EX-99.1 13 d43018dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

[    ] [    ], 2016

Dear Armstrong World Industries, Inc. Shareholder:

Last year, we announced plans to separate our Resilient Flooring and Wood Flooring segments from our Building Products (Ceilings) segment. The separation will occur by means of a spin-off of a newly formed company named Armstrong Flooring, Inc. (“AFI”), which will contain the current, pre-separation Resilient Flooring and Wood Flooring segments of Armstrong World Industries, Inc. (“AWI”). AWI, the existing publicly traded company, will continue to operate its Building Products segment. AWI’s Unallocated Corporate segment will be phased out as the items traditionally included by AWI in this segment are allocated between AWI and AFI and absorbed by each company as overhead costs on a going forward basis. As two distinct publicly traded companies, AWI and AFI will be better positioned to focus resources on their respective businesses and strategic priorities.

We believe that separating our flooring and ceilings businesses will create two strong companies that will be leaders in their respective markets and that will benefit from increased strategic focus, streamlined operating structures and improved capital allocation. Each public company will offer investors a distinct and compelling investment opportunity based on different operating and financial models, end-market business cycles and strategic growth opportunities.

The separation will provide current AWI shareholders with equity ownership in both AWI and AFI. The separation is intended to be tax-free to AWI and AWI shareholders.

The separation will be effected by means of a pro rata distribution of 100% of the outstanding shares of AFI common stock to holders of AWI common shares. Each AWI shareholder will receive one share of AFI common stock for every two shares of AWI common stock held as of the close of business on [        ] [        ], 2016, the record date for the distribution. No vote of AWI shareholders is required for the separation or the distribution. You do not need to take any action to receive shares of AFI common stock to which you are entitled as an AWI shareholder, and you do not need to pay any consideration or surrender or exchange your AWI common shares.

I encourage you to read the attached information statement, which is being provided to all AWI shareholders who held shares on the record date for the distribution. The information statement describes the separation in detail and contains important business and financial information about AFI.

I believe the time is right for this separation as these two businesses are well positioned to deliver value as independent companies. We appreciate your continuing support of AWI, and look forward to your future support of both companies.

Sincerely,

James J. O’Connor

Chairman of the Board

Armstrong World Industries, Inc.


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[    ] [    ], 2016

Dear Future Armstrong Flooring, Inc. Stockholder:

I am pleased to welcome you as a future stockholder of Armstrong Flooring, Inc. (“AFI”), the common stock of which we intend to list on the New York Stock Exchange under the symbol “AFI”. Although we are newly independent, we have long been a leader in the design, manufacture and sale of high-quality flooring products in North American and the Pacific Rim markets. With approximately 3,700 team members worldwide, AFI will operate 17 manufacturing facilities in 3 countries, from which we will continue to provide high performance resilient flooring products, including vinyl sheet, vinyl composition tile (VCT), luxury vinyl tile (LVT), and high-quality engineered and solid hardwood flooring products.

In 2015, AFI generated approximately $1.2 billion of revenue as part of Armstrong World Industries, Inc. AFI’s North American residential franchise is an innovation leader in vinyl, laminate and hardwood flooring products, and we have a strong presence in meeting the needs of our customers in key commercial end use segments. We also have a growing presence in the Pacific Rim following the construction of two flooring plants in China to service that market.

As explained in the attached information statement, we believe that AFI will be a strong company that is a leader in its field and that will benefit from increased strategic focus and a streamlined operating structure. We plan to create long-term stockholder value by continuing to improve our industry-leading position and capitalizing on our strategic growth opportunities.

We invite you to learn more about AFI and our strategic initiatives by reading the attached information statement. We thank you in advance for your support as a future stockholder of AFI.

Sincerely,

Donald R. Maier

President and Chief Executive Officer

Armstrong Flooring, Inc.


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended.

 

PRELIMINARY AND SUBJECT TO COMPLETION, DATED FEBRUARY 29, 2016

INFORMATION STATEMENT

Armstrong Flooring, Inc.

This information statement is being furnished in connection with the distribution by Armstrong World Industries, Inc. (“AWI”) to its shareholders of all of the issued and outstanding shares of common stock of Armstrong Flooring, Inc. (“AFI”), a wholly owned subsidiary of AWI that will hold, directly or indirectly, the assets and liabilities related primarily to AWI’s Resilient Flooring and Wood Flooring segments. To implement the distribution, AWI will distribute all of the shares of AFI common stock on a pro rata basis to AWI shareholders.

For every two common shares of AWI you hold of record as of the close of business on [        ] [        ], 2016, the record date for the distribution, you will receive one share of AFI common stock. You will receive cash in lieu of any fractional shares of AFI common stock that you would have received after application of the distribution ratio. AFI expects the shares of AFI common stock to be distributed to you at [        ], Eastern time, on [        ] [        ], 2016. AFI refers to the date of the distribution of the AFI common stock as the “distribution date.”

The distribution is intended to be tax-free to AWI shareholders for U.S. federal income tax purposes. The distribution is subject to certain conditions, including an opinion of tax counsel confirming that the separation and distribution generally should be tax-free to AWI and its shareholders for U.S. federal income tax purposes.

No vote of AWI shareholders is required for the separation or the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send AWI a proxy, in connection with the separation or the distribution. You do not need to pay any consideration, exchange or surrender your existing AWI common shares or take any other action to receive your shares of AFI common stock.

There is no current trading market for AFI common stock, although AFI expects that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and AFI expects “regular-way” trading of AFI common stock to begin on the first trading day following the completion of the distribution. AFI has applied to have its common stock authorized for listing on the New York Stock Exchange under the symbol “AFI.” Following the separation and distribution, AWI will continue to trade on the New York Stock Exchange under the symbol “AWI.”

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 17.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is [        ].

This information statement was first mailed to AWI shareholders on or about [        ].


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

     1   

INFORMATION STATEMENT SUMMARY

     8   

RISK FACTORS

     17   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     28   

THE SEPARATION AND DISTRIBUTION

     29   

DIVIDEND POLICY

     37   

CAPITALIZATION

     38   

SELECTED HISTORICAL COMBINED FINANCIAL DATA OF ARMSTRONG FLOORING, INC.

     40   

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     41   

BUSINESS

     48   

PROPERTIES

     54   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     55   

MANAGEMENT

     70   

DIRECTORS

     73   

COMPENSATION DISCUSSION AND ANALYSIS

     80   

EXECUTIVE COMPENSATION

     91   

GRANTS OF PLAN BASED AWARDS

     93   

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

     94   

OPTION EXERCISED AND STOCK VESTED

     95   

PENSION BENEFITS

     96   

NONQUALIFIED DEFERRED COMPENSATION

     97   

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

     98   

DIRECTOR COMPENSATION

     103   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     108   

DESCRIPTION OF MATERIAL INDEBTEDNESS

     117   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     118   

DESCRIPTION OF ARMSTRONG FLOORING, INC.’S CAPITAL STOCK

     121   

WHERE YOU CAN FIND MORE INFORMATION

     125   

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

     F-1   


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QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

 

What is AFI and why is AWI separating AFI’s business and distributing AFI stock?

AFI, which is currently a wholly owned subsidiary of AWI, was formed to own and operate AWI’s Resilient Flooring and Wood Flooring segments. The separation of AFI from AWI and the distribution of AFI common stock are intended to provide you with equity ownership in two separate, publicly traded companies that will be able to focus exclusively on each of their respective businesses. AWI and AFI expect that the separation will result in enhanced long-term performance of each business for the reasons discussed in the section entitled “The Separation and Distribution—Reasons for the Separation.”

 

Why am I receiving this document?

AWI is delivering this document to you because you are a holder of AWI common shares. If you are a holder of AWI common shares as of the close of business on [        ] [        ], 2016, the record date of the distribution, you will be entitled to receive one share of AFI common stock for every two AWI common shares that you held at the close of business on such date. This document will help you understand how the separation and distribution will affect your post-separation ownership in AWI and AFI, respectively.

 

How will the separation of AFI from AWI work?

To accomplish the separation, AWI will engage in a division under Pennsylvania law (which we refer to as the “division”), in which the assets and liabilities of AWI related primarily to AWI’s Resilient Flooring and Wood Flooring segments will be allocated to a newly-formed Pennsylvania corporation that will result from the division (the “Resulting PA Corporation”). After the division becomes effective, the Resulting PA Corporation will merge with and into AFI (which we refer to as the “second step merger”), with AFI surviving the second step merger as a Delaware corporation and the successor to the Resulting PA Corporation. In addition to the division and the second step merger, any assets and liabilities of AWI’s retained subsidiaries that are related primarily to AWI’s Resilient Flooring and Wood Flooring segments will be assigned, assumed or transferred to AFI or one of its subsidiaries.

 

  After the completion of the division, the second step merger, and any related assignment, assumption or transfer of additional assets and liabilities, AWI will distribute all of the outstanding shares of AFI common stock to AWI shareholders on a pro rata basis as a distribution intended to be generally tax-free for U.S. federal income tax purposes. For additional information on the separation, see “The Separation and Distribution.”

 

Why is the separation of AFI structured as a distribution?

AWI believes that a generally tax-free distribution of shares in the United States of AFI common stock to the AWI shareholders is an efficient way to separate its Resilient Flooring and Wood Flooring segments in a manner that will create long-term value for AWI, AFI and their respective shareholders.

 

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What is the record date for the distribution?

The record date for the distribution will be [        ], 2016.

 

When will the distribution occur?

It is expected that all of the shares of AFI common stock will be distributed by AWI at [            ], Eastern time, on [        ] [        ], 2016 to holders of record of AWI common shares at the close of business on [            ] [            ], 2016, the record date for the distribution.

 

What do shareholders need to do to participate in the distribution?

Shareholders of AWI as of the record date for the distribution will not be required to take any action to receive AFI common stock in the distribution, but you are urged to read this entire information statement carefully. No shareholder approval of the separation and distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing AWI common shares or take any other action to receive your shares of AFI common stock. Please do not send in your AWI stock certificates. The distribution will not affect the number of outstanding AWI common shares or any rights of AWI shareholders, although it will affect the market value of each outstanding AWI common share.

 

How will shares of AFI common stock be issued?

You will receive shares of AFI common stock through the same channels that you currently use to hold or trade AWI common shares, whether through a brokerage account, 401(k) plan or other channel. Receipt of AFI shares will be documented for you in the same manner that you typically receive shareholder updates, such as monthly broker statements and 401(k) statements.

 

  If you own AWI common shares as of the close of business on the record date for the distribution, including shares owned in certificated form, AWI, with the assistance of American Stock Transfer & Trust Company, LLC (“AST”), the distribution agent, will electronically distribute shares of AFI common stock to you or to your brokerage firm on your behalf in book-entry form. AST will mail you a book-entry account statement that reflects your shares of AFI common stock, or your bank or brokerage firm will credit your account for the shares.

 

How many shares of AFI common stock will I receive in the distribution?

AWI will distribute to you one share of AFI common stock for every two shares of AWI you held as of the close of business on the record date for the distribution. Based on approximately 55,361,230 AWI common shares outstanding as of January 31, 2016 a total of approximately 27,680,615 shares of AFI common stock will be distributed. For additional information on the distribution, see “The Separation and Distribution.”

 

Will AFI issue fractional shares of its common stock in the distribution?

No. AFI will not issue fractional shares of its common stock in the distribution. Fractional shares that AWI shareholders would otherwise have been entitled to receive will be aggregated and sold in the public market. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise be entitled to receive) to those shareholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

 

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What are the conditions to the distribution?

The distribution is subject to the satisfaction (or waiver by AWI in its sole discretion) of the following conditions:

 

    the division, the second step merger and the transfer of any additional assets and liabilities to AFI or its subsidiaries shall be completed in accordance with the terms of the separation and distribution agreement to be entered into between AWI and AFI;

 

    AWI shall have received the tax opinion from AWI’s outside tax counsel referred to in “The Separation and Distribution—U.S. Federal Income Tax Consequences” below regarding the tax treatment of the separation and the distribution and certain related transactions;

 

    the U.S. Securities and Exchange Commission (the “SEC”) shall have declared effective the registration statement of which this information statement forms a part, and this information statement shall have been mailed to the AWI shareholders;

 

    all actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental entity;

 

    the transaction agreements relating to the separation shall have been duly executed and delivered by the parties;

 

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect;

 

    the shares of AFI common stock to be distributed shall have been accepted for listing on the New York Stock Exchange, subject to official notice of distribution;

 

    the receipt of an opinion of an outside financial advisor to the board of directors of AWI confirming the solvency and financial viability of AWI before the separation and distribution and each of AWI and AFI after the distribution, which is in form and substance acceptable to AWI in its sole discretion;

 

    no event or development shall have occurred or exist that, in the judgment of AWI’s board of directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and other related transactions; and

 

    such other matters as AWI may determine in its sole discretion, including with respect to pension separation, collective bargaining agreements and other matters.

 

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  AWI and AFI cannot assure you that any or all of these conditions will be met and may also waive any of the conditions to the distribution. In addition, AWI can choose at any time not to go forward with the separation and distribution for any reason or no reason. For a complete discussion of all of the conditions to the distribution, see “The Separation and Distribution—Conditions to the Distribution.”

 

What is the expected date of completion of the separation and distribution?

The completion and timing of the separation and distribution are dependent upon a number of conditions. It is expected that the shares of AFI common stock will be distributed by AWI at [            ], Eastern time, on [            ] [            ], 2016 to the holders of record of AWI common shares at the close of business on [            ], 2016, the record date for the distribution. However, no assurance can be provided as to the timing of the separation or that all conditions to the distribution will be met.

 

Can AWI decide to cancel the distribution of AFI common stock even if all the conditions have been met?

Yes. Until the distribution has occurred, AWI has the right to terminate the distribution, even if all of the conditions are satisfied. See “The Separation and Distribution—Conditions to the Distribution.”

 

What if I want to sell my AWI common shares or my AFI common stock?

You should consult with your financial advisors, such as your stockbroker, bank or tax advisor.

 

What is “regular-way” and “ex-distribution” trading of AWI common shares?

Beginning on or shortly before the record date for the distribution and continuing up to and through the distribution date, it is expected that there will be two markets in AWI common shares: a “regular-way” market and an “ex-distribution” market. AWI common shares that trade in the “regular-way” market will trade with an entitlement to shares of AFI common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to shares of AFI common stock to be distributed in the distribution. If you decide to sell any AWI common shares before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your AWI common shares with or without your entitlement to AFI common stock to be issued in the distribution.

 

Where will I be able to trade shares of AFI common stock?

AFI has applied to list its common stock on the New York Stock Exchange under the symbol “AFI.” AFI anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before the record date for the distribution and will continue up to and through the distribution date and that “regular-way” trading in AFI common stock will begin on the first trading day following the completion of the separation. If trading begins on a “when-issued” basis, you may purchase or sell AFI common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. AFI cannot predict the trading prices for its common stock before, on or after the distribution date.

 

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What will happen to the listing of AWI common shares?

AWI common shares will continue to trade on the New York Stock Exchange after the distribution under the symbol “AWI.”

 

Will the number of AWI common shares that I own change as a result of the distribution?

No. The number of AWI common shares that you own will not change as a result of the distribution.

 

Will the distribution affect the market price of my AWI common shares?

Yes. As a result of the distribution, AWI expects the trading price of AWI common shares immediately following the distribution to be lower than the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the Resilient Flooring and Wood Flooring segments. There can be no assurance that the aggregate market value of the AWI common shares and the AFI common stock following the separation will be higher or lower than the market value of AWI common shares before the separation. This means, for example, that the combined trading prices of two AWI common shares and one share of AFI common stock after the distribution may be equal to, greater than or less than the trading price of two AWI common shares before the distribution.

 

What are the U.S. federal income tax consequences of the separation and the distribution?

The distribution is conditioned upon, among other things, AWI’s receipt of an opinion of outside counsel, in form and substance satisfactory to AWI, regarding the qualification of the separation and distribution as a transaction that generally is tax-free to AWI and, except to the extent of cash received in lieu of fractional shares, AWI’s shareholders, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. Assuming that the separation and distribution so qualifies, AWI shareholders generally should not be required, for U.S. federal income tax purposes, to recognize any gain or loss or to include any amount in their income upon their receipt of AFI common stock in the distribution except with respect to cash received in lieu of a fractional share of AFI common stock. See “The Separation and Distribution—U.S. Federal Income Tax Consequences” for further information regarding the potential tax consequences of the separation and distribution to you.

 

How will I determine my tax basis in the AFI shares I receive in the distribution?

For U.S. federal income tax purposes, your aggregate basis in the common shares that you hold in AWI and the new AFI common stock received in the distribution (including any fractional share interest in AFI common stock for which cash is received) will equal the aggregate basis in the AWI common shares held by you immediately before the distribution, allocated between your AWI common shares and the AFI common stock (including any fractional share interest in AFI common stock for which cash is received) you receive in the distribution in proportion to the relative fair market value of each on the distribution date. You should consult your tax advisor about the particular consequences of the separation and distribution to you, including the application of the tax basis allocation rules and the application of state, local and non-U.S. tax laws.

 

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What will AFI’s relationship be with AWI following the separation?

AFI will enter into a separation and distribution agreement with AWI to effect the separation and provide a framework for AFI’s relationship with AWI after the separation and will enter into certain other agreements, such as a transition services agreement, a tax matters agreement, an employee matters agreement, a campus lease agreement and trademark license agreements. These agreements, together with a plan of division that will be adopted by AWI’s board of directors, will provide for the separation and allocation between AFI and AWI of the assets, employees, liabilities and obligations of AWI and its subsidiaries attributable to periods prior to, at and after AFI’s separation from AWI and will govern the relationship between AFI and AWI subsequent to the completion of the separation and distribution. For additional information regarding the separation and distribution agreement and other transaction agreements, see “Risk Factors—Risks Related to the Separation,” “The Separation and Distribution” and “Certain Relationships and Related Person Transactions.”

 

Who will manage AFI after the separation?

AFI will benefit from a management team with an extensive background in the Resilient Flooring and Wood Flooring segments. Led by Donald R. Maier, who will be AFI’s President and Chief Executive Officer after the separation, AFI’s management team will possess a diverse set of relevant skills as well as experience in its industry. For more information regarding AFI’s management, see “Management.”

 

Are there risks associated with owning AFI common stock?

Yes. Ownership of AFI common stock is subject to both general and specific risks relating to AFI’s business, the industry in which it operates, its ongoing contractual relationships with AWI and its status as a separate, publicly traded company. Ownership of AFI common stock is also subject to risks relating to the separation. These risks are described in the “Risk Factors” section of this information statement beginning on page 17. You are encouraged to read that section carefully.

 

Does AFI plan to pay dividends?

AFI currently does not intend to pay a regular cash dividend. The decision to pay cash dividends on the common stock will be subject to the sole discretion of AFI’s board of directors and will depend upon many factors. See “Dividend Policy.”

 

Will AFI incur any indebtedness prior to or at the time of the distribution?

Yes. AFI anticipates having approximately $100.0 million of indebtedness upon completion of the separation. AFI expects to distribute approximately $50.0 million of the funds that it borrows before the separation to AWI. See “Description of Material Indebtedness” and “Risk Factors—Risks Related to AFI’s Business.

 

Who will be the distribution agent, transfer agent, registrar and information agent for the AFI common stock?

The distribution agent, transfer agent and registrar for the AFI common stock will be AST. For questions relating to the mechanics of the distribution or matters relating to the subsequent transfer of AFI common stock, you should call AST shareholder services at (877) 248-6417. If your shares are held by a bank, broker or other nominee, you should contact your bank or broker.

 

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Where can I find more information about AWI and AFI?

Before the distribution, if you have any questions relating to AWI’s business performance, you should contact:

 

  Armstrong World Industries, Inc.
  2500 Columbia Avenue
  P.O. Box 3025
  Lancaster, Pennsylvania 17603
  (717) 397-0611
  Attn: Investor Relations

 

  After the distribution, AFI stockholders who have any questions relating to AFI’s business performance should contact AFI at:
 

 

 
 Armstrong Flooring, Inc.
 
  2500 Columbia Avenue
  P.O. Box 3025
  Lancaster, Pennsylvania 17603
  (717) 397-0611
  Attn: Investor Relations

 

  The AFI website (www.armstrongflooring.com) is expected to be operational as of the effective time of the distribution.

 

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INFORMATION STATEMENT SUMMARY

This summary highlights selected information from this information statement relating to Armstrong Flooring, Inc.’s separation from Armstrong World Industries, Inc. and the distribution of common stock by Armstrong World Industries, Inc. to its shareholders. Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement regarding Armstrong Flooring, Inc. assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Also, unless the context otherwise requires, references in this information statement to “AFI,” “we,” “us,” “our” and “our company” refer to Armstrong Flooring, Inc., a Delaware corporation, and its combined subsidiaries unless the context requires otherwise. References in this information statement to “AWI” refer to Armstrong World Industries, Inc., a Pennsylvania corporation, and its consolidated subsidiaries unless the context requires otherwise. References to Armstrong Flooring, Inc. historical business and operations refer to the business and operations of Armstrong World Industries, Inc.’s flooring products business that will be allocated, assigned, assumed or transferred to or by Armstrong Flooring, Inc. in connection with the separation and distribution.

Armstrong Flooring, Inc.

AFI is a Delaware corporation incorporated in 2015. We are a leading global producer of flooring products for use primarily in the construction and renovation of residential, commercial and institutional buildings. We design, manufacture, source and sell resilient and wood flooring products in North America and the Pacific Rim.

On February 23, 2015, AWI, a Pennsylvania corporation incorporated in 1891, announced that its board of directors had unanimously approved a plan to separate AWI’s Resilient Flooring and Wood Flooring segments from its Building Products (Ceilings) segment. The separation will be effected by allocating the assets and liabilities related primarily to the Resilient Flooring and Wood Flooring segments to AFI and then distributing the common stock of AFI to AWI’s shareholders. The separation and distribution will result in AWI and AFI becoming two independent, publicly traded companies, with AFI owning and operating the Resilient Flooring and Wood Flooring segments and AWI continuing to own and operate the Building Products (Ceilings) segment.

Reportable Segments

We operate two business segments—Resilient Flooring and Wood Flooring.

Resilient Flooring —Our Resilient Flooring segment designs, manufactures, sources and sells a broad range of floor coverings primarily for homes and commercial and institutional buildings under various brands, including the Armstrong brand. Manufactured products in this segment include vinyl sheet, vinyl tile, and luxury vinyl tile (“LVT”) flooring. In addition, our Resilient Flooring segment sources and sells laminate flooring products, vinyl tile products, vinyl sheet products, LVT products, linoleum products, adhesives, and installation and maintenance materials and accessories. Resilient Flooring products are offered in a wide variety of types, designs, colors and installation options. We sell these products to independent wholesale flooring distributors, large home centers, retailers, contractors and to the manufactured homes industry, and secure specifications for these products through architects, designers and end users. When market conditions and available capacity warrant, we also provide product on an original equipment manufacturer (“OEM”) basis to other flooring companies.

Wood Flooring —Our Wood Flooring segment designs, manufactures, sources and sells hardwood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices under the Armstrong and Bruce brands. The product offering includes pre-finished solid and engineered wood floors in various wood species, and related accessories. Virtually all of our Wood Flooring sales are in North America. Our Wood Flooring products are generally sold to independent

 



 

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wholesale flooring distributors, large home centers, retailers, and flooring contractors and specified by regional and national builders. When market conditions and available capacity warrant, we also provide product on an OEM basis to other flooring companies.

Products and Markets

We are well positioned in the product categories and markets in which we operate—often holding a leadership or significant market share position. We compete in wood and resilient flooring markets in the Americas and the Pacific Rim. The majority of our sales are in North America, where we serve both commercial and residential markets. In the Pacific Rim, we are focused on commercial markets only. Effectively, all of our Wood Flooring segment sales are in North America, as these products are focused on the residential market. The major markets in which we compete are:

North American Residential. Our Resilient Flooring and Wood Flooring segments sell products for use in single and multi-family housing. Homeowners, builders, and property management firms can choose from our innovative resilient and wood flooring products, for which we are North America’s largest provider, or from our laminate flooring products. We compete directly with other domestic and international suppliers of these products. Our flooring products also compete with carpet, stone and ceramic products, which we do not offer, however, the designs and performance of LVT products are resulting in additional penetration of other flooring segments.

Our products are used in new home construction and existing home renovation work. Industry analysts estimate that existing home renovation (also known as replacement/remodel) work represents approximately 75% of the total North American residential market opportunity. Key U.S. statistics that indicate market opportunity include existing home sales (a key indicator for renovation opportunity), housing starts, housing completions, home prices, interest rates and consumer confidence. We believe there is some longer-term correlation between these statistics and our revenue after reflecting a lag period of several months between a change in these indicators and our operating results. However, we believe that consumers’ preferences for product type, style, color, availability and affordability also significantly affect our revenue. Further, changes in inventory levels and/or product focus at national home centers and independent wholesale flooring distributors can significantly affect our revenue.

North American Commercial. Many of our products, primarily resilient flooring, are used in commercial and institutional buildings. Our revenue opportunities come from new construction as well as renovation of existing buildings. Renovation work is estimated to represent the majority of the total North American commercial market opportunity. Most of our revenue comes from four major segments of commercial building – education, healthcare, retail and office. We monitor U.S. construction starts and follow project activity. Our revenue from new construction can lag behind construction starts by as much as twenty-four months given that the installation of flooring typically occurs later in the construction process. We also monitor office vacancy rates, gross domestic product (“GDP”) and general employment levels, which can indicate movement in renovation and new construction opportunities. We believe that these statistics, taking into account the time-lag effect, provide a reasonable indication of our future revenue opportunity from commercial renovation and new construction. However, we believe that consumers’ preferences for product type, style, color, availability and affordability also significantly affect our revenue.

Outside of North America. We also serve commercial markets in the Pacific Rim region with over 80% of the sales in this region coming from China and Australia. The commercial segments we serve are similar to the North American market (office, education, retail, and healthcare), however there is a higher penetration of resilient flooring in the hospitality (retail) and office segments in China than we see in North America. For the countries where we have significant revenue, we monitor various national statistics (such as GDP) as well as construction data (starts and project-related information). Revenues come primarily from new construction and renovation work. In 2014, following a review of strategic alternatives, we decided to exit our European flooring business and cease further funding of our DLW subsidiary in Germany.

 



 

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LVT Investment. LVT represents the fastest growing resilient flooring product category. Through the utilization of advanced printing and embossing technology, LVT enables attractive designs emulating wood and stone visuals combined with the durability associated with vinyl tile products. In addition, LVT offers a wide variety of installation options for the professional and do-it-yourself installer, with an enhanced ease of installation when compared to other products such as wood or ceramic tile, and this can be seen with the growing popularity of floating LVT floors. The largest market for LVT is North America. Historically, this market has been largely served by imported product manufactured in the Pacific Rim. We are nearing completion of construction of an expansion to our Lancaster, Pennsylvania plant to add LVT manufacturing capacity. Announced in 2013, this approximately $50 million investment allows us to locally serve the North American market, and leverage our manufacturing expertise to create a strong cost and quality position. This improved cost, quality and service model will allow us to grow share in this important category.

Our Business Strategies

Extend our preferred brand status with specialty flooring retailers and home centers.

We intend to leverage our existing strong relationships with distributors, home centers, and leading retailers and continue to strengthen these ties by helping our partners with products and value-added programs that grow our mutual businesses. We believe that ongoing investments in merchandising and integrated marketing programs will support and enable this growth. We expect that improving and adapting our presence in key consumer research channels will allow us to participate more fully in the consumer purchase journey.

Outpace the North American market in the fast growing LVT product category.

We expect that new capabilities to develop and manufacture an innovative line of products at our domestic LVT plant, coupled with our strength in distribution, will enable us to sell a differentiated LVT product line, effectively service our customers, and grow our share of the fast-growing LVT market.

Leverage traditional strength with architects and contractors to win more specified bids.

We are the resilient flooring provider of choice for technically informed commercial buyers due to the durability, fashion-forward design, and low total cost of ownership of our products. We expect that further customization of our messaging and sales approach to meet the needs of unique end-use segments, combined with market leading products, will improve conversion and increase sales force efficiency in the commercial segment. We believe we are well positioned to maintain leadership in education and retail and an expanded presence in healthcare and office. Our distributor partnerships are critical to our success in this space, and we plan to continue to invest to build shared selling capabilities.

Capitalize on recent investments and strong positioning to win a greater share of the Pacific Rim market.

We are gaining recognition as a commercial resilient flooring innovation leader throughout the Pacific Rim market. We believe that our regional investments in manufacturing facilities and global R&D scale will allow us to produce resilient products that are differentiated versus our competition and desired by our customers. We plan to continue to expand our strong network of distribution partnerships throughout the region to provide our customers with the most complete resilient flooring solutions.

Use brand, innovation, and investments to differentiate our product offering in the eyes of consumers and provide operating leverage.

We believe that we have distinct opportunities to expand margins within our product portfolio, building from our foundation of the most recognized brand in the flooring industry. Our scale in hard surfaces enables us to invest in innovation that meaningfully adds to our traditional strengths of design, quality and reliable installation

 



 

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systems. Through application of lean principles to our leading position in wood flooring, we are improving the through cycle return of our wood segment. Across wood, vinyl sheet, and vinyl composition tile (“VCT”) categories, we are capitalizing on opportunities to sell a richer mix of products targeted at the most attractive customer segments in North America and Pacific Rim markets.

Our Strengths

Our market leading position in resilient and wood flooring affords us scale, experience, and brand equity.

We are the leading producer of resilient and wood flooring products across North America. Our significant scale and experience in manufacturing enable us to bring cost-competitive, high-quality products to our customers in all of our markets. We are able to offer our customers a broad spectrum of choices in materials and designs to suit many resilient and wood flooring needs. In addition, Armstrong and Bruce are two trusted brands with high consumer awareness, and reputations for delivering superior performance and other key product attributes, such as quality, durability, appearance, and style. Finally, our product lines share and leverage common business systems and infrastructure, giving us scale and efficiency benefits in our go-to-market operations.

Strong long-term relationships with customers and key channel partners provide us with depth and breadth of sales coverage.

We operate a well-established network of strategically aligned and highly experienced distributors, many of whom we have partnered with for decades. The regional scale of our distributors allows us to economically reach many thousands of specialty flooring retail and commercial accounts with quality service and a clear sales message. Our distributor partners are among the strongest in the business. We also leverage our own sales team to provide sales and service coverage to larger regional and national accounts, including the major home centers, mass merchants and flooring superstores, as well as to drive specifications with key builders. Our broad sales and distribution network allows us to respond efficiently and effectively to the needs of our customers across multiple end-use segments. In this way, we may pursue the best of both the direct and two-step sales models to achieve depth and breadth in the market. We also have strong relationships with key influencer groups in the commercial purchase process, including architecture & design firms, dedicated flooring contractors, and general contractors.

Our broad resilient and wood flooring product portfolio positions us to play and win in the most attractive segments.

We are well positioned to succeed in faster growing hard surface product categories such as LVT and engineered hardwood. Additionally, we have a leading position in the VCT segment. LVT is one of the fastest growing segments of the flooring industry, offering the enhanced durability of traditional vinyl flooring in attractive new designs, appealing to a wide range of flooring consumers. We have invested in advanced production capabilities in the category to allow us significant flexibility to create new designs and respond quickly to customer needs, positioning us to succeed in the category and win share. Similarly, our wood flooring business offers us exposure to an additional growth market. Demand for wood flooring products, particularly engineered wood, is expected to continue to rise, driven by consumer preference/market penetration, continued health in the replacement market, and growth in new construction.

Armstrong continues to be an anchor brand in key retail accounts.

Our strong brand recognition, reputation for quality, durability, and innovative designs and consumer pull have established Armstrong and Bruce as significant brands in both specialty flooring retailers and major home centers. Our continued strength in these areas, coupled with our marketing initiatives targeted at the homeowner segment, position AFI well to benefit from the flooring category growth home centers are experiencing and the important role that home centers play in many residential customers’ purchase process. Similarly, we are well

 



 

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positioned through our distributor partners to maintain and grow our position of strength in the large network of independent flooring stores, which are a critical part of our business in North America. Through these key accounts we can sell a richer mix of products to attractive consumer and light commercial “Main Street” segments.

Continued strength in innovation gives us a sustainable means of differentiation from our competitors.

We have a strong legacy of innovation and continue to invest in new product and manufacturing technologies. Through these technologies (e.g., coatings, production processes, and chemical formulations), as well as complementary technology partnerships, we can create products with superior performance and/or cost advantages. Ongoing excellence in innovation can provide us with a long-term source of differentiation to help us convert sales against the competition and justify premium price points at expanded margins.

Our production network of in-house manufacturing and source partners has available capacity to absorb additional volume as our end-market demand expands.

Our investments in manufacturing and productivity initiatives have created an improved cost structure, and our facilities and source partners can accommodate the growth we anticipate over the next several years without the need for substantial additional capital investment. As such, we may benefit from operating leverage that will drive margin expansion as our revenues increase.

Our commercial business in the Pacific Rim affords us access to the growing economies of that region.

We expect that demand for resilient flooring products will continue to rise at a robust rate in these countries and our strong network coverage has positioned us to capitalize on these opportunities. Our established distribution network within China provides us with coverage of more than 650 cities. Throughout the Pacific Rim, our network also covers markets in Australia, Southeast Asia, India, Japan, Korea and Taiwan. This expansive network is supported by two advanced manufacturing facilities in Wujiang, China, and a third facility in Braeside, Australia.

The Separation

Reasons for the Separation

The AWI board of directors determined that the separation of AWI’s flooring business from its ceilings (building products) business would be in the best interests of AWI and approved the separation.

The AWI board of directors considered a wide variety of factors in evaluating the separation. Among other things, the AWI board of directors considered the following potential benefits of the separation:

 

    Greater focus on individual businesses may drive improved results. The separation will allow for customized strategies and operating initiatives for each company. Following the separation, each company will be able to focus its investments on distinct products and channels without consideration of performance, or other issues, of the other business. Each company will be able to provide greater transparency and clarity to its investors on operating drivers. The greater market discipline and scrutiny on performance within each independent company may result in better decision-making and results.

 

    Enhanced strategic and management focus. The separation is expected to allow AFI and AWI to more effectively pursue their distinct operating priorities and strategies and enable management of each company to focus on unique opportunities for long-term growth and profitability.

 

    More efficient allocation of capital. Separate capital structures can be designed to correlate with risk and cash flow profile of each business. Each company can adopt a level of leverage appropriate to its particular risk profile.

 



 

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    Direct access to capital markets. The separation will create an independent equity structure that will afford each company with direct access to the capital markets. As a result, each company will have more flexibility to capitalize on its unique growth opportunities.

 

    Alignment of incentives with performance objectives. Separate companies will allow for better alignment of management incentives with equity performance. Each separate company will allow for greater opportunities to assume senior positions, which, combined with better aligned compensation policies, will help attract and retain talent.

 

    Broadening of investor base may enhance value. Two pure play companies may attract a broader base of shareholders by providing them with choice and flexibility to allocate investments between two distinctly different opportunities. The two companies will have different growth rates, margins and returns, different construction cycle exposure, and different risk/reward profiles.

Neither AFI nor AWI can assure you that, following the separation, any of the benefits described above or otherwise will be realized to the extent anticipated or at all.

The AWI board of directors also considered a number of potentially negative factors in evaluating the separation, including:

 

    One-time costs of the separation. The planning, evaluation and implementation of the separation will result in significant costs, which are expected to include approximately $70 million in professional fees and other expenses, and approximately $20 million in capital expenditures relating to the separation.

 

    Uncertain benefits. There is considerable risk of not realizing the anticipated benefits of the separation.

 

    Restrictions and limitations. The agreements that will be entered into between AFI and AWI in connection with the separation will place limitations upon both AFI and AWI as separate companies.

 

    Potential for takeover. As a smaller company, AFI may be at increased risk to become the target of a takeover on terms that are not in the best interests of AFI or its stockholders.

