Common Stock, plus (ii) 750,917 shares of Common Stock, which is the number of shares of Common Stock that remained available for awards under the 2011 LTIP as of April 15, 2016, plus (iii)
the number of shares of Common Stock subject to outstanding awards under the 2011 LTIP as of April 15, 2016 that terminate, expire, or are cancelled, forfeited, exchanged, or surrendered without having been exercised, vested, or paid under the 2011
LTIP after the effective date of the 2016 LTIP (not exceeding 2,180,275 shares of Common Stock).
The number of shares of Common Stock reserved for
issuance under the 2016 LTIP will be reduced on a one-for-one basis for each share of stock issued under the 2016 LTIP pursuant to a stock option or stock appreciation right (SAR) and will be reduced by a fixed ratio of one and six tenths (1.6)
shares for each share of stock issued under the 2016 LTIP pursuant to a stock award or stock unit. For example, if shares are issued pursuant to an award of 1,000 stock units, the share reserve under the 2016 LTIP will be reduced by 1,600 shares.
When deciding on the number of shares to be available for awards under the 2016 LTIP, the Board considered a number of factors, including the
number of shares available under the 2011 LTIP, our past share usage (burn rate), the number of shares needed for future awards, a dilution analysis, competitive data from relevant peer
companies, the current and future accounting expenses associated with our equity award practices, and input from our shareholders and shareholder advisory firms.
Dilution Analysis
As of April 15, 2016, our capital structure consisted of 55,480,362 shares of Common Stock
outstanding. 750,917 shares of Common Stock remained available for grant of awards under the 2011 LTIP as of April 15, 2016. The proposed share authorization is a request for 2,000,000 new shares of Common Stock to be available for awards under the
2016 LTIP. The table below shows our potential dilution (overhang) levels based on our fully diluted shares of Common Stock and our request for 2,000,000 shares of Common Stock to be available for awards under the 2016 LTIP. The
2,000,000 new shares of Common Stock represent approximately 3.30% of fully diluted shares of Company Common Stock, including all shares that will be authorized under the 2016 LTIP, as described in the table below. The Board believes that this
number of shares of Common Stock under the 2016 LTIP represents a reasonable amount of potential equity dilution, which will allow us to continue awarding equity awards, and that equity awards are an important component of our equity compensation
program.
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30
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AWI 2016 Proxy Statement
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
Potential Overhang with 2,000,000 Shares
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Stock Options Outstanding as of April 15, 2016
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1,399,631
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Weighted Average Exercise Price of Stock Options Outstanding as of April 15, 2016
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$
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40.66
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Weighted Average Remaining Term of Stock Options Outstanding as of April 15, 2016
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5.9
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Outstanding Full Value Awards under the 2011 LTIP as of April 15, 2016
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780,644
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Outstanding Full Value Awards under the 2008 Directors Stock Unit Plan as of April 15, 2016
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199,071
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Total Equity Awards Outstanding as of April 15, 2016
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2,379,346
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Shares Available for Grant under the 2011 LTIP as of April 15, 2016
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750,917
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Shares Available for Grant under the 2008 Directors Stock Unit Plan as of April 15, 2016
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11,875
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Shares Requested
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2,000,000
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Total Potential Overhang under the Plan (including all prior employee and non-employee director equity compensation plans)
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5,142,138
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Shares of Common Stock Outstanding as of April 15, 2016
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55,480,362
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Fully Diluted Shares of Common Stock
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60,622,500
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Potential Dilution of 2,000,000 shares as a Percentage of Fully Diluted Shares of Common
Stock
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3.30
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%
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The Outstanding Full Value Awards in the foregoing table are measured at target for the outstanding performance-based
awards, which can be paid at, above or below target. All dividend equivalent rights under outstanding awards are paid in cash.
The Shares Available for
Grant in the foregoing table will not be issued under the 2011 LTIP or the 2008 Directors Stock Unit Plan, respectively, if the 2016 LTIP or the 2016 Directors Stock Unit Plan, respectively, is approved by the shareholders. The number shown for the
2011 LTIP has not been not adjusted for the 1.6 to one share counting provision for full value shares under the 2011 LTIP. The Shares Requested in the foregoing table is the number of new shares and does not include shares subject to outstanding
grants under the 2011 LTIP or shares that were available under the 2011 LTIP as of April 15, 2016.
The Fully Diluted Shares of Common Stock in the
foregoing table consists of the Shares of Common Stock Outstanding as of April 15, 2016 plus the Total Potential Overhang described in the foregoing table. Based on our current equity award practices, the Board estimates that the authorized shares
under the 2016 LTIP may be sufficient to provide us with an opportunity to grant equity awards for
approximately three to five years, in amounts determined appropriate by the Compensation Committee, which will administer the 2016 LTIP (as discussed below). This is only an estimate, and
circumstances could cause the share reserve to be used more quickly or more slowly. These circumstances include, but are not limited to, the future price of shares of the Common Stock, the mix of cash, options and full value awards provided as
long-term incentive compensation, grant amounts provided by our competitors, payout of performance-based awards in excess of target in the event of superior performance, hiring activity, and promotions during the next few years.
Burn Rate
The table below sets forth the following
information regarding the awards granted under the 2011 LTIP and the 2008 Directors Stock Unit Plan: (i) the burn rate for each of the last three calendar years and (ii) the average burn rate over the last three calendar years. The burn rate for a
year has been calculated as follows:
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(i)
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the sum of (x) all stock options granted in the applicable year, (y) all time-based stock units and stock awards granted in the applicable year, multiplied by
2.5 (which
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AWI 2016 Proxy Statement
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
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represents a premium on full value share awards based on our annual stock price volatility), and (z) the number of all performance-based stock units and stock awards granted in
the applicable year (at
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target level performance), multiplied by 2.5, divided by
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(ii)
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the weighted average number of shares of Common Stock outstanding for the applicable year.
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Dividend equivalents are not included in the
burn rate calculation, because dividend equivalents under the outstanding awards are paid only in cash and are not paid in shares of Common Stock.
Burn Rate
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2015
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2014
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2013
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Three-Year
Average
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Time-Based and Performance-Based (at target level performance) Stock Units and Stock Awards Granted
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331,525
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244,831
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224,480
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Total Full Value Awards x 2.5
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828,812
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612,078
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561,200
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Stock Options Granted
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318,915
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382,420
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Total Full Value Awards x 2.5 and Stock Options Granted
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828,812
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930,993
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943,620
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Weighted Average Shares of Common Stock Outstanding as of December 31
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55,359,064
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58,885,040
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57,778,424
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Burn Rate
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1.50
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%
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1.58
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%
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1.63
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%
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1.57
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%
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The burn rate means that we used an annual average of 1.57% of the weighted average shares outstanding for awards
granted over the past three
years under the 2011 LTIP and the 2008 Directors Stock Unit Plan.
The following table shows the total number of
stock units and stock awards granted in a year, as well as the number of performance-based stock units and stock awards that were (i) eligible to be earned in a year and (ii) earned in the year. The performance-based units and awards are based on
the number of shares earned and eligible to be earned for the three-year performance period ending in the applicable year.
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2015
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2014
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2013
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Time-Based Stock Units and Stock Awards Granted in the Applicable Year
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331,525
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(1)
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114,973
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84,613
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Performance-Based Stock Units and Stock Awards Granted in the Applicable Year
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129,858
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139,867
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Total Grants of Stock Units and Stock Awards
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331,525
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244,831
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224,480
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Performance-Based Stock Units and Stock Awards that were eligible to be Earned in the Applicable Year (at maximum
performance)
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244,295
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245,700
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244,125
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Performance-Based Stock Units and Stock Awards Earned in the Applicable Year
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79,570
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92,664
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92,768
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(1)
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In 2015, we granted 100% of our long-term incentive grants as time-based stock grants as a strong retention incentive to keep management in place and fully focused on the Company
during the separation of AFI.
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The Board believes that our executive compensation program, and particularly the granting of equity awards, allows us
to align the interests of officers and other employees who are selected to receive awards with those of our
shareholders. The 2016 LTIP is designed to enable us to formulate and implement a compensation program that will attract, motivate and retain officers and other employees who we expect will
contribute to our financial success. The Board believes that
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AWI 2016 Proxy Statement
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
awards granted pursuant to the 2016 LTIP are a vital component of our compensation program and, accordingly, that it
is important that an appropriate number of shares of stock be authorized for issuance under the 2016 LTIP.
DESCRIPTION OF THE 2016
LTIP
The following is a brief description of the material features of the 2016 LTIP. This description is qualified in its entirety by reference to
the full text of the 2016 LTIP, a copy of which is attached to this Proxy Statement as Annex C.
AWARDS
The 2016 LTIP provides that awards may be granted in any of the following forms:
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incentive stock options
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nonqualified stock options
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stock appreciation rights
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restricted stock awards
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SHARE
AUTHORIZATION
The 2016 LTIP authorizes for issuance up to the sum of (i) 2,000,000 shares of shares of Common Stock, plus (ii) 750,917 shares of
Common Stock, which is the number of shares of Common Stock that remained available for awards under the 2011 LTIP as of April 15, 2016, plus (iii) the number of shares of Common Stock subject to outstanding awards under the 2011 LTIP as of April
15, 2016 that terminate, expire, or are cancelled, forfeited, exchanged, or surrendered without having been exercised, vested, or paid under the 2011 LTIP after the effective date of the 2016 LTIP (not exceeding 2,180,275 shares of Common Stock).
All shares of Common Stock numbers are subject to adjustment as described below.
The number of shares of Common Stock reserved for issuance under the
2016 LTIP shall be reduced on a one-for-one basis for each Common Share issued with respect to a stock option or SAR and shall be reduced by a fixed ratio of one and six tenths (1.6) shares of Common Stock for each Common Share issued with respect
to a restricted stock award or stock unit.
If and to the extent stock options and SARs terminate, expire or are cancelled, forfeited, exchanged or surrendered
without having been exercised (including stock options granted under the 2011 LTIP that terminate, expire or are cancelled, forfeited, exchanged or surrendered without having been exercised on or after the effective date of the 2016 LTIP), and if
and to the extent that any restricted stock awards or stock units are forfeited or terminated, or otherwise not paid in full (including restricted stock awards or stock units granted under the 2011 LTIP that are forfeited or terminated, or otherwise
not paid in full on or after the effective date of the 2016 LTIP), the shares subject to such awards will become available again for purposes of the 2016 LTIP. If any shares of Common Stock are withheld or surrendered in payment of the exercise
price of a stock option or withheld for purposes of satisfying our tax withholding obligations with respect to stock options or SARs, such shares will not be available for re-issuance under the 2016 LTIP. Shares of Common Stock withheld for purposes
of satisfying our tax withholding obligations with respect to awards other than stock options or SARs (including with respect to awards granted under the 2011 LTIP that are paid on or after the effective date of the 2016 LTIP) shall be available for
re-issuance under the 2016 LTIP. If SARs are awarded, the full number of shares subject to the SARs shall be considered awarded under the 2016 LTIP, without regard to the number of shares issued upon exercise of the SARs. To the extent any awards
are paid in cash, and not in shares of Common Stock, any shares previously subject to such awards will not count against the share limits under the 2016 LTIP. The share ratios described above will be used for calculating the number of shares
available for re-issuance under the 2016 LTIP. For the avoidance of doubt, if shares of Common Stock are repurchased on the open market with the proceeds of the exercise price of stock options, such shares may not again be made available for
issuance under the 2016 LTIP.
In the event of our acquisition of any company, outstanding equity awards with respect to stock of the acquired company
may be assumed or replaced with awards under the 2016 LTIP. Outstanding awards that are assumed or replaced by awards under the 2016 LTIP in connection with an acquisition (referred to as substitute awards) will not reduce the 2016 LTIPs share
reserve described above, consistent with applicable stock exchange
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AWI 2016 Proxy Statement
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33
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
requirements. The terms of any such substitute award will be determined by the Compensation Committee and may include
exercise prices or base prices that are different from those otherwise described in the 2016 LTIP. If we assume a shareholder approved equity plan from an acquired company, any shares of Common Stock available under the assumed plan (after
appropriate adjustments, as required to reflect the transaction) may be issued pursuant to awards under the 2016 LTIP and will not reduce the 2016 LTIPs share reserve as described above.
GRANT LIMITS
The 2016 LTIP provides that
the maximum aggregate number of shares of Common Stock with respect to which awards may be made to any individual employee under the 2016 LTIP during any calendar year is 750,000 shares, subject to adjustment as described below. For dividends and
dividend equivalent rights that are intended to qualify for the performance-based compensation exemption of Section 162(m) of the Internal Revenue Code, the maximum amount of dividends and dividend equivalent rights that may accrue in any calendar
year with respect to performance-based awards granted to any individual employee under the 2016 LTIP is $6,000,000. The maximum cash award payout that may be earned by a participant for each twelve months in a performance period is $5,000,000.
ADMINISTRATION
The 2016 LTIP
will be administered and interpreted by a committee appointed by our Board from among its members (the LTIP Committee). Our Board has delegated administrative responsibility of the LTIP to the Compensation Committee. References to the
LTIP Committee in this summary of the 2016 LTIP means the Compensation Committee. The LTIP Committee shall be comprised, unless otherwise determined by our Board, of not less than two members who shall be (i) non-employee directors
within the meaning of Rule 16b-3(b)(3) of the Exchange Act, (ii) outside directors under Section 162(m) of the Internal Revenue Code, and (iii) independent directors, as determined in accordance with the independence
standards established by the stock exchange on which our Common Stock is at the time primarily traded.
The LTIP Committee has the discretionary authority to make such determinations and interpretations and to take such
action in connection with the 2016 LTIP and any awards granted under the 2016 LTIP as it deems necessary or advisable. The LTIP Committee may delegate to one or more of its members, to one or more officers or members of management or to one or more
agents, such administrative duties as it may deem advisable; provided that such delegation does not adversely affect the exemption provided by Rule 16b-3 of the Exchange Act, does not prevent an award from qualifying as performance-based
compensation, if so intended, under Section 162(m) of the Internal Revenue Code, and complies with applicable law and with applicable stock exchange requirements.
Eligibility for Participation
Participants may consist of our officers and key employees and
those of our subsidiaries and affiliates, whom the LTIP Committee determines to be significantly responsible for our success and future growth and profitability and whom the LTIP Committee may designate from time to time to receive awards under the
2016 LTIP. Consultants and advisors who perform services for us or any of our subsidiaries and affiliates shall be eligible to participate in the 2016 LTIP if the consultants or advisors render bona fide services to us or our subsidiaries and
affiliates, the services are not in connection with the offer and sale of securities in a capital-raising transaction and the consultants or advisors do not directly or indirectly promote or maintain a market for our securities. Members of the Board
who are not employees of the Company or employees of our subsidiaries or affiliates are not eligible to participate in the 2016 LTIP.
TYPES OF AWARDS
Stock Options
The LTIP Committee may award stock options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code
(ISOs) or nonqualified stock options that are not intended to so qualify (NQSOs) or any combination of ISOs and NQSOs. Anyone eligible to participate in the 2016 LTIP may receive an award of NQSOs. Only employees of the Company and our subsidiaries
may receive an award of ISOs. All of the authorized shares under the 2016 LTIP may be granted as ISOs, subject to adjustment as described below.
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AWI 2016 Proxy Statement
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
The LTIP Committee fixes the exercise price per share for stock options on the date of grant. The per share exercise
price of any stock option awarded under the 2016 LTIP shall not be less than the fair market value of a share of Common Stock on the date of grant. If the recipient of an ISO is a participant who holds more than 10% of the total combined voting
power of all classes of outstanding stock of the Company or a subsidiary, the exercise price per share of an ISO awarded to such person must be at least 110% of the fair market value of a share of Common Stock on the date of grant. To the extent
that the aggregate fair market value of shares of Common Stock, determined on the date of grant, with respect to which ISOs become exercisable for the first time by a participant during any calendar year exceeds $100,000, such ISOs will be treated
as NQSOs for tax purposes.
The LTIP Committee determines the term of each stock option. The term may not exceed ten years from the date of grant and,
if the recipient of an ISO is a participant who holds more than 10% of the combined voting power of all classes of outstanding stock of our Company or a subsidiary, the term for such ISO may not exceed five years from the date of grant. Unless the
LTIP Committee determines otherwise, if a vested NQSO would terminate at a time when trading in our Common Stock is prohibited by law or our insider trading policy, the vested NQSO may be exercised until the 30th day after the expiration of such
prohibition. The LTIP Committee determines the vesting period and other terms of stock options. A participant may pay the exercise price and any withholding taxes upon exercise of a stock option: (i) in cash; (ii) with the approval of the LTIP
Committee, by withholding shares of Common Stock having a fair market value on the date of exercise equal to the exercise price; (iii) with the approval of the LTIP Committee, by delivering shares of Common Stock already owned by the participant and
having a fair market value on the date of exercise equal to the exercise price or through attestation to ownership of such shares; (iv) by payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board;
or (v) by such other method as the LTIP Committee may approve, to the extent permitted by applicable law.
SARs
The LTIP Committee may award SARs to anyone eligible to participate in the 2016 LTIP. SARs may
be awarded in connection with, or independently of, any stock option awarded under the 2016 LTIP. Upon exercise of a SAR, the participant will receive an amount equal to the excess of (i) the
fair market value of a specified number of shares of Common Stock on the date of exercise over (ii) the fair market value of such shares of Common Stock on the date the SAR is awarded, or other higher specified base amount, as determined by the LTIP
Committee. The base amount shall not be less than the fair market value of the Common Stock subject to the SARs on the date of grant. Such payment to the participant will be in cash, in shares of Common Stock, or in a combination of cash and shares
of Common Stock, as determined by the LTIP Committee. The LTIP Committee will determine the vesting period and other terms of SARs, including whether SARs will be awarded in connection with, or independently of, any stock options. The LTIP Committee
determines the term of each SAR. The term of a SAR may not exceed ten years from the date of grant. Unless the LTIP Committee determines otherwise, if a vested SAR would terminate at a time when trading in our Common Stock is prohibited by law or
our insider trading policy, the vested SAR may be exercised until the 30th day after the expiration of such prohibition.
Restricted Stock Awards
The LTIP Committee may grant restricted stock awards to anyone eligible to participate in the 2016 LTIP. Restricted stock awards may be subject to
such terms and conditions as the LTIP Committee deems appropriate. The LTIP Committee determines the number of shares of Common Stock subject to restricted stock awards as well as the other terms and conditions, including vesting, as the LTIP
Committee determines appropriate.
With respect to the shares of Common Stock subject to a restricted stock award, participants have all of the rights
of a holder of shares of Common Stock, including the right to vote the shares. Dividends with respect to restricted stock may either be currently paid to the participant or withheld by the Company for the participants account, and interest may
be credited on cash dividends withheld, subject to such terms as determined by the LTIP Committee; provided that dividends with respect to performance-based restricted stock awards shall vest only to the extent that the underlying restricted stock
award vests, as determined by the LTIP Committee.
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AWI 2016 Proxy Statement
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35
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
Stock Units
The LTIP Committee may award stock units to anyone eligible to participate in the 2016 LTIP. Each stock unit provides the right to receive a payment in shares of
Common Stock or in cash at such time as the award agreement shall specify.
The LTIP Committee determines the number of stock units that will be
awarded, as well as the other terms and conditions applicable to the stock units, including vesting and whether the stock units shall have dividend equivalent rights. Any dividend equivalent right will vest and become payable at the same time as the
underlying stock unit, unless the LTIP Committee determines otherwise; provided that any dividend equivalent right with respect to a performance-based stock unit will vest and be paid only if and to the extent the underlying stock unit vests and is
paid as determined by the LTIP Committee.
Stock units may be paid at the time specified by the LTIP Committee. If a stock unit becomes distributable,
it will be paid in cash, in shares of Common Stock, or in a combination of cash and shares of Common Stock, as determined by the LTIP Committee.
Cash Awards
The LTIP Committee may, in its discretion,
grant awards to be settled solely in cash. Cash awards may be subject to such terms and conditions, including vesting, as the LTIP Committee deems appropriate.
