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Section 1: DEF 14A (DEF 14A)

afi-def14a_20180601.htm

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

 

 

Filed by the Registrant  

Filed by a Party other than the Registrant  

 

Check the appropriate box:

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material Pursuant to §240.14a-12

ARMSTRONG FLOORING, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than Registrant)

Payment of Filing Fee (check the appropriate box):

 

 

No fee required.

 

 

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

 

 

 

(1)

 

    Title of each class of securities to which transaction applies:

 

 

 

 

 

 

(2)

 

    Aggregate number of securities to which transaction applies:

 

 

 

 

 

 

(3)

 

    Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

 

 

 

(4)

 

    Proposed maximum aggregate value of transaction:

 

 

 

 

 

 

(5)

 

    Total fee paid:

 

 

 

 

Fee paid previously with preliminary materials.

 

 

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

 

 

 

(1)

 

    Amount Previously Paid:

 

 

 

 

 

 

(2)

 

    Form, Schedule or Registration Statement No.:

 

 

 

 

 

 

(3)

 

    Filing Party:

 

 

 

 

 

 

(4)

 

    Date Filed:

 

 

 


 

 

ARMSTRONG FLOORING, INC.

2500 COLUMBIA AVENUE, P.O. BOX 3025

LANCASTER, PA 17603

 

www.armstrongflooring.com

April 18, 2018

 

2018 ANNUAL MEETING OF STOCKHOLDERS

Dear Stockholders:

We look forward to your attendance virtually via the Internet or by proxy at the 2018 Armstrong Flooring, Inc. Annual Stockholders’ Meeting. We will hold the meeting at 9:00 a.m. Eastern time on Friday, June 1, 2018.

Please refer to the proxy statement for detailed information on each of the matters to be acted on at the meeting. Your vote is important, and we strongly urge you to cast your vote. We encourage you to vote promptly, even if you plan to attend the meeting via the Internet.

On behalf of your Board of Directors, thank you for your continued support of Armstrong Flooring.

 

Very truly yours,

 

 

Larry S. McWilliams

Chair of the Board

 

 


NOTICE OF 2018 ANNUAL MEETING OF STOCKHOLDERS

 

Time and Date

  

9:00 a.m. Eastern Time on Friday, June 1, 2018

Attendance

  

Online at www.virtualshareholdermeeting.com/AFI2018

Record Date

  

April 9, 2018

Notice is hereby given that a meeting of the stockholders of Armstrong Flooring, Inc. (the “Company”) will be held virtually, via the Internet at www.virtualshareholdermeeting.com/AFI2018, on Friday, June 1, 2018 at 9:00 a.m. Eastern time (the “Annual Meeting”) for the following purposes:

 

1.

To elect six (6) director nominees named in the accompanying Proxy Statement to serve one-year terms expiring at the 2019 Annual Meeting of Stockholders;

 

2.

To hold a non-binding, advisory vote to approve the compensation of the Company’s named executive officers;

 

3.

To ratify the selection of KPMG LLP as the Company’s independent registered public accounting firm for 2018; and

 

4.

To transact such other business that may properly come before the Annual Meeting or any adjournments or postponements thereof.

Only stockholders of record at the close of business on April 9, 2018 are entitled to notice of, and to vote at, the Annual Meeting, and any adjournments or postponements thereof.

By Order of the Board of Directors.

 

Christopher S. Parisi

Senior Vice President, General Counsel & Secretary

April 18, 2018

YOUR VOTE IS IMPORTANT. We urge you to cast your vote promptly, even if you plan to attend the Annual Meeting via the Internet. You may vote via the Internet, by telephone, or, if you have received a printed version of these proxy materials, by mail. See “QUESTIONS AND ANSWERS” on page 1 of the Proxy Statement for further information. Instructions on how to attend and participate via the Internet are posted at www.virtualshareholdermeeting.com/AFI2018. Stockholders may vote and submit questions while attending the meeting via the Internet.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF

PROXY MATERIALS FOR THE ANNUAL MEETING

TO BE HELD ON JUNE 1, 2018:

The Notice of Annual Meeting, Proxy Statement and

the Company’s 2017 Annual Report are available at www.proxyvote.com.

 

 


 

QUESTIONS AND ANSWERS

1

PROPOSAL 1 – ELECTION OF DIRECTORS

4

Former Class I Director Nominees

5

Class II Director Nominees

6

Other Directors

7

CORPORATE GOVERNANCE

8

Corporate Governance Documents

8

Board Leadership Structure

8

Director Independence

9

Board’s Role in Risk Management Oversight

9

Board’s Role in Succession Planning

9

Board Evaluation

10

Board Meetings and Committees

10

Compensation Committee Interlocks and Insider Participation

11

Certain Relationships and Related Party Transactions

12

Director Qualification Standards

12

Director Education

13

Communication with Board

13

COMPENSATION OF DIRECTORS

14

Stock Ownership Guidelines

15

Director Compensation Table

15

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND DIRECTORS

16

Certain Beneficial Owners

16

Management and Directors

18

Directors – Aggregate Ownership

19

COMPENSATION DISCUSSION AND ANALYSIS

20

COMPENSATION COMMITTEE REPORT

35

SUMMARY COMPENSATION TABLE

36

GRANTS OF PLAN BASED AWARDS

37

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

38

OPTIONS EXERCISED AND STOCK VESTED

39

PENSION BENEFITS

40

NONQUALIFIED DEFERRED COMPENSATION

42

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

43

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

48

PROPOSAL 2 – ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

49

PROPOSAL 3 – RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

50

AUDIT COMMITTEE REPORT

50

FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

51

OTHER BUSINESS

52

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

52

SUBMISSION OF STOCKHOLDER PROPOSALS

52

ANNUAL REPORT ON FORM 10-K

53

INCORPORATION BY REFERENCE

53

ANNEX A

A-1

 

 

 

 

 


PROXY STATEMENT

On April 1, 2016, we became an independent public company as a result of the separation by Armstrong World Industries, Inc. (“AWI”) of its Resilient Flooring and Wood Flooring segments from its Building Products segment (the “Separation”).

We prepared this Proxy Statement under the direction of our Board of Directors (the “Board”) to solicit your proxy for use at our 2018 Annual Meeting of Stockholders to be held via the Internet on Friday, June 1, 2018 at 9:00 a.m. Eastern time (the “Annual Meeting”). When we refer to “we,” “our,” “us,” “Armstrong Flooring,” “AFI” and the “Company” in this Proxy Statement, we are referring to Armstrong Flooring, Inc. This Proxy Statement (“Proxy Statement”) and the related materials are first being distributed to stockholders on or about April 18, 2018.

QUESTIONS & ANSWERS

Why am I being asked to review these materials?

Our Board is soliciting proxies for use at the Annual Meeting. In order to solicit your proxy, we must furnish you with this Proxy Statement, which contains information about the proposals to be voted upon at the Annual Meeting. As a stockholder, you are invited to attend the Annual Meeting via the Internet and are entitled and encouraged to vote on the proposals described in this Proxy Statement.

Who is entitled to vote?

Each holder of record of our shares of common stock, par value $0.0001 per share (“Common Shares”), at the close of business on the record date, April 9, 2018 (the “Record Date”), is entitled to one vote for each Common Share owned on each matter to be voted on. As of the Record Date, 25,742,615 Common Shares were issued and outstanding and entitled to vote at the Annual Meeting, which number excludes 2,465,863 Common Shares held in treasury.

What must I do to attend the meeting via the Internet?

You may attend and participate in the Annual Meeting via the Internet at www.virtualshareholdermeeting.com/AFI2018 where you will be able to vote and submit questions during the meeting. Stockholders who use the control number that was furnished to them with their copy of these proxy materials to log on to the meeting will be able to vote and submit questions during the meeting.

How do I vote?

You may vote your shares as follows:

By Internet Before The Annual Meeting - Go to 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 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 Annual Meeting - Go to www.virtualshareholdermeeting.com/AFI2018

You may attend the Annual Meeting via the Internet and vote during the Annual Meeting. Have the information that is printed in the box marked by the arrow available and follow the instructions.

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 meeting date. Have your proxy card in hand when you call and then follow the instructions.

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.

1


If your shares are registered directly in your own name with our transfer agent, AST Financial (“AST”), you are considered a “stockholder of record” with respect to those shares, and the Notice has been sent directly to you. If you hold your shares through a broker, bank or other nominee, you are considered a “beneficial owner” of those shares, holding such shares in “street name.” If you are a beneficial owner of shares, you will receive instructions from your broker or other nominee describing how to instruct your broker or nominee to vote your shares. To vote online at the Annual Meeting, beneficial owners will need to contact the broker, trustee or nominee that holds their shares to obtain a “legal proxy” that will permit them to vote their shares via the Internet at the meeting.

What is the deadline for voting if I do not plan to attend the Annual Meeting?

You may vote via the Internet or by telephone until 11:59 p.m., Eastern Time, on May 31, 2018, or Broadridge Investor Communications Solutions, Inc. must receive your paper proxy card by mail on or before May 31, 2018.

Can I change my vote after I have delivered my proxy?

A subsequent vote will change your prior vote. The last vote received prior to the Annual Meeting will be the one counted. If you are a stockholder of record, you may also change your vote by voting online during the Annual Meeting. Beneficial owners wishing to change their votes after returning voting instructions to their broker or other nominee must contact the broker or nominee directly.

Can I revoke a proxy?

Yes. A stockholder of record may revoke a properly executed proxy at any time before its exercise by submitting a letter addressed to, and received by, our Corporate Secretary, by delivering later dated proxy instructions or by voting online during the meeting. Beneficial owners cannot revoke their proxies at the Annual Meeting because the registered stockholders (the broker, bank or other nominees) will not be present. Beneficial owners who wish to vote online during the Annual Meeting must obtain a legal proxy from their broker, bank or other nominee.

Who will vote my shares at the Annual Meeting and how will they vote my shares if I provide voting instructions and/or grant my proxy?

Larry S. McWilliams, Chair of the Board, and Donald R. Maier, our President and CEO, were designated by the Board to vote all proxies, or record an abstention or withholding, in accordance with the directions on the proxy. If no contrary direction is given, the shares will be voted as recommended by the Board.

Who will count the votes and how much does it cost the Company?

We have engaged Broadridge Investor Communications Solutions, Inc. to tabulate the proxy votes and any votes cast in person for a fee of approximately $15,000 plus reasonable expenses.

What is a quorum? Why is a quorum required?

It is important that your proxy be returned because a quorum is required for our stockholders to conduct business at the Annual Meeting. The presence at the meeting or representation by proxy of the holders of Common Shares having a majority of the voting power represented by all issued and outstanding Common Shares entitled to vote on the Record Date will constitute a quorum, allowing us to conduct the business of the meeting. Proxies received but marked as abstentions, if any, will be included in the calculation of the number of shares considered to be present at the meeting for quorum purposes. Because this Proxy Statement includes a “routine” management proposal, shares represented by “broker non-votes” will be counted in determining whether there is a quorum present. If there is not a quorum present at the Annual Meeting, we will be forced to reconvene the Annual Meeting at a later date.

What is the effect of an abstention?

The shares of a stockholder who abstains from voting on a matter will be counted for purposes of determining whether a quorum is present at the Annual Meeting, so long as the stockholder is present or represented by proxy. With regard to the election of directors, votes may be cast “for,” “against,” or “abstain,” and votes to abstain will have no effect. Abstentions may be specified on all other proposals. An abstention from voting on a matter by a stockholder present or represented by proxy at the Annual Meeting has the same legal effect as a vote “against” approval of the compensation of our named executive officers (“NEOs”) and ratification of the selection of KPMG LLP as our independent registered public accounting firm for 2018.

2


How will votes be counted on shares held through brokers?

If you are a beneficial owner and do not provide your broker with voting instructions, your shares may constitute “broker non-votes.” Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. Brokers are not entitled to vote on the election of directors or the advisory proposal to approve the compensation of our NEOs unless the brokers receive voting instructions from the beneficial owner. The shares of a stockholder whose shares are not voted because of a broker non-vote on a particular matter will be counted for purposes of determining whether a quorum is present at the Annual Meeting so long as the stockholder is represented by proxy. In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered present and entitled to vote on that proposal. Thus, broker non-votes will not affect the outcome of any matter being voted on at the Annual Meeting, assuming that a quorum is obtained. Brokers will be permitted to vote without voting instructions on the ratification of the selection of KPMG LLP as our independent registered public accounting firm for 2018, assuming that a quorum is obtained.

How many votes are needed to approve each of the proposals?

Each director nominee will be elected by a plurality of the votes cast at the Annual Meeting. A plurality means that the nominees with the largest number of votes are elected as directors up to the maximum number of directors to be chosen at the Annual Meeting.

Approval, on an advisory basis, of the compensation of our NEOs requires the affirmative vote of a majority of the Common Shares present online during the meeting or represented by proxy and entitled to vote at the Annual Meeting.

The ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2018 requires the affirmative vote of a majority of the votes present and entitled to vote at the meeting to be approved.

What does it mean if I receive more than one proxy card or voting instructions?

This means that you have multiple accounts in which you own our Common Shares. Please vote all proxy cards/voting instructions from us to ensure that all of your Common Shares are voted. However, you may want to contact your broker, bank or our transfer agent to consolidate as many accounts as possible under a single name and address. Our transfer agent is AST. All communications concerning Common Shares you hold in your name, including address changes, name changes, requests to transfer and similar issues, can be handled by contacting AST, 6201 15th Avenue Brooklyn, NY 11219; or by email to info@astfinancial.com; or by phone (1-800-937-5449).

What should we do if multiple stockholders reside in our household, and we wish to change the number of copies of proxy materials that we receive?

Some banks, brokers, broker-dealers and other similar organizations acting as nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of this Proxy Statement and the annual report may have been sent to multiple stockholders in your household. If you would prefer to receive separate copies of a Proxy Statement or annual report for other stockholders in your household, either now or in the future, please contact your bank, broker, broker-dealer or other similar organization serving as your nominee. Upon written or oral request to the attention of Investor Relations, 2500 Columbia Avenue, P.O. Box 3025, Lancaster, Pennsylvania 17603, via email at IR@armstrongflooring.com , or via telephone to the Investor Relations department at 717-672-9300, we will promptly provide separate copies of the annual report and/or this Proxy Statement. Stockholders sharing an address who are receiving multiple copies of the Proxy Statement or annual report and who wish to receive a single copy of such materials in the future will need to contact their bank, broker, broker-dealer or other similar organization serving as their nominee to request that only a single copy of each document be mailed to all stockholders at the shared address in the future.

Where can I find voting results of the Annual Meeting?

We will announce preliminary general voting results at the meeting and publish final detailed voting results on a Current Report on Form 8-K that we will file with the U.S Securities and Exchange Commission (“SEC”) within four (4) business days after the Annual Meeting.

 

 

 

 

3


PROPOSAL 1 – ELECTION OF DIRECTORS

 

Our Board currently consists of nine (9) members, eight (8) of whom were appointed in connection with the Separation when the Company was a wholly-owned subsidiary of AWI. Richard E. Wenz was also appointed in connection with the Separation and passed away on June 29, 2016. Michael W. Malone was appointed to the Board effective October 1, 2016.

Our Amended and Restated Certificate of Incorporation (“Certificate”) and Amended and Restated Bylaws (“Bylaws”) provide that our Board is to initially be divided into three (3) classes, each comprised of three (3) directors.

 

Class I

Kathleen S. Lane, Michael W. Malone and Jacob H. Welch

Class term expired in 2017; reelected in 2017; to be elected on an annual basis thereafter

Class II

Jeffrey Liaw, Donald R. Maier and James J. O’Connor

Class term expires in 2018; to be elected on an annual basis thereafter

Class III

Michael F. Johnston, James C. Melville and Larry S. McWilliams

Class term expires in 2019; to be elected on an annual basis thereafter

Upon the expiration of the initial term of each class of directors, the directors of such class will thereafter stand for election annually, such that, beginning with the 2019 annual meeting of stockholders, our Board will no longer be divided into classes and each director will stand for election annually.

As noted above, the former Class I and current Class II directors are up for reelection. Based on the recommendation of its Nominating and Governance Committee (the “Governance Committee”), which is composed solely of ‘independent directors’ as defined in the New York Stock Exchange (“NYSE”) Listing Standards, the Board has nominated these directors for election at the Annual Meeting. Each nominee is a current member of the Board, and with the exception of Mr. Maier, each is an independent member of the Board. Based on this recommendation and each nominee’s prior service to the Board, credentials and experience, the Board has determined that each such nominee can make a significant contribution to the Board and should continue to serve as a director. If elected, these directors will hold office until the 2019 annual meeting of stockholders and until their successors are elected and qualified.

The Board is not seeking the election of Class III directors, whose terms have not yet expired. You may not vote for a greater number of persons than the nominees named in this Proxy Statement.

Each nominee has agreed to be named in this Proxy Statement and to serve if elected. We have no reason to believe that any of the nominees would be unable to serve if elected, but if any nominee is unavailable for election, the proxy holders may vote for another nominee proposed by the Board, in which case your shares will be voted for such other nominee.

The pages that follow include biographical information about each of our directors, including service as a director, experience, public company directorships held currently or at any time during the last five (5) years, and the qualifications and skills that factored into the Board’s determination that the director should serve on the Board.

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FORMER CLASS I DIRECTOR NOMINEES

KATHLEEN S. LANE

Age: 60

Independent

Director Since:    March 30, 2016

Committees Served:    Audit

Experience:     Executive Vice President and Chief Information Officer of TJX Companies, Inc., a specialty multi-national apparel retailer with leading retail brands such as T-J-Maxx, Marshalls, and HomeGoods (2008 to 2013). Group Chief Information Officer at National Grid Plc., an international electricity and gas utility (2006 to 2008). Senior Vice President and Chief Information Officer of Gillette Company (Procter & Gamble) (2002 to 2006).

Other Public Company Board Experience:     EarthLink Holdings Corp. (since 2013); Bob Evans Farms, Inc. (2014 to 2017).

Skills and Qualifications:     Ms. Lane has 30 years of IT experience, including chief information officer roles in the consumer products, financial services, utilities and retail industries. From her multiple chief information officer roles, Ms. Lane provides the Board with a substantial IT and business process background as well as considerable global technical and business experience. Ms. Lane also brings gender diversity and public company board experience to our Board.

MICHAEL W. MALONE

Age: 59

Independent

Director Since:    October 1, 2016

Committees Served:    Audit (Chair); Finance

Experience:     Vice President – Finance and CFO of Polaris Industries Inc. (1997 to 2015; retired 2016). Corporate Secretary of Polaris Industries Inc. (1997 to 2010). Vice President and Treasurer of Polaris Industries Inc. (1994 to 1997). CFO and Treasurer of the predecessor company of Polaris Industries Inc. (1993 to 1994). Joined Polaris Industries Inc. in 1984 after four years with Arthur Andersen L.L.P.

Skills and Qualifications:     Mr. Malone offers our Board extensive financial and senior management knowledge and expertise, including public company CFO experience, within the manufacturing industry.

JACOB H. WELCH

Age: 34

Independent

Director Since:    March 30, 2016

Committees Served:    Finance; Management Development and Compensation

Experience: Partner at ValueAct Capital (since 2009). Analyst with The Blackstone Group in its private equity division in New York (2006 to 2009). Appointed to AFI’s Board pursuant to and in accordance with an appointment and stockholder’s agreement between AFI and members of the ValueAct Group, dated February 26, 2016.

Skills and Qualifications:     Mr. Welch offers our Board his advisory experience with ValueAct’s portfolio companies, as well as his knowledge and expertise in finance.

 

5


CLASS II DIRECTOR NOMINEES

JEFFREY LIAW

Age: 41

Independent

Director Since:    March 30, 2016

Committees Served:    Audit; Finance (Chair)

Experience:     CFO of Copart, Inc., a leading global provider of online auctions and vehicle remarketing services (since January 2016). CFO of FleetPride, Inc., a nationwide supplier of heavy-duty truck and trailer parts (2012 to 2015). Principal at TPG Capital active in TPG’s energy and industrial investing practice areas (2005 to 2012). Associate at Bain Capital prior to 2005.

Other Public Company Board Experience:     Graphic Packaging Holding Company (2008 to 2013); Armstrong World Industries, Inc. (2012 to March 31, 2016).

Skills and Qualifications:     Mr. Liaw offers our Board financial expertise and experience, including as a public company CFO within the industrials sector.

DONALD R. MAIER

Age: 54

Director Since:    March 30, 2016

Experience:     President and CEO of Armstrong Flooring, Inc. (2016 to present). Executive Vice President and CEO of Flooring Products division of Armstrong World Industries, Inc. (2014 to 2016); Senior Vice President, Global Operations Excellence of Armstrong World Industries, Inc. (2010 to 2014). Senior Advisor of TPG Capital Advisors, the global buyout firm of TPG Global (2007 to 2010). Various senior leadership, strategic and business development, marketing and engineering roles at Hillenbrand Industries and its subsidiaries Batesville Casket Company and Hill-Rom (1987 to 2007).

Skills and Qualifications:     Mr. Maier offers our Board extensive senior management expertise and experience within the manufacturing industry.

JAMES J. O’CONNOR

Age: 81

Independent

Director Since:    March 30, 2016

Committees Served:    Nominating and Governance; Management Development and Compensation

Experience:     CEO of Unicom Corporation (1994 to 1998). CEO of Commonwealth Edison Company (1980 to 1998). President of Commonwealth Edison Company (1977 to 1980).

Other Public Company Board Experience:     Armstrong World Industries, Inc. (Chair) (since 2007); United Continental Holdings (1984 to 2012); Corning, Inc. (1984 to 2011); Smurfit – Stone Container Corporation (2000 to 2011); Trizec Properties, Inc. (2003 to 2006); Unicom Corporation (former Chair) (1994 to 1998); Commonwealth Edison Company (former Chair) (1978 to 1998).

Skills and Qualifications:     Mr. O’Connor has a broad business background, having served in several chief and senior executive positions with large companies and on the boards of directors of companies as diverse as a utility company, an industrial manufacturing company and an airline. Mr. O’Connor also offers our Board extensive knowledge and expertise in senior executive leadership, management, and corporate governance and board practices of other major corporations.

 

THE BOARD RECOMMENDS THAT YOU VOTE ‘FOR’ THE ELECTION OF EACH OF THE FOREGOING DIRECTOR NOMINEES

6


 

 DIRECTORS WHOSE TERMS HAVE NOT YET EXPIRED

LARRY S. MCWILLIAMS, CHAIR

Age: 62

Independent

Director Since:    March 30, 2016

Committees Served:    Nominating and Governance

Experience:     Co-CEO of Compass Marketing, a marketing advisory firm to Fortune 500 consumer package companies (since 2012). President and Chief Executive Officer of Keystone Foods, a supplier of proteins and distribution services (2011 to 2012). Senior Vice President at Campbell Soup Company (2001 to 2011). President of Campbell International (2005 to 2010). President of Campbell USA (2004 to 2005). President of Campbell Soup North America (2003 to 2004).

Other Public Company Board Experience:    Armstrong World Industries, Inc. (since 2010); Bob Evans Farms, Inc. (2014 to 2017).

Skills and Qualifications:     Mr. McWilliams offers our Board senior executive leadership capabilities and experience, as well as extensive knowledge of sales, marketing, customer service relationships, international markets and distribution channels.

MICHAEL F. JOHNSTON

Age: 70

Independent

Director Since:    March 30, 2016

Committees Served:    Audit; Finance; Management Development and Compensation (Chair)

Experience:     CEO (2004 to 2008) and President and Chief Operating Officer (2000 to 2004) of Visteon Corporation, an automotive components supplier. Former President of North America/Asia Pacific, Automotive Systems Group (1999 to 2000), President of Americas Automotive Group (1997 to 1999), and other senior management positions at Johnson Controls, Inc., an automotive and building services company. In May 2009, Visteon filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.

Other Public Company Board Experience:     Whirlpool Corporation (since 2003); Armstrong World Industries, Inc. (2010 to March 31, 2016); Dover Corporation (since 2013); Chair and Director of Visteon Corporation (2004 to 2009); and, Flowserve Corporation (2007 to 2013).

Skills and Qualifications:     Mr. Johnston’s executive leadership and board of directors experience offers our Board a seasoned corporate governance perspective, and he brings to our Board extensive operational, manufacturing and design, innovation, engineering and financial experience.

JAMES C. MELVILLE

Age: 66

Independent

Director Since:    March 30, 2016

Committees Served:    Nominating and Governance (Chair); Finance; Management Development and Compensation

Experience:     Member of the Minneapolis, Minnesota-based law firm of Kaplan, Strangis and Kaplan, P.A., where he has practiced in the corporate, governance, mergers and acquisitions, securities and financial areas since 1994. Previously practiced with Dorsey and Whitney in their Minneapolis and London, England offices.

Other Public Company Board Experience:     Armstrong World Industries, Inc. (since 2012).

Skills and Qualifications:     Mr. Melville brings extensive knowledge of the law, mergers and acquisitions, executive compensation, finance, capital markets and corporate governance matters, as well as international experience and financial acumen to our Board.