After careful consideration of these, and other, potential benefits and potentially negative factors, the AWI board of directors concluded that the potential benefits of the separation outweighed these potentially negative factors.

Conditions to the Distribution

The consummation of the distribution and separation are subject to the satisfaction or, to the extent permitted by applicable law, waiver by AWI of several conditions, including:

 

    the division, the second step merger and the transfer of any additional assets and liabilities to AFI or its subsidiaries shall be completed in accordance with the terms of the separation and distribution agreement to be entered into between AWI and AFI;

 

    AWI shall have received the tax opinion from AWI’s outside tax counsel referred to in “The Separation and Distribution—U.S. Federal Income Tax Consequences” below regarding the tax treatment of the separation and the distribution and certain related transactions;

 

    the SEC shall have declared effective AFI’s registration statement on Form 10, of which this information statement forms a part, and this information statement shall have been mailed to the AWI shareholders;

 

    all actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental authority;

 

    the transaction agreements relating to the separation shall have been duly executed and delivered by the parties;

 



 

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    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect;

 

    the shares of AFI common stock to be distributed shall have been accepted for listing on the New York Stock Exchange subject to official notice of distribution;

 

    the receipt of an opinion of an outside financial advisor to the board of directors of AWI confirming the solvency and financial viability of AWI before the separation and distribution and each of AWI and AFI after the distribution, which is in form and substance acceptable to AWI in its sole discretion;

 

    no event or development shall have occurred or exist that, in the judgment of AWI’s board of directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and other related transactions; and

 

    such other matters as AWI may determine in its sole discretion, including with respect to pension separation, collective bargaining agreements and other matters.

AWI will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the separation and, to the extent it determines to proceed, to determine the record date for the distribution and the distribution date and the distribution ratio. For a complete discussion of all of the conditions to the separation, see “The Separation and Distribution—Conditions to the Distribution.”

Agreements with AWI

Following the separation and distribution, AFI and AWI will operate separately, each as an independent public company. AFI will enter into a separation and distribution agreement with AWI. In connection with the separation, AFI will also enter into various other agreements to effect the separation and provide a framework for its relationship with AWI after the separation, such as a transition services agreement, a tax matters agreement, an employee matters agreement, trademark license agreements and a campus lease agreement. These agreements will provide for the allocation between AFI and AWI of AWI’s assets, employees, liabilities and obligations attributable to periods prior to, at and after AFI’s separation from AWI and will govern certain relationships between AFI and AWI after the separation. Forms of the agreements listed above have been filed as exhibits to the registration statement on Form 10 of which this information statement is a part.

Summary Risk Factors

There are risks associated with AFI’s business, an investment in AFI’s common stock, and the separation of AFI from AWI, including:

Risks related to AFI’s business

 

    Worldwide economic conditions could have a material adverse impact on our financial condition, liquidity or results of operations.

 

    Our business is dependent on construction activity. Downturns in construction activity could adversely affect our financial condition, liquidity or results of operations.

 

    Sales fluctuations to and changes in our relationships with key customers could have a material adverse effect on our financial condition, liquidity or results of operations.

 

    Our markets are highly competitive. Competition can reduce demand for our products or cause us to lower prices. Failure to compete effectively by meeting consumer preferences and maintaining market share could adversely affect our results.

 



 

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    If the availability of raw materials or energy decreases, or the costs increase, and we are unable to pass along increased costs, our financial condition, liquidity or results of operations could be adversely affected.

 

    We are subject to risks associated with our international operations in both established and emerging markets. Legislative, political, regulatory and economic volatility, as well as vulnerability to infrastructure and labor disruptions, could have an adverse effect on our financial condition, liquidity or results of operations.

Risks related to the separation and distribution

 

    Our separation from AWI may not be beneficial.

 

    The separation may result in disruptions to, and negatively impact our relationships with, our customers and other business partners and the relationships with the customers and other business partners of AWI.

 

    The separation could result in substantial tax liabilities or tax indemnity obligations to AFI, AWI and AWI’s shareholders.

 

    We have no history of operating as an independent company.

 

    Our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

 

    Concerns about our prospects as a stand-alone company and employee compensation and benefits, after the separation and distribution or otherwise, could affect our ability to retain employees.

 

    Challenges in the commercial and credit environments may materially adversely affect our ability to complete the separation and our future access to capital.

Risks related to AFI’s common stock

 

    We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, our stock price may fluctuate significantly.

 

    Substantial sales of our common shares may occur in connection with the distribution, which could cause our share price to be volatile and to decline.

 

    Your percentage of ownership in AFI may be diluted in the future.

 

    No vote of the AWI shareholders is required in connection with the separation and distribution. As a result, if you do not want to receive our common shares in the distribution, your sole recourse will be to divest yourself of your AWI common stock prior to or on the separation date.

 

    Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Corporate Information

AFI was incorporated in Delaware for the purpose of holding AWI’s flooring business in connection with the separation and distribution described in this information statement. Prior to the separation, AFI will have no operations.

 



 

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The address of AFI’s principal executive offices is 2500 Columbia Avenue, P.O. Box 3025, Lancaster, Pennsylvania 17603. AFI’s telephone number is (717) 397-0611. AFI maintains a website at www.armstrongflooring.com. AFI’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to shareholders of AWI who will receive shares of AFI common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of AFI’s securities. The information contained in this information statement is believed by AFI to be accurate as of the date set forth on its cover. Changes may occur after that date and neither AFI nor AWI will update the information except in the normal course of their respective disclosure obligations and practices.

 



 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating AFI and AFI’s common stock. Any of the following risks could materially and adversely affect AFI’s business, financial condition or results of operations. The risk factors generally have been separated into three groups: risks related to AFI’s business, risks related to the separation and risks related to AFI’s common stock.

Risks Related to AFI’s Business

Worldwide economic conditions could have a material adverse impact on our financial condition, liquidity or results of operations.

The flooring products business is influenced by conditions in domestic and foreign economies, including inflation, deflation, interest rates, availability and cost of capital, consumer spending rates, energy availability and the effects of governmental initiatives to manage economic conditions. Volatility in financial markets and the continued softness or further deterioration of national and global economic conditions could have a material adverse effect on our financial condition, liquidity or results of operations, including as follows:

 

    the financial stability of our customers or suppliers may be compromised, which could result in additional bad debts for us or non-performance by suppliers;

 

    commercial and residential consumers of our products may postpone spending in response to tighter credit, negative financial news and/or stagnation or further declines in income or asset values, which could have a material adverse impact on the demand for our product;

 

    the net asset value of the investment funds underlying our defined benefit pension plans may decline, which could result in negative plan investment performance and additional charges, and may involve significant cash contributions to such plans to meet obligations or regulatory requirements; and

 

    our asset impairment assessments and underlying valuation assumptions may change, which could result from changes to estimates of future sales and cash flows that may lead to substantial impairment charges.

Continued or sustained deterioration of economic conditions would likely exacerbate and prolong these adverse effects.

Our business is dependent on construction activity. Downturns in construction activity could adversely affect our financial condition, liquidity or results of operations.

Our business has greater sales opportunities when construction activity is strong and, conversely, has fewer opportunities when such activity declines. The cyclical nature of commercial and residential construction activity, including construction activity funded by the public sector, tends to be influenced by prevailing economic conditions, including the rate of growth in gross domestic product, prevailing interest rates, government spending patterns, business, investor and consumer confidence and other factors beyond our control. Prolonged downturns in construction activity could have a material adverse effect on our financial condition, liquidity or results of operations.

Sales fluctuations to and changes in our relationships with key customers could have a material adverse effect on our financial condition, liquidity or results of operations.

Some of our business lines and markets are dependent on a few key customers, including independent distributors. We generally do not enter into written or long-term agreements with our independent distributors. The loss, reduction, or fluctuation of sales to one of these major customers, or any adverse change in our business relationship with any one of them, could have a material adverse effect on our financial condition, liquidity or results of operations.

 

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Our markets are highly competitive. Competition can reduce demand for our products or cause us to lower prices. Failure to compete effectively by meeting consumer preferences and maintaining market share could adversely affect our results.

Our markets are highly competitive. Competition can reduce demand for our products, negatively affect our product sales mix or cause us to lower prices. Failure to compete effectively by meeting consumer preferences and maintaining market share could have a material adverse effect on our financial condition, liquidity or results of operations. Our customers consider our products’ performance, product styling, customer service and price when deciding whether to purchase our products. Shifting consumer preference in our highly competitive markets, from residential resilient products to other flooring products, for example, whether for performance or styling preferences or our inability to develop and offer new competitive performance features could have an adverse effect on our sales. In addition, excess industry capacity for certain products in several geographic markets could lead to industry consolidation and/or increased price competition. We are also subject to potential increased price competition from overseas competitors, which may have lower cost structures.

If the availability of raw materials or energy decreases, or the costs increase, and we are unable to pass along increased costs, our financial condition, liquidity or results of operations could be adversely affected.

The availability and cost of raw materials, packaging materials, energy and sourced products are critical to our operations. For example, we use substantial quantities of natural gas, petroleum-based raw materials and hardwood lumber in our manufacturing operations. The cost of some of these items has been volatile in recent years and availability has been limited at times. We source some materials from a limited number of suppliers, which, among other things, increases the risk of unavailability. Limited availability could cause us to reformulate products or limit our production. Decreased access to raw materials and energy or significant increased cost to purchase these items and any corresponding inability to pass along such costs through price increases could have a material adverse effect on our financial condition, liquidity or results of operations.

We require a significant amount of liquidity to fund our operations.

Our liquidity needs vary throughout the year. If our business experiences materially negative unforeseen events, we may be unable to generate sufficient cash flow from operations to fund our needs or maintain sufficient liquidity to operate and remain in compliance with our debt covenants, which could result in reduced or delayed planned capital expenditures and other investments and adversely affect our financial condition or results of operations.

We may be subject to liability under and may make substantial future expenditures to comply with environmental laws and regulations, which could materially adversely affect our financial condition, liquidity or results of operations.

AWI is, and AFI may be, involved with environmental investigation and remediation activities for which AFI’s ultimate liability may exceed the currently estimated and accrued amounts. It is possible that AFI could become subject to additional environmental matters and corresponding liabilities in the future. See Note 26 to the Combined Financial Statements for further information related to environmental matters.

The building materials industry has been subject to claims relating to raw materials, such as silicates, polychlorinated biphenyl (“PCB”), polyvinylchloride (“PVC”), formaldehyde, fire-retardants and claims relating to other issues, such as mold and toxic fumes, as well as claims for incidents of catastrophic loss, such as building fires. We have not received any significant claims involving our raw materials or our product performance; however, product liability insurance coverage may not be available or adequate in all circumstances to cover claims that may arise in the future.

In addition, our operations are subject to various domestic and foreign environmental, health, and safety laws and regulations. These laws and regulations not only govern our current operations and products, but also impose

 

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potential liability on us for our past operations. Our costs to comply with these laws and regulations may increase as these requirements become more stringent in the future, and these increased costs may materially adversely affect our financial condition, liquidity or results of operations.

We are subject to risks associated with our international operations in both established and emerging markets. Legislative, political, regulatory and economic volatility, as well as vulnerability to infrastructure and labor disruptions, could have an adverse effect on our financial condition, liquidity or results of operations.

A portion of our products move in international trade, with approximately 8% of our revenues from operations outside the United States and Canada in 2014. See Note 3 to the Combined Financial Statements for further information. Our international trade is subject to currency exchange fluctuations, trade regulations, import duties, logistics costs, delays and other related risks. Our international operations are also subject to various tax rates, credit risks in emerging markets, political risks, uncertain legal systems, high costs in repatriating profits to the United States from some countries, and loss of sales to local competitors following currency devaluations in countries where we import products for sale. In addition, our international growth strategy depends in part on our ability to expand our operations in certain emerging markets. However, some emerging markets have greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions than established markets.

In addition, in many countries outside of the United States, particularly in those with developing economies, it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act or similar local anti-corruption or anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Failure to comply with these laws, as well as U.S. and foreign export and trading laws, could subject us to civil and criminal penalties. As we continue to expand our business globally, including in emerging markets, we may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely affect our business outside the United States and our financial condition, liquidity or results of operations.

We may pursue strategic transactions that could create risks and present unforeseen integration obstacles or costs, any of which could materially adversely affect our financial condition, liquidity or results of operations.

We have evaluated, and expect to continue to evaluate, potential strategic transactions as opportunities arise. We may routinely engage in discussions with third parties regarding potential transactions, including joint ventures, which could be significant. Any such strategic transaction involves a number of risks, including potential disruption of our ongoing business and distraction of management, difficulty with integrating or separating personnel and business operations and infrastructure, and increasing or decreasing the scope, geographic diversity and complexity of our operations. Strategic transactions could involve payment by us of a substantial amount of cash, assumption of liabilities and indemnification obligations, regulatory requirements, incurrence of a substantial amount of debt or issuance of a substantial amount of equity. Certain strategic opportunities may not result in the consummation of a transaction or may fail to realize the intended benefits and synergies. If we fail to consummate and integrate our strategic transactions in a timely and cost-effective manner, our financial condition, liquidity or results of operations could be materially and adversely affected.

Our plant construction projects may adversely impact our results.

The flooring products business recently completed several large plant construction projects, including two resilient flooring plants in China. In addition, we are adding manufacturing capability to our Lancaster, PA flooring plant to manufacture LVT in North America. Economic and competitive advantages and returns expected from these projects may not fully materialize as a result of changes in market conditions. In addition, there can be no assurance that the actual cost of building and operating our LVT plant in North America will not exceed our projections, and we may experience delays in this project for many reasons, including unavailability of raw materials, labor or equipment or regulatory matters.

 

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Adverse judgments in regulatory actions, product claims, environmental claims and other litigation could be costly. Insurance coverage may not be available or adequate in all circumstances.

In the ordinary course of business, we will be subject to various claims and litigation. Any such claims, whether with or without merit, could be time consuming and expensive to defend and could divert management’s attention and resources. While we will strive to ensure that our products comply with applicable government regulatory standards and internal requirements, and that our products perform effectively and safely, customers from time to time could claim that our products do not meet warranty or contractual requirements, and users could claim to be harmed by use or misuse of our products. These claims could give rise to breach of contract, warranty or recall claims, or claims for negligence, product liability, strict liability, personal injury or property damage. They could also result in negative publicity.

In addition, claims and investigations may arise related to patent infringement, distributor relationships, commercial contracts, antitrust or competition law requirements, employment matters, employee benefits issues, and other compliance and regulatory matters, including anti-corruption and anti-bribery matters. For example, we are currently a party to various litigation matters that involve product liability, tort liability and other claims under a wide range of allegations, including illness due to exposure to certain chemicals used in the workplace, or medical conditions arising from exposure to product ingredients or the presence of trace contaminants. In some cases, these allegations involve multiple defendants and relate to legacy products that we and other defendants purportedly manufactured or sold. While we will have processes and policies designed to mitigate these risks and to investigate and address such claims as they arise, we will not be able to predict or, in some cases, control the costs to defend or resolve such claims.

We will maintain insurance against some, but not all, of these potential claims. In the future, we may not be able to maintain insurance at commercially acceptable premium levels. In addition, the levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant judgment or claim is not fully insured or indemnified against, it could have a material adverse impact. We cannot assure that the outcome of all current or future litigation will not have a material adverse effect on our financial condition, liquidity or results of operations.

Increased costs of labor, labor disputes, work stoppages or union organizing activity could delay or impede production and could have a material adverse effect on our financial condition, liquidity or results of operations.

Increased costs of U.S. and international labor, including the costs of employee benefits plans, labor disputes, work stoppages or union organizing activity could delay or impede production and have a material adverse effect on our financial condition, liquidity or results of operations. As the majority of our manufacturing employees will be represented by unions and covered by collective bargaining or similar agreements, we will often incur costs attributable to periodic renegotiation of those agreements, which may be difficult to project. We are also subject to the risk that strikes or other conflicts with organized personnel may arise or that we may become the subject of union organizing activity at our facilities that do not currently have union representation. Prolonged negotiations, conflicts or related activities could also lead to costly work stoppages and loss of productivity.

We are dependent upon attracting and retaining key personnel, the loss of whom could adversely affect our business.

We believe that our success will depend, to a significant extent, upon our ability to attract and retain key senior management and operations management personnel. Our failure to recruit and retain these key personnel could adversely affect our business, financial condition or results of operations.

 

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Our intellectual property rights may not provide meaningful commercial protection for our products or brands, which could adversely impact our financial condition, liquidity or results of operations.

We will rely on our proprietary intellectual property, including numerous patents and registered trademarks, as well as our licensed intellectual property to market, promote and sell our products. We will monitor and protect against activities that might infringe, dilute, or otherwise harm our patents, trademarks and other intellectual property and rely on the patent, trademark and other laws of the United States and other countries. However, we may be unable to prevent third parties from using our intellectual property without our authorization. In addition, the laws of some non-United States jurisdictions, particularly those of certain emerging markets, will provide less protection for our proprietary rights than the laws of the United States and present greater risks of counterfeiting and other infringement. To the extent we cannot protect our intellectual property, unauthorized use and misuse of our intellectual property could harm our competitive position and have a material adverse effect on our financial condition, liquidity or results of operations.

We outsource our information technology infrastructure and certain finance and accounting functions, which makes us more dependent upon third parties.

In an effort to make our finance, accounting and information technology (“IT”), functions more efficient, increase related capabilities, as well as generate cost savings, we will outsource certain finance and accounting functions and a significant portion of our IT infrastructure to separate third party service providers. As a result, we will rely on third parties to ensure that our related needs are sufficiently met. This reliance will subject us to risks arising from the loss of control over certain processes, changes in pricing that may affect our operating results, and potentially, termination of provisions of these services by our suppliers. A failure of our service providers to perform may have a material adverse effect on our financial condition, liquidity or results of operations.

Our cost saving initiatives may not achieve expected savings in our operating costs or improved operating results.

We will aggressively look for ways to make our operations more efficient and effective. We will reduce, move and expand our plants and operations as needed. Such actions involve substantial planning, often require capital investments and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. Our ability to achieve cost savings and other benefits within expected time frames will be subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our financial condition, liquidity or results of operations could be materially and adversely affected.

Risks Related to the Separation

Our separation from AWI may not be beneficial.

We may not realize strategic, financial, operational or other benefits from the separation. As independent publicly traded companies, AWI and AFI will be smaller, less diversified companies with a narrower business focus and may be more vulnerable to changing market conditions, which could materially and adversely affect their respective business, financial condition and results of operations.

Further, there can be no assurance that the combined value of the common stock of the two publicly traded companies will be equal to or greater than what the value of our common stock would have been had the separation not occurred.

 

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The separation may result in disruptions to, and negatively impact our relationships with, our customers and other business partners and the relationships with the customers and other business partners of AWI.

Uncertainty related to the separation may lead customers and other parties with which AWI currently does business or with which we may do business in the future to terminate or attempt to negotiate changes in existing business relationships, or consider entering into business relationships with parties other than us or AWI. These disruptions could have a material and adverse effect on our or AWI’s businesses, financial condition, results of operations and prospects. The effect of such disruptions could be exacerbated by any delays in the completion of the separation.

If the separation and distribution fails to qualify as a tax-free transaction for U.S. federal income tax purposes, then AFI, AWI and AWI’s shareholders could be subject to significant tax liability or tax indemnity obligations.

It is a condition to the distribution that AWI receive an opinion of AWI’s tax counsel, Skadden, Arps, Slate, Meagher & Flom LLP, on the basis of certain facts, representations, covenants and assumptions set forth in such opinion, substantially to the effect that, for U.S. federal income tax purposes, the separation and distribution should qualify as a transaction that generally is tax-free to AWI and AWI’s shareholders, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code.

Notwithstanding the tax opinion, the Internal Revenue Service (“IRS”) could determine on audit that the distribution should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations or covenants set forth in the tax opinion is not correct or has been violated, or that the distribution should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the distribution, or if the IRS were to disagree with the conclusions of the tax opinion. If the distribution is ultimately determined to be taxable, the distribution could be treated as a taxable dividend to you for U.S. federal income tax purposes, and you could incur significant U.S. federal income tax liability. In addition, AWI and/or we could incur significant U.S. federal income tax liabilities or tax indemnification obligations, whether under applicable law or the tax matters agreement that we will enter into with AWI, if it is ultimately determined that certain related transactions undertaken in anticipation of the distribution are taxable.

The combined post-separation value of AWI and AFI shares may not equal or exceed the pre-separation value of AWI common shares.

As a result of the distribution, AWI expects the trading price of AWI common shares immediately following the distribution to be lower than the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the flooring products business held by us. There can be no assurance that the aggregate market value of the AWI common shares and the AFI common shares following the separation will be higher or lower than the market value of AWI common shares if the separation did not occur.

We have no history of operating as an independent company and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about us in this information statement refers to our business as operated by and integrated with AWI. Our historical and pro forma financial information included in this information statement is derived from the consolidated financial statements and accounting records of AWI. Accordingly, the historical and pro forma financial information included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows that AFI would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

 

   

Prior to the separation, our business has been operated by AWI as part of its broader corporate organization, rather than as an independent company. AWI or one of its affiliates has performed

 

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various corporate functions for us, such as legal, treasury, accounting, auditing, human resources, public affairs and finance. Our historical and pro forma financial results reflect allocations of corporate expenses from AWI for such functions and are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company.

 

    Currently, our business is integrated with the other businesses of AWI. Historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we will enter into transition agreements with AWI, these arrangements may not fully capture the benefits that we have enjoyed as a result of being integrated with AWI and may result in us paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition following the completion of the separation.

 

    Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of AWI. Following the completion of the separation, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may or may not be available and may be more costly.

 

    After the completion of the separation, the cost of capital for our business may be higher than AWI’s cost of capital prior to the separation.

 

    Our historical financial information does not reflect the debt that we will incur as part of the separation and distribution.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from AWI. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements of our business, see “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data of Armstrong Flooring, Inc.,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this information statement.

We may have received better terms from unaffiliated third parties than the terms we receive in our agreements with AWI.

The agreements we will enter into with AWI in connection with the separation and distribution were determined by management and the AWI board of directors in the context of the separation and distribution while we were still part of AWI and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. The terms of the agreements relate to, among other things, the licensing of intellectual property and the provision of certain employment and transition services. We may have received better terms from third parties because, among other things, third parties may have competed with each other to win our business.

We may not be able to engage in certain corporate transactions after the separation.

To preserve the tax-free treatment to AWI of the separation and the distribution, under the tax matters agreement that we will enter into with AWI, which is discussed in more detail below under the heading “Certain Relationships and Related Person Transactions – Tax Matters Agreement,” we may be restricted from taking any action that prevents the distribution and related transactions from being tax-free for U.S. federal income tax purposes. Under the tax matters agreement, for the two-year period following the distribution, we will be prohibited, except in certain circumstances, from, among other things:

 

    entering into any transaction resulting in the acquisition of 35% or more of our stock or substantially all of our assets, whether by merger or otherwise;

 

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    merging, consolidating, or liquidating;

 

    issuing equity securities beyond certain thresholds;

 

    repurchasing our capital stock; and

 

    ceasing to actively conduct our business.

These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business. In addition, under the tax matters agreement, we are required to indemnify AWI against liabilities resulting from certain actions taken after the distribution that cause the distribution to be taxable for U.S. federal income tax purposes, even if we did not participate in or otherwise facilitate such actions.

We may fail to perform under various transaction agreements that will be executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

In connection with the separation, AFI and AWI will enter into a separation and distribution agreement and will also enter into various other agreements, including a transition services agreement, a tax matters agreement, an employee matters agreement, a campus lease agreement and trademark license agreements. The separation and distribution agreement, the tax matters agreement and the employee matters agreement will determine the allocation of assets and liabilities between the companies following the separation for those respective areas and will include any necessary indemnifications related to liabilities and obligations. The transition services agreement will provide for the performance of certain services by each company for the benefit of the other for a period of time after the separation. We will rely on AWI to satisfy its performance and payment obligations under these agreements. If AWI is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have our own systems and services in place, or if we do not have agreements with other providers of these services once certain transaction agreements expire, we may not be able to operate our business effectively and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that AWI currently provides to us. We, however, may not be successful in implementing these systems and services or in transitioning data from AWI’s systems to our own.

We will be required to satisfy certain indemnification obligations to AWI or may not be able to collect on indemnification rights from AWI.

Under the terms of the separation and distribution, we will indemnify AWI from and after the separation and distribution with respect to (i) all debts, liabilities and obligations allocated or transferred to us in connection with the separation and distribution (including our failure to pay, perform or otherwise promptly discharge any such debts, liabilities or obligations after the separation and distribution), (ii) any misstatement or omission of a material fact in this information statement resulting in a misleading statement, (iii) any breach by us of the separation and distribution agreement, the transition services agreement, the employee matters agreement, the tax matters agreement, the campus lease agreement or the trademark license agreements and (iv) our ownership and operation of our business. We are not aware of any existing indemnification obligations at this time, but any such indemnification obligations that may arise could be significant. Under the terms of the separation and distribution agreement, AWI will indemnify us from and after the separation and distribution with respect to (i) all debts, liabilities and obligations allocated to AWI after the separation and distribution (including its failure to pay, perform or otherwise promptly discharge any such debts, liabilities or obligations after the separation and distribution), (ii) any breach by AWI of the separation and distribution agreement, the transition services agreement, the employee matters agreement, the tax matters agreement, the campus lease agreement or the trademark license agreements and (iii) AWI’s ownership and operation of its business. Our and AWI’s ability to satisfy these indemnities, if called upon to do so, will depend upon our and AWI’s future financial strength. If we are required to indemnify AWI, or if we are not able to collect on indemnification rights from AWI, our financial

 

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condition, liquidity or results of operations could be materially and adversely affected. We cannot determine whether we will have to indemnify AWI, or if AWI will have to indemnify us, for any substantial obligations after the distribution.

After the separation and distribution, certain of our directors and executives may have actual or potential conflicts of interest because of their equity ownership in and other continuing relationships with AWI.

Following the distribution, certain of our directors and executives will own shares of AWI’s common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. This ownership of AWI common stock may create, or may create the appearance of, conflicts of interest when these directors and executives are faced with decisions that could have different implications for AWI and us. For example, potential or actual conflicts could arise relating to: the terms and conditions of the separation and distribution; the relationship between AWI and us after the separation and distribution, including AWI’s and our respective rights and obligations under agreements entered into in connection with the separation and distribution and corporate opportunities that may be available to both companies in the future. Although we and AWI will implement policies and procedures to identify and properly address such potential and actual conflicts of interest, there can be no assurance that such conflicts of interest will not harm our business, prospects and financial condition and result in the diversion of corporate opportunities to AWI.

Challenges in the commercial and credit environments may materially adversely affect our ability to complete the separation and our future access to capital.

Our ability to issue debt or enter into other financing arrangements on acceptable terms could be materially adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or if other significantly unfavorable changes in economic conditions occur. Volatility in the world financial markets could increase borrowing costs or affect our ability to gain access to the capital markets, which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.

Risks Related to AFI’s Common Stock

We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, our stock price may fluctuate significantly.

A public market for AFI common stock does not currently exist. We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for AFI’s common stock after the separation. Nor can we predict the prices at which shares of our common stock may trade after the separation. Similarly, we cannot predict the effect of the separation on the trading prices of our common stock or whether the combined market value of the shares of our common stock and AWI common shares will be less than, equal to or greater than the market value of AWI common shares prior to the separation.

The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

    actual or anticipated fluctuations in our operating results;

 

    changes in earnings estimated by securities analysts or our ability to meet those estimates;

 

    the operating and stock price performance of comparable companies;

 

    changes to the regulatory and legal environment under which we operate; and

 

    domestic and worldwide economic conditions.

 

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Substantial sales of our common shares may occur in connection with this distribution, which could cause our share price to be volatile and to decline.

Any sales of substantial amounts of our common stock in the public market or the perception that such sales might occur, in connection with the distribution or otherwise, may cause the market price of AFI common stock to decline. Upon completion of the distribution, we expect that we will have an aggregate of approximately 27,680,615 shares of our common stock issued and outstanding on [            ] [            ], 2016. These shares will be freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”), unless the shares are owned by one of AFI’s “affiliates,” as that term is defined in Rule 405 under the Securities Act. We are unable to predict whether large amounts of our common stock will be sold in the open market following the distribution. We are also unable to predict whether a sufficient number of buyers would be in the market at that time.

Your percentage of ownership in AFI may be diluted in the future.

In the future, your percentage ownership in AFI may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and employees. We anticipate that our employees will have options to purchase shares of our common stock after the distribution as a result of conversion of their AWI stock options (in whole or in part) to AFI stock options. We anticipate our compensation committee will grant additional stock options or other stock-based awards to our employees after the distribution. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we will issue additional options or other stock-based awards to our employees under our employee benefits plans.

In addition, our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Armstrong Flooring, Inc.’s Capital Stock.”

No vote of the AWI shareholders is required in connection with the separation and distribution. As a result, if you do not want to receive our common shares in the distribution, your sole recourse will be to divest yourself of your AWI common stock prior to or on the distribution date.

No vote of our stockholders is required in connection with the distribution. Accordingly, if you do not want to receive our ordinary shares in the distribution, your only recourse will be to divest yourself of your AWI common stock prior to or on the distribution date.

Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws will contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:

 

    the inability of our stockholders to call a special meeting;

 

    rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

 

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    the right of our board to issue preferred stock without stockholder approval;

 

    the initial division of our board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult until we have phased out our staggered board;

 

    a provision that directors serving on a classified board may be removed by stockholders only for cause; and

 

    the ability of our directors, and not stockholders, to fill vacancies on our board of directors.

In addition, because we will be subject to Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), this provision could also delay or prevent a change in control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock.

We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and the provisions could delay or prevent an acquisition that our board of directors determines is not in the best interests of AFI and its stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e), see “U.S. Federal Income Tax Consequences.” Under the tax matters agreement, AFI would be required to indemnify AWI for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change in control that you may consider favorable.

Our amended and restated bylaws will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers.

Our amended and restated bylaws will provide that unless the board of directors otherwise determines, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of AFI, any action asserting a claim of breach of a fiduciary duty owed by any director or officer of AFI to us or our stockholders, creditors or other constituents, any action asserting a claim against AFI or any director or officer of AFI arising pursuant to any provision of the DGCL or AFI’s amended and restated certificate of incorporation or bylaws, or any action asserting a claim against AFI or any director or officer of AFI governed by the internal affairs doctrine. If the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, however, the action may be brought in another court sitting in the State of Delaware. Although our amended and restated bylaws will include this exclusive forum provision, it is possible that a court could rule that this provision is inapplicable or unenforceable. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against AFI and its directors and officers. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we might incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials that AFI has filed or will file with the SEC contain, or will contain, certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “anticipate,” “project” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. In particular, information included under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “The Separation and Distribution” contain forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of AFI management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Except as may be required by law, AFI undertakes no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this information statement. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors that could have a material adverse effect on our financial condition, liquidity, results of operations or future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

 

    global economic conditions;

 

    construction activity;

 

    key customers;

 

    competition;

 

    availability and costs of raw materials and energy;

 

    our liquidity;

 

    environmental matters;

 

    international operations;

 

    strategic transactions;

 

    plant construction projects;

 

    negative tax consequences;

 

    claims and litigation;

 

    labor;

 

    our intellectual property rights;

 

    outsourcing;

 

    costs savings and productivity initiatives; and

 

    other risks detailed from time to time in our filings with the SEC, press releases and other communications.

 

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THE SEPARATION AND DISTRIBUTION

Overview

On February 23, 2015, AWI, a Pennsylvania corporation incorporated in 1891, announced that its board of directors had unanimously approved a plan to separate AWI’s Resilient Flooring and Wood Flooring segments from its Building Products (Ceilings) segment. The separation will be effected by allocating the assets and liabilities related primarily to the Resilient Flooring and Wood Flooring segments to AFI and then distributing the common stock of AFI to AWI’s shareholders. The separation and distribution will result in AWI and AFI becoming two independent, publicly traded companies, with AFI owning and operating the Resilient Flooring and Wood Flooring segments and AWI continuing to own and operate the Building Products (Ceilings) segment.

At [            ], Eastern time, on [            ] [            ], 2016, the distribution date, each AWI shareholder will receive one share of AFI common stock for every two AWI common shares held at the close of business on the record date for the distribution, as described below. AWI shareholders will receive cash in lieu of any fractional shares of AFI common stock that they would have received after application of the distribution ratio. You will not be required to make any payment, surrender or exchange your AWI common shares or take any other action to receive your shares of AFI’s common stock in the distribution. The distribution of AFI’s common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “The Separation and Distribution—Conditions to the Distribution.”

Reasons for the Separation

The AWI board of directors determined that the separation of AWI’s Resilient Flooring and Wood Flooring segments from its Building Products (Ceilings) segment would be in the best interests of AWI. A wide variety of factors were considered by the AWI board of directors in evaluating the separation. Among other things, the AWI board of directors considered the following potential benefits of the separation:

 

    Greater focus on individual businesses may drive improved results. The separation will allow for customized strategies and operating initiatives for each company. Following the separation, each company will be able to focus its investments on distinct products and channels without consideration of performance, or other issues, of the other business. Each company will be able to provide greater transparency and clarity to its investors on operating drivers. The greater market discipline and scrutiny on performance within each independent company may result in better decision-making and results.

 

    Enhanced strategic and management focus. The separation will allow AFI and AWI to more effectively pursue their distinct operating priorities and strategies and enable management of both companies to focus on unique opportunities for long-term growth and profitability.

 

    More efficient allocation of capital. Separate capital structures can be designed to correlate with risk and cash flow profile of each business. Each company can adopt a level of leverage appropriate to its particular risk profile.

 

    Direct access to capital markets. The separation will create an independent equity structure that will afford each company with direct access to the capital markets. As a result, each company will have more flexibility to capitalize on its unique growth opportunities.

 

    Alignment of incentives with performance objectives. Separate companies will allow for better alignment of management incentives with equity performance. Each separate company will allow for greater opportunities to assume senior positions, which, combined with better aligned compensation policies, will help attract and retain talent.

 

    Broadening of investor base may enhance value. Two pure play companies may attract a broader base of shareholders by providing them with choice and flexibility to allocate investments between two distinctly different opportunities. The two companies will have different growth rates, margins and returns, different construction cycle exposure, and different risk/reward profiles.

 

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Neither AFI nor AWI can assure you that, following the separation, any of the benefits described above or otherwise will be realized to the extent anticipated or at all.

The AWI board of directors also considered a number of potentially negative factors in evaluating the separation, including:

 

    One-time costs of the separation. The planning, evaluation and implementation of the separation will result in significant costs, which are expected to include approximately $70 million in professional fees and other expenses, and approximately $20 million in capital expenditures relating to the separation.

 

    Uncertain benefits. There is considerable risk of not realizing the anticipated benefits of the separation.

 

    Restrictions and limitations. The agreements that will be entered into between AFI and AWI in connection with the separation will place limitations upon both AFI and AWI as separate companies.

 

    Potential for takeover. As a smaller company, AFI may be at increased risk to become the target of a takeover on terms that are not in the best interests of AFI or its stockholders.

After careful consideration of these, and other, potential benefits and potentially negative factors, the AWI board of directors concluded that the potential benefits of the separation outweighed these potentially negative factors.

Formation of Armstrong Flooring, Inc.

AFI was formed in Delaware on June 1, 2015, for the purpose of holding AWI’s Resilient Flooring and Wood Flooring segments. Prior to the separation, AFI will have no operations. As a result of the division and second step merger that will occur in connection with the separation, and prior to the distribution, AFI will succeed to the assets and liabilities that are related primarily to AWI’s Resilient Flooring and Wood Flooring segments.

When and How You Will Receive the Distribution

With the assistance of AST, AWI expects to distribute AFI common stock at [            ], Eastern time, on [            ] [            ], 2016, the distribution date, to all holders of outstanding AWI common shares as of the close of business on [            ] [            ], 2016, the record date for the distribution. AST will serve as the distribution agent in connection with the distribution and the transfer agent and registrar for AFI common stock.

