Stock-Based Compensation

Under the terms of the XPO Logistics, Inc. Amended and Restated 2011 Omnibus Incentive Compensation Plan (the “2011 Plan”), the Company grants various types of stock-based compensation awards to directors, officers and key employees. The 2011 Plan provides for awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, deferred share units, performance compensation awards, performance units, cash incentive awards and other equity-based or equity-related awards (collectively, “Awards”) that the Compensation Committee of the Board of Directors (the “Committee”) determines are consistent with the purpose of the 2011 Plan and interests of the Company.

The maximum aggregate number of shares of common stock that may be delivered pursuant to Awards under the 2011 Plan is 4,000,000 shares plus shares remaining available for awards under the prior plan as of May 31, 2012 and any shares with respect to awards granted under the predecessor plans that are forfeited after May 31, 2012. In the event of any extraordinary dividend or other extraordinary distribution, recapitalization, rights offering, stock split, reverse stock split, split-up or spin-off, the Committee shall equitably adjust any or all of the number of shares of the Company with respect to which Awards may be granted, including 2011 Plan share limits, the terms of any outstanding Award, the number of shares subject to outstanding Awards, and the exercise price of any Award, if applicable. Any shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued shares or of treasury shares.

The 2011 Plan will continue in effect until May 31, 2022, unless terminated earlier by the Board of Directors. As of December 31, 2015, there were 737,840 shares available for issuance under the 2011 Plan.

The Company recognized the following stock-based compensation expense in direct operating expense and sales, general and administrative expense in the consolidated statements of operations:



	Years ended December 31,
(Dollars in millions)	2015		2014		2013
Stock options	$	1.9	$	1.7	$	1.5
Stock appreciation rights	0.4		—		—
Restricted stock units	9.0		5.8		3.2
Performance-based restricted stock units	17.0		—		—
Warrants	8.5		—		—
Stock-based compensation expense	$	36.8	$	7.5	$	4.7

The Company did not realize any excess tax benefit or tax deductions from any of the stock-based compensation plans in 2015, 2014 and 2013.

As discussed further in Note 3—Acquisitions, the Company settled the outstanding warrants and certain performance stock awards of ND. The portion of the fair value of the warrants and performance shares not attributable to service performed prior to the acquisition date was recorded as stock-based compensation expense in the post-combination period. The amount of stock-based compensation expense related to the settlement of ND stock awards included in the year ended December 31, 2015 was $18.5 million. The $8.5 million of stock-based compensation related to the warrants was settled in cash during the second quarter of 2015 in conjunction with the acquisition.

In conjunction with the Con-way acquisition, the Company settled all outstanding restricted stock awards as well as certain restricted stock units and performance-stock awards of Con-way. All remaining outstanding Con-way equity awards were assumed by the Company, as more fully discussed below. The portion of the fair value not attributable to service performed prior to the acquisition date will be recorded as stock-based compensation expense in the post-combination period. The total value of the cash settlement of Con-way stock-based compensation awards in connection with the acquisition was $30.9 million, $10.0 million of which was paid during the fourth quarter of 2015.

Stock Options

During the years ended December 31, 2015, 2014 and 2013, the Company granted stock options to certain key employees, officers and directors of the Company. For employees and officers, the options typically vest over three to five years after the grant date, have a ten year contractual term, and an exercise price equal to the Company’s stock price on the grant date. For grants to members of the Company’s Board of directors, the options vest one year after the grant date, have a ten year contractual term, and an exercise price equal to the Company’s stock price on the grant date.

In connection with the Con-way transaction, each outstanding Con-way stock option was converted into an equivalent number of stock options with the same terms and conditions as were applicable prior to the acquisition, resulting in a total of 883,733 stock options assumed by the Company. All assumed stock options were fully vested as of the acquisition date.

