STOCKHOLDERS' EQUITY

Preferred Stock

The Company is authorized to issue up to 15,000,000 shares of preferred stock at $1.00 par value. At December 31, 2016, no shares of preferred stock have been issued; however, 2,000,000 shares of Series A Junior Participating Preferred Stock have been reserved for issuance in connection with the Company’s Shareholder Rights Plan. Additional series of preferred stock may be designated and the related rights and preferences fixed by action of the Board of Directors.

Shareholder Rights Plan

In May 2008, the Board of Directors approved a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of common stock. Each right represents the right to purchase one-hundredth of a share of Preferred Stock, at an exercise price of $100, subject to adjustment. The rights are only exercisable ten days after a person or group acquires, or commences a tender or exchange offer to acquire, beneficial ownership of 15% or more of the Company’s outstanding common stock.

Subject to the terms of the shareholder rights plan and the discretion of the Board of Directors, each right would entitle the holder to purchase a number of additional shares of common stock of LP having a total market value of twice the exercise price of each right. The rights expire in June 2018, but can be redeemed by action of the Board of Directors prior to that time at $0.01 per right.

Common Stock Plan

LP has a stock-based compensation plan under which stock option, SSARs, incentive shares, restricted stock and performance shares awards are granted. At December 31, 2016, 3.3 million shares were available under the current plan for these awards.



	Year ended December 31,
Dollar amounts in millions	2016		2015		2014
Total stock-based compensation expense (costs of sales and general and administrative)	$	13.0	$	9.3	$	9.4
Income tax benefit related to stock-based compensation	$	3.4
Impact on cash flow due to taxes paid related to net share settlement of equity awards	$	9.2	$	6.1	$	1.5

LP recognizes these compensation costs, net of an estimated forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. LP estimated the forfeiture rate for 2016, 2015 and 2014 based on its historical experience during the preceding three years.

Stock-Settled Stock Appreciation Rights

LP grants SSARs to key employees. On exercise, LP generally issues these shares from treasury. The SSARs are granted at market price at the date of grant. SSARs become exercisable over three years and expire ten years after the date of grant. The following table sets out the weighted average assumptions used to estimate the fair value of the SSARs granted using the Black-Scholes option-pricing model:



	2016			2015			2014
Expected stock price volatility	45		%	54		%	57		%
Expected dividend yield	—		%	—		%	—		%
Risk-free interest rate	1.4		%	1.5		%	1.5		%
Expected life of options (in years)	6.0 years			6.0 years			5.0 years
Weighted average fair value of options and SSARs granted	$	6.99		$	8.80		$	9.03

Expected Stock Price Volatility: The fair values of stock-based payments were valued using the Black-Scholes valuation method with a volatility factor based on LP’s historical stock prices.

Expected Dividend Yield: The Black-Scholes valuation model calls for a single expected dividend yield as an input. This is determined based upon current annual dividend as of the date of grant compared to the grant price.

Risk-Free Interest Rate: LP bases the risk-free interest rate used in the Black-Scholes valuation method on U.S. Treasury issues with an equivalent term. Where the expected term of LP’s stock-based awards do not correspond with the terms for which interest rates are quoted, LP performed a straight-line interpolation to determine the rate from the available maturities.

Expected Life of SSARs: Expected life represents the period that LP’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Estimated Pre-vesting Forfeitures: When estimating forfeitures, LP considers voluntary termination behavior as well as workforce reduction programs.

The following table summarizes stock options and SSARs outstanding as of December 31, 2016 as well as activity during the three year period then ended.



Share amounts in thousands	Options/ SSARs		Weighted Average Exercise Price		Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2014	6,937		$	14.26
Granted	494		$	18.09
Exercised	(43	)	$	9.92
Canceled	(384	)	$	21.14
Outstanding at December 31, 2014	7,004		$	14.19
Granted	378		$	17.04
Exercised	(1,334	)	$	10.76
Canceled	(309	)	$	25.83
Outstanding at December 31, 2015	5,739		$	14.54
Granted	509		$	15.74
Exercised	(1,593	)	$	7.84
Canceled	(426	)	$	28.18
Outstanding at December 31, 2016	4,229		$	15.84	4.3	$	17.4
Vested and expected to vest at December 31, 2016⁽¹⁾	4,181		$	15.84	4.3	$	17.3
Exercisable at December 31, 2016	3,352		$	15.68	3.3	$	15.3

_______________


⁽¹⁾	Expected to vest based upon historical forfeiture rate

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between LP’s closing stock price on the last trading day of 2016 and the exercise price, multiplied by the number of in-the-money options and SSARs) that would have been received by the holders had all holders exercised their awards on December 31, 2016. This amount changes based on the market value of LP’s stock as reported by the New York Stock Exchange.