If you own AWI common shares as of the close of business on the record date for the distribution, AFI’s common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you in direct registration form or to your bank or brokerage firm on your behalf. If you are a registered holder, AST will then mail you a direct registration account statement that reflects your shares of AFI common stock. If you hold your shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares. Direct registration form refers to a method of recording share ownership when no physical share certificates are issued to shareholders, as is the case in this distribution. If you sell AWI common shares in the “regular-way” market up to and including the distribution date, you will be selling your right to receive shares of AFI common stock in the distribution.

Commencing on or shortly after the distribution date, if you hold physical share certificates that represent your AWI common shares and you are the registered holder of the shares represented by those certificates, AST will mail to you an account statement that indicates the number of shares of AFI’s common stock that have been registered in book-entry form in your name.

Most AWI shareholders hold their common shares through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your AWI common shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the AFI common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.

 

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Transferability of Shares You Receive

Shares of AFI common stock distributed to holders in connection with the distribution will be transferable without registration under the Securities Act, except for shares received by persons who may be deemed to be AFI affiliates. Persons who may be deemed to be AFI affiliates after the distribution generally include individuals or entities that control, are controlled by or are under common control with AFI, which may include certain AFI executive officers, directors or principal stockholders. Securities held by AFI affiliates will be subject to resale restrictions under the Securities Act. AFI affiliates will be permitted to sell shares of AFI common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

Number of Shares of Armstrong Flooring, Inc. Common Stock You Will Receive

For every two AWI common shares that you own at the close of business on [            ] [            ], 2016, the record date for the distribution, you will receive one share of AFI common stock on the distribution date. AWI will not distribute any fractional shares of AFI common stock to its shareholders. Instead, if you are a registered holder, AST will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales pro rata (based on the fractional share such holder would otherwise be entitled to receive) to each holder who otherwise would have been entitled to receive a fractional share in the distribution. If you hold your shares through a bank or brokerage firm, AST will provide shares to DTC, which will allocate shares to DTC participant brokers, who will, in turn, sell the whole shares allocated to them in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales pro rata (based on the fractional share such holder would otherwise be entitled to receive) to each beneficial owner who holds shares through such broker. AST or the applicable DTC participant broker, in either’s respective sole discretion, without any influence by AWI or AFI, will determine when, how, and through which broker-dealer and at what price to sell the whole shares. Any broker-dealer used by AST will not be an affiliate of either AWI or AFI. AST is not an affiliate of either AWI or AFI. Neither AFI nor AWI will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

The aggregate net cash proceeds of these sales of fractional shares will be taxable for U.S. federal income tax purposes. See “U.S. Federal Income Tax Consequences” for an explanation of the material U.S. federal income tax consequences of the distribution. If you hold physical certificates for AWI common shares and are the registered holder, you will receive a check from AST in an amount equal to your pro rata share of the aggregate net cash proceeds of the sales. AFI estimates that it will take approximately two weeks from the distribution date for AST to complete the distributions of the aggregate net cash proceeds. If you hold your AWI common shares through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales and will electronically credit your account for your share of such proceeds.

Treatment of Equity-Based Compensation

The employee matters agreement will provide for the treatment of outstanding equity awards of AWI in connection with the separation. It is expected that all outstanding AWI equity awards to the extent held by employees of AFI as of the distribution date will be converted to AFI equity awards, issued pursuant to an equity incentive plan that we will establish. The conversion will result in each converted award having substantially the same intrinsic value as the applicable AWI equity award as of the conversion. It is generally not expected that changes will be made with respect to AWI equity awards held by AWI employees other than appropriate adjustments to preserve their intrinsic value following the separation.

U.S. Federal Income Tax Consequences

The following is a summary of U.S. federal income tax consequences to AWI and to the holders of AWI

 

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common stock in connection with the separation and distribution. This summary is based on the Code, the Treasury Regulations promulgated thereunder and judicial and administrative interpretations thereof, in each case as in effect and available as of the date of this information statement and all of which are subject to differing interpretations that may change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below.

Except as specifically described below, this summary is limited to holders of AWI common stock that are U.S. Holders (as defined below). For purposes of this summary, a U.S. Holder is a beneficial owner of AWI common stock that is, for U.S. federal income tax purposes:

 

    an individual who is a citizen or resident of the U.S.;

 

    a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the U.S. or any state or political subdivision thereof;

 

    an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

    a trust if (i) a court within the U.S. is able to exercise primary jurisdiction over its administration and one or more U.S. persons have authority to control all of its substantial decisions, or (ii) it has a valid election in place under applicable Treasury Regulations to be treated as a U.S. person.

This summary does not discuss all tax considerations that may be relevant to AWI shareholders in light of their particular circumstances, nor does it address the consequences to AWI shareholders subject to special treatment under the U.S. federal income tax laws, such as:

 

    dealers or traders in securities;

 

    tax-exempt entities;

 

    banks, financial institutions or insurance companies;

 

    real estate investment trusts, regulated investment companies or grantor trusts;

 

    persons who acquired AWI common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

    persons owning AWI common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

    certain former citizens or long-term residents of the United States;

 

    persons who are subject to the alternative minimum tax;

 

    a partnership or any other entity treated as a partnership for U.S. federal income tax purposes;

 

    persons who own AWI common stock through a partnership or any other entity treated as a partnership for U.S. federal income tax purposes; or

 

    persons who hold AWI common stock through a tax-qualified retirement plan.

This summary does not address the U.S. federal income tax consequences to AWI shareholders who do not hold AWI common stock as capital assets. Moreover, this summary does not address any state, local or non-U.S. tax consequences or any estate, gift or other non-income tax consequences.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds AWI common stock, the tax treatment of a partner in that partnership generally will depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to the tax consequences of the separation and distribution.

HOLDERS OF AWI COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX CONSEQUENCES OF THE SEPARATION AND DISTRIBUTION IN LIGHT OF THEIR

 

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PARTICULAR CIRCUMSTANCES AND THE EFFECT OF POSSIBLE CHANGES IN LAW THAT MIGHT AFFECT THE TAX CONSEQUENCES DESCRIBED HEREIN.

AWI expects to receive a tax opinion from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that, for U.S. federal income tax purposes, the separation and distribution should qualify as a transaction that generally is tax-free to AWI, and AWI’s shareholders except to the extent of cash received in lieu of fractional shares, under Sections 355 and 368(a)(1)(D) of the Code.

Assuming that the distribution qualifies under Sections 355 and 368(a)(1)(D) of the Code, for U.S. federal income tax purposes:

 

    no gain or loss should be recognized by AWI on the distribution;

 

    no gain or loss should be recognized by, or be includible in the income of, a holder of AWI common stock upon receipt of AFI common stock in the distribution, except with respect to any cash received in lieu of fractional shares of AFI common stock (as described below);

 

    each AWI shareholder’s basis in the AWI common stock and the AFI common stock following the distribution (including any fractional share interest in AFI common stock for which cash is received) should equal the aggregate basis of the AWI common stock that such holder held immediately before the distribution, allocated between the AWI common stock and the AFI common stock (including any fractional share interest in AFI common stock for which cash is received) in proportion to their relative fair market values at the time of the distribution;

 

    each AWI shareholder’s holding period in the AFI common stock received in the distribution (including any fractional share interest in AFI common stock for which cash is received) should include the holding period of the AWI common stock with respect to which the distribution is made, provided that such holder holds such AWI common stock as a capital asset on the date of the distribution; and

 

    each AWI shareholder who receives cash in lieu of a fractional share of AFI common stock in the distribution should be treated as having sold such fractional share for cash, and should recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the AWI shareholder’s adjusted tax basis in the fractional share, which should be long-term capital gain or loss if the shareholder’s holding period for its AWI common shares exceeds one year at the time of the distribution.

An opinion of counsel is not binding on the IRS, or the courts, and there can be no assurance that the IRS or a court will not take a contrary position. Neither AWI nor AFI has requested, or intends to request, a ruling from the IRS regarding the U.S. federal income tax consequences of the separation and distribution. If any of the facts, representations, assumptions or undertakings described or made in connection with the tax opinion are not correct, are incomplete or have been violated, AWI’s ability to rely on the tax opinion could be jeopardized. AWI and AFI are not aware of any facts or circumstances, however, that would cause these facts, representations or assumptions to be untrue or incomplete, or that would cause any of these undertakings to fail to be complied with, in any material respect.

If, notwithstanding the conclusions we expect to be included in the tax opinion, it is ultimately determined that the separation and distribution does not qualify as a tax-free transaction to AWI for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, AWI or we could incur significant U.S. federal income tax liabilities attributable to the separation and distribution. In addition, if the separation and distribution were not to qualify as a tax-free transaction for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, except to the extent of cash received in lieu of fractional shares, each AWI shareholder that receives AFI common stock in the distribution could be treated as receiving a taxable distribution in an amount equal to the fair market value of AFI common stock that was distributed to the shareholder, which generally would be taxed as a dividend to the extent of the shareholder’s pro-rata share of AWI’s current and accumulated earnings and profits,

 

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then treated as a non-taxable return of capital to the extent of the shareholder’s basis in its AWI common stock and finally treated as capital gain from the sale or exchange of its AWI common stock.

Even if the separation and distribution otherwise qualifies for tax-free treatment to AWI under Sections 355 and/or 368(a) of the Code, corporate-level taxable gain under Section 355(e) of the Code may result if fifty percent or more, by vote or value, of our common stock or AWI common stock is treated as acquired or issued as part of a plan or series of related transactions that include the distribution. The process for determining whether an acquisition or issuance triggering these provisions has occurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. For this purpose, any acquisitions or issuances of AWI common stock within two years before the distribution, and any acquisitions or issuances of our common stock or AWI common stock within two years after the distribution generally are presumed to be part of such a plan, although we or AWI, as applicable, may be able to rebut that presumption. We are not aware of any acquisitions or issuances of AWI common stock within the two years before the distribution that would be considered to occur as part of a plan or series of related transactions that includes the distribution. If an acquisition or issuance of our common stock or AWI common stock triggers the application of Section 355(e) of the Code, AWI or we could incur significant U.S. federal income tax liabilities attributable to the separation and distribution.

Treasury Regulations require holders of AWI common stock who receive AFI common stock in the distribution who, immediately prior to the distribution, own (i) at least 5% of the total outstanding stock of AWI, or (ii) securities of AWI with an aggregate tax basis of $1 million or more, to attach a statement setting forth certain information related to the distribution to their U.S. federal income tax returns for the year in which the distribution occurs.

Effect of the Separation and Distribution on the Fourth Amended Plan of Reorganization

On December 6, 2000, AWI filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. AWI subsequently emerged from bankruptcy pursuant to the terms of AWI’s Fourth Amended Plan of Reorganization, as modified, dated February 21, 2006 (the “Fourth Amended Plan of Reorganization”), as confirmed by order of the Bankruptcy Court on August 18, 2006 (the “Confirmation Order”). The separation and distribution will not affect any matters set forth in, or any transactions effected pursuant to, the Fourth Amended Plan of Reorganization or the Confirmation Order, including the comprehensive settlement resolving AWI’s liability for asbestos-related personal injury claims or any other claims resolved thereunder.

Results of the Distribution

After its separation from AWI, AFI will be an independent, publicly traded company. The actual number of shares to be distributed will be determined at the close of business on [            ] [            ], 2016, the record date for the distribution, and will reflect any exercise of AWI options between the date the AWI board of directors declares the distribution and the record date for the distribution. The distribution will not affect the number of outstanding AWI common shares or any rights of AWI shareholders. AWI will not distribute any fractional shares of AFI common stock.

AFI will enter into a separation and distribution agreement and other related agreements with AWI before the distribution to effect the separation and provide a framework for AFI’s relationship with AWI after the separation. These agreements, together with a plan of division that will be adopted by AWI’s board of directors, will provide for the allocation between AWI and AFI of AWI’s assets, liabilities and obligations attributable to periods prior to AFI’s separation from AWI and will govern the relationship between AWI and AFI after the separation. For a more detailed description of these agreements, see “Certain Relationships and Related Person Transactions.”

 

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Market for Armstrong Flooring, Inc.’s Common Stock

There is currently no public trading market for AFI’s common stock. AFI has applied to list its common stock on the New York Stock Exchange under the symbol “AFI.” AFI has not and will not set the initial price of its common stock. The initial price will be established by the public markets.

AFI cannot predict the price at which its common stock will trade after the distribution. In fact, the combined trading prices, after the separation, of the shares of AFI common stock that each AWI shareholder will receive in the distribution and the AWI common shares held at the record date for the distribution may not equal the “regular-way” trading price of an AWI share immediately prior to the separation. The price at which AFI common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for AFI common stock will be determined in the public markets and may be influenced by many factors. See “Risk Factors—Risks Related to AFI’s Common Stock.

Incurrence of Debt

AFI anticipates having approximately $100.0 million of indebtedness upon completion of the separation. In addition, AWI will discharge its $10.0 million variable rate tax-exempt industrial bond by providing the necessary funds to the trustee in anticipation of a planned redemption at the next interest payment date of April 1, 2016. We have entered into a letter of intent with a lead arranger bank to secure a $225.0 million revolving senior credit facility (“Revolving Credit Facility”). We are currently in the process of negotiating and initiating the syndication process with the lead arranger bank.

The $100.0 million of proceeds from the Revolving Credit Facility will be used to fund an anticipated $50.0 million dividend to AWI before the separation and distribution and to finance working capital and capital expenditures. The Revolving Credit Facility will be for a five-year term and will be secured by qualifying assets of AFI’s wholly owned domestic subsidiaries. The Revolving Credit Facility will also include a $50.0 million sublimit for the issuance of standby letters of credit. Borrowings under the Revolving Credit Facility will bear interest at a rate equal to an adjusted base rate or LIBOR plus an applicable margin ranging from 1.25% to 1.50%, depending on the average excess credit availability. We are required to pay a commitment fee, payable quarterly in arrears, on the average daily unused amount of the Revolving Credit Facility ranging from 0.25% to 0.375%. Outstanding letters of credit issued under the Revolving Credit Facility are subject to fees which will be due quarterly in arrears based on an adjusted base rate plus LIBOR. The Revolving Credit Facility contains financial covenants which require AFI to maintain a minimum fixed charge coverage ratio of 1.0.

Trading Between the Record Date and Distribution Date

Beginning on or shortly before the record date for the distribution and continuing up to and including through the distribution date, AWI expects that there will be two markets in AWI common shares: a “regular-way” market and an “ex-distribution” market. AWI common shares that trade on the “regular-way” market will trade with an entitlement to AFI common shares distributed pursuant to the separation. AWI common shares that trade on the “ex-distribution” market will trade without an entitlement to AFI common stock distributed pursuant to the distribution. Therefore, if you sell AWI common shares in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive AFI common stock in the distribution. If you own AWI common shares at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including through the distribution date, you will receive the shares of AFI common stock that you are entitled to receive pursuant to your ownership as of the record date of the AWI common shares.

Furthermore, beginning on or shortly before the record date for the distribution and continuing up to and including the distribution date, AFI expects that there will be a “when-issued” market in its common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for AFI common stock that will be distributed to holders of AWI common shares on the distribution date. If you owned AWI common shares at the

 

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close of business on the record date for the distribution, you would be entitled to AFI common stock distributed pursuant to the distribution. You may trade this entitlement to shares of AFI common stock, without the AWI common shares you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to AFI common stock will end, and “regular-way” trading will begin.

Conditions to the Distribution

The distribution is subject to the satisfaction (or waiver by AWI in its sole discretion) of the following conditions:

 

    the division, the second step merger and the transfer of any additional assets and liabilities to AFI or its subsidiaries shall be completed in accordance with the terms of the separation and distribution agreement to be entered into between AWI and AFI;

 

    AWI shall have received the tax opinion from AWI’s outside tax counsel referred to in “The Separation and Distribution—U.S. Federal Income Tax Consequences” regarding the tax treatment of the separation and the distribution and certain related transactions;

 

    the SEC shall have declared effective AFI’s registration statement on Form 10, of which this information statement forms a part, and this information statement shall have been mailed to the AWI shareholders;

 

    all actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental authority;

 

    the transaction agreements relating to the separation shall have been duly executed and delivered by the parties;

 

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect;

 

    the shares of AFI common stock to be distributed shall have been accepted for listing on the New York Stock Exchange subject to official notice of distribution;

 

    the receipt of an opinion of an outside financial advisor to the board of directors of AWI confirming the solvency and financial viability of AWI before the separation and distribution and each of AWI and AFI after the distribution, which is in form and substance acceptable to AWI in its sole discretion;

 

    no event or development shall have occurred or exist that, in the judgment of AWI’s board of directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and other related transactions; and

 

    such other matters as AWI may determine in its sole discretion, including with respect to pension separation, collective bargaining agreements and other matters.

AWI will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date for the distribution and the distribution date and the distribution ratio. AWI will also have sole discretion to waive any of the conditions to the distribution. AWI does not intend to notify its shareholders of any modifications to the terms of the separation that, in the judgment of its board of directors, are not material. For example, the AWI board of directors might consider material such matters as significant changes to the distribution ratio or the allocation of the assets and liabilities of AWI in the separation. To the extent that the AWI board of directors determines that any modifications by AWI materially change the material terms of the distribution, AWI will notify AWI shareholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K, or circulating a supplement to this information statement.

 

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DIVIDEND POLICY

AFI does not intend to pay cash dividends on its common stock for the foreseeable future. Instead, AFI currently intends to reinvest any future available earnings and cash flow into the business. The payment of cash dividends, if any, on the common stock will rest solely within the discretion of AFI’s board of directors and will depend, among other things, upon AFI’s earnings, capital requirements, financial condition, legal requirements, regulatory constraints, covenants associated with certain of AFI’s debt service obligations, industry practice, and other relevant factors as determined by the board of directors. There can be no assurance that AFI will continue to pay any dividends if the company does commence the payment of dividends.

 

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CAPITALIZATION

The following sets forth AFI’s cash and cash equivalents and capitalization as of December 31, 2015 on (i) an actual unaudited historical basis and (ii) an unaudited pro forma basis as adjusted to give effect to the separation and the transactions related to the separation as if they had occurred on December 31, 2015. The information below is not necessarily indicative of what AFI’s capitalization would have been had the separation, distribution and related financing transactions been completed as of December 31, 2015. In addition, it is not indicative of AFI’s future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data of Armstrong Flooring, Inc.,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and AFI’s combined financial statements and notes included in the “Index to Financial Statements and Schedule” section of this information statement.

 

     As of December 31, 2015  
     Actual      Pro Forma  
(amounts in millions)              

Cash and cash equivalents

     —         $ 38.0 (A) 
  

 

 

    

 

 

 

Current installments of long-term debt

     —        

Long-term debt, less current installments

   $ 10.0       $ 98.0 (B) 
  

 

 

    

 

 

 

Total debt

     10.0         98.0   

Shareholders’ equity:

     

Common stock, $0.0001 par value per share, authorized

     —        

Capital in excess of par value

     —           —   (C) 

Net AWI investment

     615.9         568.7 (D) 

Accumulated other comprehensive income (loss)

     2.0         (63.3 )(E), (F) 
  

 

 

    

 

 

 

Total shareholders’ equity

     617.9         505.4   
  

 

 

    

 

 

 

Total capitalization

   $ 627.9       $ 603.4   
  

 

 

    

 

 

 

 

(A) Amount reflects anticipated cash proceeds received from the credit facility described in Note (B) net of an expected $50.0 million distribution to AWI upon separation and the discharge of a $10.0 million outstanding variable rate tax-exempt industrial bond by AWI when it provides the necessary funds to the trustee in anticipation of a planned redemption at the next interest payment date of April 1, 2016.

 

(B) Prior to the separation, AWI intends to discharge its $10.0 million variable rate tax-exempt industrial bond by providing the necessary funds to the trustee in anticipation of a planned redemption at the next interest payment date of April 1, 2016. In addition, we have entered into a letter of intent with a lead arranger bank to secure a $225.0 million revolving senior credit facility. We are currently in the process of negotiating and initiating the syndication process with the lead bank. On the distribution date, we expect to have approximately $100.0 million of borrowings outstanding, net of $2.0 million of estimated debt issuance costs. Unamortized debt issuance costs have been shown as a reduction of outstanding long-term debt, consistent with the prescribed treatment under the Financial Accounting Standards Board’s Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” and the allowable treatment under ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which will be adopted by AFI as discussed in Note 2 to the annual Combined Financial Statements.

 

(C) Reflects the pro forma recapitalization of AFI’s equity. As of the distribution date, AWI’s net investment in AFI will be exchanged to reflect the distribution of shares of AFI common stock to AWI shareholders at a distribution ratio of one share of AFI common stock for two shares of AWI common stock. The distribution of common stock will be at a par value of $0.0001 per share.

 

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(D) Reflects the elimination of AWI’s net investment and other adjustments, including a reduction of AWI’s net investment in AFI due to the anticipated $50.0 million dividend distribution to AWI described in Note (A), the adjustment of tax assets and liabilities related to DLW, our former European Flooring business, and the assumption of pension and postretirement benefit liabilities and related deferred tax assets described in Notes (E) and (F). See the unaudited pro forma combined balance sheet and corresponding notes included elsewhere in this information statement for additional information regarding the assumptions and estimates used in the pro forma adjustments.

 

(E) Eligible AFI employees participate in a pension plan sponsored by AWI. Based on the analyses and recommendations provided by AWI’s actuaries and pension advisors, AWI currently anticipates that, in connection with the separation and distribution, the assets and liabilities of the defined benefit pension plan sponsored by AWI will be transferred to a mirror pension plan to be adopted by AFI upon the separation. The transfer of the assets and liabilities of the defined benefit pension plan will be based primarily on active AFI employees accruing benefits and former AFI employees who retired from a currently operating AFI location (plant or campus) who retired on or after October 1, 2006 under the defined benefit pension plan sponsored by AWI. This adjustment includes a $37.5 million increase to pension benefit liabilities, a $90.4 million decrease to Accumulated other comprehensive income (loss) and a $14.3 million increase to deferred tax assets as of December 31, 2015. The $37.5 million increase to pension benefit liabilities represents the underfunded status of the mirror pension plan to be adopted by AFI upon the separation and is comprised of an approximately $364 million projected benefit obligation, partially offset by the fair value of approximately $326 million of pension assets. These net pension benefit liabilities have been excluded from AFI’s historical Combined Balance Sheets. The benefit plan expenses associated with these obligations are included in AFI’s historical Combined Statements of Operations based on an allocation methodology that consisted of a review of personnel by business unit and based on allocations of corporate personnel.

 

(F) Eligible AFI employees participate in unfunded postretirement benefit plans sponsored by AWI. Based on the analyses and recommendations provided by AWI’s actuaries and pension advisors, AWI currently anticipates that, in connection with the separation and distribution, the liabilities of the postretirement benefit plans sponsored by AWI that relate to active and retired AFI employees under the postretirement benefit plans sponsored by AWI will be transferred to mirror postretirement benefit plans to be adopted by AFI upon the separation. This adjustment includes an $81.8 million increase to postretirement benefit liabilities, a $25.1 million increase to Accumulated other comprehensive income (loss) and a $31.1 million increase to deferred tax assets as of December 31, 2015. These postretirement benefit liabilities have been excluded from AFI’s historical Combined Balance Sheets. The benefit plan expenses associated with these obligations are included in AFI’s historical Combined Statements of Operations based on an allocation methodology that consisted of a review of personnel by business unit and based on allocations of corporate personnel.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA OF ARMSTRONG FLOORING, INC.

The following table presents AFI’s selected historical combined financial data. The selected historical combined financial data as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 are derived from audited information included elsewhere in this information statement. The selected historical combined financial data as of December 31, 2013 is derived from audited information not included in this information statement. The selected historical combined financial data as of and for the years ended December 31, 2012 and 2011 are derived from AFI’s Unaudited Combined Financial Statements that are not included in this information statement.

The selected historical combined financial data include certain expenses of AWI that were allocated to AFI for certain corporate functions including information technology, finance, legal, insurance, compliance and human resources activities. These costs may not be representative of the future costs AFI will incur as an independent, publicly traded company. In addition, AFI’s historical financial information does not reflect changes that AFI expects to experience in the future as a result of AFI’s separation from AWI, including changes in AFI’s cost structure, personnel needs, tax structure, capital structure, financing and business operations. AFI’s Combined Financial Statements also do not reflect the assignment of certain assets and liabilities between AWI and AFI, nor do they reflect the anticipated transfer of the assets and liabilities of defined benefit pension and postretirement benefit plans sponsored by AWI that relate to AFI employees accruing benefits under such plans, as reflected under “Unaudited Pro Forma Combined Financial Statements” included elsewhere in this information statement. Consequently, the financial information included here may not necessarily reflect AFI’s financial position, results of operations and cash flows in the future or what AFI’s financial position, results of operations and cash flows would have been had AFI been an independent, publicly traded company during the periods presented.

For a better understanding, this section should be read in conjunction with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Combined Financial Statements” and corresponding notes and the Audited Combined Financial Statements and corresponding notes included elsewhere in this information statement.

 

     Years Ended December 31,  
     2015      2014      2013      2012
(Unaudited)
     2011
(Unaudited)
 
(amounts in millions)                                   

Statement of operations data

              

Net sales

   $ 1,188.7       $ 1,220.4       $ 1,262.8       $ 1,209.8       $ 1,245.5   

Operating income

     17.9         10.8         40.6         83.6         60.6   

Earnings from continuing operations

     9.0         2.8         26.9         51.9         38.5   

Balance sheet data (end of period)

              

Total assets

   $ 863.4       $ 825.2       $ 998.7       $ 960.4       $ 973.1   

Long-term debt

     10.0         10.0         10.0         10.0         10.0   

Total AWI equity

     617.9         575.4         558.0         542.9         562.4   

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The Unaudited Pro Forma Combined Financial Data of AFI consists of Unaudited Pro Forma Combined Statements of Operations for the year ended December 31, 2015, and an Unaudited Pro Forma Combined Balance Sheet as of December 31, 2015 prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Unaudited Pro Forma Combined Financial Data reported below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Selected Historical Combined Financial Data of Armstrong Flooring, Inc.” and the Combined Financial Statements and corresponding notes included elsewhere in this information statement.

The following Unaudited Pro Forma Combined Financial Data is subject to assumptions and adjustments described in the accompanying notes. AFI management believes these assumptions and adjustments are reasonable under the circumstances given the information available at this time. However, these adjustments are subject to change as AWI and AFI finalize the terms of the separation, including the separation and distribution agreement, related transaction agreements and lending arrangements with banks in connection with AFI’s planned issuance of debt. The Unaudited Pro Forma Combined Financial Data does not purport to represent what AFI’s financial position and results of operations actually would have been had the separation occurred on the dates indicated, or to project AFI’s financial performance for any future period following the separation.

The Unaudited Pro Forma Combined Financial Data does not reflect all of the costs of operating as a stand-alone company, including possible higher information technology, finance, legal, insurance, compliance, human resources and other similar expenses associated with operating as a stand-alone company. Other costs that management has determined to be factually supportable and recurring are included as pro forma adjustments. Following the separation and distribution, AFI will enter into a transition services agreement and a campus lease agreement with AWI. The Unaudited Pro Forma Combined Financial Data does not contain any additional impact of these agreements because the costs reflected in our annual and year ended December 31, 2015 Combined Financial Statements included elsewhere in this information statement reasonably estimate the charges we will incur for these services after the separation.

The Unaudited Pro Forma Combined Statement of Operations for the fiscal year ended December 31, 2015 assumes the separation occurred on January 1, 2015, the first day of the last fiscal year. The Unaudited Pro Forma Combined Balance Sheet as of December 31, 2015 gives effect to the separation as if it had occurred on December 31, 2015, the latest balance sheet date. The Unaudited Pro Forma Combined Financial Data includes adjustments to reflect the following:

 

    the allocation to AFI, pursuant to the separation and distribution agreement, of all the assets and liabilities that comprise AFI’s business;

 

    the expected transfer to AFI, upon completion of the separation, of certain assets and liabilities that were not included in AFI’s Audited Combined Financial Statements;

 

    the inclusion of $100.0 million of debt at an interest rate of three-month LIBOR plus 1.50%;

 

    the cash distribution of approximately $50.0 million to AWI; and

 

    the assets and liabilities related to defined benefit pension and other postretirement plans that were not included in AFI’s Audited Combined Financial Statements.

 

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Armstrong Flooring, Inc.

Unaudited Pro Forma Combined Statement of Operations

For the Year Ended December 31, 2015

(amounts in millions, except per share data)

 

     Historical     Pro Forma
Adjustments
    Pro
Forma
 

Net sales

   $ 1,188.7        —        $ 1,188.7   

Cost of goods sold

     961.1        —          961.1   
  

 

 

   

 

 

   

 

 

 

Gross profit

     227.6        —          227.6   

Selling, general and administrative expenses

     209.7        —          209.7   

Operating income

     17.9        —          17.9   

Interest expense

     —        $ 2.2 (A)      2.2   

Other non-operating expense

     3.8        —          3.8   

Other non-operating (income)

     (0.2     —          (0.2
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     14.3        (2.2     12.1   

Income tax expense (benefit)

     5.3        (0.8 )(B)      4.5   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

   $ 9.0      ($ 1.4   $ 7.6   
  

 

 

   

 

 

   

 

 

 

Earnings per share of common stock, continuing operations:

      

Basic (C), (D)

       $ 0.27   

Diluted (C), (E)

       $ 0.27   

Average number of common shares outstanding:

      

Basic (D)

         27.8   

Diluted (E)

         28.0   

See accompanying notes to unaudited pro forma combined financial statements beginning on page 44.

 

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Armstrong Flooring, Inc.

Unaudited Pro Forma Combined Balance Sheet

As of December 31, 2015

(amounts in millions, except per share data)

 

     Historical      Pro Forma
Adjustments
    Pro
Forma
 
Assets        

Current assets:

       

Cash and cash equivalents

     —         $ 38.0 (F)    $ 38.0   

Accounts and notes receivable, net

   $ 72.2           72.2   

Inventories, net

     242.8          242.8   

Deferred income taxes

     3.0          3.0   

Prepaid expenses and other current assets

     31.7          31.7   
  

 

 

    

 

 

   

 

 

 

Total current assets

     349.7        38.0        387.7   
  

 

 

    

 

 

   

 

 

 

Property, plant, and equipment, less accumulated and amortization of $311.1

     434.5          434.5  

Intangible assets, net

     42.6          42.6  

Deferred income taxes

     23.5        0.4 (G),(I),(J)      23.9   

Cash surrender value of life insurance and other noncurrent assets

     13.1          13.1   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 863.4       $ 38.4      $ 901.8   
  

 

 

    

 

 

   

 

 

 
Liabilities and Shareholders’ Equity        

Current liabilities:

       

Accounts payable and accrued expenses

   $ 161.0         $ 161.0   

Deferred income taxes

     0.3          0.3   
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     161.3          161.3   

Long-term debt

     10.0      $ 88.0 (H)      98.0   

Pension benefit liabilities

     —           37.5 (I)      37.5   

Postretirement benefit liabilities

     3.3        81.8 (J)      85.1   

Other long-term liabilities

     12.4          12.4   

Noncurrent income taxes payable

     56.4        (56.4 )(G)      —     

Deferred income taxes

     2.1           2.1   
  

 

 

    

 

 

   

 

 

 

Total noncurrent liabilities

     84.2         150.9        235.1   

Shareholders’ equity:

       

Net AWI investment

     615.9        (615.9 )(L)      —     

Common stock, $0.0001 par value per share, 100 million shares; 27,203,464 shares issued and outstanding at December 31, 2015 on a pro forma basis

     —           —   (K)      —     

Capital in excess of par value

     —           568.7 (L)      568.7   

Accumulated other comprehensive income (loss)

     2.0        (65.3 )(I),(J)      (63.3
  

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     617.9        (112.5     505.4   
  

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 863.4      $ 38.4      $ 901.8   
  

 

 

    

 

 

   

 

 

 

See accompanying notes to unaudited pro forma combined financial statements beginning on page 44.

 

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Armstrong Flooring, Inc. Notes to Unaudited Pro Forma Combined Financial Statements

 

(A) Reflects the estimated increase in interest expense and amortization of debt issuance costs in connection with debt AFI expects to assume at the time of separation as described in Note (H). The estimated increase in interest expense was based on the issuance of $100.0 million of debt at a weighted average interest rate of 1.82% for 2015, plus the straight-line amortization of $2.0 million of debt issuance costs over the term of our revolving senior credit facility.

 

(B) Reflects the tax effects of the pro forma adjustments at the applicable statutory income tax rates. The effective tax rate of AFI could be different (either higher or lower) depending on activities subsequent to the separation.

 

(C) Pro forma basic and diluted net earnings attributable to common shares from continuing operations are based on earnings from continuing operations less earnings allocated to participating non-vested share awards granted to AFI employees. The number of participating non-vested share awards underlying AFI stock-based awards will not be determined until the distribution date or shortly thereafter. The impact of participating non-vested share awards assumed may not be indicative of the effect that will actually result from AFI participating non-vested share awards issued in connection with the adjustment of AWI participating non-vested share awards. For the purposes of preparing the unaudited pro forma earnings from continuing operations attributable to common shares, we believe an estimate based on applying the distribution ratio described in Note (D) below to the weighted-average AWI earnings from continuing operations attributable to common shares for the year ended December 31, 2015 provides a reasonable approximation of the earnings allocated to participating non-vested participating share awards. The following table is a reconciliation of earnings attributable to common shares used in AFI’s basic and diluted earnings per share calculations for the year ended December 31, 2015 (amounts in millions):

 

Earnings from continuing operations

   $ 7.6   

Earnings allocated to participating non-vested share awards

     (0.1
  

 

 

 

Earnings from continuing operations attributable to common shares

   $ 7.5   
  

 

 

 

 

(D) Pro forma weighted-average common shares outstanding are based on the weighted-average number of AWI common shares outstanding for the year ended December 31, 2015 given the expected distribution ratio of one share of AFI common stock for two shares of AWI common stock.

 

(E) Pro forma weighted average diluted common shares outstanding and diluted earnings per share are based on the number of our pro forma basic shares outstanding as described in Note (D) above, plus incremental shares assuming issuance of dilutive outstanding equity awards granted to AFI employees. The number of dilutive shares of common stock underlying AFI stock-based awards will not be determined until the distribution date or shortly thereafter. The dilutive impact of equity awards assumed may not be indicative of the effect that will actually result from AFI stock-based awards issued in connection with the adjustment of AWI stock-based awards. For the purposes of preparing the unaudited pro forma diluted earnings per common share and pro forma weighted-average diluted shares, we believe an estimate based on applying the distribution ratio described in Note (D) above to the weighted-average AWI diluted shares outstanding for the year ended December 31, 2015 provides a reasonable approximation of the potential dilutive effect of the stock-based awards.

The following table is a reconciliation of basic shares outstanding to diluted shares outstanding for the year ended December 31, 2015 (shares in millions):

 

Basic shares outstanding

     27.8   

Dilutive effect of common stock equivalents

     0.2   
  

 

 

 

Diluted shares outstanding

     28.0   
  

 

 

 

 

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Armstrong Flooring, Inc. Notes to Unaudited Pro Forma Combined Financial Statements

 

(F) Amount reflects anticipated net cash proceeds from the credit facility described in Note (H), net of an expected $50.0 million distribution to AWI upon separation and the discharge of a $10.0 million outstanding variable rate tax-exempt industrial bond by AWI when it provides the necessary funds to the trustee in anticipation of a planned redemption at the next interest payment date of April 1, 2016.

 

(G) Represents the elimination of $56.4 million of noncurrent tax liabilities for uncertain tax benefits and a $45.0 million net decrease in deferred tax assets. These amounts represent tax matters related to our former DLW subsidiary, which was our former European Flooring business. The net $11.4 million liability will be transferred to AWI in connection with the separation, as set forth in the tax matters agreement that we expect to enter into with AWI.

