Equity Incentive Plans

In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we may grant qualified and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and performance units under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new shares of common stock to cover past and future equity grants.

RSUs

RSUs vest over periods of up to five years. RSUs may contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case, both conditions must be met before any RSUs vest. For RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date.

During the three months ended March 31, 2014, our Board of Directors granted 592,001 RSUs to employees. The fair value of RSUs that vested during the three months ended March 31, 2014 was approximately $15.6 million.

Stock Options

Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either 6 or 10 years from the date they are granted. During the three months ended March 31, 2014, our Board of Directors granted 126,755 stock options to employees. The grant date fair value of these options was immaterial to the financial statements.

Restricted Stock

Restricted stock vests over a five year period, subject to a continued service condition. Shares of restricted stock may not be sold, pledged or otherwise transferred until they vest.

A summary of transactions in our stock-based compensation plans is as follows:



	Shares Available For Grant		RSUs				Stock Options				Restricted Stock
	Shares Available For Grant		Number Outstanding		Weighted Average Grant Date Fair Value		Number Outstanding		Weighted Average Exercise Price		Number Outstanding	Weighted Average Grant Date Fair Value
Balance, January 1, 2014	13,965,440		2,558,213		$	16.63	6,832,331		$	7.04	20,000	$	9.30
Granted	(718,756	)	592,001		32.31		126,755		32.31		—	—
Exercised	—		—		—		(482,844	)	4.92		—	—
Vested	—		(523,269	)	16.11		—		—		—	—
Canceled	60,326		(28,526	)	17.61		(31,800	)	7.56		—	—
Balance, March 31, 2014	13,307,010		2,598,419		$	20.29	6,444,442		$	7.69	20,000	$	9.30

For the 2014 RSU grants that contain both a performance-based vesting condition and a time-based vesting condition, we recognize compensation expense under the accelerated attribution method, pursuant to which expense is recognized over the requisite service period for each separate vesting tranche of the award. During the three months ended March 31, 2014 and 2013, we recognized $2.6 million and $1.4 million of stock based compensation expense, respectively, related to the RSUs containing a performance-based vesting condition. For all other awards, which are subject to only a time-based vesting condition, we recognize compensation expense on a straight-line basis over the requisite service period of the entire award.

In all cases, compensation expense is adjusted to reflect estimated forfeitures. When estimating forfeitures, we consider voluntary and involuntary termination behavior as well as analysis of historical forfeitures.

The components of pre-tax stock-based compensation expense are as follows (in thousands):



	Three Months Ended
	March 31,
	2014		2013
RSUs	$	5,396	$	3,672
Stock options	804		1,209
Restricted stock	46		68
Total stock-based compensation expense	$	6,246	$	4,949

The following table sets forth the classification of total stock-based compensation expense included in our Unaudited Condensed Consolidated Statements of Income (in thousands):



	Three Months Ended
	March 31,
	2014			2013
Cost of goods sold	$	103		$	98
Facility and warehouse expenses	579			684
Selling, general and administrative expenses	5,564			4,167
	6,246			4,949
Income tax benefit	(2,405		)	(1,930		)
Total stock-based compensation expense, net of tax	$	3,841		$	3,019

We have not capitalized any stock-based compensation costs during either of the three month periods ended March 31, 2014 or 2013.

As of March 31, 2014, unrecognized compensation expense related to unvested RSUs, stock options and restricted stock is expected to be recognized as follows (in thousands):



	RSUs		Stock Options		Restricted Stock		Total
Remainder of 2014	$	12,989	$	2,171	$	93	$	15,253
2015	13,188		398		—		13,586
2016	8,323		331		—		8,654
2017	4,800		9		—		4,809
2018	2,334		—		—		2,334
2019	101						101
Total unrecognized compensation expense	$	41,735	$	2,909	$	93	$	44,737