7


CORPORATE GOVERNANCE

CORPORATE GOVERNANCE DOCUMENTS

Our Corporate Governance Guidelines address the responsibilities, duties, service and qualifications of our Board, the determination of a director’s independence and any conflicts of interest, Board access to management and independent advisors, director compensation and stock ownership requirements, Board committees and other matters relating to corporate governance. Our Corporate Governance Guidelines are available on our website under “Investor Relations” and then “Corporate Governance” http://www.armstrongflooring.com/corporate/governance.html. Also available at the same location on our website are: the charters of the Audit Committee, the Management Development and Compensation Committee (the “Compensation Committee”), the Governance Committee, and the Finance Committee of the Board; the Armstrong Flooring Code of Business Conduct, the Armstrong Flooring Code of Ethics for Financial Professionals, the Armstrong Flooring, Inc. Conflicts of Interest and Related Party Transactions Policy; and the Armstrong Flooring Recoupment Policy. Our website is not part of this Proxy Statement and references to our website address in this Proxy Statement are intended to be inactive textual references only.

BOARD LEADERSHIP STRUCTURE

Our Bylaws and Corporate Governance Guidelines provide the Board with the flexibility to determine what leadership structure works best for us, including whether the same individual should serve as both our Chair and our CEO. Larry S. McWilliams serves as the Chair of our Board, while Donald R. Maier serves as our President and CEO, and as a director. The separation of these positions allows Mr. Maier to focus primarily on execution of our business strategy and operations following our recent transition to an independent, public company, while Mr. McWilliams oversees the Board’s functions. The Board will continue to evaluate its leadership and governance structure within the context of the specific needs of the business, current Board composition, and the best interests of our stockholders.

Responsibilities of the Chair include ensuring and overseeing the:

 

recruitment of new Board members;

 

evaluation and compensation of the CEO;

 

development and maintenance of an appropriate succession plan;

 

independent evaluation of risk;

 

coordination of Board meeting schedules and agenda;

 

engagement of directors in discussions at the meetings;

 

annual performance evaluations of the Board, its committees and its individual members;

 

sufficiency of information provided by management to the Board;

 

communication, when necessary, with other directors on key issues and concerns outside of regularly scheduled meetings; and

 

effective functioning of the committees through appropriate delegation to, and membership of, the committees.

The Chair is also responsible for providing effective leadership for our independent directors to facilitate the independent oversight required by our Bylaws and Corporate Governance Guidelines, including by ensuring that:

 

a majority of our directors are independent;

 

all of the members of the Audit Committee, the Compensation Committee and the Governance Committee are independent directors; and

 

the Board meets at regularly scheduled executive sessions, outside of the presence of management and those directors not deemed to be ‘Independent Directors’ of the Board. Mr. McWilliams presides at these sessions. In addition, each of the Board’s four (4) standing committees regularly meet at similar executive sessions, at which the respective committee Chairs preside.

8


DIRECTOR INDEPENDENCE

It is our policy that the Board consist of a majority of directors who are not employees and are ‘independent’ under all applicable legal and regulatory requirements, including the independence requirements of the NYSE. For purposes of evaluating the independence of directors, in accordance with our Corporate Governance Guidelines, the Board will consider all relevant facts and circumstances, including the persons or organizations with which the director has an affiliation. Consistent with our Corporate Governance Guidelines, the Governance Committee has established qualifications to assist in the determination of ‘independence,’ which either meet or exceed the independence requirements of the NYSE.

The Board has determined that all of our directors, with the exception of Mr. Maier, our President and CEO, are independent within the meaning of the NYSE listing standards and the standards established in our Corporate Governance Guidelines. In addition, the Board has further determined that each of the members of the Audit Committee, the Compensation Committee and the Governance Committee are independent within the meaning of the NYSE listing standards, any applicable minimum standards required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the enhanced standards required for membership on such committees contained in our Bylaws that directors serving on such committees meet the independence criteria under both NYSE rules and Rule 10A-3(b)(1) under the Exchange Act, and in the case of the Compensation Committee, Rule 16b-3 under the Exchange Act and as an ‘outside director’ under Section 162(m) of the Internal Revenue Code of 1986, as amended.

BOARD’S ROLE IN RISK MANAGEMENT OVERSIGHT

Risk management is an integral part of our culture. The Company has created a committee of management co-chaired by its CFO and General Counsel and composed of representatives from several areas of the business, operations and functional units, which committee meets regularly to assess, identify and develop mitigation actions regarding the strategic, operational, infrastructure and external risks facing the Company. Representatives from the committee present reports and updates to the Audit Committee on a periodic basis, culminating with a larger presentation to the Board and review in anticipation of the preparation of the annual report on Form 10-K.

The Board’s role in risk management is to review the performance and functioning of the Company’s overall risk management function and management’s establishment of appropriate systems for managing risk. Specifically, the Board reviews management’s:

 

processes to identify matters that create inappropriate risk to achieving our business plans;

 

processes to assess the likelihood and impact of such risks in order to prioritize them;

 

identification of major risks and how we define “major;”

 

identification of primary risk mitigation owners;

 

mitigation of major risks, and our view of the resulting residual risk; and

 

monitoring of major risks.

Under the direction of the cross-functional steering committee described above, management provides its feedback on business unit risks during periodic business reviews and annual strategic planning discussions. The committee periodically meets with designated risk mitigation owners and assesses control measures. In addition, the steering committee regularly reevaluates the appropriateness of risk assessments and priorities. This process includes identifying risks that could prevent achievement of business goals or plans. The internal audit group uses the resulting information as a basis for developing its audit plan.

Each Board committee, consistent with its charter, assists the Board in overseeing the review of certain risks that are particularly within its purview, including as described in “BOARD MEETINGS AND COMMITTEES” below.

BOARD’S ROLE IN SUCCESSION PLANNING

The Board is actively engaged and involved in talent management. The full Board reviews our “Organization Vitality” in support of our business strategy at least annually. More broadly, the Board, through the Compensation Committee, is regularly updated on key talent indicators for the overall workforce, including diversity, recruiting and development programs. This includes a detailed discussion of the Company’s global leadership bench and succession plans with a focus on key positions at the senior officer level, including CEO. During 2017, the Board and the Compensation Committee met in furtherance of these initiatives. In addition, the committees of the Board regularly discuss the talent pipeline for specific critical roles. High potential leaders are given exposure and visibility to Board members through formal presentations and informal events.

9


BOARD EVALUATION

Through the stewardship of the Governance Committee and its Chair and with the assistance of an external, independent third party advisor, the Board engages in a robust self-evaluation process. The process includes an extensive review of matters affecting the Board and each committee, including meeting cadence, sufficiency of materials and presentations from management and candid assessments of a director’s input during and in between meetings. The results of this process are presented by the Governance Committee Chair in a report to the Board during executive session, typically during the first regular meeting of the fiscal year. The Board’s most recent self-evaluation took place during the first quarter of 2018.

ENVIRONMENTAL AND SUSTAINABILITY

During 2017, the Board and the Governance Committee reviewed the Company’s sustainability program from a corporate governance perspective as well as with respect to environmental, health, safety and sustainability as it relates to the Company’s financial and operational performance and public image.

BOARD MEETINGS AND COMMITTEES

There are four (4) standing committees of the Board: the Audit Committee, the Compensation Committee, the Governance Committee, and the Finance Committee, each described below.

Each standing committee has a charter and consists solely of ‘independent’ or ‘outside’ directors who meet applicable independence standards required by the NYSE, the SEC, and the Internal Revenue Service, and under our Certificate and Bylaws. Each committee reports to the Board regularly and evaluates the effectiveness of its performance annually. The membership of each committee is determined by the Board based on the recommendation of the Governance Committee. The Company’s Corporate Governance Guidelines provide that (i) directors who are currently fully employed should not serve on more than two (2) other corporate boards and (ii) other directors should not serve on more than four (4) other corporate boards.

 

Director

 

Independent^

 

Audit

Committee 

 

Compensation

Committee

 

Governance

Committee

 

Finance

Committee

Michael F. Johnston

 

x

 

x

 

C

 

 

 

x

Kathleen S. Lane

 

x

 

x

 

 

 

 

 

 

Jeffrey Liaw

 

x

 

xFE

 

 

 

 

 

C

Donald R. Maier

 

 

 

 

 

 

 

 

 

 

Michael W. Malone

 

x

 

CFE

 

 

 

 

 

x

Larry S. McWilliams

 

x

 

 

 

 

 

x

 

 

James C. Melville

 

x

 

 

 

x

 

C

 

x

James J. O’Connor

 

x

 

 

 

x

 

x

 

 

Jacob H. Welch

 

x

 

 

 

x

 

 

 

x

2017 Meetings

 

 

 

5

 

5

 

5

 

3

 

^

As defined in NYSE listing standards, our Corporate Governance Guidelines and Bylaws.

Jeffrey Liaw served as the Audit Committee Chair until June 2, 2017, at which time Michael W. Malone was appointed Chair.

C

Chair of the committee.

FE

‘Audit Committee Financial Expert’ as defined by Item 407(d)(5) of SEC Regulation S-K.

Our Board met eight (8) times during 2017, three (3) of which were special meetings. All directors who served on the Board during 2017 participated in at least 75% of the meetings of the Board and meetings of the committees on which they served. Board members are expected to attend annual meetings, which can be done virtually, via the Internet, because our annual meetings may be held virtually.

Audit Committee

The responsibilities of the Audit Committee are more fully described in its charter. Among other responsibilities delegated by the Board, the Audit Committee:

 

provides oversight of (i) auditing and accounting matters, including the selection, supervision and compensation of the Company’s independent registered public accounting firm and other independent auditors, (ii) the scope of the annual audits and non-audit services performed by our independent registered public accounting firm, and (iii) our accounting practices and internal accounting controls;

10


 

has sole authority to engage, retain and dismiss the independent registered public accounting firm;

 

reviews and discusses with management and our independent registered public accounting firm the annual audited financial statements and quarterly financial statements included in our SEC filings;

 

assists the Board in monitoring the integrity of our financial statements and the independent registered public accounting firm’s qualifications, independence and performance;

 

considers risks associated with overall financial reporting, legal compliance, cybersecurity and disclosure processes;

 

reviews our earnings guidance; and

 

supervises and reviews the effectiveness of our internal audit and legal compliance functions and our compliance with legal and regulatory requirements.

Each member of the Audit Committee meets the NYSE and SEC financial literacy requirements. The Board has determined that each of Mr. Liaw and Mr. Malone qualifies as an “Audit Committee Financial Expert” as defined in the Exchange Act. The Audit Committee regularly meets independently with our internal and independent auditors, with the leaders of our compliance function, and with management.

Management Development and Compensation Committee

The responsibilities of the Compensation Committee are more fully described in its charter. Among other responsibilities delegated by the Board, the Compensation Committee:

 

oversees the design of our executive compensation and benefit programs and employment practices;

 

administers and makes recommendations regarding our incentive and equity compensation plans;

 

reviews and approves corporate goals and individual objectives relevant to the compensation of the CEO and evaluates the CEO’s performance relative to those goals and objectives, and recommends CEO compensation to the independent directors based on the evaluation;

 

oversees the evaluation of the other executive officers and establishes their compensation levels in collaboration with the CEO;

 

reviews incentive compensation to confirm that such compensation does not encourage unnecessary risk-taking; and

 

monitors senior management succession planning.

Compensation Committee Interlocks and Insider Participation     None of the members of the Compensation Committee has ever been an officer or employee of the Company or its subsidiaries, or had any relationship with the Company that requires disclosure under applicable SEC regulations.

Nominating and Governance Committee  

The responsibilities of the Governance Committee are more fully described in its charter. Among other responsibilities delegated by the Board, the Governance Committee:

 

monitors the independence of nonemployee directors;

 

reviews and evaluates director candidates and makes recommendations to the Board concerning nominees for election as Board members;

 

establishes criteria for the selection of candidates to serve on the Board;

 

recommends directors for appointment to Board committees;

 

makes recommendations to the Board regarding corporate governance matters;

 

reviews and makes recommendations to the Board regarding the compensation of nonemployee directors;

 

oversees our insurance program for directors and officers liability;

 

oversees the Company’s director education and orientation programs; and

 

coordinates an annual self-evaluation of the performance of the Board and each committee through assistance from an independent, third-party advisor.

11


Finance Committee  

The responsibilities of the Finance Committee are more fully described in its charter. Among other responsibilities delegated to it by the Board, the Finance Committee:

 

reviews and recommends matters related to our capital structure, including the issuance of debt and equity securities;

 

oversees banking arrangements, including the investment of corporate cash and management of foreign currency exchange hedges;

 

oversees management of the corporate debt structure;

 

reviews and approves material finance and other cash management transactions;

 

oversees and advises the Board on assessing capital expenditures, operating income, cash flow, cash management and working capital;

 

reviews investment strategies and policies;

 

assesses any dividend payment policy and capital structure plans and adjustments;

 

considers plans to repurchase our stock;

 

reviews our actual and forecasted operating performance; and

 

considers financial aspects of proposed mergers, acquisitions, divestitures, strategic investments, collaborations and joint ventures.