The following table presents the impact of pro forma adjustments to deferred tax assets (amounts in millions):

 

(Decrease) to deferred tax assets due to DLW tax matters as described above

   ($ 45.0

Increase to deferred tax assets due to assumption of pension benefit liabilities as described in Note (I)

     14.3   

Increase to deferred tax assets due to assumption of postretirement benefit liabilities as described in Note (J)

     31.1   
  

 

 

 

Net increase to deferred tax assets

   $ 0.4   
  

 

 

 

The tax matters agreement will generally govern AFI’s and AWI’s respective rights, responsibilities and obligations after the separation and distribution with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and other matters regarding taxes for any tax period ending on or before the distribution date, as well as tax periods beginning after the distribution date. The actual amounts that AFI may be required to accrue or pay to AWI under the tax matters agreement will depend upon a number of factors, including the outcome of the unresolved tax matters.

See Note 4 to the annual Combined Financial Statements included elsewhere in this information statement for additional information of tax matters related to DLW.

 

(H) Prior to the separation, AWI intends to discharge its $10.0 million variable rate tax-exempt industrial bond by providing the necessary funds to the trustee in anticipation of a planned redemption at the next interest payment date of April 1, 2016. In addition, we have entered into a letter of intent with a lead arranger bank to secure a $225.0 million revolving senior credit facility. We are currently in the process of negotiating and initiating the syndication process with the lead bank. On the distribution date, we expect to have approximately $100.0 million of borrowings outstanding, net of $2.0 million of estimated debt issuance costs. Unamortized debt issuance costs have been shown as a reduction of outstanding long-term debt, consistent with the prescribed treatment under ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” and the allowable treatment under ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” which will be adopted by AFI as discussed in Note 2 to the annual Combined Financial Statements.

 

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Armstrong Flooring, Inc. Notes to Unaudited Pro Forma Combined Financial Statements

 

The following table presents all inflows and outflows related to our borrowings (amounts in millions):

 

Inflows:

  

Principal amount of debt issued

   $ 100.0   

Outflows:

  

Discharge of variable rate tax-exempt industrial bond

     (10.0

Debt issuance costs, net of amortization

     (2.0

Cash dividend to AWI

     (50.0
  

 

 

 

Net proceeds from debt retained by AFI

   $ 38.0   
  

 

 

 

 

(I) Eligible AFI employees participate in a pension plan sponsored by AWI. Based on the analyses and recommendations provided by AWI’s actuaries and pension advisors, AWI currently anticipates that, in connection with the separation and distribution, the assets and liabilities of the defined benefit pension plan sponsored by AWI will be transferred to a mirror pension plan to be adopted by AFI upon the separation. The transfer of the assets and liabilities of the defined benefit pension plan will be based primarily on active AFI employees accruing benefits and former AFI employees who retired from a currently operating AFI location (plant or campus) who retired on or after October 1, 2006 under the defined benefit pension plan sponsored by AWI. This adjustment includes a $37.5 million increase to pension benefit liabilities, a $90.4 million decrease to Accumulated other comprehensive income (loss) and a $14.3 million increase to deferred tax assets as of December 31, 2015. The $37.5 million increase to pension benefit liabilities represents the underfunded status of the mirror pension plan to be adopted by AFI upon the separation and is comprised of an approximately $364 million projected benefit obligation, partially offset by the fair value of approximately $326 million of pension assets. These net pension benefit liabilities have been excluded from AFI’s historical Combined Balance Sheets. The benefit plan expenses associated with these obligations are included in AFI’s historical Combined Statements of Operations based on an allocation methodology that consisted of a review of personnel by business unit and based on allocations of corporate personnel.

 

(J) Eligible AFI employees participate in unfunded postretirement benefit plans sponsored by AWI. Based on the analyses and recommendations provided by AWI’s actuaries and pension advisors, AWI currently anticipates that, in connection with the separation and distribution, the liabilities of the postretirement benefit plans sponsored by AWI that relate to active and retired AFI employees under the postretirement benefit plans sponsored by AWI will be transferred to mirror postretirement benefit plans to be adopted by AFI upon the separation. This adjustment includes an $81.8 million increase to postretirement benefit liabilities, a $25.1 million increase to Accumulated other comprehensive income (loss) and a $31.1 million increase to deferred tax assets as of December 31, 2015. These postretirement benefit liabilities have been excluded from AFI’s historical Combined Balance Sheets. The benefit plan expenses associated with these obligations are included in AFI’s historical Combined Statements of Operations based on an allocation methodology that consisted of a review of personnel by business unit and based on allocations of corporate personnel.

 

(K) Reflects the pro forma recapitalization of AFI’s equity. As of the distribution date, AWI’s net investment in AFI will be exchanged to reflect the distribution of shares of AFI common stock to AWI shareholders at a distribution ratio of one share of AFI common stock for two shares of AWI common stock. The distribution of common stock will be at a par value of $0.0001 per share.

 

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Armstrong Flooring, Inc. Notes to Unaudited Pro Forma Combined Financial Statements

 

(L) The elimination of AWI’s net investment and adjustments to capital in excess of par reflect the following (amounts in millions):

 

Reclassification of Net AWI investment

   ($ 615.9

Cash dividend to AWI as described in Note (F)

     50.0   

Adjustment to deferred tax assets and uncertain tax positions as described in Note (G)

     (11.4

Assumption of pension benefit liabilities and related deferred tax assets as described in Note (I)

     (67.2

Assumption of postretirement benefit liabilities and related deferred tax assets as described in Note (J)

     75.8   
  

 

 

 

Total Net AWI investment/Shareholders’ Equity

   ($ 568.7

AFI common stock described in Note (K)

     —     
  

 

 

 

Total Capital in excess of par value

   ($ 568.7
  

 

 

 

 

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BUSINESS

AFI is a Delaware corporation incorporated in 2015. We are a leading global producer of flooring products for use primarily in the construction and renovation of residential, commercial and institutional buildings. We design, manufacture, source and sell resilient and wood flooring products in North America and the Pacific Rim.

On February 23, 2015, AWI, a Pennsylvania corporation incorporated in 1891, announced that its board of directors had unanimously approved a plan to separate AWI’s Resilient Flooring and Wood Flooring segments from its Building Products (Ceilings) segment. The separation will be effected by allocating the assets and liabilities related primarily to the Resilient Flooring and Wood Flooring segments to AFI and then distributing the common stock of AFI to AWI’s shareholders. The separation and distribution will result in AWI and AFI becoming two independent, publicly traded companies, with AFI owning and operating the Resilient Flooring and Wood Flooring segments and AWI continuing to own and operate the Building Products (Ceilings) segment.

Reportable Segments

We operate two business segments—Resilient Flooring and Wood Flooring.

Resilient Flooring—Our Resilient Flooring segment designs, manufactures, sources and sells a broad range of floor coverings primarily for homes and commercial and institutional buildings under various brands, including the Armstrong brand. Manufactured products in this segment include vinyl sheet, vinyl tile, and LVT flooring. In addition, our Resilient Flooring segment sources and sells laminate flooring products, vinyl tile products, LVT, vinyl sheet products, linoleum products, adhesives, and installation and maintenance materials and accessories. Resilient Flooring products are offered in a wide variety of types, designs, colors and installation options. We sell these products to independent wholesale flooring distributors, large home centers, retailers, contractors and to the manufactured homes industry, and secure specifications for these products through architects, designers and end users. When market conditions and available capacity warrant, we also provide product on an OEM basis to other flooring companies.

Wood Flooring—Our Wood Flooring segment designs, manufactures, sources and sells wood flooring products for use in new residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices, under the Armstrong and Bruce brands. The product offering includes pre-finished solid and engineered wood floors in various wood species, and related accessories. Virtually all of our Wood Flooring sales are in North America. Our Wood Flooring products are generally sold to independent wholesale flooring distributors, large home centers, retailers and flooring contractors, and specified by regional and national builders. When market conditions and available capacity warrant, we also provide product on an OEM basis to other flooring companies.

See Note 3 to the Unaudited Pro Forma Combined Financial Statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional financial information on our reportable segments.

Products and Markets

We are well positioned in the product categories and markets in which we operate – often holding a leadership or significant market share position. We compete in the wood and resilient flooring market in North America and the Pacific Rim. The majority of our sales are in North America, where we serve both commercial and residential markets. In the Pacific Rim, we are focused on commercial markets only. Effectively, all of our Wood Flooring segment sales are in North America, as these products are focused on the residential market. The major markets in which we compete are:

 

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North American Residential. Our Resilient Flooring and Wood Flooring segments sell products for use in single and multi-family housing. Homeowners, builders, and property management firms can choose from our innovative resilient and wood flooring products, for which we are North America’s largest provider, or from our laminate flooring products. We compete directly with other domestic and international suppliers of these products. Our flooring products also compete with carpet, stone and ceramic products, which we do not offer, however the designs and performance of our LVT products are resulting in additional penetration of other flooring segments.

Our products are used in new home construction and existing home renovation work. Industry analysts estimate that existing home renovation (also known as replacement/remodel) work represents the majority of the total North American residential market opportunity. Key U.S. statistics that indicate market opportunity include existing home sales (a key indicator for renovation opportunity), housing starts, housing completions, home prices, interest rates and consumer confidence. We believe there is some longer-term correlation between these statistics and our revenue after reflecting a lag period of several months between a change in these indicators and our operating results. However, we believe that consumers’ preferences for product type, style, color, availability and affordability also significantly affect our revenue. Further, changes in inventory levels and/or product focus at national home centers and independent wholesale flooring distributors can significantly affect our revenue.

North American Commercial. Many of our products, primarily resilient flooring, are used in commercial and institutional buildings. Our revenue opportunities come from new construction as well as renovation of existing buildings. Industry analysts estimate that existing home renovation (also known as replacement/remodel) work represents the majority of the total North American commercial market opportunity. Most of our revenue comes from four major segments of commercial building – education, healthcare, retail and office. We monitor U.S. construction starts and follow project activity. Our revenue from new construction can lag behind construction starts by as much as twenty-four months given that the installation of flooring typically occurs later in the construction process. We also monitor office vacancy rates, architectural billing activity, GDP and general employment levels, which can indicate movement in renovation and new construction opportunities. We believe that these statistics, taking into account the time-lag effect, provide a reasonable indication of our future revenue opportunity from commercial renovation and new construction. However, we believe that consumers’ preferences for product type, style, color, availability and affordability also significantly affect our revenue.

Outside of North America. We also serve commercial markets in the Pacific Rim region with over 80% of the sales in this region coming from China and Australia. The commercial segments we serve are similar to the North American market (office, education, retail, and healthcare), however there is a higher penetration of resilient flooring in the hospitality (retail) and office segments in China than we see in North America. For the countries where we have significant revenue, we monitor various national statistics (such as GDP) as well as construction data (starts and project-related information). Revenues come primarily from new construction and renovation work. In 2014, following a review of strategic alternatives, we decided to exit our European flooring business and cease further funding of our DLW subsidiary in Germany.

LVT Investment. LVT represents the fastest growing resilient flooring product category. Through the utilization of advanced printing and embossing technology, LVT enables attractive designs emulating wood and stone visuals combined with the durability associated with vinyl tile products. In addition, LVT offers a wide variety of installation options for the professional and do-it-yourself installer, with an enhanced ease of installation when compared to other products such as wood or ceramic tile, and this can be seen with the growing popularity of floating LVT floors. The largest market for LVT is North America. Historically, this market has been largely served by imported product manufactured in the Pacific Rim. We are nearing completion of construction of an expansion to our Lancaster, Pennsylvania plant to add LVT manufacturing capacity. Announced in 2013, this approximately $50 million investment allows us to locally serve the North American market, and leverage our manufacturing expertise to create a strong cost and quality position. This improved cost, quality and service model will allow us to grow share in this important category.

 

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The following table provides an estimate of our segments’ 2015 net sales, by major markets.

 

     (Estimated percentages of individual segment’s sales)  
     North American
Residential
    North American
Commercial
    Outside of
North America
       
     New     Renovation     New     Renovation     New     Renovation     Total  

Resilient Flooring

     5     40     5     40     5     5     100

Wood Flooring

     35     65     —          —          —          —          100

Management has used estimates in creating the table above because the end-use of our products is not easily determinable.

Customers

We use our reputation, capabilities, service and brand recognition to develop long-standing relationships with our customers. We principally sell products through independent wholesale flooring distributors, who re-sell our products to retailers, builders, contractors, installers and others. In the commercial sector, we also have important relationships with subcontractors’ alliances, large architect and design firms, and major facility owners in our focus segments. In the North American retail channel, which sells to end-users in the residential and light commercial segments, we have important relationships with national home centers such as The Home Depot, Inc. and Lowe’s Companies, Inc. In the North American residential sector, we also have important relationships with major home builders and retail buying groups. Additionally, when market conditions and available capacity warrant, we also provide product on an OEM basis to other flooring companies.

Approximately 55% of our consolidated net sales in 2015 are to distributors. Sales to large home centers account for approximately 25% of our consolidated sales in 2015. Our remaining sales are to contractors and retailers.

The Home Depot, Inc. and J.J. Haines and Company, Inc. each accounted for 10% or more of our total consolidated net sales in 2015. The Home Depot, Inc. and Lowe’s Companies, Inc. each accounted for 10% or more of our total consolidated net sales in each of 2014 and 2013.

Working Capital

We produce goods for inventory and sell on credit to our customers. Generally, our distributors carry inventory as needed to meet local or rapid delivery requirements. We sell the vast majority of our products to select, pre-approved customers using customary trade terms that allow for payment in the future. These practices are typical within the industry. Our wood flooring business generally purchases green lumber, which is held in inventory during the drying process for approximately 3 months.

Competition

We face strong competition in all of our businesses. Principal attributes of competition include product performance, product styling, service and price. Competition in North America comes from both domestic and international manufacturers. Additionally, some of our products compete with alternative products or finishing solutions. Our resilient, laminate and wood flooring products compete with carpet, stone and ceramic products. There is excess industry capacity for certain products in some geographies, which tends to increase price competition. The following companies are our primary competitors:

Beaulieu International Group, N.V., Boa-Franc, Inc., Congoleum Corporation, Forbo Holding AG, Gerflor Group, IVC Group, Krono Holding AG, Lauzon Ltd, LG Floors, Mannington Mills, Inc., Mercier Wood Flooring, Inc., Metroflor Corporation, Mirage Hardwood Floors (a division of Boa-Franc Inc.), Mohawk Industries, Inc., Mullican Flooring, L.P., Nora Systems GmbH, Pfleiderer AG, Shaw Industries, Inc., Somerset Hardwood Flooring, Tarkett AG and US Floors, Inc.

 

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Raw Materials

We purchase raw materials from numerous suppliers worldwide in the ordinary course of business. The principal raw materials used in each business include the following:

 

Business

  

Principal Raw Materials

Resilient Flooring

   PVC resins and films, plasticizers, fiberglass and felt backings, limestone, pigments, inks and stabilizers

Wood Flooring

   Hardwood lumber, veneer, coatings and stains

We also purchase significant amounts of packaging materials and consume substantial amounts of energy, such as electricity and natural gas, and water.

In general, adequate supplies of raw materials are available to all of our businesses. However, availability can change for a number of reasons, including environmental conditions, laws and regulations, shifts in demand by other industries competing for the same materials, transportation disruptions and/or business decisions made by, or events that affect, our suppliers. There is no assurance that these raw materials will remain in adequate supply to us.

Prices for certain high usage raw materials can fluctuate dramatically. Cost increases for these materials can have a significant adverse impact on our manufacturing costs. Given the competitiveness of our markets, we may not be able to recover the increased manufacturing costs through increasing selling prices to our customers.

Sourced Products

Some of the products that we sell are sourced from third parties. Our primary sourced products include various laminate, wood, vinyl sheet, and LVT products and installation-related products, as well as accessories for some of our manufactured products. We purchase some of our sourced products from suppliers that are located outside of the U.S., primarily from the Pacific Rim and Europe. Sales of sourced products represented approximately 20% of our total consolidated revenue in each of 2015, 2014 and 2013.

In general, we believe we have adequate supplies of sourced products. However, we cannot guarantee that the supply will remain adequate.

Seasonality

Generally, our resilient and wood flooring sales in North America tend to be stronger in the second and third quarters of our fiscal year due to more favorable weather conditions, customer business cycles and education renovations typical during the summer months. We see similar patterns with respect to our sales in the Pacific Rim, though the timing of the Chinese New Year can affect buying behaviors.

Patent and Intellectual Property Rights

Patent protection is important to our business. Our competitive position has been enhanced by U.S. and foreign patents on products and processes developed or perfected within AFI or (prior to our separation from AWI) or obtained through acquisitions and licenses. In addition, we benefit from our trade secrets for certain products and processes.

Patent protection extends for varying periods according to the date of patent filing or grant and the legal term of a patent in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies. Although we consider that, in the aggregate, our patents, licenses and trade secrets constitute a valuable asset of material importance to our business, we do not regard any of our businesses as being materially dependent upon any single patent or trade secret, or any group of related patents or trade secrets.

 

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We will own or have a license to use certain trademarks, including, without limitation, LOGO , Armstrong®, Alterna®™, American Scrape®, BBT®, BioBased Tile®, Bruce®, Diamond 10™, Dundee®, Excelon®, Imperial®, Initiator™, Inspiring Great Spaces®, Laurel™, Lock&Fold®, Luxe Plank®, Manchester®, Medintech®, Memories™, Natural Creations®, Plano®™, Stonetex®, Station Square™, StrataMax®, Timberline®, and Vivero™, which are important to our business because of their significant brand name recognition. Trademark protection continues in some countries as long as the mark is used, and continues in other countries as long as the mark is registered. Registrations are generally for fixed, but renewable, terms.

We review the carrying value of trademarks annually for potential impairment. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” for further information.

Employees

As of December 31, 2015, we had approximately 3,700 full-time and part-time employees worldwide. Approximately 45% of our 2,600 production and maintenance employees in the U.S. are represented by labor unions. Outside the U.S., most of our production employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. We believe that our relations with our employees are satisfactory.

Research and Development

Research and development (“R&D”) activities are important and necessary in helping us improve our products’ competitiveness. Principal R&D functions include the development and improvement of products and manufacturing processes. We spent $11.4 million in 2015, $10.8 million in 2014 and $10.4 million in 2013 on R&D activities worldwide.

Sustainability and Environmental Matters

The adoption of environmentally responsible building codes and standards such as the Leadership in Energy and Environmental Design, or LEED, rating system established by the U.S. Green Building Council, has the potential to increase demand for products, systems and services that contribute to building sustainable spaces. Many of our products meet the requirements for the award of LEED credits, and we are continuing to develop new products, systems and services to address market demand for products that enable construction of buildings that require fewer natural resources to build, operate and maintain. Our competitors also have developed and introduced to the market products with an increased focus on sustainability.

We expect that there will be increased demand over time for products, systems and services that meet evolving regulatory and customer sustainability standards and preferences and decreased demand for products that produce significant greenhouse gas emissions. We also believe that our ability to continue to provide these products, systems and services to our customers will be necessary to maintain our competitive position in the marketplace. We are committed to complying with all environmental laws and regulations that are applicable to our operations.

Legal and Regulatory Proceedings

AFI’s manufacturing and research facilities are affected by various federal, state and local requirements relating to the discharge of materials and the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities. These regulatory requirements continually change, therefore we cannot predict with certainty future expenditures associated with compliance with environmental requirements.

 

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Regulatory activities of particular importance to our operations include proceedings under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and state or international Superfund and similar type environmental laws governing several domestically and internationally owned, formerly owned and non-owned locations allegedly resulting from past industrial activity. In a few cases, we are one of several potentially responsible parties and have agreed to jointly fund the required investigation and remediation, while preserving our defenses to the liability.

We may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. Most of our manufacturing and certain of our research facilities are affected by various federal, state and local environmental requirements relating to the discharge of materials or the protection of the environment. We make expenditures necessary for compliance with applicable environmental requirements at each of our operating facilities.

We are involved in various lawsuits, claims, investigations and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, relationships with suppliers, distributors, relationships with competitors, employees and other matters. For example, we are currently a party to various litigation matters that involve product liability, tort liability and other claims under a wide range of allegations, including illness due to exposure to certain chemicals used in the workplace, or medical conditions arising from exposure to product ingredients or the presence of trace contaminants. In some cases, these allegations involve multiple defendants and relate to legacy products that we and other defendants purportedly manufactured or sold. We believe these claims and allegations to be without merit and intend to defend them vigorously. While complete assurance cannot be given to the outcome of these proceedings, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.

We have not experienced a material adverse effect upon our capital expenditures or competitive position as a result of environmental control legislation and regulations. There were no material liabilities recorded at December 31, 2014 and December 31, 2013, respectively, for potential environmental liabilities, on a global basis, that we consider probable and for which a reasonable estimate of the probable liability could be made. See Note 26 to the Combined Financial Statements and “Risk Factors – Risks Related to AFI’s Business” for information regarding the possible effects that compliance with environmental laws and regulations may have on our businesses and operating results.

Website

We will maintain a website at www.armstrongflooring.com. Information contained on our website is not incorporated into this document. Reference in this Form 10 to our website is an inactive text reference only. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports and other information about us are available free of charge through this website as soon as reasonably practicable after the reports are electronically filed with the SEC. These materials are also available from the SEC’s website at www.sec.gov.

 

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PROPERTIES

Our world headquarters will be in Lancaster, Pennsylvania. Under the terms of the separation and distribution agreement that we expect to enter into with AWI in connection with the consummation of the separation and distribution, AWI will retain ownership of the 100-acre, multi-building campus comprising the site of AWI’s current corporate headquarters, most of its operational headquarters, its U.S. R&D operations and marketing, and its customer service headquarters. We expect to enter into a campus lease agreement with AWI under which we will lease certain portions of the current headquarters as our corporate headquarters. See “The Separation and Distribution” and “Certain Relationships and Related Person Transactions” for a discussion of the terms of the separation and distribution agreement and the campus lease agreement.

We will produce and market our flooring products and services throughout the world, operating 17 manufacturing plants in three countries. One of our plants is leased and the remaining 16 are owned. We operate 14 plants located throughout the United States.

 

Business

Segment

   Number
of Plants
    

Location of Principal Facilities

Resilient Flooring      9       U.S. (California, Illinois, Mississippi, Oklahoma, and Pennsylvania), China and Australia
Wood Flooring      8       U.S. (Arkansas, Kentucky, Mississippi, Missouri, Pennsylvania, Tennessee and West Virginia)

Our sales and administrative offices are leased and/or owned worldwide, and leased facilities are utilized to supplement our owned warehousing facilities.

Production capacity and the extent of utilization of our facilities are difficult to quantify with certainty. In any one facility, utilization of our capacity varies periodically depending upon demand for the product that is being manufactured. We believe our facilities are adequate and suitable to support the business. Additional incremental investments in plant facilities are made as appropriate to balance capacity with anticipated demand, improve quality and service, and reduce costs.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with the audited combined financial statements and corresponding notes, and the unaudited pro forma combined financial statements and corresponding notes included elsewhere in this information statement. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those projected or implied in the forward-looking statements. Please see “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Separation and Distribution

On February 23, 2015, AWI, a Pennsylvania corporation incorporated in 1891, announced that its board of directors had unanimously approved a plan to separate AWI’s Resilient Flooring and Wood Flooring segments from its Building Products (Ceilings) segment. The separation will be effected by allocating the assets and liabilities related primarily to the Resilient Flooring and Wood Flooring segments to AFI and then distributing the common stock of AFI to AWI’s shareholders. The separation and distribution will result in AWI and AFI becoming two independent, publicly traded companies, with AFI owning and operating the Resilient Flooring and Wood Flooring segments and AWI continuing to own and operate the Building Products (Ceilings) segment.

Overview

We are a leading global producer of flooring products for use primarily in the construction and renovation of residential, commercial and institutional buildings. We design, manufacture, source and sell resilient and wood flooring products in North America and the Pacific Rim.

On December 4, 2014, AWI’s board of directors approved the cessation of funding to its former DLW subsidiary, which was our former European resilient flooring business. This decision followed a comprehensive evaluation of the strategic alternatives for the business. As a result of this decision, DLW management concluded that its operations could not be financed and sustained without funding from AWI and filed for insolvency in Germany on December 11, 2014. See Note 4 to the annual Combined Financial Statements for more information.

As of December 31, 2015, we operated 17 manufacturing plants in three countries, including 14 plants located throughout the U.S.

We report our financial results through two segments: Resilient Flooring and Wood Flooring. See “Results of Operations” and “Reportable Segment Results” for additional financial information on our combined company and our segments.

Factors Affecting Revenues

For information on our segments’ 2015 net sales by geography, see Note 3 to the annual Combined Financial Statements included in this information statement.

Markets. We compete in building material markets in North America and the Pacific Rim, with over 90% of our sales in North America. We closely monitor publicly available macroeconomic trends that provide insight to commercial and residential market activity, including GDP, the Architecture Billings Index and the Consumer

 

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Confidence Index. In addition, we noted several factors and trends within our markets that directly affected our business performance during 2015:

Americas

During 2015 we saw improvement in education demand but continuing weakness in healthcare and slightly softer retail demand. These trends impacted our resilient flooring business, as a significant portion of our commercial sales in Resilient Flooring originate from the healthcare and education markets.

During 2015 we noted that residential markets continued to show improvement in both builder activity and renovation activity. However, due to market conditions, we experienced continued competitive pricing actions in our Wood and Resilient Flooring businesses.

Pacific Rim

During 2015 commercial markets throughout the Pacific Rim grew, including slight growth in China, driven by the healthcare and education market segments.

Pricing Initiatives. We periodically modify prices in each of our business segments due to changes in costs for raw materials and energy, and due to changes in market conditions and the competitive environment. In certain cases, realized price increases are less than the announced increases because of competitive reactions and changing market conditions. We estimate that pricing actions decreased our 2015 combined net sales by approximately $18 million, compared to 2014.

We implemented price increases on select resilient flooring products in the Americas effective in the first and fourth quarters of 2015 and on select products in our Resilient and Wood Flooring businesses in Canada to offset currency devaluations. We also announced price increases on select resilient flooring products in Canada effective in the first quarter of 2016. We may implement additional pricing actions based upon future movements in raw material costs and/or foreign currency exchange rates.

Mix. Each of our businesses offers a wide assortment of products that are differentiated by style, design and performance attributes. Pricing and margins for products within the assortment vary. Changes in the relative quantity of products purchased at the different price points can impact year-to-year comparisons of net sales and operating income. We estimate that mix improvements increased our 2015 combined net sales by approximately $3 million, compared to 2014.

Factors Affecting Operating Costs

Operating Expenses. Our operating expenses are comprised of direct production costs (principally raw materials, labor and energy), manufacturing overhead costs, freight, costs to purchase sourced products and selling, general and administrative (“SG&A”) expenses.

Our largest individual raw material expenditures include lumber and veneers, PVC resins and plasticizers. Fluctuations in the prices of these inputs are generally beyond our control and have a direct impact on our financial results. In 2015, the costs for raw materials, sourced products and energy positively impacted operating income by approximately $48 million, compared to 2014.

During 2014, we incurred approximately $15 million of charges associated with the closure of our Thomastown, Australia resilient flooring plant and the closure of our Kunshan, China engineered wood flooring plant. Production activity for both plants was shifted to our existing facilities in the U.S.

We continue to evaluate the efficiency of our manufacturing footprint and may take additional actions in support of our cost and standardization initiatives. The charges associated with any additional cost reduction initiatives could include severance and related termination benefits, fixed asset write-downs, asset impairments and accelerated depreciation and may be material to our financial statements.

 

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Intangible Asset Impairment. In the fourth quarter of 2014 we recorded a non-cash impairment charge of $10.0 million to reduce the carrying value of our Bruce trademark to its estimated fair value based on the results of our annual impairment test. The estimated fair value was negatively impacted by competitive conditions in the U.S. residential housing market, resulting in lower projected profitability.

See also “Results of Operations” for further discussion of other significant items affecting operating costs.

Employees

As of December 31, 2015, we had approximately 3,700 full-time and part-time employees worldwide, compared to approximately 3,600 employees as of December 31, 2014. The increase in employees from 2014 to 2015 related to higher staffing levels in the Americas. Collective bargaining agreements covering approximately 100 employees at one U.S. plant will expire during 2016.

Critical Accounting Estimates

In preparing our combined financial statements in accordance with U.S. GAAP, we are required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis, using relevant internal and external information. We believe that our estimates and assumptions are reasonable. However, actual results may differ from what was estimated and could have a significant impact on the financial statements.

We have identified the following as our critical accounting estimates.

U.S. Pension Credit and Postretirement Benefit Costs—Certain of our North American employees participate in defined benefit pension and postretirement benefit plans (the “Shared Plans”) sponsored by AWI. We did not record an asset or liability to recognize the funded status of the Shared Plans as we do not sponsor these Shared Plans and have no rights or obligations related to the Shared Plans’ assets or liabilities. Our Combined Statements of Operations include expense allocations for these Shared Plans based on a review of personnel by business unit and based on allocations of corporate personnel. The related pension and other postretirement expenses attributed to the Shared Plans were recorded based primarily on the projected benefit obligation of active and inactive participants. We consider the expense allocation methodology to be reasonable for all periods presented. These expenses were funded through intercompany transactions with AWI that are reflected within the Net AWI investment on the Combined Balance Sheets.

Based on the analyses and recommendations provided by AWI’s actuaries and pension advisors, AWI currently anticipates that, in connection with the separation and distribution, the assets and liabilities of the defined benefit pension plan sponsored by AWI will be transferred to a mirror pension plan to be adopted by AFI upon the separation. The transfer of the assets and liabilities of the defined benefit pension plan will be based primarily on active AFI employees accruing benefits and former AFI employees who retired from a currently operating AFI location (plant or campus) who retired on or after October 1, 2006 under the defined benefit pension plan sponsored by AWI. In addition, based on the analyses and recommendations provided by AWI’s actuaries and pension advisors, AWI currently anticipates that, in connection with the separation and distribution, the liabilities of the postretirement benefit plans sponsored by AWI that relate to active and retired AFI employees under the postretirement benefit plans sponsored by AWI will be transferred to mirror postretirement benefit plans to be adopted by AFI upon the separation.

The Shared Plan defined benefit pension and postretirement benefit costs allocated to us are developed by AWI from actuarial valuations. These valuations are calculated using a number of assumptions, including the discount rate, the expected long-term return on plan assets and the estimated inflation in health care costs. These assumptions are generally updated annually.

 

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The discount rate is used to determine the defined benefit pension and postretirement benefit plan liabilities and to determine the interest cost component of net periodic pension and postretirement cost. AWI’s management utilized the Aon Hewitt AA only above median yield curve, which is a hypothetical AA yield curve comprised of a series of annualized individual discount rates, as the primary basis for determining the discount rate.

AWI sponsors two U.S. defined benefit pension Shared Plans, a qualified funded Shared Plan and a nonqualified unfunded Shared Plan. For the qualified funded plan, the expected long-term return on plan assets represents a long-term view of the future estimated investment return on plan assets. This estimate is determined based on the target allocation of plan assets among asset classes and input from investment professionals on the expected performance of the asset classes over 10 to 30 years. Historical asset returns are monitored and considered when AWI develops its expected long-term return on plan assets. An incremental component is added for the expected return from active management based on historical information obtained from the plan’s investment consultants.

The estimated inflation in health care costs represents a 5-10 year view of the expected inflation in AWI’s postretirement health care costs.

Certain of our U.S. employees participate in a postretirement benefit plan sponsored by us (the “AFI Postretirement Plan”). As such, we have recorded a liability of $3.5 million as of December 31, 2015 to recognize the funded status of the AFI Postretirement Plan. See Note 15 to the annual Combined Financial Statements for disclosures on pension and postretirement benefits.

Actual results that differ from various pension and postretirement plan estimates are captured as actuarial gains/losses. When certain thresholds are met, the gains and losses are amortized into future earnings over the expected remaining service period of plan participants. Changes in assumptions could have significant effects on earnings in future years.

Inventories—Inventories are valued at the lower of cost or market, with cost for U.S. inventories determined principally on the LIFO (last-in, first-out) basis and cost for non-U.S. inventories valued on the FIFO (first-in, first-out) basis. We establish reserves for LIFO valuation adjustments and for inventory obsolescence, excess inventory and inventory expected to be sold below cost.

Approximately 92% of our total inventory in 2015 and 2014, was valued on a LIFO basis. The calculation of LIFO reserves is affected by inflation and deflation in inventory components. In recent years, our Wood Flooring business segment has been most susceptible to LIFO valuation volatility due to the high volatility of lumber prices and due to long production cycles. LIFO reserves as of December 31, 2015 declined in comparison to December 31, 2014, primarily due to declines in lumber costs.

Reserves for inventory obsolescence, excess inventory and inventory expected to be sold below cost are established when the estimated market value of inventory is below its cost. Market value is represented as the replacement cost or net realizable value of inventory. We continuously review our inventory values to determine if there are any indicators that costs exceed market values. Historically, significant indicators requiring increases to inventory valuation reserves have been the age of inventory, an anticipated decrease in demand, a shift in customer preferences and overall economic conditions. Our reserves for inventory obsolescence as of December 31, 2015 and 2014 were $1.2 million. Management believes that our inventory reserves as of December 31, 2015 and 2014 are adequate, however, actual results could differ from assumptions used to value obsolete inventory, excess inventory or inventory expected to be sold below cost, and additional reserves may be required.

Impairments of Long-Lived Tangible and Intangible Assets—Our indefinite-lived intangibles are primarily trademarks and brand names, with Bruce representing our primary trademark, all of which are integral to our corporate identity and expected to contribute indefinitely to our corporate cash flows. Accordingly, they have been assigned an indefinite life. We conduct our annual impairment test for non-amortizable intangible assets during the fourth quarter, although we conduct interim impairment tests if events or circumstances indicate

 

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potential impairment. We conduct impairment tests for tangible assets and amortizable intangible assets when indicators of impairment exist, such as operating losses and/or negative cash flows. If an indication of impairment exists, we compare the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the assets. The estimate of an asset group’s fair value is based on discounted future cash flows expected to be generated by the asset group, or based on management’s estimated exit price assuming the assets could be sold in an orderly transaction between market participants or estimated salvage value if no sale is assumed. If the fair value is less than the carrying value of the asset group, we record an impairment charge equal to the difference between the fair value and carrying value of the asset group.

The principal assumption utilized in our impairment tests for definite-lived intangible assets is operating profit adjusted for depreciation and amortization. The principal assumptions utilized in our impairment tests for indefinite-lived intangible assets include revenue growth rate, discount rate and royalty rate. Revenue growth rate and operating profit assumptions are derived from those utilized in our operating plan and strategic planning processes. The discount rate assumption is calculated based upon an estimated weighted average cost of equity which reflects the overall level of inherent risk and the rate of return a market participant would expect to achieve. Methodologies used for valuing our intangible assets did not change from prior periods.

The cash flow estimates used in applying our impairment tests are based on management’s analysis of information available at the time of the impairment test. Actual cash flows lower than the estimate could lead to significant future impairments. If subsequent testing indicates that fair values have declined, the carrying values would be reduced and our future statements of income would be affected.

There were no impairment charges in 2015 or 2013 related to intangible assets.

During the fourth quarter of 2014, we recorded a non-cash impairment charge of $10.0 million to reduce the carrying amount of our Bruce trademark to its estimated fair value based on the results of our annual impairment test. The fair value was negatively affected by lower expected sales and profits due to the competitive environment in the U.S. residential housing market. The carrying value of the Wood Flooring trademarks at December 31, 2015 was $31.9 million. Continued competitive pressure beyond our expectations could lead to future material impairments of the Wood Flooring intangible assets.

During the third quarter of 2014, we recorded an impairment charge of $11.9 million on the tangible assets of the European resilient flooring business as a result of disappointing operating results. This charge is reflected within Discontinued Operations as we deconsolidated the business in the fourth quarter of 2014. See Note 4 to the annual Combined Financial Statements for further information.

During the second quarter of 2014, we decided to close our resilient flooring plant in Thomastown, Australia and our engineered wood flooring plant in Kunshan, China. During 2014, we recorded $2.2 million in cost of goods sold for accelerated depreciation due to the closure of the Thomastown, Australia plant. We sold the Thomastown, Australia facility in January 2015. During 2014, we also recorded $4.0 million in cost of goods sold for accelerated depreciation due to the closure of the Kunshan, China plant.