Performance-Based Awards
Awards granted under the 2016 LTIP may be granted in a manner such that the awards
qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code (see Federal Income Tax Consequences below). As determined by the LTIP Committee, either the awarding or vesting of such
performance-based awards may be based on the achievement of performance objectives that are based on one or more of the business criteria described below, with respect to our performance and the performance of our subsidiaries as a whole or the
performance of one or more of our business units.
The LTIP Committee will establish in writing: (i) the objective performance goals that must be met in
order for the awards to vest or be payable; (ii) the period during which performance will be measured; (iii) the maximum amounts that may be paid if the performance goals are met; and (iv) any
other conditions that the LTIP Committee deems appropriate and consistent with the 2016 LTIP and the requirements of Section 162(m) of the Internal Revenue Code. Forfeiture of all or part of any such award will occur if the performance goals are not
met, as determined by the LTIP Committee. The LTIP Committee will establish in writing the performance goals that must be met no later than 90 days after the commencement of the applicable period of service to which the performance goals relate (but
in no event after 25% of such period has elapsed), or such other period as may be consistent with the regulations issued under Section 162(m) of the Internal Revenue Code. The LTIP Committee may not increase the amount of compensation that is
payable upon achievement of the designated performance goals, but the LTIP Committee may reduce the amount of compensation that is payable upon achievement of the designated performance goals.
The LTIP Committee will use objectively determinable performance goals based on one or more of the following business criteria, individually or in combination: (i)
net earnings; (ii) earnings per share; (iii) sales; (iv) operating income; (v) earnings before interest and taxes (EBIT); (vi) earnings before interest, taxes, depreciation and amortization (EBITDA); (vii) cash flow; (viii) working capital targets;
(ix) return on equity; (x) return on capital; (xi) market price per share; (xii) total return to shareholders; (xiii) price-earnings multiples; (xiv) revenue; (xv) number of days sales outstanding in accounts receivable; (xvi) productivity; (xvii)
margin; (xviii) net capital employed; (xix) growth in assets; (xx) unit volume; (xxi) market share; (xxii) economic value; (xxiii) relative performance to a comparison group designated by the LTIP Committee based on any of the foregoing criteria; or
(xxiv) strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, customer growth, geographic business expansion goals, cost targets or goals relating to acquisitions or
divestitures.
VESTING AND FORFEITURE OF AWARDS
All awards granted under the 2016 LTIP will vest over a period that it not less than one year from the date of grant. Subject to adjustments as described
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AWI 2016 Proxy Statement
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
below, up to 5% of the share reserve as of the effective date of the 2016 LTIP may be granted without regard to the
one-year minimum vesting period.
The LTIP Committee has discretion to accelerate vesting of awards in connection with a participants death,
disability, retirement, involuntary termination without cause, in the event of a change in control or a corporate transaction or an event requiring mandatory adjustment or substitution (as described below), or in such other circumstances as the LTIP
Committee deems appropriate.
Unless otherwise provided by the LTIP Committee, a participant will forfeit all awards which have not been settled under
the 2016 LTIP, and the Committee may require repayment of paid or exercised awards, if:
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the participants employment is terminated for willful, deliberate, or gross misconduct, as determined by the LTIP Committee; or
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(ii)
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the participant breaches any written confidentiality, non-solicitation or non-competition covenant with us or a subsidiary or affiliate, including non-competition and
non-solicitation covenants described in the 2016 LTIP.
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ADJUSTMENT PROVISIONS
Awards under the 2016 LTIP and any agreements evidencing such awards, the maximum number of shares of Common Stock that may be issued under the 2016 LTIP, and the
maximum number of shares of Common Stock with respect to which awards may be granted to any one employee during any calendar year are subject to mandatory adjustment or substitution, as determined by the LTIP Committee in its sole discretion, as to
the number, price or kind of a share of Common Stock or other consideration subject to such award or as otherwise determined by the LTIP Committee to be equitable (i) in the event of changes in the outstanding Common Stock or in our capital
structure by reason of stock or extraordinary cash dividends, stock splits, reverse stock splits, spinoffs, recapitalization, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring
after the date of grant of any such award, or (ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in
any substantial dilution or enlargement of the rights awarded to, or available for, participants, or which otherwise warrants equitable adjustment because it interferes with the intended
operation of the 2016 LTIP.
CHANGE IN CONTROL
The 2016 LTIP provides double trigger vesting in the event of a change in control. Unless the LTIP Committee determines otherwise, if there is a change in control, and if participants awards
remain outstanding after the change in control (or are assumed by, or converted to similar awards with equivalent value as of the date of the change in control of, the surviving corporation (or parent or subsidiary of the surviving corporation)),
and we or our successor terminates a participants employment without cause upon or within two years after the change in control, the participants outstanding stock options and SARs shall vest and become exercisable, any restrictions on
restricted stock awards shall lapse, and stock units or cash awards shall become payable. In that event, awards that are based on performance goals will vest and be payable at their target value unless the LTIP Committee determines otherwise.
Unless the LTIP Committee determines otherwise, if there is a change in control (or are not assumed by, or converted to similar awards with equivalent
value as of the date of the change in control of, the surviving corporation (or parent or subsidiary of the surviving corporation)), and if participants awards do not remain outstanding after the change in control, then all outstanding stock
options and SARs shall immediately vest and become exercisable, any restrictions on restricted stock awards shall lapse, and stock units and cash awards shall become payable as of the date of the change in control. In that event, awards that are
based on performance goals will vest and be payable at their target value unless the LTIP Committee determines otherwise.
The LTIP Committee may
establish such other terms and conditions relating to the effect of a change in control on awards as the LTIP Committee deems appropriate. In addition to other actions, in the event of a change in control of the Company, the LTIP Committee may take
any one or more of the following actions with respect to any or all outstanding awards, without the consent of any participant: (A) determine that outstanding stock
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AWI 2016 Proxy Statement
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37
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
options and SARs shall be fully exercisable, restrictions on outstanding restricted stock awards shall lapse, and
stock units and cash awards shall become payable, as of the date of the change in control or at such other time as the LTIP Committee determines, (B) require that participants surrender their outstanding stock options and SARs for cancellation in
exchange for one or more payments by the Company, in cash, Common Stock or other property, as determined by the LTIP Committee, in an amount equal to the amount, if any, by which the then fair market value of the shares of Common Stock subject to
the participants unexercised stock options and SARs exceeds the exercise price or base amount, as applicable, and on such terms as the LTIP Committee determines, (C) after giving participants an opportunity to exercise their outstanding stock
options and SARs, terminate any or all unexercised stock options and SARs at such time as the LTIP Committee deems appropriate, (D) with respect to participants holding stock units or cash awards, determine that such participants shall receive one
or more payments in settlement of such stock units or cash awards, in such amount and form and on such terms as may be determined by the LTIP Committee, or (E) determine that awards that remain outstanding after the change in control shall be
converted to similar awards of the surviving corporation (or a parent or subsidiary of the surviving corporation). If the per-share fair market value of our Common Stock does not exceed the per-share exercise price or base amount of a stock option
or SAR, the Company will not be required to make any payment to the participant upon surrender of the stock option or SAR. Any acceleration, surrender, termination, settlement or conversion shall take place as of the date of the change in control or
such other date as the LTIP Committee may specify.
Under the 2016 LTIP, change of control means the occurrence of any one of the following:
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Any individual, entity or group, other than our company becomes the beneficial owner of more than 35% of our voting stock;
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(ii)
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Individuals who, as of July 8, 2016, constituted our Board (referred to as the incumbent board) cease to constitute at least a majority of our Board. Any individual who becomes a
director after such date and whose election or nomination was approved by a vote or recommended by a vote of at least two-thirds (2/3) of the directors then
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still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended. However, no individual who was
initially elected as a member of our Board in connection with an actual or threatened election contest or settlement of an actual or threatened election contest will be considered to be a member of the incumbent board;
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Consummation of a merger or consolidation of our company (or any direct or indirect subsidiary) with another corporation, other than a merger or consolidation where (i) at least
a majority of the Board of the corporation resulting from the transaction were members of the incumbent board at the time of the execution of the initial agreement or action of the Board providing for such transaction or (ii) there is a
recapitalization of our company (or similar transaction) in which no individual or entity beneficially owns 35% or more of the combined voting stock of our then outstanding securities resulting from the transaction;
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(iv)
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Consummation of a sale of all or substantially all of our assets; or
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(v)
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Shareholder approval of a liquidation or dissolution of our company.
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The LTIP Committee may provide a different definition of change of control in an award agreement if it determines a different definition is necessary or
appropriate, including to comply with Section 409A of the Internal Revenue Code.
STOCK OWNERSHIP POLICY
Participants who are subject to our stock ownership policy must hold a portion of the net after-tax shares received upon vesting, exercise or payment of the awards
under the 2016 LTIP until the applicable stock ownership guidelines are met, in accordance with our stock ownership policy.
NO
REPRICING OF OPTIONS OR SARS
Except in connection with a corporate transaction involving the Company (including, without limitation, any stock
dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spinoff, combination, or
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AWI 2016 Proxy Statement
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
exchange of shares), we may not, without obtaining shareholder approval, (i) amend the terms of outstanding stock
options or SARs to reduce the exercise price of outstanding stock options or the base amount of outstanding SARs, (ii) cancel outstanding stock options or SARs in exchange for other awards or stock options or SARs with an exercise price or base
amount, as applicable, that is less than the exercise price or base amount, as applicable, of the original stock options or SARs or (iii) cancel outstanding stock options or SARs with an exercise price or base amount, as applicable, above the
current stock price in exchange for cash, our Common Stock or other securities.
CLAWBACK POLICY
All awards made under the 2016 LTIP are subject to the applicable provisions of clawback or recoupment policies, share trading policies and other applicable
policies that may be implemented and approved by the Board, as such may be in effect from time to time.
AMENDMENT AND TERMINATION OF
THE LTIP
The Board may amend or terminate the 2016 LTIP at any time, subject to shareholder approval if such approval is required under the Internal
Revenue Code, applicable laws or stock exchange requirements. The 2016 LTIP will terminate on July 7, 2026, unless the 2016 LTIP is terminated earlier by the Board or is extended by the Board with the approval of the shareholders.
U.S. FEDERAL INCOME TAX IMPLICATIONS OF THE 2016 LTIP
The U.S. federal income tax consequences arising with respect to awards granted under the 2016 LTIP will depend on the type of award. From the recipients standpoint, as a general rule, ordinary income will be
recognized at the time of payment of cash, or delivery of actual shares. Future appreciation on shares held beyond the ordinary income recognition event will be taxable at capital gains rates when the shares are sold. As a general rule, we will be
entitled to a tax deduction that corresponds in time and amount to the ordinary income recognized by the recipient, and we will not be entitled to any tax deduction in respect of capital gain income recognized by the recipient.
Exceptions to these general rules may arise under the following circumstances: (i) if shares, when
delivered, are subject to a substantial risk of forfeiture by reason of failure to satisfy any employment or performance-related condition, ordinary income taxation and our tax deduction will be
delayed until the risk of forfeiture lapses (unless the recipient makes a special election to ignore the risk of forfeiture); (ii) if an employee is granted a stock option that qualifies as incentive stock option, no ordinary income will
be recognized, and we will not be entitled to any tax deduction, if shares acquired upon exercise of such option are held more than the longer of one year from the date of exercise and two years from the date of grant; (iii) we will not be entitled
to a tax deduction for compensation attributable to awards granted to one of its covered employees, if and to the extent such compensation does not qualify as performance-based compensation under Section 162(m) of the Internal Revenue
Code, and such compensation, along with any other non-performance-based compensation paid in the same calendar year, exceeds $1 million; and (iv) an award may be taxable at 20 percentage points above ordinary income tax rates at the time it becomes
vested, even if that is prior to the delivery of the cash or Stock in settlement of the award, if the award constitutes deferred compensation under Section 409A of the Internal Revenue Code, and the requirements of Section 409A of the
Internal Revenue Code are not satisfied.
The foregoing provides only a general description of the application of U.S. federal income tax laws to
certain awards granted to U.S. taxpayers under the 2016 LTIP. This discussion is intended for the information of shareholders considering how to vote at the Annual Meeting and not as tax guidance to participants in the 2016 LTIP, as the tax
consequences may vary with the types of awards made, the identity of the recipients and the method of payment or settlement. This summary does not address the effects of other federal taxes (including possible golden parachute excise
taxes) or taxes imposed under state, local, or foreign tax laws.
NEW PLAN BENEFITS UNDER THE 2016 LTIP
Future benefits under the 2016 LTIP generally will be granted at the discretion of the LTIP Committee and are therefore not currently determinable. It is
anticipated that approximately 135 individuals, including our Chief Executive Officer, are eligible to receive awards under the 2016 LTIP. The last reported sale price of a share of our Common Stock on April 15, 2016 was $42.14 per share.
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AWI 2016 Proxy Statement
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39
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ITEM 4 APPROVE THE ARMSTRONG WORLD
INDUSTRIES, INC. 2016 LONG-TERM INCENTIVE PLAN
(CONTINUED)
The table below shows, as to each of our executive officers named in the Summary
Compensation Table of this Proxy Statement and the various indicated individuals and groups, the awards granted between January 1, 2015 and December 31, 2015, under the 2011 LTIP, which are the awards that would have been granted under the 2016
LTIP had the 2016 LTIP been in place in 2015.
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Dollar Value
($)
(1)
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Number of
Units
(2)
|
|
Matthew J. Espe
|
|
Chief Executive Officer and President
|
|
|
3,150,000
|
|
|
|
56,614
|
|
David S. Schulz
|
|
Senior Vice President and Chief Financial Officer
|
|
|
690,000
|
|
|
|
12,402
|
|
Victor D. Grizzle
|
|
Executive Vice President and Chief Executive Officer, Armstrong Building Products
|
|
|
874,100
|
|
|
|
15,710
|
|
Donald R. Maier
|
|
Executive Vice President and CEO, Armstrong Floor Products
|
|
|
855,000
|
|
|
|
15,376
|
|
Mark A. Hershey
|
|
Senior Vice President, General Counsel, and Chief Compliance Officer
|
|
|
605,600
|
|
|
|
10,855
|
|
All current executive officers as a group (7 persons)
|
|
|
|
|
6,767,500
|
|
|
|
121,633
|
|
Non-employee directors as a group (9 persons)
(3)
|
|
|
|
|
0
|
|
|
|
0
|
|
All employees, including current officers who are not executive officers, as a group
(226 persons)
|
|
|
|
|
10,016,623
|
|
|
|
180,133
|
|
(1)
|
Represents the dollar value of the RSUs received based on closing stock price on the date of grant.
|
(2)
|
Represents the number of shares subject to RSUs granted to employees, including our executive officers, in 2015. See the 2015 Grant of Plan Based Awards Table above for details
of RSUs granted to the named executive officers. In 2015, 233 employees, including our executive officers, received RSUs. These numbers do not reflect adjustments made to outstanding equity awards to reflect the separation of AFI. Upon the date
of the separation, outstanding RSUs held by continuing Company employees were adjusted proportionately to increase the number of shares subject to the RSUs to take into account the separation.
|
(3)
|
Non-employee directors did not receive any awards under the 2011 LTIP in 2015 and they are not eligible to participate in the 2016 LTIP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
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|
AWI 2016 Proxy Statement
|
|
|
COMPENSATION DISCUSSION AND ANALYSIS
INTRODUCTION
This compensation discussion and analysis
(CD&A) includes a detailed description of our executive compensation programs and philosophy, which are generally applicable to all of our management employees and focuses primarily on the material components of our executive
compensation program as they apply to our Named Executive Officers (NEOs). In 2015, our NEOs were
(1)
:
Matthew J. Espe
President and CEO
David S. Schulz
Senior Vice President and CFO
Victor D. Grizzle
Executive Vice President and CEO, Armstrong Building Products (ABP)
Donald R. Maier
Executive Vice President and CEO, Armstrong Floor Products (AFP)
Mark A. Hershey
Senior Vice President, General Counsel and Chief Compliance Officer
|
(1)
|
We determined the above NEOs for 2015 in accordance with SEC rules, which require that we include: all individuals who served as our principal executive officer (Mr. Espe) and
principal financial officer (Mr. Schulz), regardless of compensation level during the year; and our three most highly compensated executive officers other than the principal executive officer and principal financial officer who were serving as
executive officers at the end of the last completed fiscal year (Messrs. Grizzle, Maier and Hershey).
|
|
EXECUTIVE SUMMARY
Our Business
We are a leading global producer of ceiling systems and, prior to April 1,
2016, flooring products for use primarily in the construction and renovation of residential, commercial and institutional buildings. We design, manufacture and sell ceiling systems (primarily mineral fiber, fiberglass wool and metal) and, prior to
April 1, 2016, flooring products (primarily resilient and wood) around the world.
On February 23, 2015, we announced that our Board had unanimously
approved the separation of our Resilient Flooring and Wood Flooring segments from our Building Products (Ceilings) segment. The separation was effective April 1, 2016, and resulted in two independent, publicly-traded companies, the Company and AFI,
with AFI owning and operating the Resilient Flooring and Wood Flooring business and the Company continuing to own and operate the Building Products (Ceilings) business.
Upon the effective date of the separation, Mr. Grizzle became the President and CEO of the Company, and Messrs. Espe, Maier and Schulz terminated employment with the Company. Messrs. Maier and Schulz became
executives of AFI upon the date of the separation.
Executive Compensation Programs
Our executive compensation programs are designed to attract and retain high caliber
talent, reward performance, and closely align the interests of our
executives with the interests of our shareholders.
We execute this philosophy through the payment of base salaries, cash incentive awards under our Management Achievement Plan (MAP), grants of time-based restricted stock units
(RSU) and, in past years, grants of performance-based (PSU) and stock options under the 2011 LTIP.
To focus our NEOs on
delivering both short- and long-term results, a significant amount of their target total direct compensation (TDC, composed of base salary, short-term and long-term incentive compensation) is dependent upon achieving specified results
and is, therefore, at risk. We also employ specific policies and practices to supplement our compensation philosophy, including:
|
|
Stock ownership guidelines to ensure NEOs have financial exposure to changes in our stock price, thereby aligning NEO and long-term shareholder interests.
|
|
|
Ability to recoup certain stock-based awards in the event of termination of employment for willful,
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|
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AWI 2016 Proxy Statement
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41
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
|
|
deliberate or gross misconduct or in the event a participant engages in injurious conduct after termination of employment. To the extent the SEC adopts future rules for clawback policies that
require changes to our policies, we will revise our policies as appropriate.
|
|
|
Insider trading policy prohibiting derivative transactions in our shares of Common Stock, including: trading in puts, calls, covered calls, or other derivative
products involving our securities; prohibiting engaging in any hedging or monetization transaction with respect to our securities; and, prohibiting holding company securities in a margin account or pledging our securities as collateral for a loan.
|
|
|
Double trigger vesting of equity grants upon a change in control.
|
|
|
No plans or agreements that provide tax gross-ups to our NEOs under Section 280G of the Internal Revenue Code.
|
|
|
Post-vesting holding requirements for amounts payable above target in our 2016 performance-based equity grants.
|
2015 Business Highlights of Pre-Separation AWI
In 2015, we placed significant emphasis on driving operational results within our businesses while executing on the separation. Key performance highlights included:
|
|
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)* of $391 million at the consolidated level were consistent with our
external guidance and internal expectations due in part to budgeted increases in strategic SG&A investments, primarily on our flooring business, incremental manufacturing expense associated with the addition of our Russian ceilings plant and the
investment in our Lancaster luxury vinyl tile manufacturing capability.
|
|
|
Flat Consolidated net sales compared to 2014 as continued price and mix gains in our ceilings business, volume recovery in our North American resilient flooring
business and improved mix in our wood flooring business were offset by volume declines in our wood flooring and European and Middle Eastern ceilings businesses and pricing pressure in our U.S. flooring business.
|
|
|
$102 million of free cash flow was up from 2014 by 60.7%, primarily due to lower capital expenditures.
|
|
|
Record EBITDA* in our ABP (ceilings) business despite challenging market conditions.
|
|
|
Significantly improved profitability in our flooring business as we benefited from raw material cost declines.
|
|
|
Execution on planned investments in our Lancaster, PA Luxury Vinyl Tile plant; Somerset, KY wood flooring plant and Pontarlier, France ceilings plant.
|
|
|
Significant investments to revitalize the AFP go-to-market strategy that included new displays and marketing collateral within the distribution and retail
channel.
|
|
|
Given challenging market conditions, we took cost reduction actions that included a 20% reduction in SG&A headcount in ABP (Ceilings) China and similar
SG&A reductions in ABP (Ceilings) EMEA.
|
For 2016 our key priorities for the post-separation ceilings business include:
|
|
Driving revenue growth by leveraging our existing global capabilities and focusing on an expanded ceilings solutions market.
|
|
|
Enhancing our manufacturing capabilities and expanding our Americas sales resources to align with broader market opportunities.
|
|
|
Continuing to pursue productivity, efficiency and working capital improvements.
|
|
|
Allocating capital to high return opportunities while optimizing free cash flow.
|
*
|
Continuing operations basis. Please refer to Annex A for a reconciliation of Adjusted EBITDA to U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
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AWI 2016 Proxy Statement
|
|
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
2015 Executive Compensation Highlights for the Historical Pre-Separation Business
The 2015 annual incentive compensation opportunities established under the MAP (the 2015 MAP) by the Compensation Committee were
based on the targets established in the Companys 2015 annual operating and financial plan approved by the Board, which included significant incremental SG&A expense in the flooring business. Additionally, in establishing EBITDA targets and
corresponding payout opportunities under the MAP, the Compensation Committee considered, among other things, a review of historical financial performance and plan payout, the Boards view of the achievability of the 2015 plan, a sensitivity
analysis of MAP payouts to Company financial performance, an analysis of MAP payouts as a percentage of incremental EBITDA, and other factors that the Compensation Committee considered relevant. Based upon its evaluation, the Compensation Committee
established MAP payout opportunities that it considered appropriate to the associated levels of EBITDA performance with a 100% payout opportunity available upon achievement of the Companys Board-approved 2015 operating and financial plan.