Other Committees     In addition to the standing committees described above, members of the Board may meet on an ad hoc basis to discuss and approve matters through other committees that have been previously established by the Board. Such committees may address such matters as succession planning and crisis response.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Pursuant to our Conflicts of Interest and Related Party Transactions Policy, any related party transaction that may arise is required to be reviewed and approved by the Governance Committee, who must have no connection with the transaction. Related party transactions would include transactions by the Company or any subsidiary with any director, director nominee, executive officer, stockholders owning more than 5% of the Company’s outstanding Common Shares, or immediate family member of any of the foregoing, and transactions with businesses affiliated with any director or director nominee that meet the specifications in Item 404 of Regulation S-K under the Exchange Act. The Chair of the Governance Committee has authority to approve transactions involving sums less than the disclosure threshold set in Item 404. The material details of any such matters are required to be disclosed to the Governance Committee at its next regular meeting.

In connection with his appointment to the Board pursuant to the Appointment and Stockholder’s Agreement, Mr. Welch, a Partner at ValueAct Capital, is entitled to receive an annual retainer (payable in cash) of $90,000 for his service on the Board, and an annual equity award in the form of restricted stock units under the 2016 Directors’ Stock Unit Plan (the “2016 Directors Stock Unit Plan”) having an aggregate fair market value of $105,000 (based on the closing price of our Common Shares as reported by the NYSE on the date of grant). Mr. Welch has directed that his cash retainers be directly paid to ValueAct Capital Management, L.P., and under an agreement with ValueAct Capital, Mr. Welch is deemed to hold it for the benefit of the limited partners of ValueAct Capital Master Fund L.P., and indirectly for other members of the ValueAct Group.

DIRECTOR QUALIFICATION STANDARDS

The Governance Committee performs an assessment of the qualifications and experience needed by the Board to properly oversee management of the Company. In doing so, the Governance Committee believes that aligning director qualifications and skill sets with our business and strategy is essential to forming a board that adds value for stockholders. While the Board does not have a formal diversity policy with respect to director nominations, it believes that a board composed of individuals with diverse attributes and backgrounds enhances the quality of the Board’s deliberations and decisions. The Board has an expansive view of diversity, going beyond the traditional concepts of race, gender and national origin. The Board believes that the diversity of viewpoints and educational backgrounds, and differences in professional experiences and expertise represented on the Board evidences diversity in many respects. The Board believes that this diversity, coupled with the personal and professional ethics, integrity and values of all of the directors, results in a board that can guide us with good business judgment.

12


The Governance Committee expects each of our directors to have proven leadership, sound judgment, integrity and a commitment to our success. In evaluating director candidates and considering incumbent directors for nomination to the Board, the Governance Committee considers a variety of factors. These include each nominee’s independence, financial literacy, personal and professional accomplishments, and experience in light of the needs of the Company. For incumbent directors, the factors also include past performance on the Board and contributions to their respective committees.

The Governance Committee will consider director candidates nominated by stockholders. When evaluating the candidacy of nominees proposed by stockholders, the Governance Committee may request additional information as it may consider reasonable to determine the proposed nominee’s qualifications to serve as a member of the Board.

The procedures for recommending candidates are posted at www.armstrongflooring.com/corporate/nominating-governance-committee.html. Stockholders who wish to suggest individuals for service on the Board are requested to review our Bylaws and supply the information required therein in a written request to the Corporate Secretary at the Company’s corporate offices at 2500 Columbia Avenue, P.O. Box 3025, Lancaster, Pennsylvania 17603.

The Chair of the Annual Meeting or any other annual or special meeting of stockholders may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures. A stockholder’s compliance with these procedures will not require us to include information regarding a proposed nominee in our proxy solicitation materials.

DIRECTOR EDUCATION

New directors participate in an orientation process to become familiar with the Company and its strategic plans and businesses, significant financial matters, core values including ethics, compliance programs, corporate governance practices and other key policies and practices through a review of background materials, meetings with senior executives and visits to Company facilities. The Governance Committee is responsible for providing guidance on directors’ continuing education. The Committee conducted an education session in 2017 in which all directors attended regarding the Board’s role in oversight of the Company’s cybersecurity risk management program.  

COMMUNICATION WITH THE BOARD

Any person who wishes to communicate with the Board, the nonemployee directors as a group, or individual directors, including the Chair, may direct a written communication to the attention of the Corporate Secretary at the Company’s corporate offices at 2500 Columbia Avenue, P.O. Box 3025, Lancaster, Pennsylvania 17603. The Corporate Secretary will forward these communications to the intended recipient director(s). You may also send general messages to directors by email to directors@armstrongflooring.com. If you wish to send an email message to the Governance Committee, including a recommendation regarding a prospective director, please send the message to the directors@armstrongflooring.com. The Corporate Secretary will forward these messages, as appropriate.

13


COMPENSATION OF DIRECTORS

In establishing our nonemployee director compensation program, including the overall value of compensation and the mix of cash and equity, the Board analyzes competitive market data and any underlying director compensation trends generally, and compares our program to those of similarly sized companies in comparable industries. Our nonemployee directors are compensated through a combination of annual retainers and equity grants in the form of stock units. The Board believes that this level of compensation supports the Company’s ability to attract nonemployee directors with suitable backgrounds and experiences. A director who is an officer or employee of the Company or its subsidiaries is not compensated for service on the Board or on any committee of the Board.

The Governance Committee, which is composed solely of independent directors, has the primary responsibility to review and consider any revisions to the nonemployee director compensation program. The Governance Committee reviewed the  nonemployee director compensation program in 2017 and determined that no revisions were warranted.

The following table describes the elements of the nonemployee director compensation program:

 

FISCAL YEAR 2017 NONEMPLOYEE DIRECTOR RETAINERS

 

 

 

 

CASH

 

 

 

Annual Retainer (1)

 

$90,000

 

 

 

 

 

Chair Fees (1) :

 

 

 

 

 

 

 

Board Chair

 

$60,000

 

Audit Committee

 

$20,000

 

Management Development & Compensation Committee

 

$20,000

 

Nominating & Governance Committee

 

$10,000

 

Finance Committee

 

$20,000

 

 

 

 

 

Special Assignment Fees (2)

 

$2,500

(3)

 

 

 

 

EQUITY (4)

 

 

 

Annual Retainer ( Board Chair )

 

$160,000

 

Annual Retainer

 

$105,000

 

 

(1)

paid in quarterly installments, in arrears

(2)

may be paid in connection with: one-on-one meetings with the CEO; plant and/or field visits not part of a regular Board meeting; or other non-scheduled significant activities

(3)

per diem; $1,250 for less than four hours

(4)

annual (or pro-rated) grant of restricted stock units; effective as of the first business day following the date of the annual meeting of stockholders, and the amount of each grant is determined by the NYSE closing price of our Common Shares on such date

DIRECTORS STOCK UNIT PLAN

Prior to the Separation, the board of directors of AWI approved the 2016 Directors Stock Unit Plan as AFI’s sole stockholder. The 2016 Directors Stock Unit Plan is designed to promote the growth and profitability of AFI by increasing the mutuality of interests between AFI’s non-employee directors and the AFI stockholders. The plan provides for the issuance to nonemployee directors of “units,” or rights to receive Common Shares (“Director RSUs”), which rights may be made conditional upon continued service or the occurrence or nonoccurrence of specified events. Except as otherwise determined by the plan administrator and unless deferred by the director, the units awarded under the plan will generally vest and settle, contingent on continued service as a director, on the earlier to occur of the next annual stockholders meeting, the date of the director’s death or disability, or the date of a “change in control” (as such term is defined in the plan) of AFI.

The 2016 Directors Stock Unit Plan is generally administered by the Governance Committee, which has the authority to (i) make discretionary grants of units to eligible directors; (ii) prescribe terms, conditions, limitations and restrictions applicable to any grant; and (iii) interpret the plan, adopt, amend and rescind rules relating to the 2016 Directors Stock Unit Plan and make all other determinations necessary or advisable with respect to the plan.

14


Upon the occurrence of certain corporate events that affect the Company’s common stock, including but not limited to extraordinary cash dividends, stock splits, reorganizations or other relevant changes in capitalization, the administrator will make appropriate adjustments with respect to the number of shares available for grants under the 2016 Directors Stock Unit Plan, the number of units covered by existing grants and the maximum number of shares that may be granted to any participant.

The maximum grant date value of the Common Shares subject to grants of Director RSUs made to a participant during any one calendar year, taken together with any cash fees earned by such participant during the calendar year, will not exceed $600,000 in total value. For purposes of this limit, the value of grants will be calculated based on the grant date fair value for financial reporting purposes.

STOCK OWNERSHIP GUIDELINES

The Governance Committee, following a review of current trends for stock ownership requirements of nonemployee directors, established stock ownership guidelines for all nonemployee directors that require each nonemployee director to achieve and hold Common Shares representing an amount equal to five (5) times the director’s annual cash retainer within five (5) years.

DIRECTOR COMPENSATION TABLE – 2017

 

Name

(a)

 

Fees

Earned or

Paid

in Cash ($)

(b)

 

 

Stock

Awards ($)(1)

(c)

 

 

Option

Awards

($)(2)

(d)

 

 

Non-Equity

Incentive

Plan

Compensation

($)

(e)

 

 

Change in

Pension Value

and

Nonqualified

Deferred

Compensation

Earnings

($)(3) (f)

 

 

All

Other

Compensation

($)(4)

(g)

 

 

Total ($)

(h)

 

Mr. Johnston

 

 

110,000

 

 

 

105,000

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

220,000

 

Ms. Lane

 

 

90,000

 

 

 

105,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

195,000

 

Mr. Liaw

 

 

118,400

 

 

 

105,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

223,400

 

Mr. Malone

 

 

101,600

 

 

 

105,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

206,600

 

Mr. McWilliams

 

 

150,000

 

 

 

160,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

310,000

 

Mr. Melville

 

 

100,000

 

 

 

105,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

205,000

 

Mr. O’Connor

 

 

90,000

 

 

 

105,000

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

200,000

 

Mr. Welch (5)

 

 

90,000

 

 

 

105,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

195,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents amounts that are in units of our Common Shares. The amounts reported represent the aggregate grant date fair value for Director RSUs granted during the fiscal year, as calculated under the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718. Under ASC Topic 718, the grant date fair value is calculated using the closing market price of our Common Shares on the date of the grant.

(2)

The directors do not receive stock options as part of their compensation for service on the Board.

(3)

There is no plan or arrangement for directors to defer the cash compensation that they receive as part of their compensation for service on the Board.

(4)

Represents matching gifts to qualified higher educational institutions.

(5)

Under an agreement with ValueAct Capital, Mr. Welch is deemed to receive the cash portion of his retainer for Board service and hold the Director RSUs for the benefit of the limited partners of ValueAct Capital Master Fund, L.P. and indirectly for (i) VA Partners I, LLC as General Partner of ValueAct Capital Master Fund, L.P., (ii) ValueAct Capital Management, L.P. as the manager of ValueAct Capital Master Fund, L.P., (iii) ValueAct Capital Management, LLC as General Partner of ValueAct Capital Management, L.P., (iv) ValueAct Holdings, L.P. as the sole owner of the limited partnership interests of ValueAct Capital Management, L.P. and the membership interests of ValueAct Capital Management, LLC and as the majority owner of the membership interests of VA Partners I, LLC and (v) ValueAct Holdings GP, LLC as General Partner of ValueAct Holdings, L.P.

15


 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,

MANAGEMENT AND DIRECTORS

CERTAIN BENEFICIAL OWNERS

The following table sets forth information regarding persons or groups known to us to be beneficial owners of more than 5% of our outstanding Common Shares as of April 3, 2018 or the date of any applicable reports filed by such persons or groups prior to that date. Beneficial ownership is determined in accordance with applicable rules of the SEC.

 

Name and Address of Beneficial Owner

 

Amount and Nature

of Beneficial

Ownership

 

 

Percent of Class

Outstanding(1)

 

ValueAct Capital Master Fund, L.P.(2)

   One Letterman Drive, Building D, 4th Floor

   San Francisco, CA 94129

 

 

4,600,000

 

 

17.86%

 

 

 

 

 

 

 

 

 

 

GAMCO Investors, Inc.(3)

   One Corporate Center

   Rye, NY 10580

 

 

2,179,505

 

 

8.46%

 

 

 

 

 

 

 

 

 

 

Dimensional Fund Advisors LP(4)

   Building One 6300 Bee Cave Road

   Austin, TX 78746

 

 

1,956,972

 

 

7.60%

 

 

 

 

 

 

 

 

 

 

The Vanguard Group(5)

   100 Vanguard Blvd.

   Malvern, PA 19355

 

 

1,746,586

 

 

6.78%

 

 

 

 

 

 

 

 

 

 

BlackRock, Inc.(6)

   55 East 52nd Street

   New York, NY 10055

 

 

1,545,199

 

 

6.00%

 

 

 

 

 

 

 

 

 

 

Nantahala Capital Management, LLC(7)

   15 East 62nd Street,

   New York, NY 10065

 

 

1,403,321

 

 

5.45%

 

 

 

16


(1)

 

 

(2)

 

 

 

 

 

 

 

(3)

 

 

 

 

 

(4)

 

 

 

 

 

 

 

 

(5)

 

 

 

 

 

(6)

 

 

 

 

 

(7)

Based on 25,742,127 Common Shares outstanding as of March 30, 2018, as reported to the NYSE (28,207,990 shares reported, less 2,465,863 shares held in treasury).