During 2014, we also made the decision to dispose of certain idle equipment at five of our wood flooring manufacturing facilities and as a result we recorded a $4.4 million impairment charge in cost of goods sold.

We cannot predict the occurrence of certain events that might lead to material impairment charges in the future. Such events may include, but are not limited to, the impact of economic environments, particularly related to the commercial and residential construction industries, material adverse changes in relationships with significant customers, or strategic decisions made in response to economic and competitive conditions.

See Notes 3 and 9 to the annual Combined Financial Statements for further information.

 

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Income Taxes—Income taxes as presented herein attribute current and deferred income taxes of AWI to the AFI stand-alone financial statements in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by ASC Topic 740: Income Taxes (“ASC 740”). Accordingly, the AFI income tax provision was prepared following the separate return method. The separate return method applies ASC 740 to the stand-alone financial statements of each member of the consolidated group as if the group member were a separate taxpayer and a stand-alone enterprise. As a result, actual tax transactions included in the consolidated financial statements of AWI may not be included in the separate annual Combined Financial Statements of AFI. Similarly, the tax treatment of certain items reflected in the separate annual Combined Financial Statements of AFI may not be reflected in the consolidated financial statements and tax returns of AWI; therefore, such items as net operating losses, credit carryforwards, and valuation allowances may exist in the stand-alone Combined Financial Statements that may or may not exist in AWI’s consolidated financial statements. Similarly such items as net operating losses, credit carryforwards, and valuation allowance may or may not exist in AFI’s Combined Financial Statements and tax returns.

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of AFI’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. It is AFI’s policy to include accrued interest related to unrecognized tax benefits and penalties in the provision for income tax expense net of tax benefits.

The breadth of AFI’s operations and the global complexity of tax regulations require assessment of uncertainties and judgments in estimating the taxes that AFI will ultimately pay. The final taxes paid are dependent on many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state, and international tax audits in the normal course of business.

Accounting Pronouncements Effective in Future Periods

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which defers the effective date for ASU 2014-09 by one year to January 1, 2018, however, public business entities would be permitted to adopt the standard as of the original effective date. We have not selected a transition method and are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which is part of ASC 718: Compensation-Stock Compensation. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award. The guidance is effective for annual periods beginning after December 15, 2015. The guidance can be applied prospectively for all awards granted or modified after the effective date or retrospectively to all awards with performance targets outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We do not expect a material impact on our financial condition, results of operations or cash flows from the adoption of this guidance.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a

 

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deduction from the carrying amount of the related debt liability instead of a deferred charge. The new guidance is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which was issued to address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. We are currently evaluating the impact the adoption of these standards will have on our financial condition and cash flows.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which provides guidance to determine when a customer’s fees paid in a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract. The new guidance is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires inventory that is measured on a first-in, first-out or average cost basis to be measured at lower of cost and net realizable value, as opposed to the lower of cost or market. For inventory that is measured under the last-in, first-out basis or the retail recovery method, there is no change to current measurement requirements. This new guidance is effective for annual reporting periods beginning after December 15, 2016, but early adoption is permitted. We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. This new guidance is effective for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact the adoption of this standard would have on our financial condition and cash flows.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most notably, this new guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This new guidance is effective for annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact the adoption of this standard would have on our financial condition, results of operations and cash flows.

Results of Operations

Unless otherwise indicated, net sales in these results of operations are reported based upon the AFI location where the sale was made. Please refer to Note 3 to the annual Combined Financial Statements for a reconciliation of segment operating income to combined earnings from continuing operations before income taxes and additional financial information related to discontinued operations.

 

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2015 Compared to 2014

Combined Results from Continuing Operations

(dollar amounts in millions)

 

     2015      2014      Change is
Favorable/

(Unfavorable)
 

Net sales:

        

Americas

   $ 1,099.6       $ 1,131.3         (2.8 )% 

Pacific Rim

     89.1         89.1         —     
  

 

 

    

 

 

    

 

 

 

Total combined net sales

   $ 1,188.7       $ 1,220.4         (2.6 )% 

Operating income

   $ 17.9       $ 10.8         65.7

Excluding the unfavorable impact from foreign exchange of $18 million, combined net sales decreased driven by unfavorable price and mix of $16 million, which was partially offset by higher volumes of $2 million.

The decrease in net sales in the Americas was driven by lower volumes in the Wood Flooring business and unfavorable price, which were only partially offset by higher volumes in the Resilient Flooring business and improvements in mix. Net sales were also unfavorably impacted by foreign exchange of approximately $12 million.

Excluding unfavorable foreign exchange impact of approximately $6 million, net sales in the Pacific Rim increased 7% as improvements in volumes and price were partially offset by unfavorable mix.

Cost of goods sold was 80.9% of net sales in 2015, compared to 83.7% in 2014. The percentage decrease compared to the prior year was impacted by reductions in input costs, primarily lumber, PVC resins and plasticizers, partially offset by an increase in allocated U.S. pension costs and an increase in manufacturing costs.

SG&A expenses in 2015 were $209.7 million, or 17.6% of net sales, compared to $177.1 million, or 14.5% of net sales, in 2014. The increase was primarily due to higher promotional spending to support go-to-market initiatives in the Americas and higher employee compensation and benefits.

Also impacting the increase in operating income was a $10 million non-cash impairment charge recorded in the fourth quarter of 2014 to reduce the carrying value of our Bruce trademark to its estimated fair value.

Other non-operating expenses were $3.8 million in 2015 and $5.3 million in 2014 and consisted primarily of foreign exchange rate losses on the translation of unhedged cross-currency intercompany loans.

Other non-operating income was $0.2 million in 2015 and $0.9 million in 2014 and consisted primarily of foreign exchange rate gains on the translation of unhedged cross-currency intercompany loans.

Income tax expense was $5.3 million and $3.6 million in 2015 and 2014, respectively. The effective tax rate for 2015 was 37.1% as compared to a rate of 56.3% for 2014. The effective tax rate for 2015 was lower than 2014 primarily due to lower unbenefitted foreign losses on higher pre-tax income partially offset by the impact of higher pre-tax income relative to the tax on foreign income.

Total other comprehensive income (“OCI”) was an $11.7 million loss for 2015 compared to a loss of $10.0 million for 2014. The amounts of foreign currency translation adjustments in both 2015 and 2014 were driven primarily by changes in the exchange rate of the Canadian dollar, the Australian dollar and the Chinese renminbi. In addition, during the fourth quarter of 2014, we recognized our remaining foreign currency exposure upon the deconsolidation of our European resilient flooring business. The period changes in derivative gains/losses were primarily due to the mark to market changes related to our foreign exchange contracts for sales in both 2015 and 2014. Postretirement adjustments represent the amortization of actuarial gains related to our defined-benefit postretirement plan.

 

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Reportable Segment Results

Resilient Flooring

(dollar amounts in millions)

 

     2015      2014      Change is
Favorable/

(Unfavorable)
 

Net sales:

        

Americas

   $ 624.2       $ 623.2         0.2

Pacific Rim

     89.1         89.1         —     
  

 

 

    

 

 

    

 

 

 

Total segment net sales

   $ 713.3       $ 712.3         0.1

Operating income

   $ 11.2       $ 39.0         (71.3 )% 

Excluding the unfavorable impact from foreign exchange of $8 million, Americas net sales for the full year 2015 increased 1%. Higher volumes contributed 4% of the increase to net sales and were driven by growth across both residential and commercial product platforms and also benefited from competitive product availability issues. Volume growth was partially offset by unfavorable price, which contributed a 1% reduction to net sales, and mix, which contributed a 1% decrease to net sales. Unfavorable price and mix impacts were primarily related to residential products.

Excluding the unfavorable impact from foreign exchange of $6 million, net sales in the Pacific Rim for the full year 2015 increased 7%. Higher volumes contributed 9% of the increase to net sales and were driven by growth across the region in the healthcare and education segments, while improvements in price contributed a 2% increase to net sales. Positive impacts from volumes and price were partially offset by unfavorable mix, which contributed a 6% reduction to net sales.

Operating income declined primarily due to higher SG&A expenses of $33 million and unfavorable price and mix of $19 million, partially offset by lower manufacturing and input costs of $18 million and the margin impact of higher volumes of $13 million. The increase in SG&A expenses was primarily related to ongoing promotional spending to support go-to-market initiatives in the Americas and higher employee compensation and benefits. The comparison was also impacted by approximately $6 million of charges in 2014 associated with the closure of our Thomastown, Australia resilient flooring plant and by a $2 million gain on the sale of the plant in 2015.

Wood Flooring

(dollar amounts in millions)

 

     2015      2014      Change is
Favorable/

(Unfavorable)
 

Total segment net sales

   $ 475.4       $ 508.1         (6.4 )% 

Operating income (loss)

   $ 6.7       $ (28.2      Favorable   

Excluding the unfavorable impact from foreign exchange of $4 million, net sales for the full year 2015 decreased 6%. Lower volumes contributed 6% of the decrease to net sales, reflecting market share losses as a result of capacity issues for our engineered wood products and prior year price and mix optimization actions. Mix was positive contributing 3% of the increase to net sales, which was partially offset by a 2% decline in price.

The improvement in operating income was driven by a decline in lumber costs that resulted in a $37 million benefit, partially offset by the margin impact of lower volumes of $10 million, higher SG&A expenses to support go-to-market activities of $3 million and unfavorable price and mix margin impact of $2 million. The comparison was also impacted by $4 million of multilayered wood flooring import duties recorded in 2015. Additionally, 2014 included approximately $9 million of severance, idle equipment and other charges associated

 

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with the closure of our Kunshan, China engineered wood flooring plant, $3 million of other idle equipment charges and a non-cash impairment charge of $10 million to reduce the carrying value of a Wood Flooring trademark to its estimated fair value.

2014 Compared to 2013

Combined Results from Continuing Operations

(dollar amounts in millions)

 

     2014      2013      Change is
Favorable/

(Unfavorable)
 

Net sales:

        

Americas

   $ 1,131.3       $ 1,178.4         (4.0 )% 

Pacific Rim

     89.1         84.4         5.6
  

 

 

    

 

 

    

 

 

 

Total combined net sales

   $ 1,220.4       $ 1,262.8         (3.4 )% 

Operating income

   $ 10.8       $ 40.6         (73.4 )% 

The decrease in combined net sales was impacted by the unfavorable impact of foreign exchange of approximately $9 million. Lower volumes of $93 million were only partially offset by $59 million of favorable price and mix.

The decrease in net sales in the Americas was driven by lower volumes, which were only partially offset by improvements in price and mix.

Excluding unfavorable foreign exchange impact of approximately $3 million, net sales in the Pacific Rim increased 9% as improvements in volumes were partially offset by unfavorable mix and price.

Cost of goods sold was 83.7% of net sales in 2014, compared to 83.5% in 2013. Compared to the prior year, lower manufacturing costs were more than offset by higher input costs. The comparison was impacted by approximately $15 million of charges in 2014 associated with the closure of our Thomastown, Australia resilient flooring plant and the closure of our Kunshan, China engineered wood flooring plant, and approximately $4 million of charges associated with cost reduction actions in the Resilient Flooring business in Australia in 2013.

SG&A expenses in 2014 were $177.1 million, or 14.5% of net sales, compared to $168.2 million, or 13.3% of net sales, in 2013. The increase was primarily due to higher promotional spending. See Reportable Segment Results for additional information.

Also impacting the decline in operating income was a $10 million non-cash impairment charge recorded in the fourth quarter of 2014 to reduce the carrying value of our Bruce trademark to its estimated fair value.

Other non-operating expenses were $5.3 million in 2014, compared to $1.2 million in 2013. The increase in 2014 as compared to 2013 was primarily due to foreign exchange rate losses on the translation of unhedged cross-currency intercompany loans.

Income tax expense was $3.6 million and $14.1 million in 2014 and 2013, respectively. The effective tax rate for 2014 was 56.3% as compared to a rate of 34.4% for 2013. The effective tax rate for 2014 was higher than 2013 primarily due to higher unbenefited foreign operating losses, lower income in foreign subsidiaries with profits, and a reduction in research and development credits.

Total OCI was a $10.0 million loss for 2014 compared to a loss of $5.2 million for 2013. The amounts of foreign currency translation adjustments in 2014 were driven primarily by changes in the exchange rate of the Canadian dollar, the Australian dollar and the Chinese renminbi. In addition, during the fourth quarter of 2014, we

 

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recognized our remaining foreign currency exposure upon the deconsolidation of our European resilient flooring business in the fourth quarter of 2014. Amounts in 2013 were driven primarily by changes in the exchange rate of the Canadian dollar, the Chinese renminbi and the Australian dollar. The period changes in derivative gains/losses were primarily due to the mark to market changes related to our foreign exchange contracts for sales in 2014. Postretirement adjustments represent the amortization of actuarial gains related to our defined-benefit postretirement plan.

Reportable Segment Results

Resilient Flooring

(dollar amounts in millions)

 

     2014      2013      Change is
Favorable/
(Unfavorable)
 

Net sales:

        

Americas

   $ 623.2       $ 644.4         (3.3 )% 

Pacific Rim

     89.1         84.4         5.6
  

 

 

    

 

 

    

 

 

 

Total segment net sales

   $ 712.3       $ 728.8         (2.3 )% 

Operating income

   $ 39.0       $ 48.1         (18.9 )% 

Excluding the unfavorable impact from foreign exchange of $4 million, Americas net sales for 2014 decreased by $17 million, or 3%. The decline reflected lower volumes and unfavorable price, which contributed 5% and less than 1% to the decrease in net sales, respectively, partially offset by favorable mix, which contributed a 3% increase to net sales. Lower volumes reflected declines for both our commercial and residential products, both of which also experienced favorable mix.

Net sales in the Pacific Rim increased as strong volume growth in China and India was partially offset by market driven sales declines in Australia.

Operating income declined primarily due to the margin impact of lower volumes of $9 million and higher SG&A expenses of $8 million driven by higher promotional and marketing expense. These negative impacts were only partially offset by lower manufacturing and input costs of $9 million as strong productivity more than offset higher input costs. The comparison was also impacted by approximately $6 million of charges in 2014 associated with the closure of our Thomastown, Australia resilient flooring plant and $4 million of charges in 2013 associated with cost reduction actions in Australia.

Wood Flooring

(dollar amounts in millions)

 

     2014      2013      Change is
(Unfavorable)
 

Total segment net sales

   $ 508.1       $ 534.0         (4.9)

Operating loss

   $ (28.2    $ (7.5      Unfavorable   

Excluding the unfavorable impact from foreign exchange of $2 million, net sales declined 5%. The decrease in net sales was due to volume declines, which contributed 13% to the decrease in net sales, partially offset by $47 million of favorable price and mix, which contributed increases to net sales of 6% and 3%, respectively. Price and mix gains in the first half of the year were offset by volume declines in the second half, which reflected sales lost to competition.

 

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The decline in operating income was driven by approximately $9 million of charges primarily associated with the closure of our Kunshan, China plant, $4 million of idle equipment charges and a non-cash impairment charge of $10 million to reduce the carrying value of our Bruce trademark to its estimated fair value. Gross profit improved driven by the benefit of price and mix of $55 million, which more than offset the impact of lower volumes of $27 million, higher SG&A expenses of $4 million and higher manufacturing and input costs of $23 million, as improvements in productivity were more than offset by higher lumber costs.

Financial Condition and Liquidity

Combined Cash Flows

(dollars in millions)

 

     Year Ended December 31,  
     2015      2014      2013  

Net cash provided by operating activities

   $ 52.6       $ 13.2       $ 57.3   

Net cash (used for) investing activities

     (58.3      (78.7      (63.5

Net cash provided by financing activities

     5.7         42.6         18.9   
  

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     —           (22.9      12.7   

Cash and cash equivalents at beginning of year

     —           22.9         10.2   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     —           —           22.9   

Cash and cash equivalents at end of period of discontinued operations

     —           —           22.9   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period of continuing operations

     —           —           —     
  

 

 

    

 

 

    

 

 

 

As AWI manages our cash and financing arrangements, all excess cash generated through earnings is deemed to be remitted to AWI and all sources of cash are deemed to be funded by AWI.

Operating activities

Operating activities for 2015 provided $52.6 million of cash. Cash was generated through earnings exclusive of non-cash expenses, primarily depreciation and amortization and deferred income taxes, and by increased working capital. Increased working capital primarily reflected net changes in accounts payable and accrued expenses and inventory.

Operating activities for 2014 provided $13.2 million of cash. Cash was generated through earnings exclusive of non-cash expenses, primarily depreciation and amortization, impairment and deferred income taxes, partially offset by increases in income taxes payable and working capital. Increased working capital primarily reflected net changes in inventory, accounts receivable and accounts payable and accrued expenses.

Operating activities for 2013 provided $57.3 million of cash. Cash was generated through earnings exclusive of non-cash expenses, primarily depreciation and amortization and loss on disposal of discontinued operations, and an increase in accounts payable and accrued expenses.

Investing activities

Net cash used for investing activities of $58.3 million, $78.7 million and $63.5 million in 2015, 2014 and 2013, respectively, was primarily due to purchases of property, plant and equipment. Purchases of property, plant and equipment in 2015 and 2014 include significant expenditures related to the expansion of our Lancaster, PA resilient flooring plant to include the manufacture of LVT. Purchases of property, plant and equipment in 2013 include expenditures related to the construction of two resilient flooring plants in China.

 

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Financing activities

Net cash provided by financing activities was $5.7 million for 2015, compared to $42.6 million provided during 2014. The cash changes discussed above resulted in less cash deemed to be funded by AWI in 2015.

Net cash provided by financing activities was $42.6 million for 2014, compared to $18.9 million during 2013. The cash changes discussed above resulted in more cash deemed to be funded by AWI in 2014.

Liquidity

Our liquidity needs for operations vary throughout the year. Historically, the primary source of liquidity for our business is the cash flow provided by operations which has been transferred to AWI to support its overall cash management strategy. Deemed transfers of cash to or from AWI to support its overall cash management strategy have been reflected in Net AWI investment in our Combined Balance Sheets, Statements of Cash Flows and Statements of AWI Equity. Accordingly, we have no cash or cash equivalents on our Combined Balance Sheets as of December 31, 2015.

As of December 31, 2015, our outstanding long-term debt of $10.0 million consisted of a variable rate, tax-exempt industrial development bond that financed the construction of a Wood Flooring plant in Somerset, Kentucky. The bond has a scheduled final maturity in 2025. This bond is remarketed by an agent on a regular basis at a market-clearing interest rate. Any portion of the bond that is not successfully remarketed by the agent is required to be repurchased. This bond is backed by letters of credit that will be drawn if a portion of the bond is not successfully remarketed. We have not had to repurchase any of the bonds. Prior to the separation, AWI intends on discharging our $10.0 million bond by providing the necessary funds to the trustee in anticipation of a planned redemption at the next interest payment date of April 1, 2016.

As of December 31, 2015, we had outstanding letters of credit totaling $10.9 million.

In July 2013, AWI’s board of directors approved the expansion of our Lancaster, PA resilient flooring plant to include the manufacture of LVT. Through December 31, 2015, we have incurred approximately $50 million related to this project. We do not anticipate incurring any additional material spending related to this construction project in 2016.

Prior to the separation, we believe that cash generated from operations, combined with continued support from AWI through the separation date, will be adequate to address our foreseeable liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations. We have entered into negotiations with a lead arranger bank to secure a credit facility prior to the completion of the separation and distribution. The credit facility is anticipated to be for approximately $225 million and we are currently in the process of negotiating and initiating the syndication process with the lead arranger bank. Post separation, we believe that cash generated from operations and this credit facility will be adequate to address our foreseeable liquidity needs based on current expectations of our business operations, capital expenditures and scheduled payments of debt obligations.

Off-Balance Sheet Arrangements

No disclosures are required pursuant to Item 303(a)(4) of Regulation S-K.

Contractual Obligations

As part of our normal operations, we enter into numerous contractual obligations that require specific payments during the term of the various agreements. The following table includes amounts ongoing under contractual obligations existing as of December 31, 2015. Only known payments that are dependent solely on the passage of time are included. Obligations under contracts that contain minimum payment amounts are shown at the

 

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minimum payment amount. Contracts that contain variable payment structures without minimum payments are excluded. Purchase orders that are entered into in the normal course of business are also excluded because they are generally cancelable and not legally binding. Amounts are presented below based upon the currently scheduled payment terms. Actual future payments may differ from the amounts presented below due to changes in payment terms or events affecting the payments.

 

(dollar amounts in millions)    2016      2017      2018      2019      2020      Thereafter      Total  

Long-term debt

     —           —           —           —           —         $ 10.0       $ 10.0   

Scheduled interest payments (1)

     —           —           —           —           —           0.8         0.8   

Operating lease obligations, net of sublease income (2)

   $ 1.9       $ 1.3       $ 1.0       $ 0.8       $ 0.5         1.6         7.1   

Unconditional purchase obligations (3)

     12.2         2.6         1.4           0.5         —           —           16.7   

Other obligations (4), (5)

     0.3         —           —           —           —           —           0.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 14.4       $ 3.9       $ 2.4       $ 1.3       $ 0.5       $ 12.4       $ 34.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For debt with variable interest rates, we projected future interest payments based on market-based interest rates.
(2) Lease obligations include the minimum payments due under existing agreements with non-cancelable lease terms in excess of one year. Amounts include real estate and equipment lease obligations of AFI and certain shared lease obligations with AWI which have been charged to AFI based on usage or other allocation methods. Amounts exclude lease obligations due to AWI under our campus lease agreement, which we will enter into upon separation.
(3) Unconditional purchase obligations include (a) purchase contracts whereby we must make guaranteed minimum payments of a specified amount regardless of how little material is actually purchased (“take or pay” contracts) and (b) service agreements. Unconditional purchase obligations exclude contracts entered into during the normal course of business that are non-cancelable and have fixed per unit fees, but where the monthly commitment varies based upon usage. Cellular phone contracts are an example. Amounts include unconditional purchase obligations of AFI and certain shared obligations with AWI that have been charged to AFI based on usage or other allocation methods.
(4) Other obligations include payments under severance agreements.
(5) Other obligations does not include $81.9 million of liabilities under ASC 740. Due to the uncertainty relating to these positions, we are unable to reasonably estimate the ultimate amount or timing of the settlement of these issues. See Note 13 to the annual Combined Financial Statements included in this information statement for more information.

We are party to supply agreements, some of which require the purchase of inventory remaining at the supplier upon termination of the agreement. The last such agreement will expire in 2016. Had these agreements terminated at December 31, 2015, we would have been obligated to purchase approximately $4.4 million of inventory. Historically, due to production planning, we have not had to purchase material amounts of product at the end of similar contracts. Accordingly, no liability has been recorded for these guarantees.

Letters of credit are issued to third party suppliers, insurance and financial institutions and typically can only be drawn upon in the event of our failure to pay our obligations to the beneficiary. This table summarizes the commitments we have available in the U.S. for use as of December 31, 2015. Letters of credit are currently arranged through AWI’s Accounts Receivable Securitization Facility.

 

Other Commercial Commitments

(dollar amounts in millions)

   Total
Amounts
Committed
   Less
Than 1
Year
   1 – 3
Years
   4 – 5
Years
   Over 5
Years
Letters of credit    $10.9    $10.9    —      —      —  

 

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Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We are exposed to market risk from changes in foreign currency exchange rates that could impact our results of operations, cash flows and financial condition. AWI enters into derivative contracts, including contracts to hedge our foreign currency exchange rate exposures. Upon completion of the separation and distribution, we intend to enter into similar derivative contracts that mirror agreements presently entered into by AWI. Forward swap contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. Derivative financial instruments are used as risk management tools and not for speculative trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage exposure to potential nonperformance on such instruments. Developments in the capital markets are regularly monitored.

Counterparty Risk

AWI only enters into derivative transactions with established counterparties having a credit rating of BBB or better. Counterparty credit default swap levels and credit ratings are monitored on a regular basis. All of AWI’s derivative transactions with counterparties are governed by master International Swap and Derivatives Association, Inc. agreements (“ISDAs”) with netting arrangements. These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty. AWI neither posts nor receives cash collateral with any counterparty for our derivative transactions. As of December 31, 2015, AWI had no cash collateral posted or received for any of our derivative transactions. These ISDAs do not contain any credit contingent features other than those contained in AWI’s bank credit facility. Exposure to individual counterparties is controlled, and thus the risk of counterparty default is negligible.

Exchange Rate Sensitivity

We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement. AWI enters into foreign currency forward exchange contracts to reduce its remaining exposure. At December 31, 2015, our major foreign currency exposures are to the Canadian dollar, the Australian dollar and the Chinese renminbi. A 10% strengthening of all currencies against the U.S. dollar compared to December 31, 2015 levels would decrease our 2016 earnings before income taxes by approximately $4.2 million, including the impact of current foreign currency forward exchange contracts.

The table below details our outstanding currency instruments as of December 31, 2015, all of which mature in 2016.

 

On balance sheet foreign exchange related derivatives

(dollar amounts in millions)

      

Notional amounts

   $ 40.9   

Assets at fair value, net

     2.9   

 

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MANAGEMENT

Executive Officers Following the Distribution

The following table sets forth information as of February 29, 2016 regarding the individuals who are expected to serve as executive officers of AFI following the distribution. While some of AFI’s executive officers are currently officers and employees of AWI, after the distribution, none of the individuals will continue to be employees or executive officers of AWI.

 

Name

  Age   

Expected Position

Donald R. Maier   51    President and Chief Executive Officer
John “Jay” W. Thompson   47    Senior Vice President and Chief Financial Officer
Dominic C. Rice   54    Senior Vice President and North America Commercial
Joseph N. Bondi   49    Senior Vice President and North America Residential
David S. Schulz   50    Senior Vice President and Chief Operating Officer
Christopher S. Parisi   45    Senior Vice President, General Counsel, Secretary and Chief Compliance Officer
John C. Bassett   52    Senior Vice President, Human Resources
Charles E. Grogan   58    Vice President of Global Operations
Scott W. Hess   43    Vice President and Chief Information Officer
Kimberly Z. Boscan   50    Vice President and Controller
John B. Hillenbrand   57    Vice President of Research & Development

Mr. Donald R. Maier is expected to serve as President and Chief Executive Officer of AFI and as a director. Since September 26, 2014, Mr. Maier has served as both the Division Chief Executive Officer and Executive Vice President of Armstrong Flooring Products. He joined AWI in January 2010, serving as Senior Vice President of Global Operations Excellence. Mr. Maier came to AWI from TPG Capital Advisors, the global buyout group of TPG Global, a global private investment firm (“TPG”). Prior to TPG, Mr. Maier held a steady progression of roles at Hillenbrand Industries, beginning in 1987, as a manufacturing and product engineer for the company’s subsidiary Batesville Casket Company before later moving from product development and marketing leadership roles to Vice President of Manufacturing and Operations. In 2002, he became Vice President of Strategy and Business Development, for a larger Hillenbrand subsidiary, Hill-Rom. In 2003, Mr. Maier became Vice President and General Manager of Hill Rom’s North America division before being named Senior Vice President in 2005. He holds a bachelor’s degree in Industrial Systems Engineering from The Ohio State University in Columbus, Ohio, and an MBA, with a concentration in Marketing, from Xavier University in Cincinnati, Ohio.

Mr. John “Jay” W. Thompson is expected to serve as Senior Vice President and Chief Financial Officer of AFI. Mr. Thompson joined AWI on August 17, 2015 and presently serves as the Chief Financial Officer of Armstrong Flooring Products. Mr. Thompson came to AWI from TPG, where, from 2011 to 2014, he held various key senior finance positions for TPG, and for several of its portfolio companies, including: most recently, as Acting Chief Financial Officer of Chobani, an international Greek-yogurt manufacturer; Interim VP Finance at FleetPride, an aftermarket heavy-duty truck parts retailer and distributor; Interim Chief Financial Officer at Nexeo Solutions, a global chemical distributor; and Senior Director of Global Finance at TPG. Prior to joining TPG, Mr. Thompson held several senior finance positions for PepsiCo, Inc. from 2004 to 2011 for several of the company’s key beverage brands, including Senior Finance Director of PepsiCo, Inc.’s chilled direct-store delivery business. Prior to joining PepsiCo, Mr. Thompson held key finance, consulting and tax positions at Bain & Company, Inc., Goldman Sachs & Co. and KPMG, respectively. He holds a bachelor’s degree in Economics and Managerial Studies and a master’s degree in Accountancy from Rice University in Houston, Texas, as well as a master’s degree in Business Administration from Harvard Business School in Boston, Massachusetts.

Mr. Dominic C. Rice is expected to serve as Senior Vice President and North America Commercial of AFI. Since May 2010, Mr. Rice has served as the Vice President of Commercial Flooring of Armstrong Flooring Products. Mr. Rice joined AWI in 1981 in Armstrong Building Products Sales, and held a steady progression of roles in

 

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Sales, Marketing and General Management before moving to AWI’s flooring business. From 1995 to 1999, Mr. Rice served as Managing Director of Armstrong Flooring Product’s Australian flooring business before relocating to the United States to manage Armstrong Flooring Product’s commercial flooring product portfolio. Mr. Rice has over thirty years of experience in the commercial building materials industry, in both the North American and international markets, and is a current member of the board of directors, and past Chairman, of the Resilient Floor Covering Institute.

Mr. Joseph N. Bondi is expected to serve as Senior Vice President and North America Residential of AFI. Mr. Bondi joined AWI in May 2014, and presently serves as the Vice President of Armstrong Residential Flooring, North America. Mr. Bondi came to AWI from North American Specialty Products LLC, formerly Certain Teed Foundations Group, where he served as Vice President and General Manager from 2013 until 2014. Prior to North American Specialty Products LLC, from 2009 to 2013, Mr. Bondi served as Vice President and General Manager of CertainTeed’s Pipe and Foundation business. Prior to that role, from 2006 to 2009, Mr. Bondi served as Vice President, National Accounts for Certain Teed Corporation, where he was responsible for sales management and sales strategy for a sales force supporting retail and lumber building materials accounts across North America, and, beginning in 2007 until 2009, took on the added responsibility of Vice President and General Manager for Certain Teed Insulation’s Retail and Lumber business. He holds a bachelor’s degree in Materials Engineering from Drexel University, and an MBA, with a concentration in Marketing and Operations Management, from the Wharton School of the University of Pennsylvania, both in Philadelphia, Pennsylvania.

Mr. David S. Schulz is expected to serve as Senior Vice President and Chief Operating Officer of AFI, with oversight of Asia Pacific sales and operations, investor relations, and strategic matters, including mergers and acquisitions. Since November 16, 2013, Mr. Schulz has served as AWI’s Chief Financial Officer. He joined AWI in 2011 as Vice President, Finance for Armstrong Building Products. Mr. Schulz came to AWI from Procter & Gamble, a global manufacturer and provider of a wide variety of consumer goods (“P&G”), where he served as Chief Financial Officer of the Americas snacks division from 2009 to 2011, and, from 2008 to 2009, as the finance director of the coffee business unit of the J.M. Smucker Company following the merger of P&G’s Folgers Coffee Company with Smucker. Prior to joining P&G, Mr. Schulz was an officer in the United States Marine Corps. He holds a bachelor’s degree in Finance from Villanova University in Villanova, Pennsylvania, and a master’s degree in Management from the U.S. Naval Postgraduate School in Monterey, California.

Mr. Christopher S. Parisi is expected to serve as Senior Vice President, General Counsel, Secretary and Chief Compliance Officer of AFI. Mr. Parisi joined AWI in October 2011, serving as Vice President, Corporate Governance until June 2014, at which time he was appointed Vice President, Associate General Counsel and Secretary of AWI. Mr. Parisi came to AWI from Toll Brothers, Inc., a luxury home builder. Prior to Toll Brothers, Mr. Parisi provided similar public company corporate governance, commercial and transactional legal support at Orthovita, Inc. (now Stryker), an orthobiologics medical device manufacturer, and IKON Office Solutions, Inc. (now RICOH Americas), an office equipment distributor and services provider. Mr. Parisi began his legal career at Morgan, Lewis & Bockius in Philadelphia, Pennsylvania. He holds a bachelor’s degree from La Salle University in Philadelphia, Pennsylvania and a J.D. from Widener University Delaware Law School in Wilmington, Delaware.

Mr. John C. Bassett is expected to serve as Senior Vice President, Human Relations of AFI. Mr. Bassett joined AWI in 1998, and has served as Vice President, Human Relations for Armstrong Flooring Products since 2014. Prior to serving in his current position, from 2012 to 2014 Mr. Bassett was the General Manager, Hardwood Manufacturing of Armstrong Flooring Products. Mr. Bassett served, from 2010 to 2012, as Vice President of Human Resources, Global Operating & Supply Chain of Armstrong Corporate, and from 2003 to 2010, as Vice President of Human Resources, Armstrong Flooring Products. He held a steady progression of roles beginning in 1998 through 2003 including Plant Human Resources Manager of Lancaster Plant of Armstrong Flooring Products, General Manager of Human Resources of Armstrong Flooring Products, and General Manager of Human Resources of Armstrong Wood Products. Mr. Bassett holds a bachelor’s degree in Chemical Engineering from University of Maine, in Orono, Maine.

 

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Mr. Charles E. Grogan is expected to serve as the Vice President of Global Operations of AFI. Mr. Grogan has served as Vice President of Global Operations for Armstrong Flooring Products since May 2014. Mr. Grogan joined AWI in March 2010, serving as the Vice President of Operations Excellence, Wood. Mr. Grogan has also served in roles at Armstrong Flooring Products including Vice President of Resilient Manufacturing and Vice President of Wood Manufacturing. Prior to joining AWI, Mr. Grogan was Vice President of Manufacturing for the Stanley Furniture Company from 2008 to 2010, and before that he was Vice President & General Manager for La-Z-Boy South. Mr. Grogan deployed lean as a competitive advantage in both companies. Mr. Grogan gained significant lean experience at the Batesville Casket Company, where he obtained lean certifications from both Shingijutsu, Japan and Hillenbrand Industries. Mr. Grogan served in a progression of roles there to include Plant Manager, Director of Mississippi Operations and Director of Manufacturing Strategy. Mr. Grogan has a bachelor’s degree in Business Management from DePaul University in Chicago, Illinois.

Mr. Scott W. Hess is expected to serve as Vice President and Chief Information Officer of AFI. Prior to joining Armstrong in August 2015, from 2011 to 2015 Mr. Hess served as the Managing Director with Huron Consulting Group, where he led the IT Strategy and Management practice. Mr. Hess has over twenty years of experience as a management consultant, providing strategy, operations and technology solutions to commercial, healthcare, government and higher education clients. Mr. Hess began his consulting career at Arthur Andersen in 1995 until 2002, and from 2002 to 2011 served as Managing Director and Partner for Grant Thornton and as a Partner with SMART Business Advisory & Consulting. Mr. Hess holds a bachelor’s degree from the Pennsylvania State University, in State College, Pennsylvania and an MBA from the University of Massachusetts, in Amherst, Massachusetts.

Ms. Kimberly Z. Boscan is expected to serve as Vice President and Controller of AFI. Ms. Boscan joined AWI in October 2015, serving as Vice President, Controller, Flooring. Prior to joining AWI, from 2012 to 2015 Ms. Boscan performed management consulting through her firm, Zeiser Boscan Enterprises, LLC, and through Vaco Indianapolis, LLC. In 2008, Ms. Boscan joined Mead John Nutrition in advance of its spin-off from Bristol-Meyer Squibb to serve as Assistant Controller, a role she held until 2012. Additionally, from 1997 to 2007, Ms. Boscan held a variety of roles within the finance organization of Ford Motor Company. She holds a bachelor’s degree in Accounting from California University of Pennsylvania in California, Pennsylvania and an MBA, with a concentration in Finance, from the University of Pittsburgh, in Pittsburgh, Pennsylvania.