The final MAP payout factor reflects that the Company achieved EBITDA in excess of its 2015 operating and financial plan due in part to record EBITDA
in our ABP (ceilings) business and above target probability in our AFP (flooring) business.
Our 2015 EBITDA performance resulted in a 146% MAP payout
factor at the consolidated level.
Our 2013 2015 performance-based equity grants were based on achieving a cumulative Return on Invested Capital
(ROIC) goal during the 2013-15 performance period. Our three-year cumulative ROIC performance for 2013 2015 resulted in a
57% payout factor, reflecting actual performance relative to the performance goal established in 2013.
The Compensation Committee completed the following key activities with respect to our Pre-Separation ceilings and flooring
business in 2015:
|
|
Determined EBITDA to be the performance metric against which to measure and reward for annual MAP performance in 2015.
|
|
|
|
Approved a 2015 EBITDA target of $352 million and established a corresponding payout factor for the MAP.
|
|
|
|
Approved 2015 MAP payments in line with above target performance during 2015.
|
Also during 2015, the Compensation
Committee and the Board completed a number of activities in connection with the separation of our ceilings and flooring businesses on April 1, 2016 intended to encourage identified executives to focus on both a successful execution of the
transaction and achieving the Companys goals and objectives
|
|
|
|
|
|
|
|
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AWI 2016 Proxy Statement
|
|
|
|
43
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
during the transition period between the announcement and execution of the separation transaction. Upon the
recommendation of the Compensation Committee, the Company:
|
|
Entered into retention agreements with Messrs. Espe, Schulz, and Hershey.
|
|
|
|
Each executive was eligible to receive a cash retention award in an amount equal to one and one-half times the executives base salary (two times in
the case of Messrs. Espe and Schulz) if his employment with the Company continued through the closing of a separation, sale or similar transaction with respect to the flooring business of the Company prior to June 30, 2016 (unless such date was
extended by the Board). Retention payments were made upon the successful execution of the separation in April 2016.
|
|
|
Entered into new severance agreements with Messrs. Schulz, Hershey and Grizzle to more closely align with competitive practices and to create internal equity
among participants.
|
|
|
|
Each executive will be entitled to receive certain cash severance benefits if the executives employment is terminated by the Company without Cause or by
the executive for Good Reason (as such terms are defined in the severance agreement). The severance is equal to (i) one and one-half (1.5) times the executives then-current annual base salary plus his target annual incentive under
the Companys MAP program, payable in lump sum, and (ii) a pro-rated annual incentive bonus based on actual performance for the year of termination, payable at the time that bonuses are paid to employees of the Company generally.
|
|
|
Amended Mr. Espes employment agreement dated June 24, 2010 as amended on December 31, 2012, to provide Mr. Espe with comparable severance benefits as
stated above, by adding the MAP component to his existing severance formula of two times base salary.
|
|
|
Updated existing change in control (CIC) agreements for all NEOs to align with current market practices. No changes were made to the amount of severance benefits
provided, except as described below with respect to the MAP. The changes included the following:
|
|
|
|
For the MAP bonus for the year of termination, provide executive with pro-rata
|
|
|
target bonus rather than a pro-rata bonus based on actual performance, since the performance goals generally do not continue to be relevant after a CIC.
|
|
|
|
In the event of a dispute under the CIC agreement, executives legal fees and expenses incurred in good faith will be reimbursed by the Company. The prior
agreements provided for payment by the Company of legal fees incurred by the officer in connection with a dispute, but only to the extent that the officers claim is successful.
|
|
|
|
Modified the CIC definition to reflect current market terms and Company ownership (see CIC Agreements Key Terms on page 70 for the new
definition).
|
|
|
|
Modified the Good Reason definition to:
|
|
|
|
Expressly provide that a diminution of duties includes a diminution of duties as a result of the Company no longer being a publicly traded corporation following
the CIC, and
|
|
|
|
Include relocation of the executives principal place of employment to a location more than 50 miles from the executives principal place of employment
immediately prior to the CIC.
|
|
|
Approved long-term incentive awards to eligible participants in the form of time-based restricted stock units. The Compensation Committee determined that the
Company was not able to establish meaningful long-term performance metrics for the 2015-2017 performance cycle until the financial planning in connection with the separation was completed. The Compensation Committee also determined that it was
appropriate to provide equity grants with a strong retention incentive, because of the need to keep management in place and fully focused on the Company during the separation, and the Compensation Committee recognized the limited retention value of
employees outstanding long- term incentive awards. Therefore, the Compensation Committee determined that time-based restricted stock units were an appropriate form of long-term incentive award for the 2015 transition year.
|
|
|
Directed management to apply the concentration approach to outstanding equity awards in the separation, whereby employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
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AWI 2016 Proxy Statement
|
|
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
|
|
outstanding stock options, RSUs and PSUs will be aligned with the stock of their employer company in the separation. Upon the date of the separation, outstanding equity awards held by
continuing Company employees and directors were adjusted to increase the number of shares, and decrease the applicable per share exercise price of stock options, proportionately to take into account the separation.
|
|
|
Finally, during 2015 and into 2016, the Compensation Committee focused on establishing separate compensation plan designs for each of the ceilings and flooring
businesses appropriate to those businesses post-separation. During this period, the Compensation Committee:
|
|
|
|
Developed a strategic framework for long-term value creation and linkage between pay and performance, both over the short-term and the long-term.
|
|
|
|
Designed the 2016 short-term incentive program and determined free cash flow (FCF) to be an appropriate performance metric against which to measure
performance in the post-separation environment.
|
|
|
|
Approved a full year 2016 FCF target of $91 million and established a corresponding payout factor for the short-term plan.
|
|
|
|
Developed a new long-term equity incentive (2016 LTI) framework with the explicit objective of generating superior total shareholder returns (TSR).
|
|
|
|
Established that our new senior leadership team would receive their 2016 LTI in 100% PSU. Before 2015, the Company historically granted PSUs that vested based on
the achievement of ROIC over a three-year period.
|
|
|
|
On April 11, 2016, the Compensation Committee granted PSUs to the most senior executive tier, which will vest based on achievement of absolute total shareholder
return (Absolute TSR - 75% of the award) and free cash flow (FCF - 25% of the award), which the Compensation Committee believes creates the desired focus on generating total shareholder return and closely aligns
managements
|
|
|
interests with those of the Companys shareholders. The 2016 LTI awards are designed to focus on long-term shareholder value creation through the execution on the Companys
post-separation strategic plan. The Compensation Committee believes that these grants, following consummation of the separation of AFI, reinforce and provide increased incentives for the execution of the Companys three-year strategic plan and
the creation of additional value-enhancing initiatives. Further details are outlined in the Companys current report on Form 8-K filed with the SEC on April 13, 2016.
|
|
|
|
Imposed post-vesting holding requirements for our NEOs on amounts payable above target in our 2016 performance-based equity grants.
|
|
|
Made recommendations to the Board regarding the new senior leadership team of the Company and approved related compensation changes.
|
|
|
Renewed its engagement with Towers Watson as the Compensation Committees independent consultant.
|
The table below summarizes TDC paid or awarded to our NEOs during 2015. This table is not intended to be a substitute for the Summary Compensation Table
(SCT) or Grants of Plan-Based Awards Table (GPBAT). Base salary reflects the total salary paid for 2015. 2015 MAP awards and LTIP awards are reflected in the SCT and GPBAT. LTIP awards represent an
incentive for future performance, not current cash compensation, and are at risk of forfeiture.
2015 NEO TDC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
2015
Salary $
|
|
|
2015
Final
MAP $
|
|
|
2015
LTIP $
(1)
|
|
|
TDC $
|
|
Mr. Espe
|
|
|
1,009,401
|
|
|
|
1,621,100
|
|
|
|
3,150,000
|
|
|
|
5,780,501
|
|
Mr. Schulz
|
|
|
473,800
|
|
|
|
518,820
|
|
|
|
690,000
|
|
|
|
1,682,620
|
|
Mr. Grizzle
|
|
|
496,558
|
|
|
|
424,560
|
|
|
|
874,000
|
|
|
|
1,795,118
|
|
Mr. Maier
|
|
|
485,725
|
|
|
|
670,310
|
|
|
|
855,000
|
|
|
|
2,011,035
|
|
Mr. Hershey
|
|
|
443,925
|
|
|
|
388,800
|
|
|
|
605,600
|
|
|
|
1,438,325
|
|
(1)
|
Amounts represent the aggregate grant date fair value for long-term incentive equity awards granted in 2015, as calculated under the Financial Accounting
Standards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AWI 2016 Proxy Statement
|
|
|
|
45
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
|
Boards Accounting Standards Codification Topic 718. Under ASC Topic 718, the grant date fair value is calculated using the closing market price of our Common Stock on the
date of the grant.
|
Consideration of 2014 Advisory Shareholder Vote on Executive Compensation
At our 2011 annual meeting, our shareholders expressed a preference that advisory votes on executive compensation occur every three years. In accordance with this
vote, the Board implemented an advisory vote on executive compensation every three years until the next required vote on the frequency of shareholder votes on the compensation of executives. That vote is scheduled to occur at the 2017 annual
meeting. Our most recent advisory shareholder vote on executive compensation took place at the 2014 annual meeting.
The Board and the Compensation
Committee appreciate and value the views of our shareholders. In considering the results of the 2014 favorable (97%) advisory vote on executive compensation, the Compensation Committee noted our current executive compensation program has been
effective in implementing our stated compensation philosophy and objectives.
The Compensation Committee recognizes executive pay practices and notions
of sound governance principles continue to evolve. While no specific changes were implemented as a result of the vote, the Compensation Committee intends to continue to pay close attention to ongoing trends and invites our shareholders to
communicate any concerns or opinions on executive pay directly to the Compensation Committee or the Board. Please refer to COMMUNICATION WITH THE BOARD on page 10 for further information. As indicated above, the Compensation Committee
has redesigned the 2016 short-term and long-term incentive compensation plans to support our post-separation business plan.
PHILOSOPHY AND OBJECTIVES OF OUR EXECUTIVE COMPENSATION PROGRAM
Our long-term success and growth depend on highly capable global leaders with the experience and skills to deliver our strategy in a volatile and changing market
environment. Thus, our executive compensation programs are designed to attract, motivate and retain those high-quality leaders. Generally, the same principles that apply to our NEOs also apply to the compensation of our salaried employees. In
developing and maintaining our executive compensation program, the Compensation Committee focuses on the following key objectives:
|
|
Align executive interests with shareholders interests.
|
|
|
Create a strong link between pay and performance by placing a significant portion of compensation at risk based on performance against
pre-established goals.
|
|
|
Structure sufficiently competitive compensation packages globally, to enable access to high-quality executives in a highly competitive talent environment.
|
|
|
As a special focus for 2015, provide incentives to keep management in place and fully focused on the Company during the separation process.
|
HOW WE MAKE COMPENSATION DECISIONS
The Compensation Committee is responsible for executive compensation program design and the decision-making process relative to NEOs specifically, and broadly, as these programs apply to other senior leaders and
participating employees. The Compensation Committee solicits input from the independent members of the Board, the CEO, other members of management, and its independent compensation consultant to assist it with its responsibilities. The following
summarizes the roles of each of the key participants in the executive compensation decision-making process.
|
|
|
|
|
|
|
|
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|
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46
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|
AWI 2016 Proxy Statement
|
|
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
Roles of Key Participants
|
|
|
Compensation Committee
|
|
Sets the philosophy and principles that guide
the executive compensation program
Oversees the design of our executive compensation programs in context of our culture, competitive
practices, legal and regulatory landscape, and governance trends
Reviews and approves short- and long-term incentive compensation design, including performance goals and the reward consequences for delivering above or below target performance
Reviews and approves corporate goals
and individual objectives relevant to the compensation of the CEO, evaluates the CEOs performance relative to those goals and objectives, and recommends CEO compensation to be ratified by the independent directors based on the
evaluation
Oversees the
evaluation of the other executive officers and approves their compensation in collaboration with the CEO
|
Independent Members of the Board
|
|
Participate in the performance assessment process for the CEO
Review and ratify CEO compensation
decisions, including base salary, MAP, and LTIP awards
|
Committee Consultant Towers Watson
|
|
Provides analysis, advice and recommendations with regard to executive
compensation
Attends
Compensation Committee meetings, as requested, and communicates between meetings with the Compensation Committee Chair
Advises the Compensation Committee on market trends, regulatory issues and developments and how they may
impact our executive compensation programs
|
CEO
|
|
Provides input to the Compensation Committee on senior executive performance
and compensation recommendations
|
|
|
|
|
|
|
|
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AWI 2016 Proxy Statement
|
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|
47
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
Independent Compensation Consultant
In July 2015, the Compensation Committee renewed its engagement of Towers Watson as its independent consultant on executive compensation matters.
Towers Watson serves as our Pension Plan Actuary in Canada (an arrangement that has been in place for several years, prior to Towers Watson becoming the Compensation Committees consultant) and typical actuary
annual fees are $220,000. We also purchase select compensation and HR survey data from the firm. Towers Watson does not perform any other services for the Company. At the request of the Compensation Committee, in addition to providing general
executive compensation advice, Towers Watson performed the following services during 2015:
|
|
Advised on the design considerations with respect to the 2015 MAP and the 2015 LTIP, to ensure appropriate linkage between short- and long-term performance and
pay.
|
|
|
Advised on the design considerations with respect to the 2016 short-term and long-term incentive program, to ensure appropriate linkage between short- and
long-term performances and pay in a post-separation business environment.
|
|
|
Advised on various questions related to the separation.
|
|
|
Advised the Compensation Committee on setting the CEOs compensation.
|
The Compensation Committee determined the work of Towers Watson did not raise any conflicts of interest in 2015. In making this assessment, the Compensation Committee considered the independence factors enumerated
in Rule 10C-1(b) under the Exchange Act and corresponding rules of NYSE, including the fact Towers Watson provides limited other services to us, the level of fees
received from us as a percentage of Towers Watsons total revenue, policies and procedures employed by Towers Watson to prevent conflicts of interest, and whether the individual Towers
Watson advisors to the Compensation Committee own any shares of Common Stock or have any business or personal relationships with members of the Compensation Committee or our executive officers.
After considering all of the factors required by the NYSE rules and all other factors relevant to Towers Watsons independence from management, the
Compensation Committee has determined Towers Watson is independent.
Use of Competitive Data
In setting NEO compensation, the Compensation Committee considers various types of information, including survey data, peer compensation data, tally sheets, wealth
accumulation analyses and related benchmark information.
Annual Compensation Benchmarking
Annually, the Compensation Committee reviews all components of NEO compensation versus competitive market data.
In general, we target NEO pay to be at or near the 50th percentile of the competitive market, but we may deviate from this target due to an individuals
performance, internal equity with peers situated at similar levels, and to attract the required level of global business knowledge and leadership needed to achieve our strategic objectives.
The principal sources of market data include (combined Competitive Market):
|
|
Survey data (all NEOs), including surveys by AonHewitt and Towers Watson (Market)
|
|
|
Peer Group data (CEO and CFO) (Peer Group)
|
|
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48
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AWI 2016 Proxy Statement
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|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
Peer Group
The Compensation Committee
uses compensation data compiled from a group of peer companies based on a number of pre-established criteria, including business model comparability, company size measured by revenues (one half to two times the Companys revenue) and market
capitalization, global presence, and competition for executive talent and investor capital.
During 2014, the Compensation Committee conducted an
in-depth review of the Peer Group, and the selection criteria. No changes were made to the peer group in 2015.
Our Peer Group consists of 18
manufacturing companies in the building and construction industries and is reflected below:
|
|
|
|
|
Acuity Brands, Inc.
|
|
Louisiana-Pacific Corporation
|
|
Steelcase, Incorporated
|
AO Smith Corp.
|
|
Martin Marietta Materials
|
|
The Valspar Corporation
|
Fortune Brands Home & Security, Inc.
|
|
Masco Corporation
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|
Universal Forest Products, Inc.
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Herman Miller, Incorporated
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|
Mohawk Industries, Inc.
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USG Corporation
|
Leggett & Platt, Inc.
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Nortek, Inc.
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|
Vulcan Materials Company
|
Lennox International Inc.
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|
Owens Corning
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|
W. R. Grace & Company
|
We anticipate that our Compensation Committee will evaluate the composition of our peer group in 2016, taking into
consideration the impact of the separation of AFI.
Tally Sheets and Wealth Accumulation Analyses
The Compensation Committee uses tally sheets and wealth accumulation analyses when evaluating compensation-related decisions for each NEO.
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Tally sheets provide historic information on each executives equity and non-equity compensation, and other compensation such as potential payments upon
termination of employment.
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Wealth accumulation analysis assesses the total Armstrong-specific wealth that could be earned by each NEO given certain stock price assumptions.
|
Compensation Mix
To facilitate the link between NEO pay and company performance, in a typical year a significant amount of TDC is performance-based and at risk. In 2015, the Compensation Committee granted RSUs, as the
Compensation Committee determined
that it was appropriate to provide equity grants with a strong retention incentive, because of the need to keep management in place and fully focused on the Company during the separation, and
because of the difficulty of setting meaningful long-term performance metrics in the transition period around the separation.
In a return to our more
typical practices, in 2016, NEOs received 100% PSUs, as more fully described below.
Typically, 81% of our CEOs target TDC and 68% of the average
target TDC of our other NEOs is performance-based and at risk. The following chart shows the 2015 compensation mix, consisting of base salary, performance-based MAP, and time-based RSUs as the LTI grants.
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|
AWI 2016 Proxy Statement
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49
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
ELEMENTS, CHARACTERISTICS & OBJECTIVES OF OUR EXECUTIVE COMPENSATION
Elements, Objectives and Key 2015 NEO Actions
|
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Type
|
|
Compensation
Elements
|
|
Objectives
|
|
Key 2015 NEO Actions
|
Performance-Based
|
|
Long-Term Incentive (LTIP)
|
|
Promotes long- term value-creation for our
shareholders, and fosters retention, by rewarding execution and achievement of goals linked to our longer term strategic initiatives and cost of capital
Target opportunity generally set at Peer Group and/or Market median
In 2015, the Compensation Committee
provided equity grants with a strong retention incentive, because of the need to keep management in place and fully focused on the Company during the separation. The Compensation Committee recognized the limited retention value of employees
outstanding long-term incentive awards and the difficulty of establishing meaningful long-term performance metrics until the financial planning in connection with the separation was completed.
In a return to our more typical
practice, in 2016, our senior leadership team received 100% PSUs.