 

On a Schedule 13D filed with the SEC on April 11, 2016, ValueAct Capital Master Fund, L.P., VA Partners I, LLC, ValueAct Capital Management, L.P., ValueAct Capital Management, LLC, ValueAct Holdings, L.P. and ValueAct Holdings GP, LLC each reported shared voting and dispositive power with respect to 4,600,000 shares. VA Partners I, LLC is the general partner of ValueAct Capital Master Fund, L.P. ValueAct Capital Management, L.P. renders management services to ValueAct Capital Master Fund, L.P. ValueAct Capital Management, LLC is the general partner of ValueAct Capital Management, L.P. ValueAct Holdings, L.P. is the sole owner of the limited partnership interests of ValueAct Capital Management, L.P. and the membership interests of ValueAct Capital Management, LLC and is the majority owner of the membership interests of VA Partners I, LLC.  ValueAct Holdings GP, LLC is the general partner of ValueAct Holdings, L.P.

 

On a Schedule 13D Amendment Number 3 filed with the SEC on February 15, 2018, Gabelli Funds, LLC reported sole voting and dispositive power with respect to 486,100 shares, GAMCO Asset Management Inc. reported sole voting power with respect to 1,275,455 shares and sole dispositive power with respect to 1,446,455 shares, Teton Advisors, Inc. reported sole voting and dispositive power with respect to 246,400 shares, Associated Capital Group, Inc. reported sole voting and dispositive power with respect to 150 shares and Mario J. Gabelli reported sole voting and dispositive power with respect to 400 shares.  

 

On a Schedule 13G filed with the SEC on February 9, 2018, Dimensional Fund Advisors LP reported sole voting power with respect to 1,875,076 shares and sole dispositive power with respect to 1,956,972 shares.  Dimensional Fund Advisors LP, an investment adviser registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager or sub-adviser to certain other commingled funds, group trusts and separate accounts (such investment companies, trusts and accounts, collectively referred to as the “Funds”). In certain cases, subsidiaries of Dimensional Fund Advisors LP may act as an adviser or sub-adviser to certain Funds. In its role as investment advisor, sub-adviser and/or manager, Dimensional Fund Advisors LP or its subsidiaries may possess voting and/or investment power over shares that are owned by the Funds, and may be deemed to be the beneficial owner of shares held by the Funds. However, all reported shares are owned by the Funds.

 

On a Schedule 13G Amendment Number 1 filed with the SEC on February 12, 2018, The Vanguard Group reported sole voting power with respect to 24,062 shares, shared voting power with respect to 846 shares, sole dispositive power with respect to 1,722,928 shares and shared dispositive power with respect to 23,658 shares.  Vanguard Fiduciary Trust Company, a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 22,812 shares as a result of its serving as an investment manager of collective trust accounts. Vanguard Investments Australia, Ltd., a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 2,096 shares as a result of its serving as investment manager of Australian investment offerings.

 

On a Schedule 13G Amendment Number 1 filed with the SEC on January 29, 2018, BlackRock, Inc. reported sole voting power with respect to 1,483,615 shares and sole dispositive power with respect to 1,545,199 shares. BlackRock, Inc. is the parent holding company of BlackRock Advisors, LLC, BlackRock Investment Management (UK) Limited, BlackRock Asset Management Canada Limited, BlackRock Investment Management (Australia) Limited, BlackRock (Netherlands) B.V., BlackRock Fund Advisors, BlackRock Asset Management Ireland Limited, BlackRock Institutional Trust Company, National Association, BlackRock Financial Management, Inc., BlackRock Asset Management Schweiz AG, and BlackRock Investment Management, LLC.

 

On a Schedule 13G filed with the SEC on February 14, 2018, Nantahala Capital Management, LLC, Wilmot B. Harkey and Daniel Mack reported shared voting and dispositive power with respect to 1,403,321 shares. As of December 31, 2017, Nantahala Capital Management, LLC may be deemed to be the beneficial owner of 1,403,321 shares held by funds and separately managed accounts under its control, and as the managing members of Nantahala Capital Management, LLC, each of Messrs. Harkey and Mack may be deemed to be a beneficial owner of those shares.

 

 

17


 

MANAGEMENT AND DIRECTORS

The following table sets forth, as of April 3, 2018, the amount of Common Shares beneficially owned by all directors, currently-serving NEOs (as identified in the “COMPENSATION DISCUSSION AND ANALYSIS”) and all directors and executive officers as a group in accordance with applicable SEC rules.

 

Name

 

Number of

Common

Shares

Beneficially

Owned

 

 

Number of

Shares

Subject

to Options(1)

Exercisable

or Which

Become

Exercisable

Within

60 Days

 

 

Total

Number of

Shares

Beneficially

Owned(2)

 

 

Restricted

Stock

Units(3) /

Unvested

Options

 

 

Total

Common

Shares

Beneficially

Owned Plus

Restricted

Stock

Units and

Unvested

Options

 

Brent A. Flaharty

 

 

0

 

 

 

0

 

 

 

0

 

 

 

26,591

 

 

 

26,591

 

Ronald D. Ford

 

 

0

 

 

 

0

 

 

 

0

 

 

 

55,080

 

 

 

55,080

 

Michael F. Johnston

 

 

0

 

 

 

 

 

 

0

 

 

 

81,303

 

 

 

81,303

 

Kathleen S. Lane

 

 

0

 

 

 

 

 

 

0

 

 

 

14,787

 

 

 

14,787

 

Jeffrey Liaw

 

 

0

 

 

 

 

 

 

0

 

 

 

37,355

 

 

 

37,355

 

Donald R. Maier

 

 

45,689

 

 

 

264,841

 

 

 

310,530

 

 

 

76,561

 

 

 

387,091

 

Michael W. Malone

 

 

0

 

 

 

 

 

 

0

 

 

 

11,423

 

 

 

11,423

 

Larry S. McWilliams

 

 

13,823

 

 

 

 

 

 

13,823

 

 

 

8,710

 

 

 

22,533

 

James C. Melville

 

 

2,115

 

 

 

 

 

 

2,115

 

 

 

16,902

 

 

 

19,017

 

James J. O’Connor

 

 

3,500

 

 

 

 

 

 

3,500

 

 

 

18,287

 

 

 

21,787

 

Dominic Rice

 

 

14,121

 

 

 

27,126

 

 

 

41,247

 

 

 

36,308

 

 

 

77,555

 

Jacob H. Welch (4)

 

 

0

 

 

 

 

 

 

0

 

 

 

5,716

 

 

 

5,716

 

Directors and Executive Officers as

   a group (14 persons)(5)

 

 

85,907

 

 

 

330,667

 

 

 

416,574

 

 

 

414,893

 

 

 

831,467

 

 

(1)

Directors do not receive stock option grants under the 2016 Directors Stock Unit Plan or as part of the compensation program for nonemployee directors.

(2)

No individual director or executive officer other than Mr. Maier (1.5%) beneficially owns 1% of the Common Shares outstanding as of March 30, 2018. The directors and executive officers as a group beneficially own approximately 2% of the Common Shares outstanding as of March 30, 2018.

(3)

Represents, in the case of NEOs, unvested time-based restricted stock units (“NEO RSUs”) granted to them under the 2016 AFI long-term incentive plan and, in the case of nonemployee directors, vested and unvested stock units (Director RSUs) granted to them as part of their annual retainer for Board service that are not acquirable by the director within 60 days of March 30, 2018 under the terms of the 2016 Directors Stock Unit Plan. See Directors Aggregate Ownership table below for further information. Neither the unvested NEO RSUs nor the Director RSUs have voting power.

(4)

Under an agreement with ValueAct Capital, Mr. Welch is deemed to hold the Director RSUs for the benefit of the limited partners of ValueAct Capital Master Fund, L.P. and indirectly for (i) VA Partners I, LLC as General Partner of ValueAct Capital Master Fund, L.P., (ii) ValueAct Capital Management, L.P. as the manager of ValueAct Capital Master Fund, L.P., (iii) ValueAct Capital Management, LLC as General Partner of ValueAct Capital Management, L.P., (iv) ValueAct Holdings, L.P. as the sole owner of the limited partnership interests of ValueAct Capital Management, L.P. and the membership interests of ValueAct Capital Management, LLC and as the majority owner of the membership interests of VA Partners I, LLC and (v) ValueAct Holdings GP, LLC as General Partner of ValueAct Holdings, L.P.

(5)

Includes amounts for John C. Bassett, SVP, Human Resources and Christopher S. Parisi, SVP, General Counsel and Secretary.

18


DIRECTORS – AGGREGATE OWNERSHIP

The table below sets forth, as of March 27, 2018, additional detail as to each nonemployee director’s ownership and rights to ownership in the Company’s equity.

 

Name

 

Common

Shares (1)

 

 

Vested

Restricted

Stock Units (2)

 

 

Unvested

Restricted

Stock

Units (3)(4)

 

 

Total

Equity

 

 

Total

Value (5)

 

 

Michael F. Johnston

 

 

0

 

 

 

75,587

 

 

 

5,716

 

 

 

81,303

 

 

$

1,113,038

 

 

Kathleen S. Lane

 

 

0

 

 

 

9,071

 

 

 

5,716

 

 

 

14,787

 

 

$

202,434

 

 

Jeffrey Liaw

 

 

0

 

 

 

31,639

 

 

 

5,716

 

 

 

37,355

 

 

$

511,390

 

 

Michael W. Malone

 

 

0

 

 

 

5,707

 

 

 

5,716

 

 

 

11,423

 

 

$

156,381

 

 

Larry S. McWilliams

 

 

13,823

 

 

 

0

 

 

 

8,710

 

 

 

22,533

 

 

$

308,477

 

 

James C. Melville

 

 

2,115

 

 

 

9,071

 

 

 

5,716

 

 

 

16,902

 

 

$

231,388

 

 

James J. O’Connor

 

 

3,500

 

 

 

9,071

 

 

 

5,716

 

 

 

18,287

 

 

$

250,349

 

 

Jacob H. Welch(6)

 

 

0

 

 

 

0

 

 

 

5,716

 

 

 

5,716

 

 

$

78,252

 

 

Total

 

 

19,438

 

 

 

140,146

 

 

 

48,722

 

 

 

208,306

 

 

$

2,851,709

 

 

 

 

1.

Includes, for Messrs. Melville and O’Connor, shares acquired in a pro rata distribution by AWI as a result of the Separation (every 2 shares of AWI common stock resulted in 1 Common Share), and for Mr. McWilliams, shares acquired following the vesting of his 2016 grant for retainer services under the terms of the 2016 Directors Stock Unit Plan.

 

2.

Includes Director RSUs that have vested but are not yet acquirable by the director which were granted under the director compensation program of AWI prior to the Separation; amounts were adjusted based on exchange ratio calculated based on the closing price of AWI’s common stock on April 1, 2016 and the opening price of our Common Shares on April 4, 2106, both as reported on the NYSE. The Exchange Ratio was 3.70248. Vested units will be acquirable by the director (x) for units granted prior to June 2011, six (6) months following the termination of the director's service on the Board, and, (y) for units granted during and after June 2011, at the time of the termination of the director's service on the Board. Also includes Director RSUs granted and vested under the 2016 Directors Stock Unit Plan but are not yet acquirable until the termination of the director’s service on the Board per the director’s election to defer.

 

3.

Director RSUs granted on June 5, 2017 under the terms of the 2016 Directors Stock Unit Plan. The Director RSUs vest (contingent upon the director's continued service as of such date) on the earlier of (i) the next annual stockholders meeting following the grant; (ii) the death or total and permanent disability of the director; or (iii) the date of any Change in Control (as defined in the Plan). Shares will be issued for vested units within 60 days of (x) the vesting date, or (y), a later deferral date if deferred by the director under the terms of the Plan.  

 

4.

Under the terms of the 2016 Directors Stock Unit Plan, Director RSUs vest on the date of the Company’s annual meeting of stockholders that immediately follows the grant date. The Director RSUs in this column will vest on June 1, 2018 (contingent upon the director's continued service as of such date).

 

5.

Represents an amount equal to the sum of the number of Common Shares beneficially owned, plus the number of vested and unvested Director RSUs, as applicable, multiplied by $13.69, which was the closing price of the Company’s Common Shares on the NYSE on March 27, 2018.

 

6.