Mr. John B. Hillenbrand is expected to serve as the Vice President of Research & Development of AFI. Mr. Hillenbrand has served as Vice President of Research & Development for Armstrong Flooring Products since joining AWI in January 2016. Prior to joining AWI, Mr. Hillenbrand was Vice President and Chief Innovation Officer for Owens Corning, a global developer and producer of insulation, roofing and fiberglass composites, from 2008 to 2015. Before joining Owens Corning in 2008, Mr. Hillenbrand spent 23 years at DuPont, where he worked in a variety of global innovation, corporate venturing, product management, technology, and operations roles in DuPont’s polymers, advanced fibers, and elastomers businesses. Mr. Hillenbrand received his bachelor’s degree from Virginia Polytechnic Institute and State College in Blacksburg, Virginia, and his master’s and doctoral degrees from Carnegie Mellon University in Pittsburgh, Pennsylvania, all in chemical engineering. He is also active in the Industrial Research Institute, serving on the board of directors since 2012 and slated to become Board Chair in 2016.

 

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DIRECTORS

Board of Directors Following the Distribution

The following table sets forth information as of February 29, 2016 regarding those persons who are expected to serve on AFI’s board of directors following the distribution. All of the nominees will be presented to AFI’s sole stockholder, AWI, for election before the distribution. Some of the persons who are expected to serve as AFI’s directors are currently directors of AWI. After the distribution, Larry S. McWilliams, James C. Melville and James J. O’Connor are expected to continue to serve as directors of AWI.

 

Name

   Age   

Position

Donald R. Maier    51    Director, President and Chief Executive Officer
Larry S. McWilliams    59    Chairman
Michael F. Johnston    68    Director
Kathleen S. Lane    58    Director
Jeffrey Liaw    39    Director
James C. Melville    64    Director
James J. O’Connor    78    Director
Jacob H. Welch    31    Director
Richard E. Wenz    66    Director

AFI’s board of directors will initially be divided into three classes, each comprised of three directors. The directors designated as Class I directors will have terms expiring at the first annual meeting of stockholders following the distribution, which AFI expects to hold in 2017. The directors designated as Class I directors will have terms expiring at the 2017 annual meeting of stockholders. The directors designated as Class II directors will have terms expiring at the 2018 annual meeting of stockholders, and the directors designated as Class III directors will have terms expiring at the 2019 annual meeting of stockholders. 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 annual meeting in 2019, AFI’s board of directors will no longer be divided into classes and each director will stand for election annually. AFI expects that Class I directors will be comprised of Ms. Lane and Messrs. Welch and Wenz; Class II directors will be comprised of Messrs. Liaw, Maier and O’Connor; and Class III directors will be comprised of Messrs. Johnston, Melville and McWilliams.

Mr. Donald R. Maier is expected to serve as a member of the board of directors of AFI, and as its President and Chief Executive Officer. Since September 26, 2014, Mr. Maier has served as both the Division Chief Executive Officer and Executive Vice President of Armstrong Flooring Products. He joined AWI in January 2010, serving as Senior Vice President of Global Operations Excellence. Mr. Maier came to AWI from TPG. Prior to TPG, Mr. Maier held a steady progression of roles at Hillenbrand Industries, beginning in 1987, as a manufacturing and product engineer for the company’s subsidiary Batesville Casket Company before later moving from product development and marketing leadership roles to Vice President of Manufacturing and Operations. In 2002, he became Vice President of Strategy and Business Development, for a larger Hillenbrand subsidiary, Hill-Rom. In 2003, Mr. Maier became Vice President and General Manager of Hill Rom’s North America division before being named Senior Vice President in 2005.

Mr. Larry S. McWilliams, who has served as an Independent Director of AWI since July 2, 2010, is expected to serve as Chairman of the board of directors of AFI. Since 2010, Mr. McWilliams has also been a member of AWI’s Audit and Management Development and Compensation committees. Mr. McWilliams was previously the President and Chief Executive Officer of Keystone Foods, a producer of proteins, from May 2011 to May 2012. From May 2005 to October 2010, he served as a Senior Vice President at Campbell Soup Company and subsequently became the President of Campbell International, responsible for all of Campbell Soup’s business in Europe, Latin America and Asia Pacific. Mr. McWilliams joined Campbell Soup in March 2001 as Senior Vice President Sales and Chief Customer Officer, overseeing the company’s relationships with its global retail partners. In April 2003, he assumed the position of President North America Soup. Mr. McWilliams was named

 

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Senior Vice President and President Campbell USA in March 2004. Prior to Campbell Soup, Mr. McWilliams held positions at Coca-Cola from 1995 to 2001 and the Pillsbury Company from 1993 to 1995. Mr. McWilliams also serves as a member of the boards of directors of Bob Evans Farms, Inc., a full-service restaurant company (since 2014) and Godiva Chocolatiers International, a privately held company (since 2012). Mr. McWilliams formerly served on the Board of Governors of St. Joseph’s University Food Marketing Council and the Grocery Manufacturers’ Association’s Industry Affairs Council. 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.

Mr. Michael F. Johnston, who has served as an Independent Director of AWI since 2010, is expected to serve as a member of the board of directors of AFI. Mr. Johnston was previously with Visteon Corporation, an automotive components supplier, until 2008. At Visteon, he served as Chairman of the board of directors, Chief Executive Officer, President, and Chief Operating Officer at various times from 2000 to 2008. Before joining Visteon, Mr. Johnston held various positions in the automotive and building services industry, including serving as President, North America/Asia Pacific for Johnson Controls’ Automotive Systems Group. Mr. Johnston also serves as a member of the boards of directors of the following companies: Whirlpool Corporation, a leading manufacturer and marketer of major home appliances (since 2003), serving as Presiding Director and a member of its Audit Committee; and Dover Corporation, a diversified global manufacturer (since February 2013), serving as a member of its Audit Committee. Mr. Johnston previously served as a member of the board of directors of Flowserve Corporation (2007 to 2013) including as the Chairman of its Corporate Governance and Nominating Committee and a member of its Finance Committee. Mr. Johnston’s executive leadership and board of directors experience offers our board of directors a seasoned corporate governance perspective, and he brings to our board of directors extensive operational, manufacturing and design, innovation, engineering and financial experience.

Ms. Kathleen S. Lane is expected to be named as a member of the board of directors of AFI. Ms. Lane has served as a member of the board of directors of Bob Evans Farms, Inc. since 2014, serving as a member of the Finance Committee, Nominating Committee and Corporate Governance Committee, and has served as a member of the board of directors of EarthLink Holdings Corp., a leading network services provider, since 2013, serving as a member of the Audit Committee and the Leadership and Compensation Committee. Ms. Lane has previously served as the Executive Vice President and Chief Information Officer of TJX Companies, Inc., a specialty multinational apparel retailer with leading retail brands such as T-J-Maxx, Marshalls, and HomeGoods, from 2008 to 2013. Prior to joining TJX, she was the Group Chief Information Officer at National Grid Plc., an international electricity and gas utility, from 2006 to 2008 and the Senior Vice President and Chief Information Officer of Gillette Company (Procter & Gamble) from 2002 to 2006. 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 will provide the board with a substantial IT and business process background. Ms. Lane will also bring public company board experience to our board of directors.

Mr. Jeffrey Liaw, who has served as an Independent Director of AWI since June 2012, is expected to be named as a member of the board of directors of AFI. Mr. Liaw is the Chief Financial Officer of Copart, Inc., a leading global provider of online auctions and vehicle remarketing services. Prior to joining Copart in January of 2016, Mr. Liaw was the Chief Financial Officer of FleetPride, Inc., a nationwide supplier of heavy-duty truck and trailer parts. Prior to joining FleetPride in December 2012, Mr. Liaw was a principal of TPG Capital for seven years and was active in TPG’s energy and industrial investing practice areas. Before joining TPG in 2005, Mr. Liaw was an associate at Bain Capital, a private equity investment firm, in its Industrials practice. Mr. Liaw previously served as a member of the boards of directors of Graphic Packaging Holding Company, a provider of packaging solutions for consumer products companies (2008 to 2013), including as a member of its Nominating and Corporate Governance Committee, and Oncor Electric Delivery Company, LLC. Mr. Liaw served as an observer to AWI’s board of directors on TPG’s behalf from 2009 until June 2012, at which time he was elected as a member of AWI’s board of directors. Mr. Liaw offers our board of directors financial expertise and experience working with a broad range of manufacturing companies.

 

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Mr. James C. Melville, who has served as an Independent Director of AWI since 2012, is expected to be named as a member of the board of directors of AFI. Mr. Melville is a member of the Minneapolis-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. Prior to joining Kaplan, Strangis and Kaplan, P.A., Mr. Melville practiced with Dorsey and Whitney in their Minneapolis, Minnesota and London, England offices. Mr. Melville previously served as a member of AWI’s board of directors from September 2009 until July 2010. Mr. Melville is active in numerous local and civic organizations and their boards. Mr. Melville served as an observer of AWI’s board on behalf of the Armstrong World Industries, Inc. Asbestos Personal Injury Settlement Trust (the “Trust”) from August 2010 until February 2012. Mr. Melville brings extensive knowledge of the law, mergers and acquisitions, executive compensation, and corporate governance matters, international experience and financial acumen to our board of directors.

Mr. James J. O’Connor, who has served as an Independent Director of AWI since 2007, is expected to be named as a member of the board of directors of AFI. Mr. O’Connor is a retired Chairman of the board of directors and Chief Executive Officer of Unicom Corporation. Mr. O’Connor joined Commonwealth Edison Company in 1963, became President in 1977, a member of the board of directors in 1978 and Chairman and Chief Executive Officer in 1980. In 1994, Mr. O’Connor was also named Chairman and Chief Executive Officer of Unicom Corporation, which then became the parent company of Commonwealth Edison Company, from which he retired in 1998. Mr. O’Connor previously served on the boards of directors of the following companies: Trizec Properties, Inc. (2003 to 2006); Corning, Inc. (1984 to 2011); Smurfit – Stone Container Corporation (2000 to 2011); and United Continental Holdings, Inc. (1984 to 2012). 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 of directors extensive knowledge and expertise in senior executive leadership, management, and corporate governance and board practices of other major corporations.

Mr. Jacob H. Welch is expected to be named as an Independent Director of AFI. He is currently a Partner at ValueAct Capital. Prior to joining ValueAct Capital in August 2009, Mr. Welch worked as an analyst with The Blackstone Group in its private equity division in New York. Mr. Welch will be appointed to AFI’s board of directors pursuant to and in accordance with an appointment and stockholder’s agreement between AFI and members of the ValueAct Group, dated February 26, 2016. For additional information on the appointment and stockholder’s agreement, see “Certain Relationships and Related Person Transactions. - ValueAct Appointment and Stockholder’s Agreement” below. Mr. Welch offers our board of directors his advisory experience with Value Act’s portfolio companies, as well as his knowledge and expertise in finance.

Mr. Richard E. Wenz, who has served as an Independent Director of AWI since 2010, is expected to be named as a member of the board of directors of AFI. Mr. Wenz is a private investor. From 2002 to 2003, Mr. Wenz was the Chief Executive Officer of Jenny Craig International, a weight loss, weight management, and nutrition company. From 2000 to 2002, Mr. Wenz was an operating affiliate of DB Capital Partners. From 1997 to 2000, Mr. Wenz was President and Chief Operating Officer of Safety 1st , Inc. During 1995 and 1996, Mr. Wenz was the partner in charge of the Chicago office of The Lucas Group, a business strategy consulting firm. Prior to 1995, Mr. Wenz held senior executive positions with Professional Golf Corporation, Electrolux Corporation, The Regina Company and Wilson Sporting Goods Company. Mr. Wenz began his career in 1971 with Arthur Young & Co. (predecessor of Ernst & Young LLP) and left the firm as a partner in 1983. Mr. Wenz is a certified public accountant, and he serves as a member of the board of directors of Summer Infant, Inc., a global designer, marketer, and distributor of branded juvenile health, safety and wellness products (since 2007) and serves as Lead Independent Director and Chair of the Nominating and Governance Committee. Mr. Wenz also serves as a member of the board of directors of Pet Supplies Plus serving as the Chair of the Audit Committee. Mr. Wenz previously served on the boards of directors of Easton-Bell Sports, Inc. (2006 to 2014), Strategic Partners, Inc. (2004 to 2010), Hunter Fan Company (2002 to 2007), and Radica Games, Inc. (2004 to 2006). Mr. Wenz brings extensive senior executive leadership, board service, including Audit Committee, at companies with diverse

 

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businesses, public accounting, risk management, strategic planning and international experience to our board of directors.

Director Independence

A majority of AFI’s board of directors will consist of directors who are not employees and are independent under all applicable legal and regulatory requirements, including the independence requirements of the New York Stock Exchange and the Corporate Governance Principles to be established by the board of directors. AFI will seek to have all of its non-management directors qualify as “independent” under these standards. AFI’s board of directors is expected to establish categorical standards to assist it in making its determination of director independence. AFI expects these standards will provide that no director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with AFI or its subsidiaries (either directly or as a partner, shareholder or officer of an organization that has a relationship with AFI or any of its subsidiaries).

For purposes of evaluating the independence of directors, and in line with the Corporate Governance Principles the board will establish, the board will consider all relevant facts and circumstances in making an independence determination, and not merely from the standpoint of the director, but also from that of persons or organizations with which the director has an affiliation. Consistent with our Corporate Governance Principles, to be considered “independent,” the Governance Committee has established qualifications to assist in the determination, which either meet or exceed the independence requirements of the New York Stock Exchange. In making its determination, the board of directors will consider include following standards:

 

    a director is not independent if the director is, or has been within the last three years, an employee of AFI or its subsidiaries, or an immediate family member is, or has been within the last three years, an executive officer of AFI or its subsidiaries;

 

    a director is not independent if the director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from AFI or its subsidiaries, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), and other than amounts received by an immediate family member for service as an employee (other than an executive officer);

 

    a director is not independent if (A) the director or an immediate family member is a current partner of a firm that is AFI’s internal or external auditor; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and personally works on AFI’s or AFI’s subsidiaries’ audit; or (D) the director or an immediate family member was within the last three years a partner or employee of such a firm and personally worked on AFI or its subsidiaries’ audit within that time;

 

    a director is not independent if the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the present executive officers of AFI or its subsidiaries at the same time serves or served on that company’s compensation committee;

 

    a director is not independent if the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, AFI or its subsidiaries for property or services in an amount that, in any of the last three fiscal years, exceeds the greater of $1 million, or two percent of such other company’s consolidated gross revenues; and

 

    a director is not independent if the director is an executive officer of a charitable organization that received charitable contributions (other than matching contributions) from AFI and its subsidiaries in the preceding fiscal year that are in excess of the greater of $1 million or 2 percent of such charitable organization’s consolidated gross revenues.

 

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AFI’s board of directors will assess on a regular basis, and at least annually, the independence of directors and, based on the recommendation of the Nominating and Governance Committee, will make a determination as to which members are independent.

Committees of the Board of Directors

Effective upon the completion of the distribution, AFI’s board of directors will have the following standing committees: an Audit Committee, a Management Development and Compensation Committee (“Compensation Committee”), a Nominating and Governance Committee and a Finance Committee.

Audit Committee. Ms. Lane, and Messrs. Liaw and Wenz are expected to be the members of the board’s Audit Committee. Mr. Wenz is expected to be the Audit Committee Chairman. The board of directors is expected to determine that at least one member of the Audit Committee is an “audit committee financial expert” for purposes of the rules of the SEC. In addition, the board is expected to determine that at least one member of the Audit Committee has accounting or related financial management expertise and that each member is financially literate as required by New York Stock Exchange rules. In addition, AFI expects that the board of directors will determine that each of the members of the Audit Committee will be independent, as defined by the rules of the New York Stock Exchange, Section 10A(m)(3) of the Exchange Act, and in accordance with the company’s Corporate Governance Principles. The Audit Committee will regularly meet independently with the Company’s internal and independent auditors, with the leaders of the Company’s compliance function, and with management. The Audit Committee will (i) oversee 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, non-audit services performed by the Company’s independent registered public accounting firm, and (iii) the Company’s accounting practices and internal accounting controls. The Audit Committee will have sole authority to engage, retain and dismiss the independent registered public accounting firm, review 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, assist the board in monitoring the integrity of the Company’s financial statements and the independent registered public accounting firm’s qualifications, independence and performance, consider risks associated with overall financial reporting, legal compliance and disclosure processes and supervise and review the effectiveness of the Company’s internal audit and legal compliance functions and compliance by the Company with legal and regulatory requirements.

Management Development and Compensation Committee. Messrs. Johnston, Melville, O’Connor and Welch are expected to be the members of the board of directors’ Compensation Committee. Mr. Johnston is expected to be the Compensation Committee Chairman. The board of directors is expected to determine that each member of the Compensation Committee will be independent, as defined by the rules of the New York Stock Exchange and in accordance with the company’s Corporate Governance Principles. In addition, AFI expects that the members of the Compensation Committee will qualify as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act and as “outside directors” for purposes of Section 162(m) of the Code. The Compensation Committee will oversee the design of our executive compensation and benefit programs and employment practices; administer and make recommendations regarding incentive and equity compensation plans; review and approve corporate goals and individual objectives relevant to the compensation of the Chief Executive Officer (“CEO”) and evaluate the CEO’s performance relative to those goals and objectives, and recommend CEO compensation to the independent directors based on the evaluation; oversee the evaluation of the other executive officers and establish their compensation levels in collaboration with the CEO; review incentive compensation to confirm that such compensation does not encourage unnecessary risk-taking; and monitor senior management succession planning.

Nominating and Governance Committee. Messrs. Melville, McWilliams and O’Connor are expected to be the members of the board’s Nominating and Governance Committee. Mr. Melville is expected to be the Nominating and Governance Committee Chairman. The board of directors is expected to determine that each of the members

 

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of the Nominating and Governance Committee will be independent, as defined by the rules of the New York Stock Exchange and in accordance with the company’s Corporate Governance Principles. The Nominating and Governance Committee will monitor the independence of nonemployee directors, review and evaluate director candidates and make recommendations to the board concerning nominees for election as board members, establish criteria for the selection of candidates to serve on the board, recommend directors for appointment to board committees, make recommendations to the board regarding corporate governance matters, review and make recommendations to the board regarding the compensation of nonemployee directors, oversee the Company’s director education and orientation programs and coordinate an annual self-evaluation of the performance of the board and each committee through assistance from an independent, third party advisor.

Finance Committee. Messrs. Liaw, Johnston, Melville and Welch are expected to be the members of the board’s Finance Committee. Mr. Liaw is expected to be the Finance Committee Chairman. The Finance Committee will review and recommend matters related to AFI’s capital structure, including the issuance of debt and equity securities; banking arrangements, including the investment of corporate cash; and management of the corporate debt structure. In addition, the Finance Committee will review and approve material finance and other cash management transactions. The Finance Committee will also responsible for overseeing and advising the board on assessing capital expenditures, operating income, cash flow, cash management and working capital; reviewing investment strategies and policies; assessing the dividend payment policy; reviewing plans to repurchase AFI stock; assessing adjustments to AFI’s capital structure; assessing annual and five-year capital plans and specific capital plan investments; assessing financial aspects of insurance and risk management; reviewing AFI’s actual and forecasted operating performance; reviewing AFI’s annual earnings guidance; and reviewing financial aspects of proposed mergers, acquisitions, divestitures, strategic investments, collaborations and joint ventures.

The board of directors is expected to adopt a written charter for each of the Audit Committee, the Compensation Committee, the Nominating and Governance Committee and the Finance Committee. These charters will be posted on AFI’s website in connection with the separation.

Compensation Committee Interlocks and Insider Participation

During the company’s year ended December 31, 2014, AFI was not an independent company, and did not have a compensation committee or any other committee serving a similar function. Decisions as to the compensation of those who currently serve as AFI’s executive officers were made by AWI, as described in the section of this information statement captioned “Compensation Discussion and Analysis.”

Corporate Governance

Stockholder Recommendations for Director Nominees

AFI’s amended and restated bylaws will contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the board of directors. AFI expects that the board of directors will adopt a policy concerning the evaluation of stockholder recommendations of board candidates by the Nominating and Governance Committee.

Corporate Governance Principles

The board of directors is expected to adopt a set of Corporate Governance Principles in connection with the separation to assist it in guiding AFI’s governance practices. These practices will be regularly re-evaluated by the Nominating and Governance Committee in light of changing circumstances in order to continue serving the company’s best interests and the best interests of AFI’s stockholders.

Communicating with the Board of Directors

AFI’s Corporate Governance Principles will include procedures by which stockholders and other interested parties who would like to communicate their concerns to one or more members of AFI’s board of directors, a

 

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board committee, the lead director or the independent non-management directors as a group may do so by writing to any such party at AFI, c/o Corporate Secretary, 2500 Columbia Avenue, P.O. Box 3025, Lancaster, Pennsylvania 17603. All concerns received will be appropriately forwarded and, if deemed appropriate by the Corporate Secretary, may be accompanied by a report summarizing such concerns.

Director Qualification Standards

AFI’s Corporate Governance Principles will provide that the Nominating and Governance Committee is responsible for reviewing with AFI’s board of directors the appropriate skills and characteristics required of board members in the context of the makeup of the board of directors and developing criteria for identifying and evaluating board candidates.

The process that the Nominating and Governance Committee will use to identify a nominee to serve as a member of the board of directors will depend on the qualities being sought. From time to time, AFI may engage an executive search firm to assist the committee in identifying individuals qualified to be board members. The committee will consider the knowledge, experience, diversity, and personal and professional integrity of potential directors, as well as their willingness to devote the time necessary to effectively carry out the duties and responsibilities of membership on the board. The committee may reevaluate the relevant criteria for board membership from time to time in response to changing business factors or regulatory requirements. The full board of directors will be responsible for selecting candidates for election as directors based on the recommendation of the Nominating and Governance Committee.

Procedures for Treatment of Complaints Regarding Accounting, Internal Accounting Controls, and Auditing Matters

In accordance with the Sarbanes-Oxley Act of 2002, AFI expects that its Audit Committee will adopt procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, and auditing matters and to allow for the confidential, anonymous submission by employees and others of concerns regarding questionable accounting or auditing matters.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Introduction

This Compensation Discussion and Analysis (“CD&A”) describes the historical compensation philosophy, policies and practices of AWI in respect of our Named Executive Officers (“NEOs”) and attempts to outline certain aspects of AFI’s anticipated compensation structure for the NEOs. Prior to the separation, AWI’s Compensation Committee will make appropriate compensation decisions and establish preliminary compensation philosophy, principles and program design which will be reviewed and adjusted by the AFI Compensation Committee after the separation to ensure the program design is appropriately aligned with AFI strategy and to remain market competitive. Because AFI is currently part of AWI and not an independent company, AFI’s Compensation Committee has not yet been constituted.

Following the separation, Donald R. Maier is expected to serve as AFI’s President and Chief Executive Officer (CEO), John “Jay” W. Thompson is expected to serve as AFI’s Senior Vice President and Chief Financial Officer (CFO) and David S. Schulz is expected to serve as AFI’s Senior Vice President and Chief Operating Officer (COO). Further, Joseph N. Bondi is expected to serve as AFI’s Senior Vice President and North America Residential and Charles Grogan is expected to serve as AFI’s Vice President of Global Operations.

 

Name

   Age   

Position

Donald R. Maier    51    President and Chief Executive Officer
David S. Schulz    50    Senior Vice President and Chief Operating Officer
John “Jay” W. Thompson    47    Senior Vice President and Chief Financial Officer
Joseph N. Bondi    49    Senior Vice President and North America Residential
Charles E. Grogan    58    Vice President of Global Operations

Philosophy and Objectives of AWI’s Executive Compensation Program

AWI’s long-term success and growth depend on highly capable global leaders with the experience and skills to deliver its strategy in a volatile and changing market environment. Thus, AWI’s executive compensation programs are designed to attract, motivate and retain those high-quality leaders.

AWI’s compensation programs are designed and administered around the following core principles:

 

    Align executive interests with shareholders’ interests.

 

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

 

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

We expect AFI’s executive compensation program will generally include similar principles as AWI’s executive compensation programs

How AWI Makes Compensation Decisions

Following the separation, we expect that AFI’s board of directors will adopt a Compensation Committee Charter that initially will grant the AFI Compensation Committee similar responsibilities to those of the AWI Compensation Committee. The following summarizes the roles of each of the key participants in the executive compensation decision-making process for AWI’s executive compensation programs. We expect AFI’s allocation of responsibilities will initially be similar.

 

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Roles of Key Participants

 

Compensation Committee   

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

 

•    Oversees the design of AWI’s executive compensation programs in context of AWI’s culture, competitive practices, legal and regulatory landscape, and governance trends

 

•    Reviews and approves short- and long-term incentive compensation design, including performance goals and the reward consequences for delivering above or below target performance

 

•    Reviews and approves corporate goals and individual objectives relevant to the compensation of the CEO, evaluates the 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

Independent Members of the Board   

•    Participate in the performance assessment process for the CEO

 

•    Approve CEO compensation decisions, including base salary, Management Achievement Plan (“MAP”), and Long-Term Incentive Plan (“LTIP”). awards

Independent Advisor   

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

 

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

 

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

CEO   

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

Use of Competitive Data

The following summarizes AWI’s approach to using competitive data. Following the separation, the AFI Compensation Committee will review and may make changes to align with the post-separation compensation philosophy. In setting NEO compensation, the AWI Compensation Committee considers various types of information, including survey data, peer compensation data, tally sheets, wealth accumulation analyses and related benchmark information.

Annual Compensation Benchmarking

Annually, the AWI Compensation Committee reviews all components of NEO compensation versus competitive market data.

In general, AWI targets NEO pay to be at or near the 50th percentile of the competitive market, but may deviate from this target due to an individual’s performance, internal equity with peers situated at similar levels, and to attract the required level of global business knowledge and leadership needed to achieve its strategy.

 

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The principal sources of market data include (combined “Competitive Market”):

 

    Survey data (all NEOs), including surveys by AonHewitt and Towers Watson (“Market”)

 

    Peer Group data (CEO and CFO) (“Peer Group”)

Peer Group

The AWI Compensation Committee uses compensation data compiled from a group of peer companies based on several criteria, including business model comparability, company size measured by revenues and market capitalization, and competition for executive talent and investor capital. AWI’s 2015 Peer Group consisted of 16 manufacturing companies in the building and construction industries and is reflected in the table below. Following the separation, AFI Compensation Committee will review and determine a peer group relevant to AFI.

 

Acuity Brands, Inc.

  Masco Corporation   Sherwin-Williams Company

W. R. Grace & Company

  Herman Miller, Incorporated   Steelcase, Incorporated

Leggett & Platt, Inc.

  Mohawk Industries, Inc.   Universal Forest Products, Inc.

Lennox International Inc.

  Nortek, Inc.   USG Corporation

Louisiana-Pacific Corporation

  Owens Corning   Vulcan Materials Company

Martin Marietta Materials

   

Elements, Characteristics & Objectives of AWI’s Executive Compensation

The following table summarizes the elements and objectives of AWI’s total direct compensation program. Following the separation, AFI’s Compensation Committee will review the compensation programs and may make certain changes to align them with the post-separation compensation philosophy and view of business needs and strategic priorities.

 

Type

   Compensation
Elements
  

Objectives

   Long-Term
Incentive (LTIP)
  

•    Promotes long-term value-creation for AWI shareholders, and fosters retention, by rewarding execution and achievement of goals linked to AWI’s longer term strategic initiatives and cost of capital

 

•    Actual value realized is based on company performance over a 3-year time frame

 

•    Target opportunity generally set at Peer Group and/or Market median

Performance-Based    Annual Incentive
(MAP)
  

•    Provides an annual incentive opportunity for achieving financial results based on performance goals tied to AWI’s annual operating plan

 

•    Awards tied to AWI, business unit and individual performance, including leadership behaviors

 

•    Target opportunity generally set at Peer Group and/or Market median

   Base Salary   

•    Provides reasonable and Market competitive fixed pay reflective of an executive’s role, scope of responsibility and individual performance

 

•    Generally set at Peer Group and/or Market median

 

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Type

   Compensation Elements   

Objectives

   Benefits   

•    Standard range of health, welfare, and retirement benefits generally similar to those provided to other salaried employees, except that AWI’s executive officers:

 

•    are eligible to receive enhanced AWI-paid long-term disability benefits;

 

•    are eligible for non-qualified retirement savings benefits

Fixed    Limited Perquisites   

•    Very limited perquisites or personal benefits

 

•    Personal financial counseling at a cost generally less than $4,500 per NEO

 

•    Executive physicals at a cost typically less than $5,000 per NEO

 

•    From time to time, executives may be reimbursed for costs related to relocation or commuting in accordance with AWI policy.

Alignment of Compensation Elements and Objectives

The following table illustrates how AWI’s executive compensation elements align with compensation objectives:

 

Executive Compensation Element

   Attract
Talented
Employees
     Align
Management
and
Shareholder
Interests
     Pay for
Performance
     Motivate and
Retain
Management
 

Base Salary

   ü               ü     

Annual Incentive (MAP)

   ü         ü         ü         ü     

Long-Term Incentive (LTIP)

   ü         ü         ü         ü     

2015 COMPENSATION DESIGN AND OUTCOMES

Base Salary

AWI’s Compensation Committee’s decision on 2015 base salaries for Messrs. Maier and Schulz was largely driven by the competitiveness of each NEO’s base salary compared to the Competitive Market; increases were effective April 1, 2015. The table below represents the increase in base salary rate for each of AFI’s expected NEOs as of December 31. This information differs from the SCT, which reflects the total base salary received for the year.

 

Name

   Change in
2015 Base
Salary
   

Primary Rationale

Donald R. Maier

     3.0   Standard merit increase over 2014

David S. Schulz

     4.0   Standard merit increase over 2014

John “Jay” W. Thompson

          New Hire starting salary

Joseph Bondi

     2.5   Standard merit increase over 2014

Charles E. Grogan

     2.7   Standard merit increase over 2014

Management Achievement Plan (“MAP”)

AWI’s MAP awards provide an annual incentive opportunity for achieving financial results that are based on performance goals tied to AWI’s annual operating plan.

 

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Each participant’s target MAP opportunity (expressed as a percent of base salary) is based on role responsibility, alignment with similar positions internally, and external Competitive Market. Actual payout will vary with actual business performance relative to performance targets.

MAP awards were determined based on the following formula, measures and weightings. The Compensation Committee approves these factors at the beginning of each fiscal year. Additional details follow below the table.

2015 MAP Design

 

Base

Salary $

  ×   

Target MAP

Opportunity %

   =   

Target

MAP $

   ×   

Company and

Business

Performance %

   ×   

Individual

Performance %

   =   

Annual MAP

Payout $

2015 Target MAP Opportunity

Under the AWI MAP program, 2015 Target MAP opportunity (expressed as a percentage of base salary) for AFI’s expected NEOs were as set forth in the table below.

 

Name

   Target MAP %
Opportunity
    Target MAP
$
 

Donald R. Maier

     75     364,294   

David S. Schulz

     75     355,350   

John “Jay” W. Thompson

     60     84,375   

Joseph Bondi

     45     126,070   

Charles E. Grogan

     40     104,025   

2015 MAP Performance Metrics and Weighting

The Compensation Committee selected EBITDA (for both the consolidated as well as at the business unit level) as the 2015 MAP performance metric. The Compensation Committee determined that EBITDA aligned to key elements of AWI’s 2015 operating plan and financial plans and is a good measure of operating performance (pre-financing and pre-tax).

In establishing MAP performance and payout ranges for AWI, Armstrong Flooring Products (“AFP”) and Armstrong Building Products (“ABP”), the Compensation Committee considered a number of factors:

 

    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 shareholders

For 2015, the Compensation Committee established the following performance ranges and associated payout ranges. Pre-incentive AWI Consolidated and business unit performance are converted to a corresponding payout factor on a straight line basis between Threshold and Target and between Target and Maximum. MAP payout factors are capped at 200%.

 

     EBITDA $ (in millions)      Payout  
     Threshold      Target      Maximum      Threshold     Target     Maximum  

Consolidated

     281.6         352.0         422.4         50     100     200

AFP

     80.2         100.3         120.4         50     100     200

ABP

     273.7         342.1         410.5         50     100     200

The MAP opportunity for NEOs with primary responsibilities at the Corporate level is weighted 100% to consolidated results. NEOs with business unit responsibilities are weighted appropriately to their business unit.

 

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Weighting

   Consolidated     Business
Unit
 

Donald R. Maier

     30     70

David S. Schulz

     100  

John “Jay” W. Thompson

       100

Joseph Bondi

       100

Charles E. Grogan

       100

2015 Final Performance and Payout Factors

Our 2015 EBITDA performance resulted in a 146% MAP payout factor at the consolidated level.

Further details are shown in the table below (dollars in millions):

 

Adjusted EBITDA

   2015
Target
$M
     2015
Actual
$M*
     Performance
%
    Payout
%
 

Consolidated

     352.0         378.0         107     146

AFP

     100.3         114.8         114     200

ABP

     342.1         344.7         101     100

 

* Please refer to Annex A for a reconciliation of Adjusted EBITDA to U.S. GAAP. We achieved full year adjusted EBITDA of $378 million after giving effect to the specific items that the Compensation Committee pre-determined in February 2014 were eligible for exclusion from the achievement calculation.

2015 Final MAP Awards

The Compensation Committee determined the final 2015 MAP payouts by multiplying the NEO’s target MAP amount by the final weighted payout factors, as outlined below.

For Mr. Maier, who was weighted 30% Consolidated and 70% Business Unit, the Compensation Committee approved a final weighted payout factor of 184%.

 

            Weighting     2015 Final MAP  

Name

   Target
MAP $
     Consolidated     Business Unit     Weighted
Payout Factor
    Payout $  

Donald R. Maier

   $ 364,294         30     70     184   $ 670,310   

David S. Schulz

   $ 355,350         100       146   $ 518,820   

John “Jay” W. Thompson

   $ 84,375           100     200   $ 168,750   

Joseph Bondi(1)

   $ 126,070           100     200   $ 277,370   

Charles E. Grogan

   $ 104,025           100     200   $ 208,050   

 

(1) Mr. Bondi’s 2015 MAP payment includes a 110% individual performance modifier.

Long-Term Incentive Plan (“LTIP”)

The goal of the LTIP is to provide equity-based long-term incentive awards that link management interests to shareholder returns and focus management on AWI’s long-term performance.

In determining long-term incentive award opportunities, the AWI Board and the Compensation Committee generally consider a number of factors, including Competitive Market, internal equity, and cost (dilution and accounting cost) and also take into consideration tally sheet and wealth accumulation analyses.

 

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LTIP awards for a given year are typically made two business days following the release of prior fiscal year’s fourth quarter and full year financial results. This allows sufficient time for the market to absorb the announcement of earnings and current year performance guidance.

AWI’s standard LTI program has historically included 60% non-qualified stock options and 40% performance-based restricted stock units (PSU). However, in 2015, in anticipation of the separation and distribution, the Compensation Committee awarded restricted stock units to all participants.

No equity awards are being granted to our executive officers in connection with the separation. As further discussed at the end of the Compensation Discussion and Analysis, AFI anticipates adopting a new long-term incentive plan, under which LTIP awards will be granted after the separation as part of our executive compensation program. The plan will become effective as of the separation.

2015 Target LTIP

The AWI Compensation Committee annually determines LTIP target opportunities (expressed as a percent of base salary) based on role responsibility, alignment with similar positions internally, and external Competitive Market, as well as a review of tally sheets and wealth accumulation analyses.

The respective target percentages for LTIP grants to AFI’s expected NEO’s in 2015 and the resulting Grant Date Fair Value were as set forth in the table below.

 

Name

   2015 LTIP Target
as % of Base Salary
    2015 LTIP Grant Date
Fair Value ($) (1)
 

Donald R. Maier

     180     855,000   

David S. Schulz

     150     690,000   

John “Jay” W. Thompson(2)

       150,000   

Joseph Bondi

     55     151,300   

Charles E. Grogan

     55     140,300   

 

(1) Amounts represent the grant date fair value for the long-term incentive equity award granted in February 2015, as calculated under the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718. Under ASC Topic 718, the grant date fair value is calculated using the closing market price of AWI’s Common Shares ($55.64) on the date of the grant (February 24, 2015).
(2) Mr. Thompson received a one-time special equity grant upon hire on August 24, 2015. The grant date fair value is calculated using the closing market price of AWI’s Common Shares ($53.54) on the date of the grant.