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NEOs received RSU awards with values ranging
from 140% to 312% of base salary
2013-2015 PSU award paid out at 57% of target
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Annual Incentive (MAP)
|
|
Provides an annual incentive opportunity for
achieving financial results based on performance goals tied to our annual operating plan
Drives EBITDA performance
Awards tied to Company, business unit and individual performance, including leadership
behaviors
Target
opportunity generally set at Peer Group and/or Market median
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NEOs received MAP payments ranging from 114% to 184% of target
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Fixed
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Base Salary
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|
Provides reasonable and market competitive
fixed pay reflective of an executives role, responsibility and individual performance
Generally set at Peer Group and/or market median
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NEOs received merit increases effective April 1, 2015
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Benefits
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Standard range of health, welfare, and
retirement benefits generally similar to those provided to other salaried employees, except that executives:
are eligible to receive enhanced Company-paid long-term disability benefits;
are eligible for non-qualified
retirement savings benefits
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Limited Perquisites
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|
Very limited perquisites or personal
benefits
Personal
financial counseling at a cost generally less than $4,500 per NEO
Executive physicals at a cost typically less than $5,000 per NEO
Executive Long-Term Disability at a cost generally less than $5,000 per NEO
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50
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|
AWI 2016 Proxy Statement
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|
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
Alignment of Compensation Elements and Objectives
The following table illustrates how our executive compensation elements align with our compensation objectives. As mentioned above, the objective of the RSUs granted in 2015 was primarily for purposes of retention.
In normal years, our LTIP is based on various financial performance metrics incorporating a strong pay for performance linkage
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Executive Compensation Element
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Attract
Talented
Employees
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Align
Management
and
Shareholder
Interests
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Pay for
Performance
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Motivate and
Retain
Management
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Base Salary
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ü
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ü
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Annual Incentive (MAP)
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|
ü
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ü
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ü
|
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|
ü
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|
Long-Term Incentive (LTIP)
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ü
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ü
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ü
|
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ü
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2015 COMPENSATION DESIGN AND OUTCOMES
Base Salary
The Compensation Committees decision on 2015 base salaries was largely driven by the
competitiveness of each NEOs base salary compared to the Competitive Market; increases were effective April 1, 2015. The table below represents the base salary rate as of December 31. This information differs from the SCT, which reflects
the total base salary received for the year.
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Name
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|
2014
Salary $
|
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|
2015
Salary $
|
|
|
Change in
Base
Salary
|
|
Mr.
Espe
(1)
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|
1,009,400
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1,009,400
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Mr. Schulz
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|
460,000
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|
478,400
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4.0%
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|
Mr. Grizzle
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|
485,630
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|
500,200
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3.0%
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Mr. Maier
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|
475,000
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489,300
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3.0%
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Mr. Hershey
|
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|
432,600
|
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|
447,700
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|
3.5%
|
|
(1)
|
Mr. Espe did not receive an increase for 2015.
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Management Achievement Plan
MAP awards provide an annual incentive opportunity for achieving financial results based on performance goals tied to annual operating plan.
Each NEOs target MAP opportunity (expressed as a percent of base salary) is based on role responsibility, alignment with similar positions internally, and external Competitive Market. Actual payout will vary with
actual business performance relative to performance targets.
MAP awards were determined based on the following formula, measures and weightings. The
Compensation Committee approves these factors at the beginning of each fiscal year. Additional details follow below the table.
2015 MAP Design
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AWI 2016 Proxy Statement
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51
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
2015 Target MAP Opportunity
2015 Target MAP opportunities (expressed as a percentage of base salary) for NEOs were as set forth in the table below. There were no changes to these targets when expressed as a percentage of base salary from
2014.
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Name
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|
Target MAP %
Opportunity
|
|
|
Target MAP
$
|
|
Mr. Espe
|
|
|
110%
|
|
|
|
1,110,340
|
|
Mr. Schulz
|
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|
75%
|
|
|
|
355,350
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|
Mr. Grizzle
|
|
|
75%
|
|
|
|
372,418
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|
Mr. Maier
|
|
|
75%
|
|
|
|
364,294
|
|
Mr. Hershey
|
|
|
60%
|
|
|
|
266,355
|
|
2015 MAP Performance Metrics and Weighting
The Compensation Committee selected EBITDA (for both the consolidated as well as at the business unit level) as the 2015 MAP performance metric. The Compensation Committee determined that EBITDA aligned to key
elements of our 2015 operating plan and financial plans and is an appropriate measure of operating performance (pre-financing and pre-tax).
In establishing the 2015 EBITDA target of $352 million and corresponding payout factor, the Compensation Committee
conducted a detailed analysis that took into account a number of factors, including analyst expectations, a review of actual historic performance, consideration of achievability and sensitivity analysis, an analysis of the percent of incremental
EBITDA to be provided as a target for participants, the complexity and timing of the separation of AFI, as well an analysis of the external context, such as expected peer group performance and broader market performance.
Based on this in-depth analysis, the Compensation Committee determined that this target represented a significant degree of difficulty. In addition, planned and
necessary increased SG&A spending in AFP and non-cash pension related charges contributed to a challenging goal.
The final MAP payout factor was a
result of record EBITDA in our ABP business and above target profitability in the flooring business.
For 2015, the Compensation Committee
established the following performance ranges and associated payout ranges. The Companys consolidated and business unit performance are converted to a corresponding payout factor on a straight line basis between Threshold and Target and between
Target and Maximum. MAP payout factors are capped at 200%.
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EBITDA $ (in millions)
|
|
|
EBITDA Performance as % of Target
|
|
|
Payout
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
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|
Maximum
|
|
|
Threshold
|
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|
Target
|
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Maximum
|
|
Consolidated
|
|
|
281.6
|
|
|
|
352.0
|
|
|
|
422.4
|
|
|
|
80
|
%
|
|
|
100
|
%
|
|
|
120
|
%
|
|
|
50
|
%
|
|
|
100
|
%
|
|
|
200
|
%
|
AFP
|
|
|
80.2
|
|
|
|
100.3
|
|
|
|
120.4
|
|
|
|
80
|
%
|
|
|
200
|
%
|
|
|
120
|
%
|
|
|
50
|
%
|
|
|
100
|
%
|
|
|
200
|
%
|
ABP
|
|
|
273.7
|
|
|
|
342.1
|
|
|
|
410.5
|
|
|
|
80
|
%
|
|
|
300
|
%
|
|
|
120
|
%
|
|
|
50
|
%
|
|
|
100
|
%
|
|
|
200
|
%
|
|
|
|
|
|
|
|
|
|
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|
52
|
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|
AWI 2016 Proxy Statement
|
|
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
The MAP opportunity for NEOs with primary responsibilities at the Corporate level is weighted 100% to consolidated
results. NEOs with business unit responsibilities are weighted 30% to consolidated results and 70% to the individual business unit.
|
|
|
|
|
|
|
|
|
Weighting
|
|
Consolidated
|
|
|
Business Unit
|
|
Mr. Espe
|
|
|
100%
|
|
|
|
|
|
Mr. Schulz
|
|
|
100%
|
|
|
|
|
|
Mr. Grizzle
|
|
|
30%
|
|
|
|
70% (ABP)
|
|
Mr. Maier
|
|
|
30%
|
|
|
|
70% (AFP)
|
|
Mr. Hershey
|
|
|
100%
|
|
|
|
|
|
Individual Performance
The Board and the Compensation Committee considered individual performance when finalizing MAP awards for the CEO and other NEOs and decided not to make individual
performance adjustments in determining the final 2015 MAP awards. For MAP awards intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code, any individual performance adjustment cannot
exceed the maximum level determined by EBITDA performance.
2015 Final Performance and Payout Factors
Our 2015 EBITDA performance resulted in a 146% MAP payout factor at the consolidated level.
Final performance and payout is determined by adding incentive expense to targets as well as to actual performance to reflect performance excluding accruals for incentive compensation.
Further details are shown in the table below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
2015
Target
$M
|
|
|
2015
Actual
$M*
|
|
|
Performance
%
|
|
|
Payout
%
|
|
Consolidated
|
|
|
352.0
|
|
|
|
378.0
|
|
|
|
107%
|
|
|
|
146%
|
|
AFP
|
|
|
100.3
|
|
|
|
114.8
|
|
|
|
114%
|
|
|
|
200%
|
|
ABP
|
|
|
342.1
|
|
|
|
344.7
|
|
|
|
101%
|
|
|
|
100%
|
|
*
|
Please refer to Annex A for a reconciliation of Adjusted EBITDA to U.S. GAAP. We achieved full year adjusted EBITDA of $378 million after giving effect to the specific items that
the Compensation Committee pre-determined in February 2015 were eligible for exclusion from the achievement calculation.
|
2015 Final MAP Awards
The Compensation Committee determined the final 2015 MAP payouts by multiplying the NEOs target MAP amount by the final weighted payout factors, as outlined below.
For NEOs who were weighted 100% to consolidated results, the Compensation Committee approved a final payout factor of 146%.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Target
MAP $
|
|
|
Payout
Factor
|
|
|
2015 Final
MAP
Award $
|
|
Mr. Espe
|
|
|
1,110,340
|
|
|
|
146
|
%
|
|
|
1,621,100
|
|
Mr. Schulz
|
|
|
355,350
|
|
|
|
146
|
%
|
|
|
518,820
|
|
Mr. Hershey
|
|
|
266,355
|
|
|
|
146
|
%
|
|
|
388,880
|
|
For Messrs. Grizzle and Maier, who were weighted 30% to consolidated results and 70% to Business Unit results, the
Compensation Committee approved a final payout factor of 114% and 184%, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Target
MAP $
|
|
|
Weighted
Cons.
Payout
Factor
(wtd. 30%)
|
|
|
Weighted
Business
Unit
Payout
Factor
(wtd. 70%)
|
|
|
2015
Final
MAP
Payout
Factor%
|
|
|
2014
Final
MAP
Award $
|
|
Mr. Grizzle
|
|
|
372,418
|
|
|
|
146%
|
|
|
|
100%
|
|
|
|
114%
|
|
|
|
424,560
|
|
Mr. Maier
|
|
|
364,294
|
|
|
|
146%
|
|
|
|
200%
|
|
|
|
184%
|
|
|
|
670,310
|
|
Long Term Incentive Plan
The goal of the long-term incentive plan is to provide equity-based long-term incentive awards that link management interests to shareholder returns and focus management on our long-term performance.
In determining long-term incentive award opportunity for the CEO and other NEOs, the Board and the Compensation Committee generally consider a number of factors,
including Competitive Market, internal equity, and cost (dilution and accounting cost) and also take into consideration tally sheet and wealth accumulation analyses.
Long-term incentive plan awards for a given year are typically made two business days following the release of our prior fiscal years fourth quarter and full year financial results. This allows sufficient
time
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|
AWI 2016 Proxy Statement
|
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|
53
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
for the market to absorb the announcement of earnings and current year performance guidance.
Historically the Compensation Committee awarded a combination of stock options and PSUs. In 2015, our long-term incentive awards for NEOs and other eligible
employees consisted of 100% time-vested RSUs to maximize their value as a retention incentive in connection with the separation, in consideration of the criticality of retaining key employees during the separation process. The Compensation Committee
recognized the limited retention value of employees outstanding long-term incentive awards. The Compensation Committee also determined that it would be difficult for the Company to establish meaningful long-term performance metrics until the
financial planning in connection with the separation was completed.
In anticipation of the separation, the Compensation Committee did not make
long-term incentive awards in 2016 on the regular schedule in February 2016. Instead, the 2016 long-term incentive awards were made following the separation in April 2016.
On April 11, 2016, the Compensation Committee granted PSUs to the senior leadership team, which will vest based on achievement of Absolute TSR (75% of the award) and FCF (25% of the award), which the Compensation
Committee believes creates the desired focus on generating total shareholder return and closely aligns managements interests with those of the Companys shareholders. The 2016 LTI awards are designed to focus on long-term shareholder
value creation through the execution on the Companys post-separation strategic plan. The Committee believes that these grants, following consummation of the separation of AFI, reinforce and provide increased incentives for the execution of the
Companys three-year strategic plan and the creation of additional value-enhancing initiatives. Further details are outlined in the Companys current report on Form 8-K filed with the SEC on April 13, 2016.
2015 Target LTIP
The Compensation Committee annually
determines LTIP target opportunity (expressed as a percent of base salary) based on role responsibility, alignment with similar positions internally, and external Competitive Market, as well as a review of tally sheets and wealth accumulation
analyses.
The respective target percentages for LTIP grants to our NEOs in 2015 and the resulting Grant Date Fair Value were as
set forth in the table below. LTIP targets did not change for our NEOs , with the exception of Mr. Schulz, whose 2015 LTIP target was increased from 130% to 150% to more closely align to market median.
|
|
|
|
|
|
|
|
|
Name
|
|
2015 LTIP Target
as % of Base
Salary
|
|
|
2015 LTIP
Grant Date Fair
Value
$
(1)
|
|
Mr. Espe
|
|
|
312%
|
|
|
|
3,150,000
|
|
Mr. Schulz
|
|
|
150%
|
|
|
|
690,000
|
|
Mr. Grizzle
|
|
|
180%
|
|
|
|
874,100
|
|
Mr. Maier
|
|
|
180%
|
|
|
|
855,000
|
|
Mr. Hershey
|
|
|
140%
|
|
|
|
605,600
|
|
(1)
|
Amounts represent the grant date fair value for the long-term incentive equity award granted in February 2015, as calculated under the Financial Accounting Standards Boards
Accounting Standards Codification Topic 718. Under ASC Topic 718, the grant date fair value is calculated using the closing market price of our shares of Common Stock ($55.64) on the date of the grant (February 24, 2015).
|
ADDITIONAL INFORMATION REGARDING OUR COMPENSATION PROGRAMS
Qualified and Non-qualified Defined Benefit Pension Plans
Our NEOs do not participate in the Companys
qualified defined benefit pension plan, the Retirement Income Plan (RIP), which was closed to newly hired employees after January 1, 2005.
Qualified Defined Contribution Savings Plan and Non-qualified Deferred Compensation Plan
For salaried
employees who do not participate in the RIP, we provide a 401(k) match of 100% on the first 4% of employee contributions and a 50% match on the next 4% of employee contributions, up to a maximum company match of $18,000 for 2015. All NEOs are
eligible to participate in this program.
We offer an unfunded, nonqualified deferred compensation plan, the Armstrong Nonqualified Deferred
Compensation Plan (NQDCP). This plan is to restore Company contributions that would be lost due to Internal Revenue Code limits on compensation that can be taken into account under our tax-qualified 401(k) and to allow participants to
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54
|
|
|
|
AWI 2016 Proxy Statement
|
|
|
COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
voluntarily elect to defer some portion of base salary and MAP until a future date. Participants receive a Company
match identical to the 401(k) company match up to a maximum contribution of 6% of eligible earnings. All NEOs are eligible to participate in this program.
Bonus Replacement Retirement Plan
The Bonus Replacement Retirement Plan (BRRP) was established to
allow executives to defer a portion of income (up to $20,000) into a qualified, tax-deferred plan. The Company will make a non-elective contribution to the executives account, and a corresponding reduction to the amount of the MAP payment. The
executive may choose from the same investment options provided under the 401(k) plan.
In anticipation of the separation, the Company discontinued the
BRRP and merged the assets of the plan into each participants 401(k) plan account.
Severance in Absence of Change in Control
As briefly described earlier in the CD&A under the 2015 Executive Compensation Highlights on page 43, during a review of the Companys
severance practices in February 2015, the Compensation Committee revised severance benefits for Messrs. Espe, Schulz, Grizzle and Hershey, to more closely align with competitive practices and to create internal equity among participants.
Mr. Espes employment agreement was amended to provide severance payment equal to 200% of base salary plus target annual incentive under the Companys MAP. In addition, the amendment states that a termination of employment under the
employment agreement will not result in accelerated vesting of outstanding equity awards. Mr. Espe will be subject to a two-year non-competition and non-solicitation agreement following his termination of employment. Please refer to the 2011
Proxy Statement for a summary of Mr. Espes employment agreement. The amendment was disclosed in the Companys current report on Form 8-K filed with the SEC on March 8, 2015.
Under the Companys severance plan, which applied to Mr. Maier in the absence of a Change in Control event and in the absence of an employment agreement,
severance benefits for executive participants provide a minimum of 26 weeks and a maximum of 52 weeks of base salary based on years of service.
In connection with the separation of AFI, the Company announced an enhanced severance program in March 2015, which
will continue for one year after the separation, April 1, 2017. The severance benefits for executive participants under the enhanced program provide a minimum of 39 weeks and a maximum of 52 weeks of base salary based on years of service.
Change in Control Agreements
We provide
individual change in control (CIC) agreements to the NEOs to establish a competitive level of financial security in the event of a CIC. In 2015, the Compensation Committee determined the level of CIC benefits for the NEOs based on
research conducted by Skadden and an assessment of contemporary market practices.
The Compensation Committee made revisions to the existing agreements
to update the agreements. The changes to the agreements were described earlier in this proxy statement under the 2015 Executive Compensation Highlights section on page 43.
None of the CIC agreements provides for tax gross-ups under Sections 280G and 4999 of the Internal Revenue Code. For more information regarding our NEO CIC agreements, please refer to CIC Agreements
Key Terms section on page 70.
Stock Ownership Guidelines
The Compensation Committee instituted stock ownership guidelines for our NEOs in August 2010 in an effort to ensure that our NEOs have significant long-term value creation tied to stock price appreciation.
Ownership requirements and progress toward their achievement are reviewed annually as part of the compensation planning process. A significant percentage of each NEOs compensation is directly linked to our stock price appreciation. In 2016,
the Compensation Committee updated the guidelines to require retention of 50% of net shares acquired upon any future vesting or exercise of equity awards until the ownership guidelines are met.
The stock ownership guidelines for our NEOs are calculated as a fixed number of shares using a required ownership multiple, the executives annualized base
salary as of a certain date, and the stock price as of a fixed date. The required
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AWI 2016 Proxy Statement
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55
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COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
ownership multiple for our CEO is six times annual base pay and is three times annual base pay for our other NEOs.
For purposes of the stock ownership guidelines, we include direct ownership of shares and stock units held in employee plans. Stock options are
included to the extent they are in-the-money. PSUs are not included in determining whether an executive has achieved the ownership levels.
The stock ownership guidelines required achievement of the ownership multiple within five years from the date of adoption of the guidelines for Mr. Espe since
he joined the Company prior to the adoption of the guidelines, and within five years from date of hire or promotion into the role for Messrs. Schulz, Grizzle, Maier and Hershey.
The Compensation Committee last reviewed the NEOs progress toward meeting the ownership requirements in February 2015. As of the date of the review, Messrs. Espe and Grizzle had met their ownership
requirements.
Recoupment Policy
Our
Compensation Committee has the ability to exercise discretion and take action to recoup certain stock-based awards from a plan participant in the event his or her employment is terminated for willful, deliberate or gross misconduct, as, for example,
if we were required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws as a result of such participants misconduct which led to his or her termination of
employment, or if a participant engages in injurious conduct after termination of employment. To the extent that in the future the SEC adopts rules for clawback policies that require changes to our policies, we will revise our policies as
appropriate.
Prohibition on Hedging and Derivative Trading
All members of our Board and senior management, including our NEOs and certain other employees, are required to clear any transaction involving Company securities with our General Counsels office prior to
entering into such transaction.
By policy, we prohibit derivative transactions in our Company securities, including:
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Trading in puts, calls, covered calls, or other derivative products involving Company securities.
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Engaging in any hedging or monetization transaction with respect to Company securities.
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Holding Company securities in a margin account or pledging Company securities as collateral for a loan.
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Beginning in 2011, we permitted senior management to utilize stock trading plans that comply with Rule 10b5-1 of the Exchange Act. All such plans are subject to
our pre-approval, and the ability to enter into such plans remains subject to policy prohibitions on trading while in possession of material non-public information.
Assessment of Risk
We monitor the risks associated with our compensation program on an ongoing basis.