The following is a summary of the weighted-average assumptions used to calculate the grant-date fair value using the Black-Scholes option pricing model:



	2015		2014		2013
Weighted-average risk-free interest rate	1.6	%	1.9	%	1.6	%
Weighted-average volatility	60.7	%	50.5	%	51.0	%
Weighted-average dividend yield	—		—		—
Weighted-average expected option term (in years)	6.61		6.44		6.44

For stock options with an exercise price equal to the Company’s stock price on the date of grant, the expected term of options granted has been derived based upon the Company’s history of actual exercise behavior and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon the Company’s historical market price at consistent points in a period equal to the expected life of the options. The risk-free interest rate is based on the U.S. Treasury yield curve with a term equal to the expected term of the option in effect at the time of grant.

A summary of stock option award activity for the years ended December 31, 2015, 2014 and 2013 is presented below:



	Stock Options
	Number of Stock Options		Weighted-Average Exercise Price		Exercise Price Range	Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Term


Outstanding at December 31, 2012	1,383,332		$	10.06	$2.28 - $18.07	$	5.50	8.29
Granted	111,000		20.18		$16.57 - $23.19	10.13
Exercised	(57,464	)	4.59		$2.96 - $6.08	11.62
Forfeited	(15,348	)	14.25		$6.08 - $16.57	6.99
Outstanding at December 31, 2013	1,421,520		$	11.02	$2.28 - $23.19	$	6.01	6.93
Granted	50,000		27.48		$23.31 - $31.28	14.37
Exercised	(74,531	)	6.83		$2.96 - $17.10	18.43
Forfeited	(52,194	)	15.21		$10.53 - $31.28	7.50
Outstanding at December 31, 2014	1,344,795		$	11.70	$2.68 - $27.87	$	6.04	6.84
Granted	85,755		26.72		$26.63 - $27.47	15.71
Assumed	883,733		24.17		$10.94 - $31.88	5.71
Exercised	(271,703	)	19.20		$2.68 - $29.79	4.85
Forfeited	(38,300	)	20.51		$12.10 - $27.87	9.80
Outstanding at December 31, 2015	2,004,280		$	16.66	$2.68 - $31.88	$	6.06	4.57
Options exercisable at December 31, 2015	1,680,525		$	16.62	$2.68 - $31.88	$	5.49	4.05

The intrinsic value of options outstanding and exercisable at December 31, 2015 was $21.7 million and $18.3 million, respectively. As of December 31, 2015, the Company had approximately $2.3 million of unrecognized compensation cost related to stock options which is expected to be recognized over a weighted-average period of 2.35 years. The remaining estimated compensation expense related to existing stock options is as follows:



	Years ended December 31,
(Dollars in millions)	2016		2017		2018		2019		2020
Remaining estimated compensation expense related to existing stock options	$	1.2	$	0.6	$	0.4	$	0.1	$	—

The total intrinsic value of options exercised during 2015, 2014 and 2013 was $4.1 million, $1.7 million and $0.8 million, respectively. The total cash received from options exercised during 2015, 2014 and 2013 was $5.2 million, $0.5 million, and $0.3 million, respectively.

Stock Appreciation Rights

In connection with the Con-way transaction, the Company assumed all SARs held by Con-way employees. Each SAR was converted into an equivalent number of SARs with the same terms and conditions as were applicable prior to the acquisition. All converted SARs were fully vested as of the acquisition date. The SARs are liability-classified awards, and, as a result, the Company re-measures the fair value of the awards each reporting period until the awards are settled. The Company recognizes any changes in fair value as compensation cost in the current period. The ultimate expense recognized for the SARs is equal to the intrinsic value at settlement. The Company’s accrued liability for cash-settled SARs of $1.9 million at December 31, 2015 was determined using a weighted-average fair value of $13.45 per SAR at December 31, 2015. The Company did not have SARs outstanding in 2014 or 2013.

The following table summarizes SAR activity for 2015:



	Stock Appreciation Rights
	Number of Rights		Weighted-Average Exercise Price		Weighted-Average Remaining Term


Outstanding at December 31, 2014	—		$	—	—
Granted	—		—		—
Assumed	180,789		15.61		—
Exercised	(37,186	)	15.61		—
Forfeited	—		—		—
Outstanding at December 31, 2015	143,603		$	15.61	1.79
SARs exercisable at December 31, 2015	143,603		$	15.61	1.79

The intrinsic value of SARs outstanding and exercisable at December 31, 2015 was $1.7 million. The total cash paid to settle exercised SARs during 2015 was $0.6 million.