Under an agreement with ValueAct Capital, Mr. Welch is deemed to hold the Director RSUs for the benefit of the limited partners of ValueAct Capital Master Fund, L.P. and indirectly for (i) VA Partners I, LLC as General Partner of ValueAct Capital Master Fund, L.P., (ii) ValueAct Capital Management, L.P. as the manager of ValueAct Capital Master Fund, L.P., (iii) ValueAct Capital Management, LLC as General Partner of ValueAct Capital Management, L.P., (iv) ValueAct Holdings, L.P. as the sole owner of the limited partnership interests of ValueAct Capital Management, L.P. and the membership interests of ValueAct Capital Management, LLC and as the majority owner of the membership interests of VA Partners I, LLC and (v) ValueAct Holdings GP, LLC as General Partner of ValueAct Holdings, L.P.

 

 

19


COMPENSATION DISCUSSION AND ANALYSIS

In this section, we provide a detailed description of our compensation programs, including the underlying philosophy and strategy, the individual elements, the methodology and processes used by the Board and the Management Development and Compensation Committee (“the Committee”) to make compensation decisions, and the relationship between AFI performance and compensation delivered in fiscal year 2017.  The discussion in this CD&A focuses on the compensation of our CEO, individuals serving in the role of CFO, and the next three most highly compensated senior executives for the fiscal year 2017.  These individuals, referred to as AFI’s NEOs, were:

 

Donald R. Maier, President and CEO

 

Ronald D. Ford, Senior Vice President and CFO (appointed effective September 1, 2017)

 

Joseph N. Bondi, Senior Vice President, Chief Product Officer (resigned effective February 1, 2018)

 

Dominic C. Rice, Chief Product Officer and Senior Vice President, Global Operations

 

Brent A. Flaharty, Senior Vice President, North America Sales (promoted on March 6, 2017)

 

Kimberly Z. Boscan, Interim CFO, Vice President and Controller (served as Interim CFO from May 8, 2017, to August 31, 2017, resigned effective March 15, 2018)

 

John “Jay” W. Thompson, Former Senior Vice President and CFO (served as Senior Vice President and CFO through May 8, 2017)

We seek to pay our senior executives fairly and competitively and to link pay with performance.  Each NEO’s total compensation is targeted to the market median while actual compensation is linked to performance.  The main elements of our compensation program are base salary, a short-term incentive under our Annual Incentive Plan (AIP), and long-term incentive (LTI) grants.  To facilitate the link between NEO compensation and company performance, a significant portion of our senior executives' target compensation is performance-based.  We emphasize compensation opportunities that reward our senior executives when they deliver targeted financial results and drive stockholder value.  In fiscal year 2017, incentive compensation (annual incentive awards and equity incentive awards) accounted for approximately 78% of Mr. Maier’s total target direct compensation (base salary, annual incentive awards and long-term equity incentive awards) and approximately 59% of the average total target direct compensation of the other NEOs.  

EXECUTIVE SUMMARY

Our Business

We are a global leader in the design and manufacture of floors.  As of December 31, 2017, we operated 15 plants in 3 countries and had approximately 3,600 employees worldwide.  For more information about our business, please see “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC.

Our 2017 Business Performance

 

Our 2017 EBITDA performance of $65 million was lower than 2016 performance of $83 million and did not meet our initial expectations of $75 to $85 million, resulting in no fiscal year 2017 AIP payouts.  The underperformance was primarily due to continued volume declines in portions of our legacy portfolio and a difficult price environment.

 

While disappointing, we believe that management took a number of important steps to revitalize our portfolio and drive the business toward our medium-term target of 10% EBITDA margins:

20


LVT sales grew at double digit rates, with meaningful growth in manufactured products with Diamond 10® Technology, as well as sourced products, such as our Rigid Core products.

We continued product innovation, including the expansion of our Diamond 10® Technology to solid wood on our Paragon product line.

In early 2017, we announced the combination of our commercial and residential go-to-market organizations. The new structure provides enhanced support and responsiveness to retailers and contractors and fosters greater alignment with distributors, which cover both commercial and residential markets.  To provide focus to the new structure, Brent Flaharty was promoted to SVP, North America Sales effective March 6, 2017.

In the second quarter of 2017, we acquired the VCT assets of Mannington Mills, Inc.

We repurposed a portion of our Stillwater, Oklahoma vinyl sheet plant to add LVT manufacturing capacity.

Volume declines in our Wood Flooring segment reflected shifting consumer preferences and continued competitive pressures from lower-priced imports.  As a result, we closed two wood plants in Q4 2017 driving annualized savings of $8 to $10 million.

Ronald D. Ford was appointed Senior Vice President and CFO effective September 1, 2017 replacing Jay Thompson who resigned May 8, 2017.

Free cash flow expanded by $2 million over 2016 to $19 million, primarily due to improvements in net working capital.

We maintained a healthy liquidity position necessary to provide the financial flexibility to accomplish our strategic vision. In March 2017, our Board of Directors authorized a share repurchase program of up to $50 million.  The repurchase program is aligned with our goal to increase the efficiency of our capital structure over time while preserving sufficient liquidity to invest in growth projects and other value-accretive opportunities.

In February 2018, we announced a shift to empower our distributors with increased responsibility for marketing, merchandising and sales of our residential flooring products, and that we were focusing our resources to drive growth with our national retail and commercial customers.  To help retain our senior executives during this transition and implement the changes needed for our success, we made retention equity grants to our senior executives in February 2018.

We believe that these changes will enhance our competitive position and position us to achieve our medium-term goals.

Our 2017 Executive Compensation Objectives and Actions

The Committee reviews and makes decisions about senior executive compensation, including the amount of base salary, short-term incentive awards and long-term incentive awards made to our NEOs.  The Committee takes into account our financial and business results, individual performance and competitive data.  In light of these considerations, the Committee made the following executive compensation decisions in fiscal year 2017:

Continued the emphasis on the use of performance-based equity incentives so that the achievement of target compensation for our senior executives correlates with strong performance for AFI and our stockholders.

Established fiscal year 2017 performance goals for our Annual Incentive Plan, including target adjusted EBITDA of $90 million consistent with our Board-approved business plan.  These performance goals were calculated consistently with the way in which our publicly disclosed non-GAAP financial measures were calculated.  (See Annex A for more information about our non-GAAP financial measures, including a reconciliation to GAAP.)

Set target incentive levels for fiscal year 2017 Annual Incentive Plan of 110% of base salary for the CEO and a range of 50% to 70% of base salary for the other NEOs.

Approved no fiscal year 2017 Annual Incentive Plan payouts, as the 2017 $65 million adjusted EBITDA result was below threshold performance.

Granted annual LTI awards to our NEOs after considering our compensation philosophy and the Committee's assessment of individual performance and expected future contributions. Our NEOs have a significant percentage of their total compensation linked to performance-based compensation elements, specifically the long-term incentive grants. The grant value of each annual LTI award was 100% performance-based awards (PSAs) for Messrs. Maier, Bondi, Flaharty, Rice and Thompson and 100% performance-based stock units (PSUs) for Mr. Ford.  As Ms. Boscan was not a top tier executive at the time that annual LTI incentive awards were granted, Ms. Boscan received an annual LTI award consisting of 75% PSUs and 25% time-based restricted stock units (RSUs).

Approved the executive compensation actions relating to the promotion of Mr. Flaharty to SVP, NA Sales effective March 6, 2017, the appointment of Ms. Boscan as interim CFO effective May 8, 2017, and the appointment of Mr. Ford to SVP, CFO effective September 1, 2017, including one-time RSU grants to Messrs. Flaharty and Ford.

Reviewed and approved a revised peer group which improved alignment specifically with companies of similar market capitalization.

Reviewed and approved an amended Change in Control Severance Agreement to strengthen the terms of the executive’s non-competition and non-solicitation covenants.

We believe that the fiscal year 2017 compensation of our senior executives was aligned with AFI's fiscal year 2017 results. Our compensation policies have enabled us to attract talented and experienced senior executives. We believe that these policies have benefited AFI since the Separation and will position us for growth in future years.

21


Investor Outreach

We seek regular engagement with investors in order to communicate our strategy and to solicit feedback from the investment community. The Company periodically discusses feedback, including key themes and other insights gained from the investor outreach meetings, at the Company’s Board and Committee meetings, as appropriate. The Board, as well as the management team, values the perspectives of our investors as it helps us to understand and evaluate the effectiveness of our investor communications. We also engage a third party consultant to obtain independent feedback from our investors.

Additionally, the Committee takes into consideration the results of the annual advisory vote on the Company’s executive compensation program. At the 2017 Annual Meeting, approximately 71% of the Company’s stockholders who voted expressed their approval of the compensation of the Company’s named senior executives. Since our 2017 Annual Meeting, three of the seven stockholders with 5% or more of our outstanding shares as of March 31, 2017 are no longer AFI stockholders as of March 31, 2018.  ValueAct Capital, our largest stockholder representing approximately 18% of our outstanding shares is represented on our Board.

As a result of the 2017 stockholder vote and in furtherance of our stockholder engagement program, in November and December of 2017, we invited our top stockholders representing approximately 41% of our outstanding shares to participate in discussions regarding executive compensation, environmental, social and governance matters. Members of our management, including representatives from our Compensation, Investor Relations, Sustainability and Legal teams met with a sub-set of the top stockholders to discuss their expectations and ensure that our compensation program is understood and aligned to their expectations. We discussed our approach to executive compensation programs, stockholder views on the program design and the most recent revisions to our compensation plans. As a result of these discussions, we have enhanced our disclosure regarding the manner in which the Committee evaluates and considers its selection of metrics for the Annual Incentive Plan and the Long-Term Incentive awards.

We believe that we have strong alignment between business strategy and compensation design and that our incentive plan metrics align with our business strategy, as further discussed below. We regularly analyze our practices to ensure we remain a leader in executive compensation best practices and remain aware of investor concerns.

OUR EXECUTIVE COMPENSATION PROGRAM PHILOSOPHY AND OBJECTIVES

Our long-term success and growth depend on attracting and retaining highly capable global business 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 Committee focuses on the following key objectives:

Align executive interests with stockholders’ interests to maximize long-term stockholder value;

Create a strong link between pay and performance by placing a significant portion of compensation ‘‘at risk’’ based on performance against pre-established goals; and

Structure sufficiently competitive compensation packages globally, to enable access to high-quality executives in a highly competitive talent environment.

 

Our 2017 Compensation Practices and Policies

We believe our executive pay is reasonable and provides appropriate incentives to our NEOs to achieve our financial and strategic goals without encouraging them to take excessive risks in their business decisions.  We regularly evaluate the major risks to our business, including how risks taken by management could affect the value of executive compensation. To this end, we note the following regarding our compensation practices:

22


 

WE DO

 

WE DO NOT

   use a combination of short-term and long-term incentives to ensure a strong connection between AFI’s operating performance and actual compensation delivered

   regularly evaluate our peer group and pay positioning under a range of performance scenarios

   annually review all of our compensation plans, policies, and significant practices

   annually review risks associated with compensation

   include a “double-trigger” change-in-control provision in our executive Change in Control Severance Agreements, as well as our current LTI plan, so participants will receive severance benefits only if both a change in control and a qualifying termination occur

   annually review and limit executive perquisites

   retain an independent compensation consultant who does not perform other significant services for AFI

   have an Executive Incentive Compensation Recoupment Policy to ensure accountability in the presentation of our financial statements

   enforce stock ownership requirements to ensure that Directors and executives have interests in common with our stockholders

   provide senior executives with limited perquisites (executive physicals) and benefits (such as health care insurance, life insurance, disability, and retirement plans) on the same basis as other full-time AFI employees

 

 

   provide excise tax gross-ups upon a change in control to any employees

   offer above-market earnings on contributions to deferred compensation accounts

   grant stock options with an exercise price less than the fair market value of AFI’s common stock on the date of grant

   re-price stock options without the prior approval of our stockholders

   cash out underwater stock options

   offer employment agreements to our executives, other than our Change in Control Severance Agreements

   include reload provisions in any stock option grant

   permit directors or employees, or their respective related persons, to engage in short sales of AFI’s stock or to trade in instruments designed to hedge against price declines in AFI’s stock

   permit directors or officers to hold AFI securities in margin accounts or to pledge AFI securities as collateral for loans or other obligations

 

How We Make Compensation Decisions

The 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 Committee solicits input from the independent members of the Board, the CEO, other members of management, and its independent compensation consultant to assist with its responsibilities.  The following summarizes the roles of each of the key participants in the executive compensation decision-making process.

23


Roles of Key Participants

 

Management Development and Compensation Committee

 

•   Sets the philosophy and principles that guide the executive compensation program.

•   Oversees the design of our executive compensation programs in the 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 our leadership development programs and succession planning for CEO and senior executives.

•   Reviews and approves corporate goals and individual objectives relevant to the compensation of the CEO, evaluates the CEO’s performance relative to those goals and objectives, and recommends CEO compensation to the independent directors based on the evaluation.