In addition, we are committed to performing formal assessments on a periodic basis. At the conclusion of the most recent analysis (conducted in 2014) of our compensation programs and associated risks, it was the assessment of the Compensation
Committee, that our compensation programs are structured and operated with an appropriate balance of risk and reward and, by their design, do not encourage executives to take unnecessary, excessive, or inappropriate risks and do not create risks
reasonably likely to have a material adverse effect on the Company.
Tax Deductibility of Compensation
The Internal Revenue Code imposes a $1 million limit on the amount a public company may deduct for compensation paid to the Companys CEO or any of the
Companys three other most highly compensated executive officers (other than the CFO) who are employed as of the end of the year.
This limitation
does not apply to compensation that meets the Internal Revenue Code requirements for qualifying performance-based compensation (i.e., compensation paid only if the individuals performance meets pre-established objective goals
based on performance criteria approved by shareowners).
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56
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AWI 2016 Proxy Statement
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COMPENSATION DISCUSSION AND ANALYSIS
(CONTINUED)
Our Compensation Committee retains discretion to determine whether to structure our annual and long-term incentive
compensation plans for the NEOs to maximize the tax deductibility of the payments as qualifying performance-based compensation under Section 162(m) of the Internal Revenue Code to the extent practicable. The Compensation Committee
considers both tax and accounting treatment in establishing our
compensation program. The Compensation Committee retains discretion to authorize compensation arrangements that are not fully tax deductible, as, for example, may be appropriate to attract and
retain global business leaders who can drive financial and strategic growth objectives that maximize long-term shareholder value or, as was the case in 2015, to provide significant retention incentives.
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AWI 2016 Proxy Statement
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57
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ANNUAL REPORT ON FORM
10-K
Our Annual Report to Shareholders, including financial statements, is being furnished simultaneously with this proxy
statement to all shareholders of record as of the Record Date. A copy of our Annual Report and Form 10-K for the year ended December 31, 2015, including financial statements, but excluding the financial statement schedules and most exhibits,
will be provided without charge to shareholders upon written request to: Armstrong World Industries, Inc., Investor Relations, P.O. Box 3001, Lancaster, PA 17604.
Our Annual Report is also available at www.proxyvote.com, or www.armstrongceilings.com Investors SEC
Filings 10-K. The Form 10-K will include a list of exhibits to the Form 10-K. Copies of exhibits will be furnished to shareholders upon written request and upon our receipt of payment of reproduction and mailing expenses.
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76
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AWI 2016 Proxy Statement
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INCORPORATION BY
REFERENCE
To the extent that this proxy statement has been or will be specifically incorporated by reference into any other
filing of the Company under the Securities Act of 1933 or the Exchange Act, as amended, the sections of this proxy statement
entitled Report of the Audit Committee (to the extent permitted by the rules of the SEC) and Compensation Committee Report shall not be deemed to be so incorporated,
unless specifically provided otherwise in such filing.
A list of shareholders entitled to vote at the Annual Meeting will be available for examination by shareholders at the Annual Meeting.
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AWI 2016 Proxy Statement
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77
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ANNEX A to Armstrong World Industries, Inc. 2016 Proxy Statement
To supplement its consolidated financial statements presented in accordance with accounting principles generally accepted in the United States
(GAAP), the Company provides additional measures of performance adjusted to exclude the impact of foreign exchange, restructuring charges and related costs, impairments, the non-cash impact of the U.S. pension plan and certain other gains and
losses. Adjusted figures are reported in comparable dollars using the budgeted exchange rate for 2015. The Company uses these adjusted performance measures in managing the business, including communications with its Board of Directors and employees,
and believes that they provide users of this financial information with meaningful comparisons of operating performance between current results and results in prior periods. The Company believes that these non-GAAP financial measures are appropriate
to enhance understanding of its past performance, as well as prospects for its future performance. A reconciliation of these adjustments to the most directly comparable GAAP measures is included in this release and on the Companys website.
These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.
Dollars are in millions unless otherwise indicated.
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2015
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Adjusted EBITDA
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$
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391
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D&A/Fx*
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(121
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)
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Operating Income, Adjusted
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$
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270
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Non-cash impact of U.S. Pension
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25
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Separation costs
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34
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Cost reduction initiative expenses
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7
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Multilayered Wood flooring duties
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4
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Impairment
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Foreign exchange impact
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13
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Operating Income, Reported
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$
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187
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BUILDING PRODUCTS
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2015
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Adjusted EBITDA
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$
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345
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D&A/Fx
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(70
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)
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Operating Income, Adjusted
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$
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275
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Cost reduction initiative expenses
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7
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Foreign exchange impact
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3
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Operating Income, Reported
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$
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265
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RESILIENT FLOORING
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2015
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Adjusted EBITDA
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$
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73
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D&A/Fx
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(26
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)
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Operating Income, Adjusted
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$
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47
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Cost reduction initiative expenses
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Foreign exchange impact
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5
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Operating Income, Reported
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$
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42
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WOOD FLOORING
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2015
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Adjusted EBITDA**
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$
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39
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D&A/Fx
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(12
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)
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Operating Income (Loss), Adjusted**
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$
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27
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Cost reduction and other charges
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Multilayered Wood flooring duties
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4
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Impairment
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Foreign exchange impact
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4
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Operating Income (Loss), Reported**
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$
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19
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A-1
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UNALLOCATED CORPORATE
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2015
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Adjusted EBITDA
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$
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(66
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)
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D&A/Fx
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(13
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)
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Operating Income (Loss), Adjusted**
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$
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(79
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)
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Non-cash impact of U.S. Pension
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25
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Separation costs
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34
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Foreign exchange impact
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1
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Operating Income (Loss), Reported**
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$
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(139
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)
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CASH FLOW
***
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2015
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Net cash from operations
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$
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204
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Less: net cash (used for) investing
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(102
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)
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Add back (subtract) adjustments to reconcile free cash flow
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Net cash effect from deconsolidation of European Flooring business
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Other
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Free Cash Flow
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$
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102
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*
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Excludes accelerated depreciation associated with cost reduction initiatives reflected below. Actual D&A as reported is; $31.4 million for the three months ended December 31,
2015, $31.3 million for the three months ended December 31, 2014, $118.3 million for the year ended December 31, 2015, and $129.4 million for the year ended December 31, 2014
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**
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Includes a $4 million charge recorded in the second quarter of 2015 resulting from new duty rates assigned by the U.S. Department of Commerce on multilayered wood importers and a
$1 million gain recorded in the second quarter of 2014 related to a refund of previously paid duties on imports of engineered wood flooring.
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***
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Cash flow includes cash flows attributable to European Flooring business.
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A-2
ANNEX B to Armstrong World Industries, Inc. 2016 Proxy Statement
Armstrong World Industries, Inc.
2016 Directors Stock Unit Plan
1. Purpose
The purposes of this 2016 Directors Stock Unit Plan (the
Plan
) are to promote the growth and profitability of Armstrong World
Industries, Inc. (the
Company
) by increasing the mutuality of interests between directors and the shareholders of the Company.
The Plan is a successor to the 2008 Directors Stock Unit Plan, as amended and restated (the
2008 Plan
). No additional grants will be made under the 2008 Plan after the Effective Date of this
Plan. Outstanding grants under the 2008 Plan shall continue in effect according to their terms, consistent with the 2008 Plan.
2. Definitions
The following terms shall have the meanings shown:
2.1
2008 Plan
shall have the meaning ascribed to the term in Section 1.
2.2
Affiliate
shall mean, with respect to any Person, any other Person that, at any time that a determination is made
hereunder, directly or indirectly, controls, is controlled by, or is under common control with such first Person. For the purpose of this definition, control shall mean, as to any Person, the possession, directly or indirectly, of the
power to elect or appoint a majority of directors (or other persons acting in similar capacities) of such Person or otherwise to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
2.3
Beneficial Owner
and
Beneficially Own
shall have
the meaning set forth in Rules 13d-3 and 13d-5 promulgated under the Exchange Act or any successor provision.
2.4
Board
shall mean the Board of Directors of the Company.
2.5
Change in Control
of the Company shall be deemed to have occurred if the event set forth in any one of the following
sections shall have occurred:
(a) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty-five percent (35%) or more of the combined voting power of the Companys
then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of subsection (c) below;
(b) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the
date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by the Board or nomination for election by the Companys shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended;
(c) There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation immediately
following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such
B-1
merger or consolidation or, if the Company or the entity surviving such merger is then a subsidiary, the ultimate parent thereof, or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities
acquired directly from the Company or its Affiliates) representing thirty-five percent (35%) or more of the combined voting power of the Companys then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement
for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets immediately following which the individuals
who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred (i) by virtue of the consummation of any transaction or series of integrated transactions immediately
following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of
the assets of the Company immediately following such transaction or series of transactions or (ii) by virtue of the consummation of a spin-off of any business line or business unit of the Company or a sale of (or similar transaction with
respect to) all or substantially all of the assets that comprise a business line or business unit of the Company. The Committee may provide in a grant agreement for another definition of Change in Control, including as necessary to comply with
Section 409A of the Code.
2.6
Committee
shall mean the Nominating and Governance Committee of the Board,
or any other committee designated by the Board to administer the Plan.
2.7
Common Stock
shall mean Common Stock
of the Company.
2.8
Company
shall have the meaning ascribed to the term in Section 1.
2.9
Deferred Payment Date
shall have the meaning set forth in Section 4.3(c).
2.10
Dividend Equivalent
shall mean the right to receive an amount equal to any cash dividend that is paid on a share of
Common Stock underlying a Unit, including regular cash dividends and extraordinary cash dividends.
2.11
Effective
Date
shall have the meaning ascribed to the term in Section 5.14.
2.12
Exchange Act
shall mean
Securities Exchange Act of 1934, as amended.
2.13
Non-Employee Director
shall mean a member of the Board who is
not an employee of the Company or its subsidiaries.
2.14
Participant
shall mean a Non-Employee Director to whom
Units are granted under the Plan.
2.15
Person
shall mean any individual, entity or group, including any
person or group within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision.
2.16
Plan
shall have the meaning ascribed to the term in Section 1.
2.17
Separation from Service
shall mean a separation from service with the Company and its subsidiaries under
Section 409A of the Code.
B-2
2.18
Unit
shall mean a right granted by the Committee pursuant to
Section 4.1 to receive one share of Common Stock as of a specified date, which right may be made conditional upon continued service or the occurrence or nonoccurrence of specified events as herein provided.
3. General
3.1
Administration
.
The Plan may be administered by the Board or, if so delegated, to the Committee. Administration shall be delegable to the extent it does not adversely affect the exemption provided by Rule 16b-3 of the Exchange Act and provided that such delegation
complies with applicable law and applicable stock exchange requirements. To the extent that the Board or Committee administers the Plan, references in the Plan to the Committee shall be deemed to refer to the Board or the Committee, as
applicable.
(a)
Committee Membership
. Unless the Plan is administered by the Board, each member of the Committee shall at
the time of any action under the Plan be a Non-Employee Director within the meaning of Rule 16b-3(b) (or any successor rule) promulgated under the Exchange Act, and to the extent any member of the Committee is not a Non-Employee
Director within the meaning of Rule 16b-3(b) (or any successor rule) promulgated under the Exchange Act, such member shall abstain or recuse himself or herself from such action, provided that, upon such abstention or recusal, the Committee
remains composed of two or more Non-Employee Directors.
(b)
Committee Authority
. The Committee shall have the
authority in its sole discretion from time to time: (i) to make discretionary grants of Units to eligible directors as provided herein; (ii) to prescribe such terms, conditions, limitations and restrictions, not inconsistent with the Plan,
applicable to any grant as deemed appropriate; and (iii) to interpret the Plan, to adopt, amend and rescind rules and regulations relating to the Plan, and to make all other determinations and take all other action necessary or advisable for
the implementation and administration of the Plan. A majority of the Committee shall constitute a quorum, and the action of a majority of the members of the Committee present at any meeting at which a quorum is present, or acts unanimously adopted
in writing without the holding of a meeting, shall be the acts of the Committee. All such actions of the Committee shall be final, conclusive and binding upon the Participant.
(c)
Indemnification
. No member of the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, except in circumstances involving his or her bad faith or willful
misconduct, or for any act or failure to act hereunder by any other member or employee or by any agent to whom duties in connection with the administration of this Plan have been delegated. The Company shall indemnify members of the Committee and
any agent of the Committee who is an employee of the Company, a subsidiary or an affiliate against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of
the Plan, except in circumstances involving such persons bad faith or willful misconduct.
3.2
Eligibility
. A grant of
Units under the Plan may be made to any Non-Employee Director of the Company.
3.3
Common Stock Available under the Plan
.
(a)
Aggregate Limitation
. The aggregate number of shares of Common Stock that may be issued in connection with Units
granted under the Plan shall not exceed 250,000 shares, subject to adjustments pursuant to Section 5.4.
(b)
Individual
Participant Limitation
. For grants made on or after the Effective Date, the maximum grant date value of shares of Common Stock subject to grants of Units made to any Participant during any one calendar year, taken together with any cash fees
earned by such Participant for services rendered during the calendar year, shall not exceed $600,000 in total value. For purposes of this limit, the value of such grants shall be calculated based on the grant date fair value of such grants for
financial reporting purposes.
B-3
(c)
Source of Shares
. Shares of Common Stock issued under the Plan may be authorized but
unissued shares of Common Stock or reacquired shares of Common Stock, including shares purchased by the Company on the open market for purposes of the Plan.
(d)
Share Counting
. If and to the extent any Units granted under this Plan are forfeited, terminated, or otherwise are not paid in full, the shares reserved for such grants shall again be available for
purposes of the Plan. The provisions of this Section 3.3(d) shall apply only for purposes of determining the aggregate number of shares of Common Stock that may be issued under the Plan, but shall not apply for purposes of determining the
maximum number of shares of Common Stock with respect to which grants may be granted to any individual Participant under the Plan.
4. Units
4.1
Grant of Units
. Each Non-Employee Director shall be granted Units under the Plan in accordance with the provisions set
forth below, contingent upon his or her continued service as a director of the Company:
(a)
Annual Grants
. Unless the
Committee determines otherwise, each year, each Non-Employee Director shall be granted a number of Units based on a formula approved by the Committee. The Committee shall establish appropriate terms and conditions for the annual grants.
(b)
Pro-Rated Grants
. In the case of a Non-Employee Director who is elected to the Board other than at the annual meeting of
shareholders, the Committee may pro-rate the amount of the annual grant of Units awarded to such director to correspond to the period of time to be served by the Non-Employee Director between such Non-Employee Directors election and the next
annual meeting of shareholders.
(c)
Discretionary Grants
. Units may also be granted to eligible Non-Employee Directors at
such times, in such amounts, and upon such terms and conditions as the Committee deems appropriate.
4.2
Grant Agreements
.
The grant of Units shall be evidenced by a written agreement executed by the Company and the Participant, stating the number of Units granted and such other terms and conditions of the grant as the Committee may from time to time determine. Units
granted under the Plan shall be made conditional upon the Participants acknowledgement, in writing or by acceptance of the Units, that all decisions and determinations of the Committee shall be final and binding on the Participant, his or her
successors and any other person having or claiming an interest under such Units.
4.3
Standard Terms and Conditions of
Units
. Unless otherwise determined by the Committee, each grant of Units shall be made on the following terms and conditions, in addition to such other terms and conditions as the Committee may prescribe:
(a)
Vesting
. The date on which each Unit shall vest, contingent upon the Participants continued service as a director of the
Company on such date, shall be the first to occur of:
(i) The date of the next annual shareholders meeting;
(ii) The date on which the Participant has a Separation from Service on account of death or total and permanent disability of the Participant
(as determined by the Committee); or
(iii) The date of a Change in Control.
(b)
Payment Date
. Each vested Unit shall be paid upon vesting of the Units in accordance with Section 4.3(d) below, unless the
Participant has made an effective deferral election in accordance with Section 4.3(c) below.
(c)
Deferral Elections
. A
Participant may elect to defer payment of vested Units that will be granted in a designated year, consistent with the requirements of Section 409A of the Code. The deferral
B-4
election may provide for payment upon the first to occur of (i) the date of the Participants Separation from Service for any reason other than cause (as determined by the Committee) or
(ii) a Change in Control that meets the requirements of a a change in the ownership or effective control, or a change in the ownership of a substantial portion of the assets, of the Company under Section 409A of the Code. The
first to occur of (i) or (ii) is referred to as the
Deferred Payment Date
. Any election to defer payment of Units must be made in writing in a form approved by the Committee and must be made prior to January 1 of
the calendar year in which the Units are to be granted to the Participant, or as otherwise permitted under Section 409A of the Code. The Company shall create a bookkeeping account for each Participant who defers Units, and shall credit the
Participants deferred Units to such bookkeeping account.
(d)
Time and Form of Payment
. Vested Units shall be paid in
the form of shares of Common Stock, with one share of Common Stock delivered for each vested Unit, within 60 days after the date of vesting in accordance with Section 4.3(b) or within 60 days after the Deferred Payment Date in accordance with
Section 4.3(c), as applicable.
(e)
Forfeiture of Units
. Upon the effective date of a Separation from Service for
cause, as determined by the Committee, all Units that have not been paid, whether or not vested, shall immediately be forfeited to the Company without consideration or further action being required of the Company or the Participant. Upon the
effective date of a Separation from Service for any reason other than cause, as determined by the Committee, all unvested Units (other than those that vest in accordance with Section 4.4(a)(ii)) shall immediately be forfeited to the Company
without consideration and without further action being required of the Company or the Participant.
(f)
Dividend
Equivalents
. If an award of Units is outstanding as of the record date for determining the shareholders of the Company entitled to receive a cash dividend on its outstanding shares of Common Stock, each Participant shall be entitled to be
credited with Dividend Equivalents with respect to the Participants outstanding Units. Dividend Equivalents will accrue as of the date of the dividend payment and, if applicable, will be credited to a bookkeeping account established by the
Company for the Participant. Dividend Equivalents on unvested Units will accrue and be paid in cash within 60 days after the date of vesting of the underlying Units. Dividend Equivalents on vested Units that have been deferred will be paid in cash
on the payment date for the applicable dividend. If and to the extent that the underlying Units are forfeited, all related accrued Dividend Equivalents shall also be forfeited. No interest shall accrue on Dividend Equivalents.
4.4
Optional Terms and Conditions of Units
. To the extent not inconsistent with the Plan, the Committee may prescribe such terms and
conditions applicable to any grant of Units as it may in its discretion determine, notwithstanding the provisions of Section 4.3. The Committee shall have discretion to accelerate vesting of Units in such circumstances as the Committee deems
appropriate.
4.5
Transfer Restriction
. No Unit shall be assignable or transferable by another than by will, or if the
Participant dies intestate, by the laws of descent and distribution of the state of domicile at the time of death.
4.6
Continued Service as an Employee
. Unless the Committee determines otherwise, if a Participant ceases serving as a director and,
immediately thereafter, he or she is employed by the Company or any subsidiary, then such Participant will not be deemed to have ceased service for purposes of the Plan at that time, and his or her continued employment by the Company or any
subsidiary will be deemed to be continued service for purposes of the Plan;
provided, however
, that such service shall cease as of the date of a Separation from Service, and such former director will not be eligible for additional grants of
Units under the Plan while he or she is an employee of the Company or a subsidiary.
5. Miscellaneous
5.1
No Right to Continued Service
. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any
Participant the right to continue in the service as a director of the Company or an employee of the Company or any of its subsidiaries, nor shall it affect any right that the Company or its shareholders may have to elect or remove directors or hire
or fire any employees.
B-5
5.2
Non-Uniform Determinations
. The Committees determinations under the Plan need
not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, grants under the Plan, whether or not such persons are similarly situated.
5.3
No Rights as Shareholders
. Recipients of grants under the Plan shall have no rights as shareholders of the Company with respect
thereto until shares of Common Stock are delivered in payment therefor.
5.4
Adjustments of Stock
. Units granted under the
Plan and any agreements evidencing such grants, the maximum number of shares of Common Stock that may be issued under the Plan as stated in Section 3.3(a) and the maximum number of shares of Common Stock with respect to which grants may be made
to any one Participant as stated in Section 3.3(b) shall be subject to mandatory adjustment or substitution, as determined by the Committee in its sole discretion, as to the number, price or kind of a share of Common Stock or other
consideration subject to such Units or as otherwise determined by the Committee to be equitable:
(i) in the event of changes in
the outstanding Common Stock or in the capital structure of the Company by reason of stock or extraordinary cash dividends, stock splits, reverse stock splits, spinoffs, recapitalization, reorganizations, mergers, consolidations, combinations,
exchanges, or other relevant changes in capitalization occurring after the date of grant of any such Units, or
(ii) in the event
of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, Participants, or which otherwise warrants equitable adjustment
because it interferes with the intended operation of the Plan.