Additional Information Regarding AWI’s Compensation Programs

Qualified and Non-qualified Defined Benefit Pension Plans

The NEOs identified in this information statement do not participate in AWI’s qualified defined benefit pension plan, the Retirement Income Plan (“RIP”), which was closed to newly hired employees after January 1, 2005.

Qualified Defined Contribution Savings Plan and Non-qualified Deferred Compensation Plan

For salaried employees who do not participate in the RIP, AWI provides a 401(k) match of 100% on the first 4% of employee contributions and a 50% match on the next 4% of employee contributions, up to a maximum company match of $18,000 for 2015. All NEOs are eligible to participate in this program. We anticipate AFI’s program will look similar to the AWI program.

AWI offers an unfunded, nonqualified deferred compensation plan, the Armstrong Nonqualified Deferred Compensation Plan (“NQDCP”). This plan is to restore AWI contributions that would be lost due to Code limits

 

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on compensation that can be taken into account under AWI’s tax-qualified 401(k) and to allow participants to voluntarily elect to defer some portion of base salary and MAP until a future date. Participants receive an AWI match identical to the 401(k) company match up to a maximum contribution of 6% of eligible earnings. All current AWI NEOs are eligible to participate in this program. We anticipate AFI’s program will look similar to the AWI program.

Change in Control (“CIC”) Agreements

AWI has provided individual CIC agreements to its named executive officers, including Messrs. Maier and Schulz, to establish a competitive level of financial security in the event of a CIC.

AFI anticipates that its NEOs will be party to similar arrangements with AFI following the separation and distribution.

Severance and Retention Agreements

In March, 2015, AWI entered into severance and retention agreements with certain of its named executive officers, including Mr. Schulz. As discussed in the section “Potential Payments Upon Termination or Change in Control,” Mr. Schulz will be eligible to receive certain cash severance benefits under the severance agreement if his employment is terminated by AWI without Cause or by him for Good Reason (as such terms are defined in the agreement) and he executes a release of claims. Under his retention agreement Mr. Schulz will be eligible to receive a cash retention award in an amount equal to two (2) times base salary if his employment with AWI continues through the closing of the separation and distribution, sale or similar transaction with respect to the flooring business of AWI prior to June 30, 2016 (unless such date is extended by the board of directors of AWI). In the event Mr. Schulz experiences a qualifying termination of employment prior to the closing of the transaction, the retention award will be paid within fifteen (15) business days of the date of termination.

Stock Ownership Guidelines

AWI requires its executive officers to accumulate shares of AWI Common Stock with a value equal to a specified multiple of base pay. AFI’s Compensation Committee is expected to adopt stock ownership guidelines based on compensation philosophy, business needs and corporate governance guidelines.

Recoupment Policy

AWI has the ability to exercise discretion and take action to recoup certain stock-based awards from a plan participant in the event his or her employment is terminated for willful, deliberate or gross misconduct. For example, recoupment could occur if AWI was required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws as a result of such participant’s misconduct which led to his or her termination of employment, or if a participant engages in injurious conduct after termination of employment.

Prohibition on Hedging and Derivative Trading

All members of AWI’s Board and senior management, including AFI’s expected NEOs and certain other employees, are required to clear any transaction involving AWI securities with AWI’s General Counsel’s office prior to entering into such transaction.

By policy, AWI prohibits derivative transactions in its securities, including:

 

    Trading in puts, calls, covered calls, or other derivative products involving AWI securities.

 

    Engaging in any hedging or monetization transaction with respect to AWI securities.

 

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    Holding company securities in a margin account or pledging AWI securities as collateral for a loan.

Beginning in 2011, AWI permitted senior management to utilize stock trading plans that comply with Rule 10b5-1 of the Exchange Act. All such plans are subject to AWI’s pre-approval, and the ability to enter into such plans remains subject to prohibitions on trading while in possession of material non-public information.

Tax Deductibility of Compensation

Section 162(m) of the Code imposes a $1 million limit on the amount a public company may deduct for compensation paid to the company’s CEO or any of the company’s three other most highly compensated executive officers (other than the CFO) who are employed as of the end of the year.

This limitation does not apply to compensation that meets the tax code requirements for “qualifying performance-based” compensation (i.e., compensation paid only if the individual’s performance meets pre-established objective goals based on performance criteria approved by shareowners).

We generally intend to structure and administer our annual and long-term incentive compensation plans to meet the exception under Section 162(m) for performance-based compensation, taking advantage of transitional rules under Section 162(m) that will apply to AFI, such that these amounts are deductible for tax purposes. Once constituted, our compensation committee will retain discretion to authorize compensation arrangements not fully tax deductible, as, for example, may be appropriate to attract and retain global business leaders who can drive financial and strategic growth objectives that maximize long-term shareholder value.

Summary of the 2016 LTIP

General. AWI’s board of directors approved the Armstrong Flooring, Inc. 2016 Long-Term Incentive Plan (the “2016 LTIP”) as AFI’s sole stockholder. It is expected that AFI’s board of directors will approve the 2016 LTIP, which will become effective as of the separation. A form of the 2016 LTIP is being filed as an exhibit to AFI’s registration statement on Form 10 of which this information statement is a part. The general description of the 2016 LTIP is qualified in its entirety by reference to the 2016 LTIP’s provisions as set forth in the exhibit.

Purposes. The purposes of the 2016 LTIP are to attract, retain and motivate highly competent persons as officers, key employees, consultants and advisors of AFI, and its subsidiaries and affiliates, by providing them with appropriate incentives and rewards to encourage them to enter into and continue in the employ of AFI, to acquire a proprietary interest in the long-term success of AFI and to reward the performance of individuals in fulfilling their personal responsibilities for long-range achievements.

Administration. The 2016 LTIP will be administered and interpreted by a committee appointed by the board of directors (the “Committee”), who will have the authority to establish such rules and regulations as it deems necessary for the proper administration of the 2016 LTIP. The Committee has sole discretionary authority to make such determinations and interpretations and to take such action in connection with the 2016 LTIP and any benefits granted thereunder as it deems necessary or advisable. Subject to applicable law, the Committee may delegate to one or more of its members, to one or more officers or members of management, or to one or more agents such administrative duties as it may deem advisable.

2016 LTIP Participants. Participants will consist of such officers and key employees of AFI and its subsidiaries and affiliates as the Committee in its sole discretion determines to be significantly responsible for the success and future growth and profitability of AFI and whom the Committee may designate from time to time to receive benefits under the 2016 LTIP.

 

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Description of Awards. Benefits granted under the 2016 LTIP may be granted in any one or a combination of (i) stock options, (ii) stock appreciation rights, (iii) restricted stock awards, (iv) stock units and (v) cash awards. Restricted stock awards, stock units and cash awards may, as determined by the Committee in its discretion, constitute performance-based awards, which are described in greater detail below. Benefits granted under the 2016 LTIP will vest over a period that is not less than one year from the date of grant. Up to five percent (5%) of the shares of common stock subject to the 2016 LTIP share reserve may be granted without regard to such minimum vesting requirement. The Committee generally has discretion to accelerate vesting in connection with a participant’s death, disability, retirement, involuntary termination without “cause,” in the event of a “change in control” or a corporate transaction, or in other circumstances as the Committee deems appropriate. Generally, the 2016 LTIP provides for the forfeiture of a participant’s benefits which have not been settled in the event of conduct by the participant that is injurious to AFI.

Performance-Based Awards. As determined by the Committee in its sole discretion, either the granting or vesting of such performance-based awards will be based on achievement of performance objectives that are based on one or more of the business criteria described below, with respect to one or more business units or AFI and its subsidiaries as a whole. The Committee will use objectively determinable performance goals based on one or more of the following business criteria, individually or in combination: (i) net earnings; (ii) earnings per share; (iii) sales; (iv) operating income; (v) earnings before interest and taxes (EBIT); (vi) earnings before interest, taxes, depreciation and amortization (EBITDA); (vii) cash flow; (viii) working capital targets; (ix) return on equity; (x) return on capital; (xi) market price per share; (xii) total return to shareholders, (xiii) price-earnings multiples, (xiv) revenue, (xv) number of days sales outstanding in accounts receivable, (xvi) productivity, (xvii) margin, (xviii) net capital employed, (xix) growth in assets, (xx) unit volume, (xxi) market share, (xxii) economic value, (xxiii) relative performance to a comparison group designated by the Committee based on any of the foregoing criteria, or (xxiv) strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, customer growth, geographic business expansion goals, cost targets or goals relating to acquisitions or divestitures. Such business criteria may be adjusted to account for unusual or infrequently occurring items or changes in accounting.

Assumed Grants. AWI LTIP awards that are converted to AFI awards in connection with the separation will continue to vest and be paid in accordance with, and subject to, the terms and conditions of the applicable grants, and the shares with respect to such outstanding converted awards will be issued under the 2016 LTIP.

Shares Reserved for Awards. The number of common shares reserved and available for awards under the 2016 LTIP will be 5,500,000 shares, subject to adjustment made in accordance with the 2016 LTIP. Upon the occurrence of certain corporate events that affect the common stock, including but not limited to extraordinary cash dividend, stock split, reorganization or other relevant changes in capitalization, the Committee will make appropriate adjustments with respect to the number of shares available for grants under the 2016 LTIP, the number of shares covered by outstanding awards and the maximum number of shares that may be granted to any participant.

Individual Participant Limitations. The maximum number of shares of common stock with respect to which stock options, stock appreciation rights, restricted stock awards and stock units may be granted to an individual employee during any one calendar year may not exceed 1,500,000 shares, subject to adjustment in accordance with the 2016 LTIP. The maximum amount of dividend and dividend equivalents that may accrue in any calendar year with respect to performance-based awards granted to any individual employee under the 2016 LTIP is $6,000,000. The maximum cash award payout that may be earned by an employee for each 12 months in a performance period is $5,000,000.

Change in Control. The 2016 LTIP provides “double trigger” vesting in the event of a change in control (as defined in the 2016 LTIP). Unless the Committee determines otherwise, if there is a change in control, and if participants’ awards granted under the 2016 LTIP remain outstanding after the change in control (or are assumed by, or converted to similar benefits with equivalent value as of the date of the change in control of the surviving

 

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corporation), and AFI or the successor terminates a participant’s employment without cause upon or within two years after the change in control, the participant’s outstanding stock options and SARs will be exercisable, any restrictions on restricted stock awards will lapse and stock units or cash awards will become payable as of the termination date. In that event, awards that are based on performance-based goals will vest and be payable at their target value unless the Committee determines otherwise. Unless the Committee determines otherwise, if there is a change in control and if participants’ awards granted under the 2016 LTIP do not remain outstanding after the change in control (and are not assumed or converted to similar benefits), then all outstanding stock options and SARs will be exercisable, any restrictions on restricted stock awards will lapse, and stock units and cash awards will become payable as of the date of the change in control. In that event, awards that are based on performance goals will vest and be payable at their target value unless the Committee determines otherwise.

Amendment and Termination. The board of directors may amend or terminate the 2016 LTIP at any time; provided, however, that the board of directors may not, without shareholder approval, make any amendment that requires shareholder approval pursuant to applicable regulatory requirements, including increasing the number of shares available to be used in grants under the 2016 LTIP other than for adjustments as described above. The 2016 LTIP will terminate on the day immediately preceding the tenth anniversary of the effective date, unless it is earlier terminated by the board of directors or extended with approval of the shareholders.

 

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EXECUTIVE COMPENSATION

Historical Compensation of Executive Officers Prior to the Separation and Distribution

Each of AFI’s NEOs was employed by AWI prior to the separation and distribution, therefore, the information provided for the years 2015, 2014 and 2013 reflects compensation earned at AWI, if any, and paid by AWI. The amounts and forms of compensation reported below are not necessarily indicative of the compensation that AFI NEOs will receive following the separation, which could be higher or lower, because historical compensation was determined by AWI relative to roles and responsibilities that may not be indicative of the expected future roles and responsibilities in AFI.

Messrs. Maier and Schulz are currently and were as of December 31, 2015, officers of AWI. Accordingly, historic compensation decisions were made by the AWI Compensation Committee. Historic compensation decisions for Messrs. Thompson, Bondi and Grogan were made in the context of AWI’s overall compensation governance structure.

Executive compensation decisions following the separation will be made by AFI’s Compensation Committee. All references in the following tables to stock options, restricted stock units and performance-based restricted stock units relate to awards granted by AWI in respect of AWI common shares.

Summary Compensation Table

The table below sets forth the total compensation for our NEOs during fiscal 2015. The table also sets forth the information regarding fiscal 2014 and 2013 compensation for Messrs. Maier, Schulz, and Grogan because they were employed by AWI in those fiscal years. Mr. Thompson was hired in 2015 and did not have compensation prior to 2015. Mr. Bondi was hired in 2014.

Position titles refer to each NEO’s title in 2015 at AWI.

 

Name and
Principal Position

  Year     Salary
($)
    Bonus(1)
($)
    Stock
Awards(2)
($)
    Option
Awards(2)
($)
    Non-Equity
Incentive Plan

Compensation(3)
($)
    Change in
Pension Value
& Nonqualified
Deferred

Compensation
Earnings
($)
    All Other
Compensation(4)
($)
    Total
($)
 

Mr. Maier

    2015        485,725          855,000          670,310               144,470 (5)      2,155,505   

Executive Vice President

    2014        428,466        68,710        335,200        502,800        188,790               140,427        1,664,393   

and CEO, Armstrong

    2013        409,000        —          240,000        360,000        159,600               87,464        1,256,064   

Floor Products

                 

Mr. Schulz

    2015        473,800          690,000          518,820               52,153 (5)      1,734,773   

Senior Vice President

    2014        435,367        —          208,000        312,000        248,160               40,678        1,244,205   

and Chief Financial

    2013        262,912        —          51,880        77,820        128,900               20,290        541,802   

Officer

                 

Mr. Thompson

    2015        140,625        160,000        150,000          168,750               114,019 (5)      733,394   

Chief Financial Officer

                 

Mr. Bondi

    2015        280,156        —          151,300          277,370               30,658 (5)      739,485   

Vice President, North

    2014        170,833        50,000        220,500        90,750        17,690               9,469        559,242   

America Residential

                 

Mr. Grogan

    2015        260,063        35,000        140,300          208,050               17,754 (5)      661,166   

Vice President, Global

    2014        247,616        —          217,200        55,800        21,780               16,015        558,411   

Operations

    2013        230,360        —          37,590        56,385        22,260               13,163        359,758   

 

(1) The amount disclosed for Mr. Thompson was a signing-bonus paid upon hire. Mr. Grogan entered into a retention arrangement on January 2014, if retained through January 2016 he would receive $35,000. In 2014 Mr. Bondi received a sign-on bonus paid upon hire.

 

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(2) The amounts reflect the aggregate grant date fair value of stock units granted in the fiscal year, computed in accordance with 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 price of AWI’s common shares ($55.64) on the date of grant (February 24, 2015).
(3) The 2015 amounts disclosed are the awards under the 2015 MAP.
(4) The amounts shown in the “All Other Compensation” column include: (i) cash dividends paid; (ii) Company matching contribution to the Savings and Investment 401(k) Plan and to the NQDCP; (iii) premiums for long-term disability insurance; (iv) relocation expenses; and (v) personal benefits (“perquisites”) consisting of medical examinations and financial planning expense reimbursements to the extent the total perquisite value is $10,000 or greater per individual. For each person the total value of all such perquisites did not reach $10,000.
(5) The following table provides the detail for the amounts reported in the All Other Compensation for 2015 for each NEO:

 

Name

   Perquisites
and Other
Benefits

($)
     Cash
Dividends(a)

($)
     Company
Match
Savings Plan
Contributions

($)
     Executive
Long-
Term
Disability

($)
     Relocation(b)
($)
     All Other
Compensation

($)
 

Mr. Maier

                     44,970                 99,500         144,470   

Mr. Schulz

             5,677         46,476                    52,153   

Mr. Thompson

                     5,313                 108,707         114,019   

Mr. Bondi

                     17,983                 12,675         30,658   

Mr. Grogan

             4,207         13,547                    17,754   

 

(a) Cash dividends were paid upon vesting of PSUs in 2015.
(b) Mr. Maier was provided commuting expense assistance following his promotion to the global EVP & CEO AFP role on September 26, 2014 details of which are outlined in SEC form 8-K filing on August 22, 2014. The commuting expense is to cover housing, car lease and flight travel. Mr. Thompson received relocation reimbursements in accordance with AWI’s relocation policy. In lieu of relocation, Mr. Bondi receives a monthly lump sum payment of $975 to cover housing.

 

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GRANTS OF PLAN BASED AWARDS

The following table will provide information on MAP awards, stock options, RSUs and PSUs granted to each NEO in 2015.

 

              Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
    Estimated Future
Payouts Under Equity
Incentive Plan Awards
  All
Other
Stock
Awards:
Number
of
Shares
of Stock
or Units
(#)
    All
Other
Option
Awards:
Number
of
Securities
Under-
Lying
Options
(#)
  Exercise
or Base
Price of
Option
Awards
($/Sh)
  Grant
Date

Fair
Value

of Stock
and
Option
Awards(4)
($)
 

Name

        Grant
Date
  Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
  Target
(#)
  Maximum
(#)
       

Mr. Maier

    (1)      N/A     182,147        364,294        728,588                 
    (2)      2/25/2015                 15,367            855,000   

Mr. Schulz

    (1)      N/A     177,675        355,350        710,700                 
    (2)      2/25/2015                 12,402            690,000   

Mr. Thompson

    (1)      N/A     42,188        84,375        168,750                 
    (2)      8/24/2015                 2,802            150,000   

Mr. Bondi

    (1)      N/A     63,035        126,070        252,141                 
    (2)      2/25/2015                 2,720            151,300   

Mr. Grogan

    (1)      N/A     52,013        104,025        208,050                 
    (2)      2/25/2015                 2,522            140,300   

 

(1) The amounts shown represent the 2015 MAP target opportunity for each NEO. Actual payouts are included in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.
(2) In 2015, AWI’s LTI program for NEOs consisted of 100% time-based restricted stock units (RSUs) in anticipation of the announced separation and distribution of the Flooring business. The RSUs will vest in three equal installments on the first, second and third anniversaries of the effective date grant. Any cash dividends declared will be accrued in a non-interest bearing account and paid when the restrictions on the underlying shares lapse. Mr. Thompson received a one-time special RSU grant upon hire.

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table will show the number of shares underlying exercisable and unexercisable options and invested and, as applicable, unearned RSUs and PSUs (in each case denominated in shares of AWI Common Stock) held by each NEOs at December 31, 2015. Market or payout values in the table below are based on the closing price of AWI Common Stock as of December 31, 2015 which was $45.78.

 

        Option Awards     Stock Awards  
                                                     

Name

  Grant Date  

Number of
Securities
Underlying
Unexercised
Options

 

   

Number of
Securities
Underlying
Unexercised
Options

(#)

 

    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number of
Shares or
Units of
Stock That
Have Not
Vested

(#)
    Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
    Equity
Incentive
Plans Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested (#)
    Equity
Incentive
Plans Awards
Market or
Payout Value
of Unearned
Shares or
Other Rights
That Have Not
Vested ($)
 
   

 

 

             
    Exercisable     Unexercisable              

Mr. Maier

  3/2/2011     8,094          35.57        03/02/21           
  11/1/2011     6,026          33.15        11/01/21           
  2/28/2012     22,588          43.21        02/28/22           
  2/20/2013     11,106        5,553 (1)      51.76        02/20/23           
  2/25/2014     4,964        9,928 (1)      53.87        02/25/24           
  9/26/2014     1,633        3,267 (1)      56.52        09/26/24           
  9/26/2014             1,557 (2)      71,279       
  2/20/2013                 4,637 (3)      212,282   
  2/25/2014                 4,589 (3)      210,084   
  2/25/2015             15,367 (1)      703,501       

Mr. Schulz

  6/1/2012     4,472          40.71        06/01/21           
  2/28/2012     4,287          43.21        02/28/22           
  2/20/2013     2,401        1,201 (1)      51.76        02/20/23           
  2/25/2014     4,177        8,354 (1)      53.87        02/25/24           
  2/20/2013                 1,003 (3)      45,917   
  2/25/2014                 3,862 (3)      176,802   
  2/25/2015             12,402 (1)      567,764       

Mr. Thompson

  8/24/2015             2,802 (1)      128,276       

Mr. Bondi

  5/19/2014     1,262        2,526 (1)      52.39        05/19/24           
  5/19/2015                 1,155 (3)      52,876   
  12/11/2014             3,162 (4)      144,756       
  2/24/2015             2,720 (1)      124,522       

Mr. Grogan

  2/28/2012     3,176          43.21        02/28/22           
  3/2/2011     2,429          35.57        03/02/21           
  2/20/2013     1,740        870 (1)      51.76        02/20/23           
  2/25/2014     747        1,494 (1)      53.87        02/25/24           
  2/20/2013                 2,429 (3)      111,200   
  2/25/2014                 691 (3)      31,634   
  12/11/2014             3,557 (4)      162,839       
  2/24/2015             2,522 (1)      115,457       

 

(1) Grant will vest in three equal installments on the first, second and third anniversaries of the date of grant.
(2) Grant will vest on the third anniversary of the date of grant.
(3) The number of common shares of AWI reflected in this column represents the target shares if the ROIC goal is achieved. The awards would vest December 31, 2015 and December 31, 2016 respectively.
(4) Grant will vest in two installments on the second and third anniversaries of the grant date. 2/3rds of the award will vest the second year and 1/3rd of the award will vest the third year.

 

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OPTION EXERCISED AND STOCK VESTED

The following table shows the exercise of stock options made by each NEO during 2015 as well as stock awards held by each NEO that became free of restrictions during 2015.

 

     Option Awards(1)      Stock Awards(2)  

Name

   Number
of Shares
Acquired
on Exercise
(#)
     Value
Realized
on Exercise
($)
     Number
of Shares
Acquired
on Vesting
(#)
     Value
Realized
on Vesting
($)
 

Mr. Maier

     —           —           

Mr. Schulz

     —           —           664         35,783   

Mr. Thompson

     —           —           

Mr. Bondi

     —           —           

Mr. Grogan

     —           —           492         26,514   

 

(1) Represents the number of stock options exercised in 2015. The value realized upon exercise is computed by determining the difference between the market price at exercise and the exercise price of the options.
(2) Represents the number of PSU’s that vested in 2015. The value realized upon vesting is computed by multiplying the number of units by the value of the underlying shares on the vesting date.

The following table lists the details of the PSU awards that vested in 2015 for the NEOs. The cash dividends associated with these vesting events are represented in the “All Other Compensation” column in the Summary Compensation Table.

 

Name

   Type      Grant
Date
     Payout
Date
     Number of
Shares Granted
     Number of
Shares Acquired
on Vesting
     Value Realized
on Vesting
($)
 

Mr. Schulz

     PSU         02/28/12         02/19/2015         1,005         664         35,783   

Mr. Grogan

     PSU         02/28/12         02/19/2015         745         492         26,514   

The performance period for PSUs granted in 2013 ended on December 31, 2015. The final payout was not determinable as of December 31, 2015. The final payout determination will be made in February 2016 by the AWI Compensation Committee after a review of AWI’s performance.

 

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PENSION BENEFITS

Our NEOs do not participate in AWI’s qualified defined pension plan, which was closed to newly hired employees after January 1, 2005.

 

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NONQUALIFIED DEFERRED COMPENSATION

The table below shows the executive contributions, earnings and account balances for each NEO who participates in the NQDCPs.

 

Name

   Executive
Contributions

in 2015(1)
($)
     Registrant
Contributions
in 2015(2)

($)
     Aggregate
Earnings
in 2015
($)
     Aggregate
Withdrawals/
Distributions

($)
     Aggregate
Balance at
12/31/15(3)

($)
 

Mr. Maier

     34,598         26,971         3,465         0         299,437   

Mr. Schulz

     61,954         47,666         1,386         0         181,961   

Mr. Thompson

     0         0         0         0         0   

Mr. Bondi

     4,371         3,643         36         0         7,978   

Mr. Grogan

     Does not participate            

 

(1) The amount in this column is also reported as either Salary or Non-Equity Incentive Plan Compensation in the Summary Compensation Table.
(2) The amount in this column is also reported in the All Other Compensation column of the Summary Compensation Table.
(3) The table below reflects amounts reported in the aggregate balance at last fiscal year end that were previously reported as compensation to the NEO in AWI’s Summary Compensation Table for previous years.

 

Name

   Amount
Previously
Reported

($)
 

Mr. Maier

     195,524   

Mr. Schulz

     53,481   

AWI’s defined benefit pension plans were closed to new salaried participants effective January 1, 2005 and to existing salaried participants who did not meet the age and service requirements as of March 1, 2006. None of the NEOs participate in AWI’s pension plans. Instead, the NEOs are eligible to participate in a 401(k) savings plan with an enhanced AWI match. AWI matches 100% on the first 4% of employee contributions and 50% on the next 4% of employee contributions in the enhanced plan. The NQDCP was established to provide benefits similar to the 401(k) as it applies to managers whose eligible earnings (base salary plus annual incentive) exceed 12.5 times the Code 402(g) elective deferral limit in effect for the plan year. For 2015, the eligible earnings limit was $225,000. A participant may elect to defer up to 25% of eligible base salary earnings and up to 25% of eligible annual incentive earnings. The matching contribution will be the same as that provided under the qualified 401(k) savings plan with the enhanced company match. Participants may transfer account balances between any of the plan’s available investment options.

Participants become 100% vested in AWI’s match account after completing three years of continuous employment having worked at least 1,000 hours in each year.

Except in the case of an unforeseeable emergency or having reached age 70, no in-service distributions are permitted. Participants can elect to receive plan benefits as a single lump sum or in 120 monthly installments commencing after the date of the participant’s termination of employment. All elections must comply with the Code requirements. If the total account value is less than $10,000, the entire account balance will be paid as a single sum at the time of termination. In the event of a participant’s death, any remaining payments shall be paid to the participant’s designated beneficiary or estate.

AWI reserves the right to cause the participant to forfeit or require repayment of AWI match benefits where the participant is discharged for willful, deliberate or gross misconduct or where the participant has engaged in conduct that is injurious to AWI.

 

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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The tables below summarize the estimated value of the potential payments and benefits under AWI’s plans and arrangements to which each NEO would be entitled upon termination of employment under the circumstances indicated. Except for the continuation of health and welfare benefits and outplacement support, amounts would be paid as a lump sum at termination. The amounts shown assume that such termination was effective December 31, 2015. The amounts to be shown will not necessarily be indicative of what we will pay under similar circumstances, in part, because a wide variety of factors can affect payment amounts, which, as a result, can be determined with certainty only when an actual change in control or termination event occurs.

The “Change in Control” column assumes that there is no limitation on payments under the “best net” provision in each CIC agreement. Amounts in the “Change in Control” column are “double trigger” payments and are therefore applicable only in the event both a CIC event and either an involuntary (without cause) termination or a Termination for Good Reason under the CIC agreement occur.

Mr. Maier

 

Benefit

   Resignation $      Involuntary
for Cause $
     Involuntary
without
Cause $
     Termination
for Good
Reason $
     Change in
Control $
 

Cash Severance

     —           —           366,975         366,975         1,712,550   

Health & Welfare Benefit Continuation

     —           —           —           —           89,800   

Outplacement Support

     —           —           25,000         25,000         30,000   

Pro-rated MAP

     —           —           366,975         366,975         366,975   

Accelerated LTIP

     —           —              

PSU

     —           —           —           —           210,084   

RSU

     —           —           —           —           774,781   

Stock Options

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —         $ 758,950       $ 758,950       $ 3,184,190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mr. Schulz

 

Benefit

   Resignation $      Involuntary
for Cause $
     Involuntary
without
Cause $
     Termination
for Good
Reason $
     Change in
Control $
 

Cash Severance

     —           —           1,255,800         1,255,800         1,674,400   

Cash Retention

           956,800         956,800         956,800   

Health & Welfare Benefit Continuation

     —           —           —           —           89,100   

Outplacement Support

     —           —           25,000         25,000         30,000   

Pro-rated MAP

     —           —           358,800         358,800         358,800   

Accelerated LTIP

     —           —              

PSU

     —           —           —           —           176,802   

RSU

     —           —           —           —           567,764   

Stock Options

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —         $ 2,596,400       $ 2,596,400       $ 3,853,666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Mr. Thompson

 

Benefit

   Resignation $      Involuntary
for Cause $
     Involuntary
without
Cause $
     Termination
for Good
Reason $
     Change in
Control $
 

Cash Severance

     —           —           375,000         375,000         375,000   

Health & Welfare Benefit Continuation

     —           —           3,100         3,100         3,100   

Outplacement Support

     —           —           15,000         15,000         15,000   

Pro-rated MAP

     —           —           84,375         84,375         84,375   

Accelerated LTIP

     —           —              

PSU

     —           —           —           —           —     

RSU

     —           —           —           —           128,276   

Stock Options

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —         $ 477,475       $ 477,475       $ 605,751   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mr. Bondi

 

Benefit

   Resignation $      Involuntary
for Cause $
     Involuntary
without
Cause $
     Termination
for Good
Reason $
     Change in
Control $
 

Cash Severance

     —           —           211,405         211,405         211,405   

Health & Welfare Benefit Continuation

     —           —           —           —           —     

Outplacement Support

     —           —           15,000         15,000         15,000   

Pro-rated MAP

     —           —           126,844         126,844         126,844   

Accelerated LTIP

     —           —              

PSU

     —           —           —           —           52,876   

RSU

     —           —           —           —           269,278   

Stock Options

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —         $ 353,250       $ 353,250       $ 675,404   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mr. Grogan

 

Benefit

   Resignation $      Involuntary
for Cause $
     Involuntary
without
Cause $
     Termination
for Good
Reason $
     Change in
Control $
 

Cash Severance

     —           —           196,313         196,313         196,313   

Health & Welfare Benefit Continuation

     —           —           —           —           —     

Outplacement Support

     —           —           15,000         15,000         15,000   

Pro-rated MAP

     —           —           104,700         104,700         104,700   

Accelerated LTIP

     —           —              

PSU

     —           —           —           —           31,364   

RSU

     —           —           —           —           278,297   

Stock Options

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —         $ 316,013       $ 3126,013       $ 625,674   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Resignation or Involuntary Termination for Cause

No incremental benefits are provided to any of the NEOs in the event of a voluntary resignation or an involuntary termination for Cause. Cause is defined as (i) the willful and continued failure by the executive to substantially perform the executive’s duties after a written demand for substantial performance is delivered to the executive by the board of directors, or (ii) the willful engaging by the executive in conduct which is demonstrably and materially injurious to AWI, or (iii) the executive’s conviction of any felony.

 

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Qualifying Involuntary Termination

Under AWI’s severance plan, which applies to the NEOs in the absence of a CIC event and in the absence of an employment agreement, severance benefits for executive participants provide a minimum of 26 weeks and a maximum of 52 weeks of base salary based on years of service, or a separate contractual arrangement. In connection with the pending separation and distribution, AWI announced an enhanced severance program. The enhancement will continue one year after the separation and distribution. The severance benefits for executive participants provide a minimum of 39 weeks and a maximum of 52 weeks of base salary based on years of service or a separate contractual arrangement. A Severance Pay Committee, composed of members of management, reserves the right to depart from the severance pay schedule where factors justify an upward or downward adjustment in the level of benefits. In no event may the severance payment exceed two times the participant’s annual compensation.

In the event of a qualifying involuntary termination, all salaried employees are eligible for continuation of health care and life insurance benefits at active employee premium contributions for a period of six months unless the employee is eligible for and elects retiree health care coverage. In addition, senior executives are eligible for twelve months of executive outplacement support provided by an outside service provider.

As discussed above in the CD&A, during a review of AWI’s severance practices in February 2015, AWI’s Compensation Committee revised severance benefits for Mr. Schulz, to more closely align with competitive practices and to create internal equity among participants (disclosed in the SEC Form 8-K filing on March 8, 2015). Pursuant to his severance agreement, and upon his execution of a release of claims. Mr. Schulz is entitled to severance upon a termination by AWI without cause or by Mr. Schulz for good reason (as defined below) in an amount equal to one and one-half times his then current annual base salary plus target annual incentive under AWI’s MAP program, payable in lump sum, and a pro-rated annual incentive bonus based on actual performance for the year of termination, payable at the time that bonuses are paid to employees of AWI.

For purposes of Mr. Schulz’s severance agreement, good reason is generally defined to mean: (i) a material diminution in Mr. Schulz’s authority, duties, or responsibilities or the assignment of Mr. Schulz to duties or responsibilities that are materially inconsistent with those in currently in effect; (ii) a 10% reduction of Mr. Schulz’s base salary, except for across-the-board salary reductions similarly affecting all senior executive officers of AWI; (iii) the relocation of Mr. Schulz’s principal place of employment to a location more than 50 miles from his current principal place of employment; (iv) a material breach by AWI of its obligations under the severance agreement; or (v) failure of AWI to obtain assumption and agreement by a successor of AWI to be bound by the severance agreement.

In March, 2015, AWI’s Compensation Committee also entered into a retention agreement with Mr. Schulz pursuant to which he is eligible to receive a cash retention award in an amount equal to two (2) times base salary if his employment with AWI continues through the closing of the spin-off, sale or similar transaction with respect to the flooring business of AWI prior to June 30, 2016 (unless such date is extended by the board of directors of AWI). In the event Mr. Schulz’s employment is terminated by AWI without cause or by him for good reason, or due to death or disability (as such terms are defined in his severance agreement), prior to the closing of the separation and distribution, the retention award will be paid within fifteen (15) business days of the date of termination.

Mr. Thompson’s offer letter provides for severance benefits equal to a minimum of 52 weeks of base salary, plus the continuation of health care and life insurance benefits at the active employee contribution levels for 12 months.

 

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Qualifying Involuntary Termination Following a Change in Control

Messrs. Maier and Schulz are the only two NEOs who are party to CIC agreements, the key terms of which are described below. Under the CIC agreements, an executive is eligible to receive severance pay upon a Termination for Good Reason following a CIC. Termination for Good Reason is defined in each executive’s individual CIC agreement and includes any one of the following events following a CIC:

 

  (i) the assignment to the executive of any duties inconsistent with the executive’s status as an executive officer of AWI or a substantial adverse alteration in the nature or status of the executive’s responsibilities;

 

  (ii) a reduction by AWI in the executive’s annual base salary;

 

  (iii) relocation of the Executive’s principal place of employment to a location more than fifty miles;

 

  (iv) failure by AWI to pay to the executive any portion of the executive’s current compensation; or

 

  (v) failure by AWI to continue in effect any compensation or benefit plan in which the executive participates immediately prior to a CIC which is material to the executive’s total compensation unless an equitable arrangement has been made.