As of December 31, 2016, there was $2.5 million of total unrecognized compensation costs related to stock options and SSARs. These costs are expected to be recognized over a weighted-average period of 0.93 years. LP recognized $4.6 million, $3.6 million and 3.8 million in compensation expense associated with these awards for the years ended December 31, 2016, 2015 and 2014.

Incentive Share Awards

LP has granted incentive share stock awards (restricted stock units) to certain key employees and directors. The awards entitle the participant to receive a specified number of shares of LP common stock at no cost to the participant. Awards granted under this plan to employees vest three years from the date of grant and to directors over one year. The market value of these grants approximates the fair value. The fair value of the restricted units on the date of the grant is amortized ratably over the service period which is generally three years. LP recorded compensation expense related to these awards in 2016, 2015 and 2014 of $4.7 million, $3.5 million and $3.0 million. As of December 31, 2016, there was $4.0 million of total unrecognized compensation cost related to unvested incentive share awards. This expense will be recognized over a weighted-average period of 1.0 years.

The following table summarizes incentive share awards outstanding as of December 31, 2016 as well as activity during the three-year period then ended.



	Shares		Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2014	752,595
Granted	123,982
Vested	(253,834	)
Canceled	(29,130	)
Outstanding at December 31, 2014	593,613
Granted	252,629
Vested	(285,495	)
Canceled	(24,765	)
Outstanding at December 31, 2015	535,982
Granted	297,173
Vested	(147,676	)
Canceled	(9,212	)
Outstanding at December 31, 2016	676,267		1.1	$	12.8

Restricted Stock

LP grants restricted stock to certain senior executive employees. The shares vest three years from the date of grant. During the vesting period, the participants have voting rights and receive dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Additionally, granted but unvested shares are forfeited upon termination of employment. The fair value of the restricted shares on the date of the grant is amortized ratably over the service period which is generally three years. As of December 31, 2016, there was $1.9 million of total unrecognized compensation costs related to restricted stock. This expense will be recognized over the next 1.2 years.

The following table summarizes restricted stock awards outstanding as of December 31, 2016 as well as activity during the three year period then ended.



	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014	512,085		$	11.48
Granted	122,649		17.93
Restrictions lapsing	(170,567	)	9.54
Canceled	(11,021	)	12.35
Outstanding at December 31, 2014	453,146		13.93
Granted	69,744		17.04
Restrictions lapsing	(225,645	)	8.71
Canceled	(14,544	)	19.29
Outstanding at December 31, 2015	282,701		18.59
Granted	160,441		15.74
Restrictions lapsing	(97,605	)	20.49
Canceled	—		—
Outstanding at December 31, 2016	345,537		$	16.73

LP recorded compensation expense related to these awards in 2016, 2015 and 2014 of $2.4 million, $1.7 million, and $2.1 million.

Performance Share Awards

In 2016, LP awarded performance shares to certain senior key employees. These performance shares are earned based upon LP attaining specified revenue growth rates associated with LP's SmartSide products to overall revenue growth as compared to the prior year. The performance period is measured over 2016 with a subsequent two year vesting period. During 2016, the Company issued 90,444 performance units at an average grant date fair value of $20.45 per share. The aggregate value of these shares were $1.8 million. LP recorded compensation expense related to these awards in 2016 of $1.0 million.

Phantom Stock

During 2012, LP made annual grants of phantom stock units to its directors. These awards are considered liability awards. The director does not receive rights of a shareholder, nor is any stock transferred. The units will be paid in cash at the end of the five-year vesting period. The value of one unit is based on the market value of one share of common stock on the vesting date. The cost of the grants is recognized over the vesting period and is included in stock-based compensation expense. As of December 31, 2016, phantom stock units covering 31,388 shares were outstanding under this program. Based upon the closing stock price at December 31, 2016, these shares equate to a cash payment of $0.6 million.