The adjustments of grants under this Section 5.4 shall include adjustment of shares
or other terms and conditions, as appropriate. The Company shall give each Participant notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes.
5.5
Amendment or Termination of the Plan
.
(a)
Amendment
. The Board may from time to time amend the Plan as it may deem advisable; provided, however, that approval of the shareholders of the Company will be required if such approval is required
in order to comply with applicable law or stock exchange requirements. An amendment of this Plan will, unless the amendment provides otherwise, be immediately and automatically effective for all outstanding grants. The Committee may amend any
outstanding grants under this Plan, provided the grants, as amended, contain only such terms and conditions as would be permitted or required for a new grant under this Plan.
(b)
Termination
. The Plan shall terminate on the day immediately preceding the tenth (10th) anniversary of the Effective Date, unless the Plan is terminated earlier by the Board or is extended by
the Board with the approval of the shareholders. The termination of the Plan shall not impair the power and authority of the Committee with respect to outstanding grants.
5.6
Unfunded Plan
. Participants shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations under the Plan. Nothing
contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative or any other
person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be
paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not intended to be
subject to the Employee Retirement Income Security Act of 1974, as amended.
B-6
5.7
No Fractional Shares
. No fractional shares of Common Stock shall be issued or
delivered pursuant to the Plan or any grant. The Committee shall determine whether cash or other property shall be issued or paid in lieu of fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise
eliminated.
5.8
Company Policies
. All Units granted under the Plan shall be subject to any applicable clawback or
recoupment policies, share trading policies and other policies that may be implemented by the Board from time to time. Unless the Committee determines otherwise, Non-Employee Directors must hold a portion of the net after-tax shares received upon
payment of Units under this Plan until the applicable stock ownership guidelines are met, in accordance with the Companys stock ownership policy applicable to Non-Employee Directors.
5.9
Requirements for Issuance of Shares
. No Common Stock shall be issued in connection with any grant hereunder unless and until all
legal requirements applicable to the issuance of such Common Stock have been complied with to the satisfaction of the Committee.
The Committee shall
have the right to condition any grant to any Participant hereunder on such Participants undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Common Stock as the Committee shall deem
necessary or advisable, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Common Stock issued under the Plan will be subject to such stop-transfer orders and other
restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. No Participant shall have any right as a shareholder with respect to Common Stock covered by a grant
until shares have been issued to the Participant.
5.10
Compliance with Law
. The Plan and the obligations of the Company to
issue or transfer shares of Common Stock in accordance with grants under the Plan shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to
Section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. To the extent that any legal
requirement of Section 16 of the Exchange Act ceases to be required under Section 16 of the Exchange Act, that Plan provision shall cease to apply. The Committee may revoke any grant under the Plan if it is contrary to law or modify a
grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Participants. The Committee may also, in its sole discretion, agree to limit
its authority under this Section.
5.11
Grants in Connection with Corporate Transactions and Otherwise
. Nothing contained in
this Plan shall be construed to (a) limit the right of the Committee to make grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm
or association, including grants to persons who become Non-Employee Directors of the Company, or for other proper corporate purposes, or (b) limit the right of the Company to make stock-based awards outside of this Plan. The terms and
conditions of the grants hereunder may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives, as determined by the Committee.
5.12
Section 409A
. The Plan is intended to comply with the requirements of Section 409A of the Code, to the extent applicable. All
grants shall be construed and administered such that the grant either (a) qualifies for an exemption from the requirements of Section 409A of the Code or (b) satisfies the requirements of Section 409A of the Code. If a grant is
subject to Section 409A of the Code, (i) distributions shall only be made in a manner and upon an event permitted under Section 409A of the Code, including, if required by Section 409A, the six-month delay applicable to payments
to specified employees upon Separation from Service, (ii) payments to be made upon a termination of service shall only be made upon a Separation from Service under Section 409A of the Code, (iii) unless the grant specifies otherwise,
each installment payment shall be treated as a separate payment for purposes of Section 409A of the Code, and (iv) in no event shall a Participant, directly or indirectly, designate the calendar year in which a distribution is made except
in accordance with Section 409A of the Code.
B-7
5.13
Governing Law
. This Plan, grants hereunder and actions taken in connection herewith
shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania (regardless of the law that might otherwise govern under applicable Pennsylvania principles of conflict of laws).
5.14
Effective Date
. The Plan shall be effective as of July 8, 2016, subject to shareholder approval of the Plan (the
Effective Date
).
B-8
ANNEX C to Armstrong World Industries, Inc. 2016 Proxy Statement
ARMSTRONG WORLD INDUSTRIES, INC.
2016 LONG-TERM INCENTIVE PLAN
Effective as of July 8, 2016
ARMSTRONG WORLD INDUSTRIES, INC.
2016 LONG-TERM INCENTIVE PLAN
EFFECTIVE AS OF JULY 8, 2016
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Index of Defined Terms Term
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Section Where Defined or First
Used
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2011 Plan
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1
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Affiliate
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14(c)(ii)
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Beneficial Owner or Beneficially Owned
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14(c)(iii)
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Benefits
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4(a)
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Board of Directors
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2(a)
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Cause
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13(a)(i)
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Cash Awards
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10
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Change in Control
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14(c)(i)
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Code
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2(a)
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Committee
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2(a)
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Common Stock
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2(a)
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Company
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1
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Consultants
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3(a)
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Dividend Equivalent Right
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9(c)
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Effective Date
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20(j)
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Exchange Act
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2(a)
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Fair Market Value
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17
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GAAP
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11(f)
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Incentive Stock Option
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6(a)
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Injurious Conduct
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13(a)
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Nonqualified Stock Option
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6(a)
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Performance-Based Awards
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11(a)
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Person
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14(c)(iv)
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Plan
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1
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Restricted Business
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13(a)(ii)
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Restricted Stock Award
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8
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Stock Appreciation Rights
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7
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Stock Options
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6
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Stock Unit
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9(c)
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Substitute Awards
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5(e)
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C-2
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1.
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Purpose
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C-5
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2.
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Administration
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C-5
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(a)
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Committee
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C-5
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(b)
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Authority
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C-5
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(c)
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Indemnification
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C-5
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(d)
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Delegation and Advisers
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C-5
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3.
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Participants
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C-6
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4.
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Type of Benefits; Vesting Restrictions
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C-6
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5.
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Common Stock Available Under the Plan
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C-7
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(a)
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Aggregate Limitations
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C-7
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(b)
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Individual Employee Limitations
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C-7
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(c)
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Source of Shares
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C-7
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(d)
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Share Counting
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C-7
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(e)
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Acquisitions
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C-8
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6.
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Stock Options
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C-8
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(a)
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Generally
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C-8
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(b)
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Exercise Price
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C-8
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(c)
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Exercise of Options
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C-8
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(d)
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Exercise Period
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C-9
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(e)
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Limitations on Incentive Stock Options
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C-9
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(f)
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Additional Limitations on Incentive Stock Options for Ten Percent Shareholders
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C-9
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7.
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Stock Appreciation Rights
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C-9
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(a)
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Generally
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C-9
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(b)
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Exercise Period
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C-10
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8.
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Restricted Stock Awards
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C-10
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(a)
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Generally
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C-10
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(b)
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Payment of the Purchase Price
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C-10
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(c)
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Additional Terms
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C-10
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(d)
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Rights as a Shareholder
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C-10
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9.
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Stock Units
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C-10
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(a)
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Generally
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C-10
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(b)
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Settlement of Stock Units
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C-11
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(c)
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Definitions
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C-11
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10.
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Cash Awards
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C-11
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11.
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Performance-Based Awards
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C-11
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(a)
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Generally
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C-11
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(b)
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Business Criteria
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C-11
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(c)
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Establishment of Performance Goals
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C-11
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(d)
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Certification of Performance
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C-12
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(e)
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Modification of Performance-Based Awards
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C-12
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(f)
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Impact of Unusual or Infrequently Occurring Items or Changes in Accounting
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C-12
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(g)
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Death, Disability or Other Circumstances
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C-12
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12.
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Foreign Laws
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C-12
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C-3
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13.
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Certain Terminations of Employment; Forfeitures
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C-12
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(a)
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Forfeiture of Unsettled Benefits
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C-12
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(b)
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Forfeiture of Settled Benefits
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C-13
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(c)
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Timing
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C-13
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(d)
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Determination from the Committee
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C-13
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(e)
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Condition Precedent
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C-13
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(f)
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Enforceability
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C-13
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14.
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Adjustment Provisions; Change in Control
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C-14
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(a)
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Adjustment
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C-14
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(b)
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Effect of a Change in Control on Benefits
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C-14
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(c)
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Definitions
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C-15
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15.
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Nontransferability
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C-16
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16.
|
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Other Provisions
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C-16
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17.
|
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Fair Market Value
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C-17
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18.
|
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Withholding
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C-17
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19.
|
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Duration, Amendment and Termination
|
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C-17
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(a)
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Amendment and Termination
|
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C-17
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(b)
|
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No Repricing
|
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C-17
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(c)
|
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Shareholder Approval for Performance-Based Awards
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C-17
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(d)
|
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Termination of Plan
|
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C-18
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20.
|
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Miscellaneous.
|
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C-18
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(a)
|
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Employment Rights
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C-18
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(b)
|
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Unfunded Plan
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C-18
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(c)
|
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No Fractional Shares
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C-18
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(d)
|
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Company Policies; Holding Requirements
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C-18
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(e)
|
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Requirements for Issuance of Shares
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|
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C-18
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(f)
|
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Compliance with Law
|
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C-19
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(g)
|
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Benefits in Connection with Corporate Transactions and Otherwise
|
|
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C-19
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|
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|
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(h)
|
|
Section 409A
|
|
|
C-19
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|
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(i)
|
|
Governing Law
|
|
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C-19
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(j)
|
|
Effective Date
|
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C-19
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C-4
ARMSTRONG WORLD INDUSTRIES, INC.
2016 LONG-TERM INCENTIVE PLAN
1.
Purpose.
The Armstrong World Industries, Inc. 2016 Long-Term Incentive Plan (the
Plan
) is hereby established as of the Effective Date. The Plan is intended to provide incentives which will attract, retain and motivate highly
competent persons as officers, key employees, consultants and advisors of Armstrong World Industries, Inc., a Pennsylvania corporation (the
Company
), and its subsidiaries and affiliates, by providing them with appropriate
incentives and rewards to encourage them to enter into and continue in the employ of the Company, to acquire a proprietary interest in the long-term success of the Company and to reward the performance of individuals in fulfilling their personal
responsibilities for long-range achievements.
The Plan is a successor to the 2011 Long-Term Incentive Plan (the
2011 Plan
), which is
an amendment and restatement of the 2006 Long-Term Incentive Plan. No additional grants will be made under the 2011 Plan after the Effective Date. Outstanding grants under the 2011 Plan shall continue in effect according to their terms, consistent
with the 2011 Plan.
2. Administration.
(a)
Committee
. The Plan will be administered by a committee (the
Committee
) appointed by the Board of Directors of the Company ( the
Board of Directors
) from among its
members (which may be the Management Development and Compensation Committee or a subcommittee thereof) and shall be comprised, unless otherwise determined by the Companys Board of Directors, solely of not less than two (2) members who
shall be (i) non-employee directors within the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act
), (ii) outside
directors within the meaning of Treasury Regulation Section 1.162-27(e)(3) under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
Code
), and (iii) independent directors, as
determined in accordance with the independence standards established by the stock exchange on which the common stock of the Company (
Common Stock
) is at the time primarily traded.
(b)
Authority
. The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Plan and the Committee has sole discretionary authority to make such determinations and interpretations and to take such action in connection with the Plan and any Benefits granted hereunder as it deems
necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all participants and their legal representatives.
(c)
Indemnification
. No member of the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, except in circumstances involving his or her bad faith or willful
misconduct, or for any act or failure to act hereunder by any other member or employee or by any agent to whom duties in connection with the administration of this Plan have been delegated. The Company shall indemnify members of the Committee and
any agent of the Committee who is an employee of the Company, a subsidiary or an affiliate against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of
the Plan, except in circumstances involving such persons bad faith or willful misconduct.
(d)
Delegation and Advisers
. The
Committee may delegate to one or more of its members, to one or more officers or members of management, or to one or more agents such administrative duties as it may deem advisable; provided, that such delegation does not adversely affect the
exemption provided by Rule 16b-3 of the Exchange Act or prevent a Benefit from qualifying as a Performance-Based Award, if so intended, and provided that such delegation complies with applicable law and applicable stock exchange requirements. The
Committee, or any person to whom it has delegated duties as aforesaid, may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may employ such legal or
other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement
of such counsel, consultant or agent shall be paid by the Company, or the subsidiary or affiliate whose employees have benefited from the Plan, as determined by the Committee.
C-5
3. Participants.
(a) Participants will consist of such officers and key employees of the Company and its subsidiaries and affiliates as the Committee in its sole discretion determines to be significantly responsible for the success
and future growth and profitability of the Company and whom the Committee may designate from time to time to receive Benefits under the Plan. Consultants and advisors who perform services for the Company or any of its subsidiaries and affiliates
(
Consultants
) shall be eligible to participate in the Plan if the Consultants render bona fide services to the Company or its subsidiaries and affiliates, the services are not in connection with the offer and sale of securities in
a capital-raising transaction and the Consultants do not directly or indirectly promote or maintain a market for the Companys securities, as determined by the Committee in its sole discretion. Consultants are eligible to receive all Benefits
under the Plan except Incentive Stock Options as described in Section 6, below. Members of the Board of Directors who are not employees of the Company and its subsidiaries and affiliates shall not be eligible to participate in the Plan.
(b) Designation of a participant in any year shall not require the Committee to designate such person to receive a Benefit in any other
year or, once designated, to receive the same type or amount of Benefit as granted to the participant in any other year. The Committee shall consider such factors as it deems pertinent in selecting participants and in determining the type and amount
of their respective Benefits. Benefits granted pursuant to a particular Section of the Plan need not be uniform as among the participants. For purposes of the Plan, the term employee excludes any person who is classified by the Company
as a contractor or consultant, no matter how characterized by the Internal Revenue Service, other governmental agency or a court. Any change of characterization of an individual by the Internal Revenue Service or any court or
government agency shall have no effect upon the classification of an individual as an employee for purposes of this Plan, unless the Committee determines otherwise.
4. Type of Benefits; Vesting Restrictions.
(a) Benefits under the Plan may be granted
in any one or a combination of (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock Awards, (iv) Stock Units and (v) Cash Awards (each as described below, and collectively, the
Benefits
). Restricted Stock Awards, Stock Units and Cash Awards may, as determined by the Committee in its discretion, constitute Performance-Based Awards, as described in Section 11 hereof. Benefits granted under the Plan
may be evidenced by an agreement (which need not be identical) that may provide additional terms and conditions associated with such Benefits, as determined by the Committee in its sole discretion,
provided, however
, that in the event of any
conflict between the provisions of the Plan and any such agreement, the provisions of the Plan shall prevail.
(b) Benefits granted
under the Plan shall vest over a period that is not less than one year from the date of grant. Subject to adjustments made in accordance with Section 14(a) below, up to five percent (5%) of the shares of Common Stock subject to the share
reserve set forth in Section 5(a) as of the Effective Date may be granted without regard to the minimum vesting requirement.
(c)
Benefits under the Plan shall be made conditional upon the participants acknowledgement, in writing or by acceptance of the Benefit grant, that all decisions and determinations of the Committee shall be final and binding on the participant,
his or her successors and any other person having or claiming an interest under such Benefit grant.
(d) The Committee shall have
discretion to accelerate vesting in connection with a participants death, disability, retirement, involuntary termination without Cause, in the event of a Change in Control or a corporate transaction or event described in Section 14(a),
or in other circumstances as the Committee deems appropriate.
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5. Common Stock Available Under the Plan.
(a)
Aggregate Limitations
.
(i) Subject to adjustments made in accordance with Section 14(a) hereof, the aggregate number of shares of Common Stock that may be issued
pursuant to Benefits granted under this Plan shall be the sum of (A) 2,000,000 shares of Common Stock, plus (B) 750,917 shares, which is the number of shares of Common Stock that remained available for grants under the 2011 Plan as of
April 15, 2016, plus (C) the number of shares of Common Stock subject to outstanding grants under the 2011 Plan as of April 15, 2016 that terminate, expire or are canceled, forfeited, exchanged or surrendered without having been
exercised, vested or paid under the 2011 Plan after the Effective Date (not exceeding 2,180,275 shares).
(ii) The number of shares of
Common Stock reserved for award and issuance under this Plan (A) shall be reduced on a one-for-one basis for each share of Common Stock subject to a Stock Option or Stock Appreciation Right and (B) shall be reduced by a fixed ratio of 1.6
shares of Common Stock for each share of Common Stock subject to a Restricted Stock Award or Stock Unit granted under the Plan.
(b)
Individual Employee Limitations
.
(i) The maximum number of shares of Common Stock with respect to which Stock Options, Stock
Appreciation Rights, Restricted Stock Awards and Stock Units may be granted to any individual employee under the Plan in any one calendar year shall not exceed 750,000 shares, subject to adjustments made in accordance with Section 14(a) hereof.
(ii) For dividends and Dividend Equivalent Rights that are intended to qualify for the performance-based compensation exemption of
Section 162(m) of the Code, the maximum amount of dividends and Dividend Equivalent Rights that may accrue in any calendar year with respect to Performance-Based Awards granted to any individual employee under the Plan is $6,000,000.
(iii) The maximum Cash Award payout that may be earned by an employee for each 12 months in a performance period is $5,000,000.
(c)
Source of Shares
. Shares of Common Stock issued under the Plan may be authorized but unissued shares of Common Stock or
reacquired shares of Common Stock, including shares purchased by the Company on the open market for purposes of the Plan.
(d)
Share
Counting
.
(i) If and to the extent Stock Options or Stock Appreciation Rights granted under the Plan terminate, expire, or are
canceled, forfeited, exchanged or surrendered without having been exercised (including stock options granted under the 2011 Plan that terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised on or after
the Effective Date) , and if and to the extent that any Restricted Stock Awards or Stock Units are forfeited or terminated, or otherwise are not paid in full (including restricted stock awards and stock units granted under the 2011 Plan that are
forfeited or terminated, or otherwise are not paid in full on or after the Effective Date) , the shares reserved for such grants shall again be available for purposes of the Plan. Shares of Common Stock withheld or surrendered in payment of the
exercise price of a Stock Option, and shares withheld or surrendered for payment of taxes with respect to Stock Options and Stock Appreciation Rights, shall not be available for re-issuance under the Plan. Shares withheld or surrendered for payment
of taxes with respect to Benefits other than Stock Options and Stock Appreciation Rights (including with respect to grants made under the 2011 Plan that are paid on or after the Effective Date) shall be available for re-issuance under the Plan. If
Stock Appreciation Rights are granted, the full number of shares subject to the Stock Appreciation Rights shall be considered issued under the Plan, without regard to the number of shares issued upon exercise of the Stock Appreciation Rights. To the
extent that any Benefits are paid in cash, and not in shares of Common Stock, such Benefits shall not count against the share limits described above in Section 5(a).
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(ii) The share counting rules in this Section 5(d) shall apply with respect to grants, exercises,
forfeitures and other actions that occur with respect to Benefits granted under this Plan, and with respect to grants made under the 2011 Plan that terminate, expire or are canceled, forfeited, exchanged or surrendered without having been exercised,
vested or paid under the 2011 Plan on or after the Effective Date, and the ratios described in Section 5(a) shall be used for calculating the number of shares available for re-issuance under the Plan pursuant to this Section 5(d).