•   Oversees the evaluation of the other senior executives and establishes their compensation levels in collaboration with the CEO.

Independent Members of the Board

 

•   Participate in the performance assessment process for the CEO.

•   Approve CEO compensation decisions, including base salary, AIP awards and LTI awards.

Independent Compensation Consultant

 

•   Provides analysis, independent advice and recommendations with regard to executive compensation.

•   Attends Committee meetings, as requested, and communicates between meetings with the Committee Chair.

•   Advises the Committee on market trends, regulatory issues and developments and how they may impact AFI’s executive compensation programs.

CEO

 

•   Provides input to the Committee on senior executive performance and compensation recommendations.

 

Independent Compensation Consultant

Beginning in June 2016, the Committee engaged Willis Towers Watson as its independent consultant on executive compensation matters.

Willis Towers Watson also serves as our Pension Plan Actuary in Canada and typical actuary annual fees paid by us to Willis Towers Watson are approximately $25,000.  We also purchase select compensation and HR survey data from the firm.

At the request of the Committee, in addition to providing general executive compensation advice outlined above, Willis Towers Watson performed the following services during 2017:

Provided information on executive compensation trends and external developments, including regulatory changes.

Provided a competitive evaluation of total compensation for the NEOs, as well as overall compensation program share usage, dilution, and LTI expense.

Reviewed the peer group used for market analyses.

Reviewed the competitiveness of actual pay delivered in relation to performance as compared to the peer group, as further discussed below.

Provided recommendations on CEO total compensation.

Reviewed recommendations for our CEO’s compensation in relation to the other NEOs.

Reviewed Committee agendas and supporting materials in advance of each meeting and raised questions or issues with management and the Committee Chair, as appropriate.

24


Provided guidance and recommendations on incentive plan design, including the rigor of metrics and goals.

Reviewed drafts and commented on this CD&A and the related compensation tables.

The Committee determined the work of Willis Towers Watson did not raise any conflicts of interest in 2017.  In making this assessment, the Committee considered the independence factors enumerated in Rule 10C-1(b) under the Exchange Act and corresponding rules of NYSE, including the fact that Willis Towers Watson provides limited other services to us, the level of fees received from us as a percentage of Willis Towers Watson’s total revenue, the policies and procedures employed by Willis Towers Watson to prevent conflicts of interest, and whether the individual Willis Towers Watson advisers to the Committee own any common shares or have any business or personal relationships with members of the Committee or our senior executives.

After considering all of the factors required by the NYSE rules and all other factors relevant to Willis Towers Watson’s independence from management, the Committee has determined Willis Towers Watson is independent.

Setting Executive Compensation

We consider market pay practices as a starting reference point when setting executive compensation.  The Committee assesses whether our level of executive pay is appropriate when compared to industry and market standards.  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 individual’s performance or tenure in his current position, 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 Committee's independent compensation consultant assists the Committee in developing the relevant competitive market using published survey data and a peer group of companies to serve as the basis for comparing the pay of our named senior executives to the market.  Annually, we conduct a detailed market review of executive pay to evaluate each element of pay against the market.

Peer Group

Our peer group is composed of companies with business models and operations comparable to our own and companies that we believe have a similar financial and operational profile.  Metrics used to select our peer group include:  revenue; market capitalization; business model comparability; global presence; and competition for executive talent.  We believe that our peer group reflects the type and complexity of business risks managed by our NEOs and that we compete with many of the companies in our peer group for executive talent.

In fiscal year 2017, the Committee, in consultation with its independent compensation consultant, evaluated the continuing appropriateness of our peer group. Following its review, the Committee approved changes to improve the market capitalization and revenue alignment between AFI and our peer group median. The changes included the removal of seven companies with market capitalization over $1.5 billion (Armstrong World Industries, Inc., Eagle Materials Inc., Headwaters, Inc., Installed Building Products, Inc., Louisiana-Pacific Corporation, Masonite International Corporation, Simpson Manufacturing Co., Inc.) and the removal of one company below $200 million market capitalization (BlueLinx Holdings, Inc.).  Four companies with market capitalization under $1B Market Cap were added (Forterra, Inc., Continental Building Products, Inc., Insteel Industries, Inc., PGT Innovations, Inc.). Our 2017 peer group, as determined by the Committee, was as follows:

 

2017 Peer Group

American Woodmark Corp

Insteel Industries, Inc.

Apogee Enterprises, Inc.

Interface, Inc.

Continental Building Products, Inc.

NCI Building Systems, Inc.

Forterra, Inc.

Patrick Industries Inc.

Gibraltar Industries, Inc.

PGT Innovations, Inc.

GMS Inc.

Ply Gem Holdings, Inc.

Griffon Corporation

Quanex Building Products Corporation

 

 

In fiscal year 2017, the Committee reviewed peer group proxy statement data in evaluating our NEOs’ pay and published compensation survey data in evaluating our other senior executives' pay.  When assessing pay levels, the Committee also reviews the relative positioning of our senior executives with each other.  In 2017, the Committee's consultant advised the Committee that our overall competitive posture for executive pay remained aligned with our pay for performance compensation philosophy.

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Target Percentile Compensation Opportunity

We target total direct compensation opportunity at or near the 50th percentile relative to our peer group.  We believe that targeting pay opportunities at the median of our peer group enables us to retain talented and experienced senior executives and is consistent with market-leading practices.

Components of the Executive Compensation Program

The following table outlines the pay elements of our Executive Compensation Program and provides a summary of actions and results for 2017.

 

Pay Element

Purpose

Characteristics

2017 Actions and Results

Base Salary

•   Provide a regular stream of income and security.

•   Fixed cash component

•   The Committee takes into account job performance, scope of duties and responsibilities, experience in role, expected future contributions, peer group and other market pay data.

•   Our NEOs’ salaries are currently below median; however, it is expected that our NEOs will move toward median over time.

Mr. Maier received an increase of 3.17% and the other NEOs received increases of 2.75%-4.0% based on individual performance and market assessment.   Mr. Flaharty received a 10% increase to his base salary as a result of his promotion to SVP, North America Sales.

 

Ms. Boscan received an additional $6,000 per month supplement (not part of her base salary) upon her promotion to interim CFO.

Annual Incentive

•   Motivate executives to improve short-term financial performance.

•   Reward executives who deliver targeted results.

•   Actual payout is based on AFI performance.

Due to below threshold 2017 EBITDA performance, the CEO and other NEOs (other than Mr. Ford) received no 2017 payout.  Mr. Ford was paid $300,000 under the AIP pursuant to the terms of his offer of employment.

Long-Term Incentive

•   Enhance alignment between management and stockholders.

•   Motivate executives to achieve superior business results over long term.

•   Support stock ownership requirements.

•   Actual value is determined by AFI performance over a three-year time frame and/or linked to stock price.

In March 2017, the CEO received an LTI grant valued at $1,575,000 equal to his annual LTI target of 250%.  The annual target LTI awards for the other NEOs were 55% to 85% of base salary.

Except for Ms. Boscan, who was not a senior executive at the time of the 2017 annual grants, the 2017 Annual LTI grant was 100% PSA/PSU to Messrs. Maier, Thompson, Ford, Bondi and Rice.  

Ms. Boscan received a grant of 75% PSU and 25% RSU.

Messrs. Ford and Flaharty each received a one-time time-based RSU grant upon appointment to their new positions (described below)

Benefits

•   Provides a standard range of health, welfare, and retirement benefits generally similar to those provided to other salaried employees, except that senior executives are eligible to receive enhanced company-paid long-term disability benefits and are eligible for nonqualified retirement savings benefits.

Actual benefits are based on enrollments made for the calendar year.

None

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Perquisites

Provide our executives with perquisites comparable to those provided to executives in our peer group.

Reimbursements for executive physicals are provided based on actual expense up to a maximum of $5,000 per year.

The personal financial counseling benefit for executives was terminated effective December 31, 2017.

 

 

NEO Changes

During 2017, several NEOs changed positions, and the Committee approved key actions for those NEOs as follows:

Mr. Thompson, Senior Vice President and Chief Financial Officer resigned from the Company effective May 8, 2017.   As part of his resignation, Mr. Thompson received no severance benefits and forfeited all outstanding awards under his 2015, 2016 and 2017 LTI grants.  He received payment for his accrued and unused vacation similar to other employees resigning from the Company.

 

In connection with her appointment to interim CFO effective May 8, 2017, Ms. Boscan received the following additional compensation: (i) $6,000 per month, which she continued to receive through 2017, and (ii) an increase of her 2017 target short-term incentive opportunity under the Annual Incentive Plan from 40% to 60% of her annual base salary.  In addition, she was eligible for a one-time payment of $50,000 to be payable on May 15, 2018, subject to Ms. Boscan’s continued employment with the Company through May 1, 2018, except in the case of her involuntary termination by the company for reasons other than unacceptable performance or misconduct.

 

Mr. Flaharty was appointed Senior Vice President, North America Sales, on March 6, 2017.  He receives an annualized base salary of $275,000, eligible to earn an annual incentive target award opportunity of 50% of his annual base salary under the AIP and was provided with a 2017 annual LTI grant with a target award of 75% of his base salary, or $206,300. In addition, Mr. Flaharty received a one-time special grant of time-based RSUs on August 10, 2017 with an award value of $206,250 that will vest in three (3) approximately equal installments, commencing on the first anniversary of the grant date and continuing on the second and third anniversaries of the grant date.  The amount of RSUs underlying the one-time grant was determined based on the closing price of the Company’s common stock as reported by the New York Stock Exchange on the grant date.  Mr. Flaharty also entered into a Change in Control and Severance Agreement and Indemnification Agreement and is eligible to participate in the Company’s Severance Pay Plan for Executive Employees.

 

Mr. Ford was appointed to the position of Senior Vice President and Chief Financial Officer, effective September 1, 2017.  Pursuant to the terms of an offer of employment letter, effective upon the commencement of his employment with the Company on September 1, 2017, Mr. Ford receives an annualized base salary of $450,000, prorated for service during 2017.  He is eligible to earn an annual incentive target award opportunity of 70% of his annual base salary under the AIP, prorated for service during 2017, based on performance measures approved by the Management Development and Compensation Committee of the Board of Directors and subject to adjustment based on performance.  For 2017, Mr. Ford’s AIP payment was $300,000 pursuant to the terms of his employment which outlined that the 2017 AIP payment would be the greater of (i) Mr. Ford’s target incentive of 70% based on his actual base salary after the adjustment for individual performance and leadership behaviors or (ii) $300,000.00. He is eligible to participate in the LTI plan with a targeted award value of up to 120% of his annual base salary.  Mr. Ford received an initial LTI grant of PSUs with a targeted value of 120% of his annual base salary which will vest in early 2020 based on company performance through December 31, 2019, consistent with the grant made to other similarly situated executives in March 2017.  Mr. Ford received a one-time special grant of time-based RSUs on September 1, 2017 with an award value of $540,000 which shall vest in three approximately equal installments, commencing on the first anniversary of the grant date and continuing on the second and third anniversaries of the grant date.  The amount of RSUs underlying the one-time grant was determined based on the closing price of the Company’s common stock as reported by the NYSE on the grant date.  Mr. Ford also entered into a Change in Control and Severance Agreement and Indemnification Agreement and is eligible to participate in the Company’s Severance Pay Plan for Executive Employees.

In early 2018, two NEO’s resigned employment:

Effective February 1, 2018, Mr. Bondi resigned from his position as Senior Vice President and Chief Product Officer.  Mr. Bondi will remain in a full-time, non-executive officer role through May 31, 2018.  Pursuant to the terms of his Separation Agreement, Mr. Bondi will be entitled to: (i) continue to receive his monthly base salary and all applicable perquisites through his May 31, 2018 termination date; (ii) be eligible to participate in employee benefit plans through his termination date; and (iii) provided that Mr. Bondi is employed by AFI through May 31, 2018, receive a lump sum payment of $250,000 following Mr. Bondi’s execution of a release.  Mr. Bondi’s Separation Agreement includes a release of all rights under his Change in Control and Severance Agreement, the Severance Pay Plan for Executive Employees and any incentive compensation plan or stock option plan. Mr. Bondi will not be eligible for the 2018 AIP or LTIP grant.

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Ms. Boscan who served as interim CFO resigned from the Company effective March 15, 2018.   As a result of her resignation, Ms. Boscan received no severance benefits, forfeited all outstanding awards under her 2016 and 2017 LTI grants and forfeited the one-time payment of $50,000 which was payable on May 15, 2018 pursuant to the terms of her interim CFO assignment.  She received payment for her accrued and unused vacation similar to other employees resigning from the Company.