Restricted Stock Units and Performance-based Restricted Stock Units

During the years ended December 31, 2015, 2014 and 2013, the Company granted RSUs and PRSUs to certain key employees, officers and directors of the Company under the 2011 Plan with various vesting requirements as established by the Compensation Committee of the Board of Directors. The RSUs granted vest based on the passage of time. The vesting of certain RSU awards also is subject to the price of the Company’s common stock exceeding a specified per share price for a designated period of time and continued employment at the Company by the grantee as of the vesting date. The PRSUs granted will vest based on the achievement of certain targets with respect to the Company’s overall financial performance for specified periods. The vesting of certain PRSU awards also is subject to the price of the Company’s common stock exceeding a specified per share price for a designated period of time and generally require continued employment at the Company by the grantee as of the vesting date.

In connection with the Con-way transaction, each outstanding RSU not previously settled was converted into an equivalent number of RSUs with the same terms and conditions as were applicable prior to the acquisition, resulting in a total of 661,988 RSUs assumed. Additionally, each outstanding PRSU not previously settled was converted into an equivalent number of PRSUs with the same time-vesting and settlement terms and conditions that existed prior to the acquisition, with the performance-based vesting conditions deemed satisfied at target, resulting in a total of 426,686 RSUs assumed.

In connection with the New Breed Transaction, the Company granted certain members of the New Breed management team an aggregate of 367,705 PRSU awards under the 2011 Plan. Pursuant to the PRSU award agreements, grantees are eligible to earn up to 367,705 PRSUs in the aggregate which will vest based on the achievement of certain targets with respect to New Breed’s financial performance during 2015, 2016 and 2017. The vesting of all such PRSUs also is subject to the price of the Company’s common stock exceeding a specified per share price for a designated period of time and continued employment at the Company by the grantee as of the vesting date.

In connection with the Pacer Transaction, certain members of the Pacer senior management team signed employment agreements with the Company that became effective upon completion of the acquisition. As part of their employment agreements, the Company granted the Pacer management team members an aggregate of 122,569 time-based RSU awards under the 2011 Plan. Certain of these awards vested 25% on the acquisition date of March 31, 2014 while the remaining 75% of the awards vest ratably on each of December 31, 2014, 2015 and 2016, subject to the employee’s continued employment with the Company through each such date. Other RSUs awarded to the Pacer senior management team provided for vesting of 33.4% of the award on March 31, 2015, 33.3% on March 31, 2016 and 33.3% on March 31, 2017, subject to the employee’s continued employment with the Company through each such date.

In connection with the 3PD Transaction, each member of the 3PD senior management team signed an employment agreement with the Company that became effective upon completion of the acquisition. Additionally, in order to incentivize 3PD’s management, the Company granted the 3PD management team time-based RSUs and performance-based PRSUs under the 2011 Plan. Pursuant to the award agreements, members of the 3PD management team are eligible to earn up to 600,000 RSUs and PRSUs in the aggregate, of which 150,000 RSUs will vest in equal tranches on each of December 31, 2014, 2015 and 2016 based on the passage of time and 450,000 PRSUs will vest based on the achievement of certain targets with respect to 3PD’s financial performance during 2016 and 2017 as part of the combined company. The vesting of all such RSUs and PRSUs also is subject to the price of the Company’s common stock exceeding a specified per share price for a designated period of time and continued employment at the Company by the grantee as of the vesting date.

The RSUs and PRSUs may vest in whole or in part before the applicable vesting date if the grantee’s employment is terminated by the Company without cause or by the grantee with good reason (as defined in the grant agreement), upon death or disability of the grantee or in the event of a change in control of the Company. Upon vesting, the RSUs and PRSUs result in the issuance of shares of XPO common stock after required minimum tax withholdings. The holders of the RSUs and PRSUs do not have the rights of a stockholder and do not have voting rights until certificates representing shares are issued and delivered in settlement of the awards.