(iii) The provisions of this Section 5(d) shall apply only for purposes of determining the aggregate number of shares of Common
Stock that may be issued under the Plan, but shall not apply for purposes of determining the maximum number of shares of Common Stock with respect to which Benefits may be granted to any individual participant under the Plan. For the avoidance of
doubt, if shares of Common Stock are repurchased on the open market with the proceeds of the exercise price of Stock Options, such shares may not again be made available for issuance under the Plan.
(e)
Acquisitions
. In connection with the acquisition of any business by the Company or any of its subsidiaries or affiliates, any
outstanding equity grants with respect to stock of the acquired company may be assumed or replaced by Benefits under the Plan upon such terms and conditions as the Committee determines in its sole discretion. Shares of Common Stock subject to any
such outstanding grants that are assumed or replaced by Benefits under the Plan in connection with an acquisition (
Substitute Awards
) shall not reduce the Plans share reserve as described above in Section 5(a),
consistent with applicable stock exchange requirements. Notwithstanding any provision of the Plan to the contrary, Substitute Awards shall have such terms as the Committee deems appropriate, including without limitation exercise prices or base
prices on different terms than those described herein. In the event that the Company assumes a shareholder-approved equity plan of an acquired company, available shares of Common Stock under such assumed plan (after appropriate adjustments to
reflect the transaction) may be issued pursuant to Benefits under this Plan and shall not reduce the Plans share reserve as described above in Section 5(a), subject to applicable stock exchange requirements.
6. Stock Options.
(a)
Generally
.
Stock Options will consist of awards from the Company that will enable the holder to purchase a number of shares of Common Stock, at set terms. Stock Options may be incentive stock options (
Incentive Stock Options
),
within the meaning of Section 422 of the Code, or Stock Options which do not constitute Incentive Stock Options (
Nonqualified Stock Options
). The Committee will have the authority to grant to any participant one or more
Incentive Stock Options, Nonqualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). Consultants are not eligible to receive Incentive Stock Options under the Plan. All of the authorized
shares as described in Section 5(a) may be granted as Incentive Stock Options. Each Stock Option shall be subject to such terms and conditions, including vesting, consistent with the Plan as the Committee may impose from time to time, subject
to the following limitations.
(b)
Exercise Price
. Each Stock Option granted hereunder shall have a per-share exercise price as
the Committee may determine on the date of grant. The per share exercise price of a Stock Option shall not be less than the Fair Market Value of a share of Common Stock on the date of grant.
(c)
Exercise of Options
. A participant may exercise a Stock Option that has become exercisable, in whole or in part, by delivering a notice
of exercise to the Company. The participant shall pay the exercise price of the Stock Option (i) in cash, (ii) if permitted by the Committee, by the withholding of shares of Common Stock subject to the exercisable Stock Option, which have
a Fair Market Value on the date of exercise equal to the exercise price, (iii) if permitted by the Committee, by delivering shares of Common Stock owned by the participant and having a Fair Market Value on the date of exercise equal to the
exercise price or by attestation to ownership of shares of Common Stock having an aggregate Fair Market Value on the date of exercise equal to the Exercise Price, (iv) by payment through a broker in accordance with procedures permitted by
Regulation T of the Federal Reserve Board, or (v) by such other method as the Committee may approve. Shares of Common Stock used to exercise a Stock Option shall have been held by the participant for any requisite period of time to avoid
adverse accounting consequences to the Company with respect to the Stock Option, as determined by the Committee. Payment for the shares pursuant to the Stock Option, and any required withholding
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taxes, must be received by the time specified by the Committee depending on the type of payment being made, but in all cases prior to the issuance of the Company Stock.
(d)
Exercise Period
. Stock Options granted under the Plan shall be exercisable at such time or times and subject to such terms and
conditions, including vesting, as shall be determined by the Committee;
provided, however
, that no Stock Option shall be exercisable later than ten (10) years after the date it is granted. Notwithstanding the foregoing, unless the
Committee determines otherwise, if a vested Nonqualified Stock Option would terminate at a time when trading in Common Stock is prohibited by law or by the Companys insider trading policy, the vested Stock Option may be exercised until the
thirtieth (30th) day after expiration of such prohibition. All Stock Options shall terminate at such earlier times and upon such conditions or circumstances as the Committee shall in its discretion set forth in such option agreement on the date
of grant.
(e)
Limitations on Incentive Stock Options
. Incentive Stock Options may be granted only to participants who are
employees of the Company or of a parent corporation or subsidiary corporation (as defined in Sections 424(e) and (f) of the Code, respectively) on the date of grant. The aggregate Fair Market Value (determined as of the time the Stock Option is
granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under all option plans of the Company and of any parent corporation or subsidiary corporation
(as defined in Sections 424(e) and (f) of the Code, respectively)) shall not exceed one hundred thousand dollars ($100,000), provided, however, that if such one hundred thousand dollars ($100,000) limit is exceeded, the excess Incentive Stock
Options shall be treated as Nonqualified Stock Options. For purposes of the preceding sentence, Incentive Stock Options will be taken into account in the order in which they are granted.
(f)
Additional Limitations on Incentive Stock Options for Ten Percent Shareholders
. Incentive Stock Options may not be granted to any
participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the
Company or any parent corporation or subsidiary corporation (as defined in Sections 424(e) and (f) of the Code, respectively), unless the exercise price of the option is fixed at not less than one hundred ten percent (110%) of the Fair
Market Value of the Common Stock on the date of grant and the exercise of such option is prohibited by its terms after the expiration of five (5) years from the date of grant of such option.
7. Stock Appreciation Rights.
(a)
Generally
. The Committee may, in its discretion, grant Stock Appreciation Rights, including a concurrent grant of Stock Appreciation Rights in tandem with any Stock Option grant. A Stock Appreciation Right means a right to receive a payment
in cash, Common Stock or a combination thereof, as determined by the Committee, in an amount equal to the excess of (i) the Fair Market Value of a specified number of shares of Common Stock on the date the Stock Appreciation Right is exercised
over (ii) the Fair Market Value of such shares of Common Stock on the date the Stock Appreciation Right is granted, or other higher specified amount, all as determined by the Committee. If a Stock Appreciation Right is granted in tandem with a
Stock Option at the date of grant of the Stock Option, the designated base amount in the award agreement shall reflect the Fair Market Value on the date such Stock Option and Stock Appreciation Right were granted, or a higher specified amount as
determined by the Committee. In any event, the base amount of each Stock Appreciation Right shall not be less than the per-share Fair Market Value of a share of Common Stock on the date of grant of the Stock Appreciation Right. Each Stock
Appreciation Right shall be subject to such terms and conditions, including vesting, as the Committee shall impose from time to time,
provided, however
, that if a Stock Appreciation Right is granted in connection with a Stock Option, the
Stock Appreciation Right shall become exercisable, be transferable and shall expire according to the same vesting, transferability and expiration rules as the corresponding Stock Option, unless the Committee determines otherwise.
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(b)
Exercise Period
. Stock Appreciation Rights granted under the Plan shall be exercisable at
such time or times and subject to such terms and conditions, including vesting, as shall be determined by the Committee;
provided, however
, that no Stock Appreciation Rights shall be exercisable later than ten (10) years after the date
it is granted. Notwithstanding the foregoing, unless the Committee determines otherwise, if a vested Stock Appreciation Right would terminate at a time when trading in Common Stock is prohibited by law or by the Companys insider trading
policy, the vested Stock Appreciation Right may be exercised until the thirtieth (30th) day after expiration of such prohibition. All Stock Appreciation Rights shall terminate at such earlier times and upon such conditions or circumstances as
the Committee shall in its discretion set forth in such right at the date of grant.
8. Restricted Stock Awards.
(a)
Generally
. The Committee may, in its discretion, grant Restricted Stock Awards consisting of Common Stock issued or transferred to
participants with or without other payments therefor. Restricted Stock Awards may be subject to such terms and conditions, including vesting, as the Committee determines appropriate. Restricted Stock Awards may constitute Performance-Based Awards,
as described in Section 11 hereof
(b)
Payment of the Purchase Price
. If the Restricted Stock Award requires payment
therefor, the purchase price of any shares of Common Stock subject to a Restricted Stock Award may be paid in any manner authorized by the Committee. Restricted Stock Awards may also be made in consideration of services rendered to the Company or
its subsidiaries or affiliates.
(c)
Additional Terms
. Restricted Stock Awards may be subject to such terms and conditions,
including vesting, as the Committee determines appropriate, including without limitation (i) Change in Control, (ii) restrictions on the sale or other disposition of such shares, and (iii) the right of the Company to reacquire such
shares for no consideration upon termination of the participants employment within specified periods, the participants competition with the Company, or the participants breach of other obligations to the Company. Restricted Stock
Awards may constitute Performance-Based Awards, as described in Section 11 hereof. The Committee may require the participant to deliver a duly signed stock power, endorsed in blank, relating to the Common Stock covered by such an Award. The
Committee may also require that the stock certificates evidencing such shares be held in custody or bear restrictive legends until the restrictions thereon shall have lapsed.
(d)
Rights as a Shareholder
. The participant shall have, with respect to the shares of Common Stock subject to a Restricted Stock Award, all of the rights of a holder of shares of Common Stock of the
Company, including the right to vote the shares. At the discretion of the Committee, cash dividends and stock dividends with respect to the Restricted Stock may be either currently paid to the participant or withheld by the Company for the
participants account, and interest may be credited on the amount of cash dividends withheld at a rate and subject to such terms as determined by the Committee; provided that cash dividends and stock dividends with respect to performance-based
Restricted Stock Awards shall vest only if and to that the underlying Restricted Stock Award vests, as determined by the Committee. The cash dividends or stock dividends so withheld by the Committee and attributable to any particular share of
Restricted Stock (and earnings thereon, if applicable) shall be distributed to the participant upon the release of restrictions on such shares and, if such share is forfeited, the participant shall have no right to such cash dividends or stock
dividends.
9. Stock Units.
(a)
Generally
. The Committee may, in its discretion, grant Stock Units to participants hereunder. Stock Units may be subject to such terms and conditions, including vesting and provisions applicable to a Change in Control as the Committee
determines appropriate. Stock Units may constitute Performance-Based Awards, as described in Section 11 hereof. A Stock Unit granted by the Committee shall provide payment in shares of Common Stock or in cash at such time as the award agreement
shall specify. Shares of Common Stock issued pursuant to this Section 9 may be issued with or without other payments therefor as may be required by applicable law or such other consideration as may be determined by the Committee. The Committee
shall determine whether a participant granted a Stock Unit shall be entitled to a Dividend Equivalent Right and the terms and conditions applicable to Dividend
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Equivalent Rights. Any Dividend Equivalent Right underlying a Stock Unit which is payable based on the achievement of specific vesting conditions shall vest and become payable at the same time as
the underlying Stock Unit, unless the Committee determines otherwise; provided that, any Dividend Equivalent Right with respect to a performance-based Stock Unit shall vest and be paid only if and to the extent the underlying Stock Unit vests and is
paid as determined by the Committee.
(b)
Settlement of Stock Units
. Shares of Common Stock representing the Stock Units shall be
distributed to the participant unless the Committee provides for the payment of the Stock Units in cash equal to the value of the shares of Common Stock which would otherwise be distributed to the participant or partly in cash and partly in shares
of Common Stock.
(c)
Definitions
. A
Stock Unit
means a notional account representing one (1) share of
Common Stock. A
Dividend Equivalent Right
means the right to receive the amount of any dividend paid on the share of Common Stock underlying a Stock Unit, which shall be payable in cash or in the form of additional Stock Units.
10. Cash Awards.
The Committee may, in its discretion, grant awards to be settled solely in cash (
Cash Awards
). Cash Awards
may be subject to such terms and conditions, including vesting, as the Committee determines appropriate. Cash Awards may constitute Performance-Based Awards, as described in Section 11 hereof.
11. Performance-Based Awards.
(a)
Generally
. Any Benefits granted under the Plan may be granted in a manner such that the Benefits qualify for the performance-based compensation exemption of Section 162(m) of the Code. Restricted Stock Awards (and any dividends payable
with respect thereto), Stock Units and Dividend Equivalent Rights that are intended to qualify for the performance-based compensation exemption of Section 162(m) of the Code are referred to as
Performance-Based Awards
. As
determined by the Committee in its sole discretion, either the granting or vesting of such Performance-Based Awards shall be based on achievement of performance objectives that are based on one or more of the business criteria described below, with
respect to one or more business units or the Company and its subsidiaries as a whole.
(b)
Business Criteria
. The Committee shall
use objectively determinable performance goals based on one or more of the following business criteria, individually or in combination: (i) net earnings; (ii) earnings per share; (iii) sales; (iv) operating income;
(v) earnings before interest and taxes (EBIT); (vi) earnings before interest, taxes, depreciation and amortization (EBITDA); (vii) cash flow; (viii) working capital targets; (ix) return on equity; (x) return on capital;
(xi) market price per share; (xii) total return to shareholders, (xiii) price-earnings multiples, (xiv) revenue, (xv) number of days sales outstanding in accounts receivable, (xvi) productivity, (xvii) margin,
(xviii) net capital employed, (xix) growth in assets, (xx) unit volume, (xxi) market share, (xxii) economic value, (xxiii) relative performance to a comparison group designated by the Committee based on any of the
foregoing criteria, or (xxiv) strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, customer growth, geographic business expansion goals, cost targets or goals
relating to acquisitions or divestitures.
(c)
Establishment of Performance Goals
. With respect to Performance-Based Awards, the
Committee shall establish in writing (i) the performance goals applicable to a given period, and such performance goals shall state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to
the participant if such performance goals are obtained and (ii) the individual employees or class of employees to which such performance goals apply; provided, however, that such performance goals shall be established in writing no later than
ninety (90) days after the commencement of the applicable period of service to which the performance goals relate (but in no event after twenty-five percent (25%) of such period has elapsed), or such other period as may be consistent with
the regulations issued under Section 162(m) of the Code.
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(d)
Certification of Performance
. No Performance-Based Awards shall be payable to or vest with
respect to, as the case may be, any participant for a given period until the Committee certifies in writing that the objective performance goals (and any other material terms) applicable to such period have been satisfied.
(e)
Modification of Performance-Based Awards
. With respect to any Benefits intended to qualify as Performance-Based Awards, after
establishment of a performance goal, the Committee shall not revise such performance goal to cause the goal to cease to meet the requirements of Section 162(m) of the Code, except as otherwise determined by the Committee, and the Committee
shall not increase the amount of compensation payable thereunder (as determined in accordance with Section 162(m) of the Code) upon the attainment of such performance goal. The Committee may reduce or eliminate the number of shares of Common
Stock or cash granted or the number of shares of Common Stock vested upon the attainment of such performance goal, based on such terms and conditions as the Committee deems appropriate. Notwithstanding the foregoing, the Committee may make such
changes to performance goals and Performance-Based Awards as the Committee deems appropriate in the event of a change in corporate capitalization, corporate transaction or other corporate event as permitted by Section 162(m), or as the
Committee otherwise determines.
(f)
Impact of Unusual or Infrequently Occurring Items or Changes in Accounting
. To the extent
applicable, subject to the following sentence and unless the Committee determines otherwise, the determination of the achievement of performance goals shall be determined based on the relevant financial measure, computed in accordance with U.S.
generally accepted accounting principles (
GAAP
), and in a manner consistent with the methods used in the Companys audited financial statements. To the extent permitted by Section 162(m), in setting the performance goals
for Performance-Based Awards within the period prescribed in Section 11(c), the Committee may provide for appropriate adjustment as it deems appropriate, including for one or more of the following items: asset write-downs; litigation or claim
judgments or settlements; changes in accounting principles; changes in tax law or other laws affecting reported results; changes in commodity prices; severance, contract termination, and other costs related to exiting, modifying or reducing any
business activities; costs of, and gains and losses from, the acquisition, disposition, or abandonment of businesses or assets; gains and losses from the early extinguishment of debt; gains and losses in connection with the termination or withdrawal
from a pension plan; stock compensation costs and other non-cash expenses; any unusual or infrequently occurring items as described in applicable Accounting Principles Board opinions or in managements discussion and analysis of financial
condition and results of operation appearing in the Companys annual report to shareholders for the applicable year; and any other specified non-operating items as determined by the Committee in setting performance goals.
(g)
Death, Disability or Other Circumstances
. The Committee may provide in the grant agreement that Performance-Based Awards under this
Section 11 shall be payable, in whole or in part, in the event of the Participants death or disability, a Change in Control or under other circumstances consistent with the requirements of Section 162(m) of the Code.
12. Foreign Laws.
The Committee may grant Benefits to individual participants who are subject to the tax laws of nations other than the United States, which
Benefits may have terms and conditions as determined by the Committee as necessary to comply with applicable foreign laws. The Committee may take any action which it deems advisable to obtain approval of such Benefits by the appropriate foreign
governmental entity; provided, however, that no such Benefits may be granted pursuant to this Section 12, and no action may be taken, which would result in a violation of the Exchange Act, the Code or any other applicable law.
13. Certain Terminations of Employment; Forfeitures.
(a)
Forfeiture of Unsettled Benefits
. Unless the Committee or any agreement providing for Benefits under this Plan shall otherwise provide, a participant shall forfeit all Benefits which have not been
settled under this Plan if:
(i) the participants employment or service with the Company and its subsidiaries and affiliates is
terminated for willful, deliberate, or gross misconduct, as determined by the Committee, in its sole discretion, or such other definition of cause as may be applicable under the grant agreement;
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(ii) during the participants employment or service with the Company and its subsidiaries and
affiliates and for a period of one (1) year thereafter, the participant engages in any business or enters into any employment relationship which the Committee in its sole discretion determines to be either directly or indirectly
(A) competitive with any aspect of the business of the Company with respect to which the participant had responsibility for, or access to, confidential information within 12 months before the participants termination of employment or
service with the Company or (B) substantially injurious to the Companys business interests, in each case in any geographic area in which the Company conducts business with respect to which the participant had responsibility for, or access
to, confidential information within 12 months before the participants termination of employment or service with the Company (a
Restricted Business
);
(iii) during the participants employment or service with the Company and its subsidiaries and affiliates and for a period of two
(2) years thereafter, the participant solicits any person who was a customer of the Company or any of its subsidiaries or affiliates with respect to any Restricted Business, or solicits potential customers of the Company or any of its
subsidiaries or affiliates who are or were identified through leads developed during the course of the participants employment or service with the Company or any of its subsidiaries or affiliates with respect to any Restricted Business, or
otherwise diverts or attempts to divert any existing business of the Company or any of its subsidiaries or affiliates;
(iv) during the
participants employment or service with the Company and its subsidiaries and affiliates and for a period of two (2) years thereafter, the participant directly for the participant or for any third party, solicits, induces, recruits or
causes another person in the employment of the Company or any of its subsidiaries or affiliates to terminate such employees employment with the Company and its subsidiaries and affiliates; or
(v) during the participants employment or service or thereafter, the participant breaches any written confidentiality, non-solicitation or
non-competition covenant with the Company or a subsidiary or affiliate.
The activities described in subsections (i), (ii) and (iii) above are
hereafter referred to as
Injurious Conduct
.
(b)
Forfeiture of Settled Benefits
. If the Committee determines
that a participant has engaged in Injurious Conduct as described in Section 13(a), the Committee may in its discretion require the participant to return to the Company any Common Stock or cash received in settlement of any Benefit under this
Plan. If the Common Stock acquired in settlement of a Benefit has been disposed of by the participant, then the Company may require the participant to pay to the Company the economic value of the Common Stock as of the date of disposition.
(c)
Timing
. Unless the grant agreement provides otherwise, the Committee shall exercise the right of forfeiture provided to the
Company in this Section 13 within one-hundred and eighty (180) days after the Companys discovery of the Injurious Conduct activities giving rise to the Companys right of forfeiture.
(d)
Determination from the Committee
. A participant may make a request to the Committee in writing for a determination regarding whether any
proposed business or activity would constitute Injurious Conduct. Such request shall fully describe the proposed business or activity. The Committee shall respond to the participant in writing and the Committees determination shall be limited
to the specific business or activity so described.
(e)
Condition Precedent
. Unless the Committee or any agreement providing for
Benefits under this Plan shall otherwise provide, no Benefit shall be deemed awarded to any participant under this Plan unless and until the participant agrees to the applicability of this Section 13.