Base Salary

In determining salary levels for each of our NEOs, the Committee considers factors such as the financial and operational performance, leadership, development of people, time in position, internal equity, and potential.  The Committee also considers each NEO’s current salary as compared to the salary range and median salary practices of our peer group. After considering all relevant information, the Board determined that the CEO’s base salary for fiscal 2017 should increase by 3.17%.  The Committee approved base salary increases for the other NEOs ranging from 2.75% to 4.0%.  Mr. Flaharty received a 10% increase to his base salary as a result of his promotion to SVP, North America Sales.  Ms. Boscan received an additional $6,000 per month supplement (not part of her base salary) upon her promotion to interim CFO. The NEOs’ salary levels remain below the market median for similar positions.  This information differs from the Summary Compensation Table, which reflects the total base salary received for the year.

 

Name

 

Base Salary as

of Dec 31, 2016

 

Salary

Increase %

 

 

Base Salary as

of Dec 31, 2017

Mr. Maier

 

$630,000

 

3.17%

 

 

650,000

Mr. Ford(1)

 

n/a

 

n/a

 

 

450,000

Mr. Bondi

 

$330,000

 

4.00%

 

 

343,200

Mr. Flaharty(2)

 

$250,000

 

10.00%

 

 

275,000

Mr. Rice

 

$300,000

 

2.75%

 

 

308,250

Ms. Boscan(3)

 

$250,000

 

2.75%

 

 

256,875

(1)

Mr. Ford was appointed Senior Vice President & CFO on September 1, 2017.

(2)

Mr. Flaharty was appointed Senior Vice President, North America Sales, on March 6, 2017.  Prior to March, Mr. Flaharty served as Vice President, Residential Sales since his hire on December 1, 2016.

(3)

Ms. Boscan served as Interim CFO from May 8, 2017 to August 31, 2017.

2017 Annual Incentive Plan

For 2017, we did not meet the performance threshold for our EBITDA goal under the AIP and, therefore, no AIP payout was made based on performance.  The Committee has the authority to exercise discretion to reduce AIP amounts earned based on subjective evaluation of quality of earnings and individual performance.  The Board and the Committee consider individual performance when finalizing AIP awards for the CEO and other NEOs and make appropriate adjustments based on individual performance.  No AIP Award for our NEOs may exceed the maximum level based on EBITDA performance.  As there was no 2017 payout based on performance, the Board and the Committee did not exercise discretion for the 2017 plan payout.  However, as part of the appointment to SVP, CFO, Mr. Ford was eligible for a 2017 Annual Incentive Plan payout of $300,000 pursuant to the terms in his offer letter.

The targets for the 2017 plan measures were based on our Board approved business plan for fiscal year 2017. In February 2017, the Committee approved the following corporate performance measures for our fiscal year 2017 cash Annual Incentive Plan based on our operating plan:

 

 

 

Threshold

 

 

Target

 

 

Maximum

 

 

Actual Performance

 

Adjusted EBITDA Goals

 

$73M

 

 

$90M

 

 

$108M

 

 

$65M

 

Payout Level

 

50%

 

 

100%

 

 

200%

 

 

0%

 

 

The Committee chose adjusted EBITDA as the corporate-level goal because it is the key metric used by management to set our business goals and evaluate our financial results.  EBITDA is defined as (i) operating income, plus (ii) depreciation and amortization, plus (iii) noncash pension expense.  

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Each NEO’s AIP target was based on a percentage of base salary.  Target and actual fiscal year 2017 Annual Incentive Plan awards for our NEOs were as follows:

 

Name

 

2017 Actual

Base Salary

 

Target Incentive

(% of Base Salary)

 

 

Target

Incentive $

 

Maximum

Incentive

Potential

 

Percentage

Payout

 

 

Actual Annual  Incentive

Payout

Mr. Maier

 

$645,000

 

110%

 

 

$709,500

 

$1,419,000

 

0%

 

 

$0

Mr. Ford(1)

 

$150,000

 

70%

 

 

$105,000

 

$210,000

 

0%

 

 

$300,000

Mr. Bondi

 

$339,900

 

60%

 

 

$203,940

 

$407,880

 

0%

 

 

$0

Mr. Flaharty

 

$270,549

 

50%

 

 

$135,275

 

$270,549

 

0%

 

 

$0

Mr. Rice

 

$306,188

 

55%

 

 

$168,403

 

$336,807

 

0%

 

 

$0

Ms. Boscan

 

$255,156

 

60%

 

 

$153,094

 

$306,187

 

0%

 

 

$0

 

(1)

Mr. Ford’s 2017 AIP payout pursuant to the terms of his employment was $300,000.

 

The Committee approves the performance goals and incentive levels for each of our senior executives under our Annual Incentive Plan.  The performance goals include a threshold, a target and a maximum.  Threshold refers to the minimum acceptable level of performance.  We do not pay an incentive if our performance is below the threshold.  If performance is at threshold, payout is 50% of their target incentive.  Target is the expected level of performance and results in a payout of 100% of their target incentive.  Senior executives may receive an amount in excess of their target incentive (up to a maximum of 200% of the target incentive) if we exceed target on the performance metric.

In establishing the performance and payout ranges for AFI, the Committee considered a number of factors including:

The amount of year-over-year improvement in EBITDA required to achieve target performance

The degree of difficulty and probability of achieving the various EBITDA performance targets

The percent of incremental EBITDA to be split between participants and stockholders

Long-Term Incentive Plan

We use equity awards to motivate our senior executives to achieve superior business results over the long term.  Equity awards support our stock ownership requirements and further enhance the alignment between management and stockholder interests.  In fiscal year 2017, the annual equity awards consist of differentiated awards based on two leadership tiers as follows:  Tier I NEOs (Messrs. Maier, Ford, Bondi, Flaharty, Rice and Thompson) were granted 100% performance-based awards in the form of PSAs or PSUs.  Ms. Boscan’s annual equity award was 75% performance-based PSUs and 25% time-based RSUs.  We believe this mix will provide an incentive to achieve favorable long-term results at a reasonable cost to the company.  Long-term incentives are issued pursuant to our Omnibus Incentive Plan.  

Equity incentives represented approximately 54% of Mr. Maier's total direct compensation and approximately 35%, on average, of the total direct compensation of the other NEOs in fiscal year 2017.  In approving fiscal year 2017 long-term equity incentive award grants, the Committee considered a number of factors:

Skills, experience, time in role and expected future contributions:  The size of an equity award depends in part on the scope of an executive officer's job responsibilities and the impact he or she can be expected to have on our future operating results.

Company performance:  The Committee reviews our prior year financial performance and the senior executives' leadership and focus on fostering our strategic initiatives.

Market alignment:  The Committee sets the target value of equity awards so that our senior executives will have a target long-term incentive near the median of our peer group.  The target values are informed by the Committee's review of the competitive positioning of each element of pay based on compensation data prepared by the external compensation consultant with reference to our peer group for our NEOs and with reference to published market compensation survey data for the other senior executives.

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The emphasis placed on equity in the mix of total compensation:  The Committee believes that incentive compensation should constitute the majority of each senior executive's overall compensation package to provide incentives to meet our performance objectives and grow our stock price over time.

Average annual share use:  The Committee also takes into account the average annual share use for total equity incentives granted to employees in order to provide stock options, restricted stock units and performance shares to eligible employees at a reasonable rate and cost to AFI and its stockholders.

Each NEO’s LTIP target was based on a percentage of salary.  Target and actual fiscal year 2017 LTIP grants for our NEOs were as follows:

 

Name

 

LTIP Target

as % of

Base Salary

 

 

Additional one-time RSU Grant as a % of Base Salary(1)

 

 

Total 2017 LTI Grant as % of Base Salary

 

 

2017 LTI Grant Date Fair Value $(2)

 

Mr. Maier

 

250%

 

 

-

 

 

250%

 

 

 

1,575,000

 

Mr. Ford

 

120%

 

 

120%

 

 

240%

 

 

 

1,080,000

 

Mr. Bondi

 

85%

 

 

-

 

 

85%

 

 

 

280,500

 

Mr. Flaharty

 

75%

 

 

75%

 

 

150%

 

 

 

412,550

 

Mr. Rice

 

75%

 

 

-

 

 

75%

 

 

 

225,000

 

Ms. Boscan

 

55%

 

 

-

 

 

55%

 

 

 

137,500

 

Mr. Thompson

 

120%

 

 

-

 

 

120%

 

 

 

450,000

 

 

 

(1)

Represents one-time special time-based RSU awards granted.  The RSUs will vest in three equal installments on the first, second and third anniversary of the grant's effective date.  Mr. Ford received the RSU grant upon hire on September 1, 2017, pursuant to his offer letter.  Mr. Flaharty received the RSU grant on August 10, 2017, shortly after his promotion to SVP, NA Sales.

 

(2)

Amounts represent the grant date fair value for the LTI equity award granted in 2017, as calculated under the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718.  Under ASC Topic 718, the grant date fair value is calculated using the closing market price of our common shares on the date of the grant.  

Equity awards are subject to vesting, forfeiture and clawback provisions, described in more detail below and in the sections following the Summary Compensation Table.  Forfeiture and clawback provisions serve as a means to redress detrimental behavior by current and former employees.  For additional information about our long-term equity incentive awards, see the narrative discussion titled "Stock Awards and Option Awards (Columns (d) and (e))" following the Summary Compensation Table below.

Performance-Based Awards

In 2017, the Committee continued the use of EBITDA and Free Cash Flow (FCF) as the primary financial measures for the 2017 – 2019 performance-based awards thus providing a consistent measurement of performance since our Separation from AWI.  Our Committee selected EBITDA as a metric in our AIP and LTIP because it is the key metric used by management to set business goals and evaluate our financial results. The use of EBITDA in both the AIP and LTIP provides an incentive for management to focus on EBITDA goals over both the short-term and long-term periods.  Our Committee selected FCF as a metric in our LTI plan because we believe FCF will create a strong alignment with performance activities and growth over the performance period.  Our Committee also selected absolute total stockholder return targets (“Absolute TSR”) as a metric in our LTI plan because we believe it best represents and captures stockholder value creation.  The plan covers a three-year performance period to allow a reasonable timeframe for value creation, challenging targets with substantial upside for breakout performance and a payout scale that defines meaningful hurdles on the way to breakout performance.  

For Tier I participants (Messrs. Maier, Ford, Bondi, Flaharty, Rice and Thompson), vesting is based on the achievement of EBITDA targets (75% of the award), FCF (25% of the award), and Absolute TSR as a modifier.  The awards have a one-year, post-vesting holding period for any portion of the award that vests above target, as described below.

Ms. Boscan was not a Tier I participant so she received an award that would have vested based on the achievement of EBITDA targets (75% of the award) and FCF (25% of the award), but no Absolute TSR modifier.

The Committee believes that the tiered approach measured on EBITDA, FCF and (except for Ms. Boscan) Absolute TSR creates the desired focus on generating total stockholder return and directly aligns management’s interests with those of our stockholders during the three-year performance period.

After the end of the performance period, each Tier I NEO (Messrs. Maier, Ford, Bondi, Flaharty, Rice and Thompson) will be eligible to vest in a number of shares (from 0 to 200% of the target award) based on AFI’s cumulative EBITDA and cumulative FCF performance over the performance period, and an Absolute TSR modifier will be applied to adjust the award

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vesting by 50% to 150%, based on Absolute TSR performance.  The maximum vesting will be 300% of the target award.  The awards have a one-year, post-vesting holding period for any portion of the award that vests above target, such that the vested above-target shares will not be available to be sold until the one-year anniversary following the vesting date of the awards, subject to limited exceptions.

After the end of the performance period, Ms. Boscan would have been eligible to vest in a number of shares (from 0 to 200% of the target awards) based on AFI’s cumulative EBITDA and cumulative FCF performance over the performance period.

Cumulative EBITDA accounts for 75% of the target award.  Cumulative EBITDA is defined as (i) operating income, plus (ii) depreciation and amortization, plus (iii) noncash pension expense.

 

2017 – 2019 Absolute FCF

 

Performance

to Target

 

 

Payout

Opportunity

 

Threshold

 

70%

 

 

50%

 

Target

 

100%

 

 

100%

 

Maximum

 

175%

 

 

200%

 

 

Cumulative FCF accounts for 25% of the target award.  Cumulative FCF is defined as cash flow from operations, less cash used in investing activities.

 

2017 – 2019 Absolute FCF

 

Performance

to Target

 

 

Payout

Opportunity

 

Threshold

 

70%

 

 

50%

 

Target

 

100%

 

 

100%

 

Maximum

 

175%

 

 

200%

 

 

For Tier I awards, Absolute TSR is used as a modifier to determine the final amount that vests based on performance.  TSR tracks the appreciation in share price of our common shares, including dividends, and is annualized for the performance period.  The ending share price for the Absolute TSR calculation will be based on the volume-weighted average closing price of our stock for the highest consecutive 30 trading days in the 60 trading day period beginning with and immediately following January 2, 2020.  The starting share price is based on the volume-weighted average closing price of our stock for the 30 trading days immediately following January 3, 2017, which was $20.83, as approved by the Committee.