For grants of RSUs and PRSUs subject to service- or performance-based vesting conditions only, the fair value is established based on the market price of XPO common stock on the date of the grant. For grants of RSUs and PRSUs subject to market-based vesting conditions, the fair value is established using the Monte Carlo simulation lattice model. The actual number of PRSUs earned will be based on the Company’s overall financial performance or the respective business unit’s financial performance, as applicable, over the applicable performance periods. The fair value of RSUs is recognized as expense on a straight line basis over the awards’ requisite service period. The fair value of PRSUs is recognized as expense on a straight line basis over the awards’ requisite service period based on the number of awards expected to vest according to actual and expected financial results of the individual performance periods compared to set performance targets for those periods. If achievement of the performance targets for a PRSU award is not considered to be probable, then no expense will be recognized until achievement of such targets becomes probable.

The fair value of all grants of RSUs and PRSUs subject to market-based vesting conditions was estimated using the Monte Carlo simulation lattice model and the assumptions noted in the following table.



	2015		2014		2013
Weighted-average risk-free interest rate	1.1	%	1.2	%	1.0	%
Weighted-average volatility	41.1	%	44.3	%	50.0	%
Weighted-average dividend yield	—		—		—
Weighted-average term (in years)	2.98		3.59		3.78

A summary of RSU and PRSU award activity for the years ended December 31, 2015, 2014 and 2013 is presented below:



	Restricted Stock Units				Performance-based Restricted Stock Units
	Number of Restricted Stock Units		Weighted-Average Grant Date Fair Value		Number of Performance-based Restricted Stock Units		Weighted-Average Grant Date Fair Value


Outstanding at December 31, 2012	883,816		$	11.31	—		$	—
Granted	305,714		14.38		450,000		15.15
Vested	(219,875	)	11.64		—		—
Forfeited	(68,000	)	10.65		—		—
Outstanding at December 31, 2013	901,655		$	13.26	450,000		$	13.26
Granted	175,773		29.81		1,114,951		23.19
Vested	(295,600	)	14.98		—		—
Forfeited	(89,005	)	14.94		(1,000	)	27.61
Outstanding at December 31, 2014	692,823		$	15.23	1,563,951		$	20.86
Granted	329,899		25.72		537,261		24.75
Assumed	1,088,674		26.02		—		—
Vested	(460,895	)	19.47		(25,424	)	31.02
Forfeited	(92,060	)	27.24		(88,728	)	28.15
Outstanding at December 31, 2015	1,558,441		$	23.01	1,987,060		$	21.47

The total fair value of RSUs vested during 2015, 2014 and 2013 was $14.3 million, $9.9 million and $5.1 million, respectively. Of the 1,558,441 outstanding RSUs, 1,359,477 vest subject to service conditions and 198,964 vest subject to service and market conditions.

The total fair value of PRSUs that vested during 2015 was $0.7 million. No PRSUs vested during December 31, 2014 or 2013, respectively. Of the 1,987,060 outstanding PRSUs, 1,736,238 vest subject to service and a combination of market and performance conditions and 250,822 vest subject to service and performance conditions.

As of December 31, 2015, the Company had approximately $24.9 million of unrecognized compensation cost related to non-vested RSU and PRSU compensation that is anticipated to be recognized over a weighted-average period of approximately 2.53 years. Remaining estimated compensation expense related to outstanding RSUs and PRSUs is as follows:



	Years ended December 31,
(Dollars in millions)	2016		2017		2018		2019		2020 and thereafter
Remaining estimated compensation expense related to outstanding RSUs and PRSUs deemed probable	$	13.1	$	7.2	$	3.1	$	0.6	$	0.9

The remaining estimated compensation expense excludes the impact of PRSUs not deemed probable as of December 31, 2015. The unrecognized compensation cost related to PRSUs not deemed probable as of December 31, 2015 is $28.8 million.