(f)
Enforceability
. The purpose of this Section 13 is to protect the Company and its subsidiaries and affiliates from Injurious
Conduct. To the extent that this Section 13 is not fully enforceable as written, the unenforceable provisions shall be modified so as to provide the Company with the fullest protection permitted by law. The Committee may waive any provisions of
this Section 13, as the Committee deems appropriate.
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14. Adjustment Provisions; Change in Control.
(a)
Adjustment
. Benefits granted under the Plan and any agreements evidencing such Benefits, the maximum number of shares of Common Stock
that may be issued under the Plan as stated in Section 5(a) and the maximum number of shares of Common Stock with respect to which Benefits may be granted to any one employee as stated in Section 5(b) shall be subject to mandatory
adjustment or substitution, as determined by the Committee in its sole discretion, as to the number, price or kind of a share of Common Stock or other consideration subject to such Benefits or as otherwise determined by the Committee to be
equitable:
(i) in the event of changes in the outstanding Common Stock or in the capital structure of the Company by reason of stock or
extraordinary cash dividends, stock splits, reverse stock splits, spinoffs, recapitalization, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the date of grant of any
such Benefit, or
(ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in
any substantial dilution or enlargement of the rights granted to, or available for, participants, or which otherwise warrants equitable adjustment because it interferes with the intended operation of the Plan.
Any adjustment in Incentive Stock Options under this Section 14 shall be made only to the extent not constituting a modification within the
meaning of Section 424(h)(3) of the Code, except as otherwise determined by the Committee, and any adjustments under this Section 14 shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3
under the Exchange Act. Any adjustment to Nonqualified Stock Options or Stock Appreciation Rights shall be made in accordance with the requirements of Sections 409A and 424 of the Code, as applicable. Further, with respect to Benefits intended to
qualify as performance-based compensation under Section 162(m) of the Code, such adjustments or substitutions shall be made to the extent that the Committee determines that such adjustments or substitutions may be made without
causing the Company to be denied a tax deduction on account of Section 162(m) of the Code, or as the Committee otherwise determines is appropriate. The adjustments of Benefits under this Section 14(a) shall include adjustment of shares,
exercise price, base price, performance goals or other terms and conditions, as appropriate. The Company shall give each participant notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all
purposes.
(b)
Effect of a Change in Control on Benefits
. The following provisions shall apply in the event of a Change in
Control:
(i) Unless the Committee determines otherwise, if there is a Change in Control of the Company, and if participants
Benefits remain outstanding after the Change in Control (or are assumed by, or converted to similar benefits with equivalent value as of the date of the Change in Control of, the surviving corporation (or a parent or subsidiary of the surviving
corporation)), and the Company or its successor terminates a participants employment without Cause upon or within two years after the Change in Control, the participants outstanding Stock Options and Stock Appreciation Rights shall vest
and become exercisable, any restrictions on Restricted Stock Awards shall lapse, and Stock Units or Cash Awards shall become payable. In that event, Benefits that are based on performance goals will vest and be payable at their target value unless
the Committee determines otherwise. Unless the Committee determines otherwise, Cause shall mean conduct described in Section 13(a)(i) above.
(ii) Unless the Committee determines otherwise, if there is a Change in Control of the Company, and if participants Benefits do not remain outstanding after the Change in Control (and are not assumed by, or
converted to similar benefits with equivalent value as of the date of the Change in Control of, the surviving corporation (or a parent or subsidiary of the surviving corporation)), then all outstanding Stock Options and Stock Appreciation Rights
shall immediately vest and become exercisable, any restrictions on Restricted Stock Awards shall lapse, and Stock Units and Cash Awards shall become payable as of the date of the Change in Control. In that event, Benefits that are based on
performance goals will vest and be payable at their target value unless the Committee determines otherwise.
C-14
(iii) Notwithstanding the foregoing, the Committee may establish such other terms and conditions
relating to the effect of a Change in Control on Benefits as the Committee deems appropriate. In addition to other actions, in the event of a Change in Control of the Company, the Committee may take any one or more of the following actions with
respect to any or all outstanding Benefits, without the consent of any participant: (A) the Committee may determine that outstanding Stock Options and Stock Appreciation Rights shall be fully exercisable, restrictions on outstanding Restricted
Stock Awards shall lapse, and Stock Units and Cash Awards shall become payable, as of the date of the Change in Control or at such other time as the Committee determines, (B) the Committee may require that participants surrender their
outstanding Stock Options and Stock Appreciation Rights for cancellation in exchange for one or more payments by the Company, in cash, Common Stock or other property (including the property, if any, payable in the transaction), as determined by the
Committee, in an amount equal to the amount, if any, by which the then Fair Market Value of the shares of Common Stock subject to the participants unexercised Stock Options and Stock Appreciation Rights exceeds the exercise price or base
amount, as applicable, and on such terms as the Committee determines, (C) after giving participants an opportunity to exercise their outstanding Stock Options and Stock Appreciation Rights, the Committee may terminate any or all unexercised
Stock Options and Stock Appreciation Rights at such time as the Committee deems appropriate, (D) with respect to participants holding Stock Units or Cash Awards, the Committee may determine that such participants shall receive one or more
payments in settlement of such Stock Units or Cash Awards, in such amount and form and on such terms as may be determined by the Committee, or (E) the Committee may determine that Benefits that remain outstanding after the Change in Control
shall be converted to similar Benefits of the surviving corporation (or a parent or subsidiary of the surviving corporation). Without limiting the foregoing, if the per share Fair Market Value of the Common Stock does not exceed the per share
exercise price or base amount of a Stock Option or Stock Appreciation Right, the Company shall not be required to make any payment to the participant upon surrender of the Stock Option or Stock Appreciation Right. Any acceleration, surrender,
termination, settlement or conversion shall take place as of the date of the Change in Control or such other date as the Committee may specify.
(c)
Definitions.
For purposes of this Plan, the following terms have the following meanings:
(i)
Change in Control
of the Company shall be deemed to have occurred if the event set forth in any one of the following
sections shall have occurred
:
(A) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty-five percent (35%) or more of the combined voting power of the Companys
then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (I) of subsection (C) below;
(B) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to
the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Companys shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended;
(C) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (I) a merger or consolidation immediately following
which the individuals who comprise the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such merger or consolidation or, if the Company or the entity surviving
such merger is then a subsidiary, the ultimate parent thereof, or (II) a merger or consolidation effected to
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implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in
the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing thirty-five percent (35%) or more of the combined voting power of the Companys then outstanding securities;
or
(D) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets immediately following which the
individuals who comprise the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred (i) by virtue of the consummation of any
transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate
ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions or (ii) by virtue of the consummation of a spin-off of any business line or business unit
of the Company or a sale of (or similar transaction with respect to) all or substantially all of the assets that comprise a business line or business unit of the Company. The Committee may provide in a grant agreement for another definition of
Change in Control, including as necessary to comply with Section 409A of the Code.
(ii)
Affiliate
shall mean
with respect to any Person, any other Person that, at any time that a determination is made hereunder, directly or indirectly, controls, is controlled by, or is under common control with such first Person. For the purpose of this definition,
control shall mean, as to any Person, the possession, directly or indirectly, of the power to elect or appoint a majority of directors (or other persons acting in similar capacities) of such Person or otherwise to direct or cause the
direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
(iii)
Beneficial Owner
and
Beneficially Own
shall have the meaning set forth in Rules 13d-3 and 13d-5
promulgated under the Exchange Act or any successor provision.
(iv)
Person
shall mean any individual, entity or
group, including any person or group within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision.
15. Nontransferability.
Benefits granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the participants
lifetime, only by the participant. In the event of the death of a participant, each Stock Option or Stock Appreciation Right theretofore granted to him or her shall be exercisable during such period after his or her death as the Committee shall in
its discretion set forth in the grant agreement and then only by the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participants rights under the Stock Option or Stock
Appreciation Right shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, at the discretion of the Committee, and subject to applicable law, a grant agreement for a Benefit other than an Incentive Stock Option may
permit the transferability of the Benefit by a participant solely for charitable purposes or to the participants spouse, siblings, parents, children and grandchildren or trusts for the benefit of such persons or to partnerships, corporations,
limited liability companies or other entities owned solely by such persons, including trusts for such persons, without consideration, subject to any restriction included in the grant agreement for the Benefit.
16. Other Provisions.
The award of any Benefit under the Plan may be subject to such other provisions (whether or not applicable to the Benefit awarded to
any other participant) as the Committee determines appropriate, including, without limitation, for the forfeiture of, or restrictions on resale or other disposition of, Common Stock acquired under any form of Benefit, for the acceleration of
exercisability or vesting of
C-16
Benefits (subject to Section 4(b)), or to comply with federal and state securities laws, or understandings or conditions as to the participants employment or service in addition to
those specifically provided for under the Plan.
17. Fair Market Value.
For purposes of this Plan and any Benefits awarded hereunder, Fair Market
Value on any given date means (i) if the Common Stock is listed on a national securities exchange on a last sale basis, the closing price reported as having occurred on the such date, or, if there is no sale on such date, then on the last
preceding date on which such a sale was reported, or (ii) if the Common Stock is not listed on a national securities exchange on a last sale basis, the amount determined by the Committee to be the fair market value based upon a good faith
attempt to value the Common Stock accurately.
18. Withholding.
All payments or distributions of Benefits made pursuant to the Plan shall be net
of any amounts required to be withheld pursuant to applicable federal, state and local tax withholding requirements. If the Company proposes or is required to distribute Common Stock pursuant to the Plan, it may require the recipient to remit to it
or to the corporation that employs such recipient an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Stock. In lieu thereof, the Company or the employing corporation shall have
the right to withhold the amount of such taxes from any other sums due or to become due from such corporation to the recipient as the Committee shall prescribe. The Committee may, in its discretion and subject to such rules as it may adopt
(including any as may be required to satisfy applicable tax and/or non-tax regulatory requirements), permit or require a participant to pay all or a portion of the federal, state and local withholding taxes arising in connection with any Benefit
consisting of shares of Common Stock by having the Company withhold shares of Common Stock having a Fair Market Value equal to the amount of tax to be withheld, or permit a participant to pay such withholding taxes by tendering shares of Common
Stock held by the participant. Unless the Committee determines otherwise, share withholding for taxes shall not exceed the participants minimum applicable tax withholding amount.
19. Duration, Amendment and Termination
.
(a)
Amendment and Termination
. The
Company, by action of its Board of Directors, may amend the Plan from time to time or suspend or terminate the Plan at any time; provided, however, that the Board of Directors shall not amend the Plan without approval of the shareholders of the
Company if such approval is required (i) in order to comply with the Code or other applicable laws, or to comply with applicable stock exchange requirements or (ii) in order to comply with Section 19(b) below. No amendment or
termination of this Plan shall, without the consent of the participant, materially impair any rights or obligations under any Benefit previously granted to the participant under the Plan, unless such right has been reserved in the Plan or the grant
agreement, or except as provided in Section 20(f) below. Notwithstanding anything in the Plan to the contrary, the Board of Directors may amend the Plan in such manner as it deems appropriate in the event of a change in applicable law or
regulations.
(b)
No Repricing
. Except in connection with a corporate transaction involving the Company (including, without
limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spinoff, combination, or exchange of shares), the Company may not, without obtaining shareholder approval,
(i) amend the terms of outstanding Stock Options or Stock Appreciation Rights to reduce the exercise price of outstanding Stock Options or the base amount of outstanding Stock Appreciation Rights, (ii) cancel outstanding Stock Options or
Stock Appreciation Rights in exchange for other awards or Stock Options or Stock Appreciation Rights with an exercise price or base amount, as applicable, that is less than the exercise price or base amount, as applicable, of the original Stock
Options or Stock Appreciation Rights or (iii) cancel outstanding Stock Options or Stock Appreciation Rights with an exercise price or base amount, as applicable, above the current stock price in exchange for cash, Common Stock or other
securities.
(c)
Shareholder Approval for Performance-Based Awards
. The Plan must be reapproved by the Companys
shareholders no later than the first shareholders meeting that occurs in the fifth year following the year in which the shareholders previously approved the provisions of Section 11, if Performance-Based Awards are to be made under
Section 11 after the date of such shareholders meeting and if required by Section 162(m) of the Code or the regulations thereunder.
C-17
(d)
Termination of Plan
. The Plan shall terminate on the day immediately preceding the tenth
(10th) anniversary of the Effective Date, unless the Plan is terminated earlier by the Board of Directors or is extended by the Board of Directors with the approval of the shareholders. The termination of the Plan shall not impair the power and
authority of the Committee with respect to outstanding Benefits. Incentive Stock Options shall not be granted after the date that is ten (10) years after the date on which the Board of Directors adopts the Plan or the Effective Date, whichever
is earlier.
20. Miscellaneous.
(a)
Employment Rights
. Neither the Plan nor any action taken hereunder shall be construed as giving any participant the right to be retained
in the employ or service of the Company or any of its subsidiaries or affiliates.
(b)
Unfunded Plan
. Participants shall have no
right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed
to create a trust of any kind, or a fiduciary relationship between the Company and any participant, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under the
Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974, as amended.
(c)
No Fractional Shares
. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan or any Benefit. The
Committee shall determine whether cash, or Benefits, or other property shall be issued or paid in lieu of fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(d)
Company Policies; Holding Requirements
. All Benefits granted under the Plan shall be subject to any applicable clawback or recoupment
policies, share trading policies and other policies that may be implemented by the Companys Board of Directors from time to time. Participants who are subject to the Companys stock ownership policy must hold a portion of the net
after-tax shares received upon vesting, exercise or payment of Benefits under this Plan until the applicable stock ownership guidelines are met, in accordance with the Companys stock ownership policy.
(e)
Requirements for Issuance of Shares
. No Common Stock shall be issued in connection with any Benefit hereunder unless and until all legal
requirements applicable to the issuance of such Common Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Benefit granted to any participant hereunder on such participants
undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Common Stock as the Committee shall deem necessary or advisable, and certificates representing such shares may be legended to reflect any
such restrictions. Certificates representing shares of Common Stock issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any
requirement that a legend be placed thereon. No participant shall have any right as a shareholder with respect to Common Stock covered by a Benefit until shares have been issued to the participant.
C-18
(f)
Compliance with Law
. The Plan, the exercise of Stock Options or Stock Appreciation Rights
and the obligations of the Company to issue or transfer shares of Common Stock in accordance with Benefits granted under the Plan shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required.
With respect to persons subject to Section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act.
In addition, it is the intent of the Company that Incentive Stock Options comply with the applicable provisions of Section 422 of the Code, and Performance-Based Awards comply with the applicable provisions of Section 162(m) of the Code.
To the extent that any legal requirement of Section 16 of the Exchange Act or Section 422 or 162(m) as set forth in the Plan ceases to be required under Section 16 of the Exchange Act or Section 422 or 162(m) of the Code, that
Plan provision shall cease to apply. The Committee may revoke any Benefit granted under the Plan if it is contrary to law or modify a Benefit to bring it into compliance with any valid and mandatory government regulation. The Committee may also
adopt rules regarding the withholding of taxes on payments to participants. The Committee may also, in its sole discretion, agree to limit its authority under this Section.
(g)
Benefits in Connection with Corporate Transactions and Otherwise
. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to grant Benefits under this Plan in
connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Benefits to employees thereof who become employees of the Company or its
subsidiaries or affiliates, or for other proper corporate purposes, or (ii) limit the right of the Company to make stock-based awards outside of this Plan. Without limiting the foregoing, the Committee may grant Substitute Awards to an employee
of another corporation who becomes an employee of the Company or its subsidiaries or affiliates by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company in substitution for
a grant made by such corporation. The terms and conditions of the Benefits may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives, as determined by the Committee.
(h)
Section 409A
. The Plan is intended to comply with the requirements of Section 409A of the Code, to the extent applicable. All
Benefits shall be construed and administered such that the Benefit either (i) qualifies for an exemption from the requirements of Section 409A of the Code or (ii) satisfies the requirements of Section 409A of the Code. If a
Benefit is subject to Section 409A of the Code, (A) distributions shall only be made in a manner and upon an event permitted under Section 409A of the Code, (B) payments to be made upon a termination of employment shall only be
made upon a separation from service under Section 409A of the Code, (C) unless the Benefit specifies otherwise, each installment payment shall be treated as a separate payment for purposes of Section 409A of the Code, and
(D) in no event shall a participant, directly or indirectly, designate the calendar year in which a distribution is made except in accordance with Section 409A of the Code. Any Benefit granted under the Plan that is subject to
Section 409A of the Code and that is to be distributed to a key employee upon separation from service shall be administered so that any distribution with respect to such Benefit shall be postponed for six (6) months following the date of
the participants separation from service, if required by Section 409A of the Code. If a distribution is delayed pursuant to Section 409A of the Code, the distribution shall be paid within thirty (30) days after the end of the
six (6)-month period. If the participant dies during such six (6)-month period, any postponed amounts shall be paid within ninety (90) days of the participants death. The determination of key employees, including the number and identity
of persons considered key employees and the identification date, shall be made by the Committee or its delegate each year in accordance with Section 416(i) of the Code and the specified employee requirements of Section 409A of
the Code.
(i)
Governing Law
. This Plan, Benefits granted hereunder and actions taken in connection herewith shall be governed
and construed in accordance with the laws of the Commonwealth of Pennsylvania (regardless of the law that might otherwise govern under applicable Pennsylvania principles of conflict of laws).
(j)
Effective Date
. The Plan shall be effective as of July 8, 2016, subject to shareholder approval of the Plan (the
Effective
Date
).
C-19
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ARMSTRONG WORLD INDUSTRIES, INC.
MARK A. HERSHEY
2500 COLUMBIA AVENUE
LANCASTER, PA 17603
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VOTE BY INTERNET
Before the meeting:
www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time
the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
During the meeting:
www.virtualshareholdermeeting.com/awi2016
You
may attend the meeting via the Internet and vote during the meeting. Have the information that is printed in the box marked by the arrow available and follow the instructions.
ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS
If you would
like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery,
please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your
proxy card in hand when you call and then follow the instructions.
VOTE BY
MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51
Mercedes Way, Edgewood, NY 11717.
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TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
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KEEP THIS PORTION FOR YOUR RECORDS
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DETACH AND RETURN THIS PORTION ONLY
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THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
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For
All
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Withhold
All
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For All
Except
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To withhold authority to vote for any individual nominee(s), mark For All Except and write the number(s) of the nominee(s) on the line below.
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The Board of Directors recommends you vote FOR the following:
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1.
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Election of Directors
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¨
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¨
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Nominees
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01 Stan A. Askren
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02 Victor D. Grizzle
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03 Tao Huang
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04 Larry S. McWilliams
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05 James C. Melville
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06 James J. OConnor
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07 John J. Roberts
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08 Gregory P. Spivy
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09 Cherryl T. Thomas
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The Board of Directors recommends you vote FOR the following proposal:
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For
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Against
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Abstain
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2
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To ratify the selection of KPMG LLP as our independent registered public accounting firm for 2016.
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3
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To approve of the Armstrong World Industries, Inc. 2016 Directors Stock Unit Plan.
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¨
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4
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To approve of the Armstrong World Industries, Inc. 2016 Long-Term Incentive Plan.
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NOTE:
Such other business as may properly come before the meeting or any adjournment thereof. In their discretion, the proxy holders are authorized to vote such other business as may properly come before the
meeting or any postponement or adjournment thereof.
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Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must
sign. If a corporation or partnership, please sign in full corporate or partnership name, by authorized officer.
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Signature [PLEASE SIGN WITHIN BOX] Date
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Signature (Joint Owners) Date
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Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:
The Annual Report, Notice & Proxy
Statement is/are
available at
www.proxyvote.com.
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ARMSTRONG WORLD INDUSTRIES, INC.
Annual Meeting of Shareholders
July 8, 2016 8:00 AM
This
proxy is solicited by the Board of Directors
The undersigned hereby
appoints Victor D. Grizzle and James J. OConnor as proxies, each with full power of substitution, to represent and vote as designated on the reverse side, all of the shares of Common Stock of Armstrong World Industries, Inc. held of record by
the undersigned on April 15, 2016, at the Annual Meeting of Shareholders to be held on July 8, 2016 at 8:00 a.m., or any adjournment of postponement thereof.
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Continued and to be signed on reverse side
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