CIC Agreements – Key Terms

We will not provide tax gross-ups under Sections 280G and 4999 of the Code to any of our NEOs. Set forth below are certain key terms of the CIC agreements for Messrs. Maier and Schulz:

 

Term of Agreement

Fixed one-year term that automatically renews for an additional year unless notice is given at least 90 days prior to the anniversary of intent not to renew; term automatically continues for two years if the CIC occurs during term

 

Severance Benefits

Two times base salary plus target annual bonus

 

Pro rata MAP

Based on actual results achieved under MAP year during which the termination occurs if a change in control termination occurs prior to the completion of the applicable performance period

 

Accelerated Equity Vesting

Double-trigger accelerated vesting (requires a CIC and qualifying termination of employment) for stock options and other equity grants to vest if assumed by the acquirer; the Compensation Committee may cash out equity grants if not assumed by the acquirer

 

280G Taxation

Any amounts paid under the CIC Agreement will be reduced to the maximum amount that can be paid without being subject to the excise tax imposed under Internal Revenue Code Section 280G, but only if the after-tax benefit of the reduced amount is higher than the after-tax benefit of the unreduced amount

“Change in Control” generally means the occurrence of one of the following events:

 

  (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of AWI (not including in the securities beneficially owned by such Person any securities acquired directly from AWI or its Affiliates) representing 35% or more of the combined voting power of AWI’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or

 

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  (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute AWI’s board of directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of AWI) whose appointment or election by AWI’s board of directors or nomination for election by AWI’s shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or;

 

  (III) there is consummated a merger or consolidation of AWI or any direct or indirect subsidiary of AWI with any other corporation, other than (i) a merger or consolidation immediately following which the individuals who comprise AWI’s board of directors immediately prior thereto constitute at least a majority of the board of directors of AWI, the entity surviving such merger or consolidation or, if AWI or the entity surviving such merger is then a subsidiary, the ultimate parent thereof, or (ii) a merger or consolidation effected to implement a recapitalization of AWI (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of AWI (not including in the securities Beneficially Owned by such Person any securities acquired directly from AWI or its Affiliates) representing 35% or more of the combined voting power of AWI’s then outstanding securities; or

 

  (IV) the stockholders of AWI approve a plan of complete liquidation or dissolution of AWI or there is consummated an agreement for the sale or disposition by AWI of all or substantially all of AWI’s assets, other than a sale or disposition by AWI of all or substantially all of the AWI’s assets immediately following which the individuals who comprise the board of directors of AWI immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.

 

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DIRECTOR COMPENSATION

Nonemployee Director Compensation Program

We intend to provide competitive compensation to our nonemployee directors that will enable us to attract and retain high-quality directors and provide such individuals with compensation at a level that is consistent with our compensation objectives. Following the separation and distribution, we anticipate that our nonemployee directors’ compensation will consist of the following:

 

Element

  

Amount

  

Terms

Annual Retainer (Cash)

  

$90,000

$150,000 (Chair)

   paid in quarterly installments, in arrears

Annual Retainer (Equity)

  

$105,000

$160,000 (Chair)

   annual (or pro-rated) grant of restricted stock

Committee Chair Fees

  

$20,000 (AC; FC; MDCC)

$10,000 (NGC)

   paid in quarterly installments, in arrears

Special Assignment Fees

  

$2,500 per diem

($1,250 for less

than four hours)

  

may be paid in connection with:

•    one-on-one meetings with the CEO

•    plant and/or field visits

•    other non-scheduled significant activities

 

* Committees: AC (Audit); FC (Finance Committee) MDCC (Management Development & Development); NGC (Nominating & Governance).

 

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Summary of the 2016 Directors Stock Unit Plan

General. The board of directors of AWI approved the Armstrong Flooring, Inc. 2016 Directors Stock Unit Plan (the “2016 Directors Stock Unit Plan” or simply the “2016 Directors Plan”) as AFI’s sole stockholder. It is expected that the board of directors of AFI will approve the 2016 Directors Plan, which will become effective as of the separation. A form of the 2016 Directors Plan is being filed as an exhibit to this registration statement on Form 10 of which this information statement is a part. The general description of the 2016 Directors Plan is qualified in its entirety by reference to the 2016 Directors Plan’s provisions as set forth in the exhibit.

Purposes. The purposes of the 2016 Directors Plan are to promote the growth and profitability of AFI by increasing the mutuality of interests between AFI’s non-employee directors and the AFI stockholders.

Description of Awards. The 2016 Directors Plan provides for the issuance to non-employee directors of “units,” or rights to receive shares of AFI common stock, which rights may be made conditional upon continued service or the occurrence or nonoccurrence of specified events. Except as otherwise determined by the administrator, the units awarded under the 2016 Directors Plan will generally vest and settle, contingent on continued service as a director, on the earlier to occur of the next annual shareholders meeting, the date of the director’s death or disability, or the date of a “change in control” of AFI (as such term is defined in the 2016 Directors Plan).

Assumed Grants. AWI director unit awards that are converted to AFI awards in connection with the separation will continue to vest and be paid in accordance with, and subject to, the terms and conditions of the applicable grants, and the shares with respect to such outstanding converted units will be issued under the 2016 Directors Plan.

Administration. The 2016 Directors Stock Unit Plan will be administered and interpreted by the board of directors or the Nominating and Governance Committee, who will have 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 2016 Directors Plan, to adopt, amend and rescind rules relating to the 2016 Directors Plan and make all other determinations necessary or advisable.

Shares Reserved for Awards. The number of common shares reserved and available for awards under the 2016 Directors Plan will be set in connection with the separation. Upon the occurrence of certain corporate events that affect the common stock, including but not limited to extraordinary cash dividend, stock split, reorganization 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 Plan, the number of units covered by existing grants and the maximum number of shares that may be granted to any participant.

Individual Participant Limitation. The maximum grant date value of shares of AFI common stock subject to grants of units 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.

Amendment and Termination. The board of directors may amend or terminate the 2016 Directors Plan at any time; provided, however, that the board of directors may not, without shareholder approval, make any amendment that requires shareholder approval pursuant to applicable regulatory requirements, including increasing the number of shares available to be used in grants under the 2016 Directors Plan other than for adjustments as described above. No new grants will be made under the 2016 Directors Plan on or after the tenth anniversary of the effective date of the 2016 Directors Plan unless it is extended with approval of the shareholders.

 

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Annex A to Compensation Discussion and Analysis

Supplemental Reconciliations of AWI GAAP to non-GAAP Results (unaudited)

(Amounts in millions, except per share data)

To supplement its consolidated financial statements presented in accordance with accounting principles generally accepted in the United States (GAAP), AWI provides additional measures of performance adjusted to exclude the impact of foreign exchange, restructuring charges and related costs, impairments, the non-cash impact of the U.S. pension plan, separation costs and certain other gains and losses. Adjusted figures are reported in comparable dollars using the budgeted exchange rate for 2015. AWI uses these adjusted performance measures in managing the business, including communications with its Board of Directors and employees, and believes that they provide users of this financial information with meaningful comparisons of operating performance between current results and results in prior periods. AWI also uses these measures for employee compensation, including compensation paid to AFI executives. AWI believes that these non-GAAP financial measures are appropriate to enhance understanding of its past performance, as well as prospects for its future performance. A reconciliation of these adjustments to the most directly comparable GAAP measures reported by AWI is included in this information statement and on AWI’s website. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Non-GAAP financial measures utilized by AWI may not be comparable to non-GAAP financial measures used by other companies.

 

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CONSOLIDATED RESULTS

FROM CONTINUING

OPERATIONS

 

     Year Ended
December 31, 2015
 

Adjusted EBITDA

   $ 391   

D&A/Fx*

     (121
  

 

 

 

Operating Income, Adjusted

   $ 270   

Non-cash impact of U.S. Pension

     25   

Separation costs

     34   

Cost reduction expenses

     7   

Multilayered Wood flooring duties

     4   

Impairment

     —     

Foreign exchange impact

     13   
  

 

 

 

Operating Income, Reported

   $ 187   
  

 

 

 

 

* Excludes accelerated depreciation associated with cost reduction initiatives reflected below. Actual D&A as reported is; $31.4 million for the three months ended December 31, 2015, $31.3 million for the three months ended December 31, 2014, $118.3 million for the year ended December 31, 2015, and $129.4 million for the year ended December 31, 2014.

BUILDING PRODUCTS

 

     Year Ended
December 31, 2105
 

Adjusted EBITDA

   $ 345   

D&A/Fx

     (70
  

 

 

 

Operating Income, Adjusted

   $ 275   

Cost reduction expenses

     7   

Foreign exchange impact

     3   
  

 

 

 

Operating Income, Reported

   $ 265   
  

 

 

 

RESILIENT FLOORING

 

     Year Ended
December 31, 2015
 

Adjusted EBITDA

   $ 73   

D&A/Fx

     (26
  

 

 

 

Operating Income, Adjusted

   $ 47   

Cost reduction expenses (income)

     —     

Foreign exchange impact

     5   
  

 

 

 

Operating (Loss) Income, Reported

   $ 42   
  

 

 

 

 

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WOOD FLOORING

 

     Year Ended
December 31, 2015
 

Adjusted EBITDA(1)

   $ 39   

D&A/Fx

     (12
  

 

 

 

Operating Income (Loss), Adjusted(1)

   $ 27   

Cost reduction expenses

     —     

Multilayered Wood flooring duties

     4   

Impairment

     —     

Foreign exchange impact

     4   
  

 

 

 

Operating Income (Loss), Reported(1)

   $ 19   
  

 

 

 

 

(1) Includes a $4 million charge recorded in the second quarter of 2015 resulting from new duty rates assigned by the U.S. Department of Commerce on multilayered wood importers and a $1 million gain recorded in the second quarter of 2014 related to a refund of previously paid duties on imports of engineered wood flooring.

 

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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

Agreements with AWI

Following the separation and distribution, AFI and AWI will operate separately, each as an independent public company. AFI will enter into a separation and distribution agreement with AWI. In connection with the separation, AFI will also enter into various other agreements to effect the separation and provide a framework for its relationship with AWI after the separation, such as a transition services agreement, a tax matters agreement, an employee matters agreement, trademark license agreements and a campus lease agreement. These agreements, together with a plan of division that will be adopted by AWI’s board of directors, will provide for the allocation between AFI and AWI of AWI’s assets, employees, liabilities and obligations attributable to periods prior to, at and after AFI’s separation from AWI and will govern certain relationships between AFI and AWI after the separation. Forms of the agreements listed above have been filed as exhibits to the registration statement on Form 10 of which this information statement is a part.

The summaries of each of the agreements listed above are qualified in their entireties by reference to the full text of the applicable agreements, which are incorporated by reference into this information statement.

Separation and Distribution Agreement

Allocation of Assets and Liabilities

The separation and distribution agreement, together with a plan of division that will be adopted by AWI’s board of directors, will identify the assets and the liabilities to be allocated, assigned, assumed or transferred to AWI and AFI as part of the separation of AWI into two companies, and it will provide for when and how these transfers, assumptions and assignments will occur. To accomplish the separation, AWI will engage in the division, in which the assets and liabilities of AWI related primarily to AWI’s Resilient Flooring and Wood Flooring segments will be allocated to the Resulting PA Corporation. After the division becomes effective, the Resulting PA Corporation will merge with and into AFI in the second step merger, with AFI surviving the second step merger as a Delaware corporation and the successor to the Resulting PA Corporation. In addition to the division and the second step merger, any assets and liabilities of AWI’s retained subsidiaries that are related primarily to AWI’s Resilient Flooring and Wood Flooring segments will be assigned, assumed or transferred to AFI or one of its subsidiaries.

In particular, the separation and distribution agreement, together with the plan of division, will provide, among other things, that subject to the terms and conditions contained therein, certain assets related primarily to the Resilient Flooring and Wood Flooring segments will be allocated, assigned, assumed or transferred to AFI, including:

 

    equity interests in certain AWI subsidiaries that hold assets relating to the Resilient Flooring and Wood Flooring segments;

 

    manufacturing facilities and other properties described in the section of this information statement captioned “Properties”;

 

    contracts (or portions thereof) that relate to the Resilient Flooring and Wood Flooring segments;

 

    information, technology, software and intellectual property related to the Resilient Flooring and Wood Flooring segments’ assets, liabilities and business;

 

    rights and assets expressly allocated to AFI pursuant to the terms of the separation and distribution agreement or certain other agreements entered into in connection with the separation;

 

    permits that primarily relate to the Resilient Flooring and Wood Flooring segments; and

 

    other assets that are included in the AFI pro forma balance sheet, which appear in the section entitled “Unaudited Pro Forma Combined Financial Statements.”

 

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The separation and distribution agreement, together with the plan of division, will also provide that certain liabilities related to the Resilient Flooring and Wood Flooring segments or any other legacy flooring operations of AWI, or to the assets listed above, will be allocated to, assumed by or transferred to AFI, and that all of the assets and liabilities of AWI (including whether accrued, contingent, or otherwise) other than those listed above will be allocated to AWI.

Except as expressly set forth in the separation and distribution agreement or any ancillary agreement, neither AFI nor AWI will make any representation or warranty as to the assets, business or liabilities allocated, assigned, assumed or transferred as part of the separation, as to any approvals or notifications required in connection with the transfers, as to the value of or the freedom from any security interests of any of the assets allocated, assigned, assumed or transferred, as to the absence or presence of any defenses or right of setoff or freedom from counterclaim with respect to any claim or other asset of either AFI or AWI, or as to the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset or thing of value to be transferred in connection with the separation. All assets will be allocated, assigned, assumed or transferred on an “as is,” “where is” basis and the respective party to which those assets will be allocated, assigned, assumed or transferred will bear the economic and legal risks that any conveyance will prove to be insufficient to vest in such party good and marketable title, free and clear of all security interests, and that any necessary consents or governmental approval are not obtained or that any requirements of laws, agreements, security interests, or judgments are not complied with.

Information in this information statement with respect to the assets and liabilities of the parties following the distribution is presented based on the allocation of such assets and liabilities pursuant to the separation and distribution agreement and the related plan of division, unless the context otherwise requires. The separation and distribution agreement will provide that, in the event that the transfer or assignment of certain assets and liabilities to AFI or AWI, as applicable, does not occur prior to the separation, then until such assets or liabilities are able to be transferred or assigned, AFI or AWI, as applicable, will hold such assets on behalf and for the benefit of the other party and will pay, perform, and discharge such liabilities, for which the other party will reimburse AFI or AWI, as applicable, for all commercially reasonable payments made in connection with the performance and discharge of such liabilities.

The Distribution

The separation and distribution agreement will also govern the rights and obligations of the parties regarding the distribution following the completion of the separation. On the distribution date, AWI will distribute to its shareholders that hold AWI common shares as of the record date for the distribution all of the issued and outstanding shares of AFI’s common stock on a pro rata basis. AWI shareholders will receive cash in lieu of any fractional shares.

Conditions to the Distribution

The separation and distribution agreement will provide that the distribution will be subject to the satisfaction (or waiver by AWI) of certain conditions. These conditions are described under “The Separation and Distribution—Conditions to the Distribution.” AWI has the sole and absolute discretion to determine (and change) the terms of, and to determine whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date for the distribution, the distribution date and the distribution ratio.

Claims

In general, each party to the separation and distribution agreement will be allocated or assume liability for all pending, threatened and unasserted legal matters related to its own business or its allocated, assumed or retained liabilities and will indemnify the other party for any liability to the extent arising out of or resulting from such allocated, assumed or retained legal matters.

 

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Releases

The separation and distribution agreement will provide that AFI and its affiliates will release and discharge AWI and its affiliates from all liabilities allocated to or assumed by AFI as part of the separation, from all acts and events occurring or failing to occur, and all conditions existing, on or before the distribution date relating to AFI’s business, and from all liabilities existing or arising in connection with the implementation of the separation, except as expressly set forth in the separation and distribution agreement. AWI and its affiliates will release and discharge AFI and its affiliates from all liabilities allocated to or retained by AWI and its affiliates as part of the separation and from all liabilities existing or arising in connection with the implementation of the separation, except as expressly set forth in the separation and distribution agreement.

These releases will not extend to obligations or liabilities under any agreements between the parties that remain in effect following the separation, which agreements include, but are not limited to, the separation and distribution agreement, the transition services agreement, the tax matters agreement, the employee matters agreement, the trademark license agreements, the campus lease agreement and certain other agreements.

Indemnification

In the separation and distribution agreement, AFI will agree to indemnify, defend and hold harmless AWI, each of its affiliates and each of their respective directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

 

    the liabilities and obligations expressly allocated to or assumed by AFI under the separation and distribution agreement or the plan of division, including any failure of AFI or any other person to pay, perform or otherwise promptly discharge any such liability or obligation in accordance with their respective terms, whether prior to, at or after the distribution;

 

    except to the extent expressly allocated to or retained or assumed by AWI, any guarantee, indemnification or contribution obligation for the benefit of AFI by AWI that survives the distribution;

 

    any breach by AFI of the separation and distribution agreement or any of the ancillary agreements;

 

    any untrue statement or alleged untrue statement or omission or alleged omission of material fact in the registration statement of which this information statement forms a part, or in this information statement (as amended or supplemented); or

 

    the operation of AFI’s business from and after the completion of the separation and distribution.

AWI will agree to indemnify, defend and hold harmless AFI, each of its affiliates and each of its respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from:

 

    the liabilities and obligations expressly allocated to or retained or assumed by AWI under the separation and distribution agreement or the plan of division, including any failure of AWI or any other person to pay, perform, or otherwise promptly discharge any such liability or obligation in accordance with their respective terms whether prior to, at, or after the distribution;

 

    except to the extent expressly allocated to or assumed by AFI, any guarantee, indemnification or contribution obligation for the benefit of AWI by AFI that survives the distribution;

 

    any breach by AWI of the separation and distribution agreement or any of the ancillary agreements;

 

    any untrue statement or alleged untrue statement or omission or alleged omission of a material fact made explicitly in AWI’s name in the registration statement of which this information statement forms a part, or in this information statement (as amended or supplemented); or

 

    the operation of AWI’s business from and after the completion of the separation and distribution.

 

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The separation and distribution agreement will also establish procedures with respect to claims subject to indemnification and related matters.

Intellectual Property

Following the distribution, AWI will continue to own the Armstrong name and will license the Armstrong name for use by AFI in its Resilient Flooring and Wood Flooring segments pursuant to a trademark license agreement.

Insurance

The separation and distribution agreement will provide for the allocation between the parties of rights and obligations under existing insurance policies with respect to occurrences prior to the distribution and sets forth procedures for the administration of insured claims.

Further Assurances

In addition to the actions specifically provided for in the separation and distribution agreement, except as otherwise set forth therein or in any ancillary agreement, both AFI and AWI will agree in the separation and distribution agreement to use reasonable best efforts, prior to, on and after the distribution date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by the separation and distribution agreement and the ancillary agreements.

Dispute Resolution

The separation and distribution agreement will also contain provisions that will govern, except as otherwise provided in any ancillary agreement, the resolution of disputes, controversies or claims that may arise between AFI and AWI related to the separation or distribution.

Expenses

Except as expressly set forth in the separation and distribution agreement or in any ancillary agreement, all costs and expenses incurred in connection with the separation and distribution incurred prior to the distribution date, including costs and expenses relating to legal and tax counsel, financial advisors and accounting advisory work related to the separation and distribution, will be paid by AWI.

Other Matters

Other matters governed by the separation and distribution agreement will include access to financial and other information, confidentiality and access to and provision of records.

Termination

The separation and distribution agreement will provide that it may be terminated, and the separation and distribution may be modified or abandoned, at any time prior to the distribution date in the sole discretion of AWI without the approval of any person, including AWI’s shareholders. In the event of a termination of the separation and distribution agreement, no party, nor any of its directors, officers, or employees, will have any liability of any kind to the other party or any other person. After the distribution date, the separation and distribution agreement may not be terminated except by an agreement in writing signed by both AWI and AFI.

Transition Services Agreement

AFI and AWI will enter into a transition services agreement prior to the distribution pursuant to which AWI and its subsidiaries and AFI and its subsidiaries will provide, on an interim, transitional basis, various services to each other. The services to be provided will include information technology, accounts payable, payroll, and other financial functions and administrative services.

 

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The transition services agreement will terminate on the earlier to occur of the last date on which either party is required to provide a service under it or December 31, 2017. The recipient for a particular service generally can terminate that service prior to the scheduled expiration date, subject to certain limitations.

Subject to certain exceptions, the liability of a service provider under the transition services agreement for the services it and its subsidiaries provides will generally be limited to actual losses and not any indirect, punitive, exemplary, remote, speculative or similar damages except in the case of gross negligence, willful misconduct and fraud.

Tax Matters Agreement

AFI and AWI will enter into a tax matters agreement prior to the separation that will generally govern AFI’s and AWI’s respective rights, responsibilities and obligations after the separation and distribution with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and other matters regarding taxes for any tax period ending on or before the distribution date, as well as tax periods beginning after the distribution date. Generally, AWI will be liable for all pre-distribution U.S. federal income taxes and certain state and foreign income taxes and non-income taxes attributable to AFI’s business. AFI generally will be liable for all other taxes attributable to its business. In addition, the tax matters agreement will provide that AFI is liable for taxes incurred by AWI that may arise if AFI takes, or fails to take, as the case may be, certain actions that may result in the separation, the distribution or certain related transactions failing to qualify as tax-free for U.S. federal income tax purposes.

Employee Matters Agreement

AFI and AWI will enter into an employee matters agreement prior to the separation to allocate liabilities and responsibilities relating to employment matters, employee compensation and benefits plans and programs and other related matters. The employee matters agreement will govern certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company. The provisions of the employee matters agreement will apply in respect of all jurisdictions except to the extent an ancillary agreement or appendix to the employee matters agreement addresses employment, compensation and benefit matters for a particular jurisdiction, in which case such ancillary agreement or appendix will govern.

The employee matters agreement will provide that, unless otherwise specified, AWI will be responsible for liabilities associated with employees who will be employed by AWI following the separation, former employees whose last employment was with the AWI businesses and AFI will be responsible for liabilities associated with employees who will be employed by AFI following the separation, former employees whose last employment was with the AFI businesses and certain specified current and former corporate employees (collectively, the “AFI allocated employees”).

Employee Benefits Generally

AFI allocated employees will be eligible to participate in AFI benefit plans as of the separation in accordance with the terms and conditions of the AFI plans as in effect from time to time. AFI expects to continue and maintain benefits at least through December 31, 2016 that, in the aggregate, are substantially similar to the benefits provided to employees prior to the separation.

Credited Service

AFI anticipates that it will recognize and give full credit for employee service with AWI for purposes of determining benefit eligibility, participation, vesting and calculation of benefits to the same extent that such service was credited by AWI for similar purposes prior to the separation.

 

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Treatment of U.S. Pension Plan

AWI maintains the Retirement Income Plan, a tax-qualified retirement plan (the “AWI Pension Plan”) for the benefit of certain of its employees. As of January 1, 2016, the AWI Pension Plan was fully funded on a Funding Target Attainment Percentage (FTAP) basis at 115%. Based on the analyses and recommendations provided by our pension advisors, the employee matters agreement provides that, in connection with the distribution, the assets and liabilities under the AWI Pension Plan that relate to active AFI allocated employees who have accrued benefits and former AFI employees who qualified to retire on or after October 1, 2006 from a currently operating AFI location (plant or campus) who retired on or after October 1, 2006 under the AWI Pension Plan (collectively, the “AFI pension plan participants”) will be transferred to a mirror pension plan to be adopted by AFI (the “AFI Pension Plan”), with the AWI Pension Plan retaining the remainder. The approximate total number of AFI pension plan participants to be allocated to the AFI pension plan currently under the AWI Pension Plan comprise approximately 2,260 current and former employees and represent approximately $279 million of liabilities (calculated on an FTAP basis) under the AWI Pension Plan, and the anticipated transfer would result in funding at approximately 104% on an FTAP basis for the AFI Pension Plan. A final decision regarding the allocation of assets and liabilities between the AWI Pension Plan and the AFI Pension Plan will be subject to the approval of our board of directors prior to the distribution. Any allocation or transfer of assets and liabilities as finally agreed in the employee matters agreement will be made in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended.

U.S. Defined Contribution Plan

AFI allocated employees will be eligible to participate in AFI’s 401(k) plan as of the separation to the extent they were eligible to participate in AWI’s 401(k) plan. It is expected that the employee matters agreement will provide for the transfer of account balances in respect of AFI allocated employees from the AWI 401(k) plan to the AFI 401(k) plan not later than thirty days following the separation.

U.S. Nonqualified Plans

As of the separation, AFI anticipates causing its Nonqualified Deferred Compensation Plan to assume all liabilities under the AWI Nonqualified Deferred Compensation Plan for the benefit of AFI allocated employees, and such individuals will cease to participate in AWI’s plan. AFI anticipates causing its Nonqualified Defined Benefit Plan to assume all liabilities under the AWI Nonqualified Defined Benefit Plan for the benefit of the AFI pension plan participants, and such individuals will cease to participate in AWI’s plan. AWI anticipates retaining certain of its nonqualified plans for which AFI will not assume any liabilities.

Welfare Benefit Plans

AFI generally expects to establish health and welfare plans or retain sponsorship of certain specified plans in accordance with the employee matters agreement. The employee matters agreement will provide that liabilities relating to or arising out of health and welfare coverage or claims incurred by the AFI allocated employees will be assumed by AFI. Before the separation, AFI expects to establish a severance pay plan that, for one year following the separation, will have substantially the same terms as AWI’s severance pay plan.

Cash Incentive Awards

AWI anticipates establishing bonus award opportunities for all employees participating in AWI’s non-equity incentive plans with a performance period commencing as of January 1, 2016 and ending as of December 31, 2016. AWI and AFI expect that achievement of awards will be measured against budgeted 2016 targets. AFI’s targets will be based on the performance of the AFI business unit as part of a combined business prior to the separation and on a separate basis for the remainder of the performance period. Awards will be paid at the regularly scheduled payment date in 2017 based upon achievement of performance criteria.

 

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Equity Compensation Awards

The employee matters agreement will provide for the treatment of outstanding equity awards of AWI in connection with the separation. The following discussion describes the expected treatment of AWI equity awards in connection with the separation. The post-separation treatment of an individual’s award is expected to depend on the type of award and whether the person will be an employee of AWI or AFI immediately prior to the separation. We expect that the treatment described below would become effective as of the distribution date.

AWI stock options held by AFI allocated employees are expected to be converted into stock options to purchase shares of AFI common stock, without any changes to their original terms, other than appropriate adjustments to the number of shares of AFI common stock subject to each AFI stock option and the exercise price payable per share so as to preserve the intrinsic value that existed with respect to the AWI stock options immediately prior to the separation. It is not expected that any changes will be made with respect to AWI stock options held by employees allocated to AWI, other than similar adjustments with respect to the number of shares of AWI common stock subject to each AWI stock option and the exercise price payable per share so as to preserve the intrinsic value that existed with respect to such AWI stock option immediately prior to the separation.

AWI restricted stock units (“AWI RSUs”) that are held by AFI allocated employees on the distribution date are expected to be converted into AFI restricted stock units (“AFI RSUs”) covering an adjusted number of shares of AFI common stock so as to preserve the value that existed with respect to such awards immediately prior to the separation. Other than such adjustment, the original terms of the AFI RSUs, including the time-based vesting and issuance schedules, will generally remain unchanged. It is also expected that AWI RSUs held by employees allocated to AWI on the distribution date will be adjusted as to the number of shares of AWI common stock subject to each AWI RSU in order to preserve the value that existed with respect to such award immediately prior to the separation. Other than such adjustment, the original terms of the AWI RSUs, including the time-based vesting and issuance schedules, will generally remain unchanged. In order to reflect the impact of the separation, it is anticipated that any performance-vesting requirements for the AWI RSUs and AFI RSUs with a performance period ending December 31, 2016 will be adjusted as follows: the vesting percentage in respect of the first two performance years will be based on AWI’s performance and the vesting percentage in respect of the third performance year will be deemed to vest at target subject to an employee’s continued service, and the resulting number of RSUs based on such adjustments will be multiplied by 0.5.

Trademark License Agreements

AFI and AWI will enter into a trademark license agreement prior to the distribution, pursuant to which AWI will provide AFI with a royalty-free, perpetual license with respect to the “Armstrong” trade name, trademark and logo that will be allocated to and retained by AWI in the separation. AFI and AWI will enter into a separate trademark license agreement prior to distribution, pursuant to which AFI will provide AWI with a five (5) year license with respect to the “Inspiring Great Spaces” tag line and certain trade dress.

Campus Lease Agreement

At the time of distribution, AWI will continue to own fee title to the campus headquarters located at 2500 Columbia Avenue, Lancaster, Pennsylvania. AWI will also retain ownership of the fixtures, furniture and equipment located on the campus at the time of distribution, with certain exclusions. Pursuant to a campus lease agreement that will be entered into by AWI and AFI, AWI will lease designated space within the campus to AFI together with the right for AFI to use the fixtures, furniture and equipment located in the leased space. The lease will also provide AFI with the right to use certain designated areas within the campus in common with AWI and other tenants. The length of the initial term of the lease will be for five years, and the lease will automatically renew for successive one-year periods unless either party delivers a non-renewal notice within the time period specified in the lease. The rent payable under the lease will be calculated based on real estate taxes and the costs related to the operation and maintenance of the campus. AWI is responsible for all structural repairs to the campus and will provide services to the AFI leased space and the common areas as provided in the lease.

 

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ValueAct Appointment and Stockholder’s Agreement

On February 26, 2016, AFI entered into an Appointment and Stockholder’s Agreement (the “Appointment Agreement”) with ValueAct Capital Master Fund L.P., VA Partners I, LLC, ValueAct Capital Management, L.P., ValueAct Capital Management, LLC, ValueAct Holdings, L.P., ValueAct Holdings GP, LLC and Jacob H. Welch (collectively, the “ValueAct Group”). The ValueAct Group is expected to beneficially own approximately 16.6% of AFI’s outstanding common stock as of the date of the consummation of the separation and distribution.

Pursuant to the Appointment Agreement, AFI will appoint Jacob H. Welch, a Partner at ValueAct Capital, as a Class I Director with a term expiring at AFI’s 2017 annual meeting of stockholders. However, if at any time the ValueAct Group ceases to own at least 7.5% of the outstanding common stock of AFI, Mr. Welch will be required to resign from the board of directors. AFI has agreed that Mr. Welch will be considered for appointment to each of the standing committees of the board of directors (other than the Audit Committee), and expects that Mr. Welch will be appointed to the Compensation Committee and the Finance Committee. Under the Appointment Agreement, the ValueAct Group is entitled to nominate a mutually acceptable replacement in the event that Mr. Welch no longer serves as a director of AFI during the term of the Appointment Agreement, so long as the ValueAct Group continues to own at least 7.5% of AFI’s outstanding common stock.

Mr. Welch has agreed, at all times while serving as a member of the board of directors, among other things, that he will: (i) meet all director independence and other standards of AFI, the New York Stock Exchange and the Securities and Exchange Commission and applicable provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, including Rule 10A-3; (ii) be qualified to serve as a director under the DGCL; and (iii) be bound by all policies, codes and guidelines applicable to all directors of AFI, including AFI’s Corporate Governance Principles, and to preserve the confidentiality of AFI’s business and information, including discussions or matters considered in meetings of the board of directors or board committees.

During the term of the Appointment Agreement, the ValueAct Group has agreed, among other things, that it will not: (i) in any way participate in any “solicitation” of proxies, or advise, encourage or influence any person with respect to the voting of any securities of AFI with respect to the election of individuals to the board of directors or approval of any stockholder proposals; (ii) in any way participate in any group with any persons who are not ValueAct affiliates with respect to AFI’s securities; (iii) acquire any beneficial or other ownership interest in more than 19% in the aggregate of the shares of AFI’s common stock outstanding at such time; (iv) sell the securities of AFI to any person or entity that would own more than 5% of the outstanding shares of AFI’s common stock following such transaction; (v) effect or seek to effect any tender or exchange offer, merger, consolidation, acquisition, scheme, arrangement, business combination, recapitalization, reorganization, sale or acquisition of material assets, liquidation, dissolution or other extraordinary transaction involving AFI; (vi) engage in any short sale or similar derivative transaction related to the market price or value of AFI’s securities; (vii) call or seek to call any meeting of stockholders, nominate any candidate to the board of directors, seek the removal of any member of the board of directors, seek to act by written consent, or make a request for any stockholder list or other AFI books and records; (viii) support or make any proposal that constitutes controlling, changing or influencing the board of directors or management of AFI, any material change in the capitalization or dividend policy of AFI, seeking to have AFI waive or amend its governance documents, or causing any class of securities of AFI to become eligible for deregistration; (ix) disparage AFI or affiliates thereof or any of its current or former officers or directors; (x) make any public disclosure, announcement or statement regarding a plan or proposal with respect to AFI or take any action that could require AFI to make any public disclosure; (xi) enter into any discussions negotiations, agreements, or understandings with any third party with respect to any of the foregoing; or (xii) request, directly or indirectly, any amendment or waiver of the foregoing.

The Appointment Agreement terminates on the earliest of: (i) AWI’s determination not to consummate the separation and distribution; (ii) AFI’s material breach of the Appointment Agreement that has not been cured within thirty (30) days after receipt of notice of such breach; (iii) the date immediately following the last day on

 

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which a stockholder of AFI may timely give notice of its intent to bring a proposal for consideration at AFI’s 2017 annual meeting of stockholders; (iv) the date that is ninety (90) days after the date any ValueAct designee ceases to be a member of the board of directors; and (v) a mutually agreed upon date.

In connection with the execution of the Appointment Agreement, AFI entered into a confidentiality agreement with the members of the ValueAct Group.

Procedures for Approval of Related Person Transactions

AFI’s board of directors is expected to adopt a written policy designed to minimize potential conflicts of interest in connection with AFI transactions with related persons. This process will be included in the written charter of the Nominating and Governance Committee, which charter will be available on the corporate governance section of AFI’s website (www.armstrongflooring.com). This website will be operational as of the effective time of the distribution.

 

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DESCRIPTION OF MATERIAL INDEBTEDNESS

AFI anticipates having approximately $100.0 million of indebtedness upon completion of the separation. In addition, AWI will discharge its $10.0 million variable rate tax-exempt industrial bond by providing the necessary funds to the trustee in anticipation of a planned redemption at the next interest payment date of April 1, 2016. We have entered into a letter of intent with a lead arranger bank to secure a $225.0 million revolving senior credit facility (“Revolving Credit Facility”). We are currently in the process of negotiating and initiating the syndication process with the lead arranger bank.

The $100.0 million of proceeds from the Revolving Credit Facility will be used to fund an anticipated $50.0 million distribution to AWI before the separation and distribution and to finance working capital and capital expenditures. The Revolving Credit Facility will be for a five-year term and will be secured by qualifying assets of AFI’s wholly owned domestic subsidiaries. The Revolving Credit Facility will also include a $50.0 million sublimit for the issuance of standby letters of credit. Borrowings under the Revolving Credit Facility will bear interest at a rate equal to an adjusted base rate or LIBOR plus an applicable margin ranging from 1.25% to 1.50%, depending on the average excess credit availability. We are required to pay a commitment fee, payable quarterly in arrears, on the average daily unused amount of the Revolving Credit Facility ranging from 0.25% to 0.375%. Outstanding letters of credit issued under the Revolving Credit Facility are subject to fees which will be due quarterly in arrears based on an adjusted base rate plus LIBOR. The Revolving Credit Facility contains financial covenants which require AFI to maintain a minimum fixed charge coverage ratio of 1.0.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Before the distribution, all of the outstanding shares of AFI’s common stock will be owned beneficially and of record by AWI. Following the distribution, AFI expects to have outstanding an aggregate of approximately 27,680,615 million shares of common stock based upon approximately 55,361,230 AWI common shares outstanding on January 31, 2016, excluding treasury shares and assuming no exercise of AWI options.

Security Ownership of Certain Beneficial Owners

The following table reports the number of shares of AFI common stock that AFI expects will be beneficially owned, immediately following the completion of the distribution by each person who will beneficially own more than five percent of AFI’s common stock. The table is based upon information available as of December 31, 2015 as to those persons who beneficially own more than five percent of AWI’s common shares and an assumption that, for every two AWI common shares held by such persons, they will receive one share of AFI common stock.

 

Name and Address of Beneficial Owner

   Amount and Nature of
Beneficial Ownership
   Percent of Class (1)

ValueAct Capital Master Fund, L.P.

One Letterman Drive, Building D, 4th Floor

San Francisco, CA 94129

   4,600,000(2)    16.6%

Armstrong World Industries, Inc.

Asbestos Personal Injury Settlement Trust

c/o Edward E. Steiner

Keating Muething & Klekamp PLL

One East Fourth Street, Suite 1400

Cincinnati, OH 45202

   2,625,617(3)    9.5%

Goldman Sachs Asset Management

200 West Street

New York, NY 10282

   1,540,909(4)    5.6%

The Vanguard Group

100 Vanguard Blvd.

Malvern, PA 19355

&n