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Stock-Based Compensation Plans
 6 Months Ended
Jun. 30, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation Plans
Share-Based Compensation Plans
Share-based compensation expense was $5 million and $9 million during the three and six months ended June 30, 2014, respectively, and $6 million and $12 million during the three and six months ended June 30, 2013, respectively. The unamortized compensation expense related to our stock options, restricted stock and performance based shares was $8 million, $21 million and $4 million, respectively, at June 30, 2014 and is expected to be recognized over a weighted average period of 2.0, 2.0 and 2.4 years, respectively. The amount of cash received from the exercise of stock options was $17 million and $1 million for the six months ended June 30, 2014 and 2013, respectively.
On March 17, 2014, the Company named Patrick K. Decker as the new President and Chief Executive Officer of Xylem Inc. As part of Mr. Decker's employment agreement, he was awarded 165,584 stock options, 40,342 restricted stock and 40,342 performance-based shares. The award was granted subject to the approval of the Xylem Omnibus Incentive Plan, which was obtained at the annual meeting of shareholders in May 2014. All share and associated expense amounts are included in activity for the second quarter of 2014.
Stock Option Grants
The following is a summary of the changes in outstanding stock options for the six months ended June 30, 2014:
 
(shares in thousands)
Shares
 
Weighted
Average
Exercise
Price / Share
 
Weighted  Average
Remaining
Contractual
Term (Years)
Outstanding at January 1, 2014
3,504

 
$
26.80

 
6.4
Granted
538

 
$
38.16

 
10.0
Exercised
(590
)
 
$
27.98

 
4.4
Forfeited
(64
)
 
$
26.05

 
5.9
Outstanding at June 30, 2014
3,388

 
$
28.42

 
6.8
Options exercisable at June 30, 2014
1,929

 
$
26.84

 
5.5
Vested and expected to vest as of June 30, 2014
3,262

 
$
28.18

 
6.7

The aggregate intrinsic value of the outstanding, exercisable and vested and expected to vest stock options as of June 30, 2014 was $37 million, $24 million and $36 million, respectively. The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the six months ended June 30, 2014 was $6 million.
Stock Option Fair Value
The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for 2014.
 
Dividend yield
1.34

%
Volatility
28.49

%
Risk-free interest rate
1.82

%
Expected term (in years)
5.61

 
Weighted-average fair value / share
$
9.72

 

Expected volatility is calculated based on a weighted analysis of historic and implied volatility measures for a set of peer companies and Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The expected term provided above represents the weighted average of expected behavior for certain groups of employees who have historically exhibited different behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.

Restricted Stock Grants
The following is a summary of restricted stock activity for the six months ended June 30, 2014: 
(shares in thousands)
Shares
 
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2014
1,275

 
$
27.67

Granted
360

 
$
38.36

Vested
(222
)
 
$
31.19

Forfeited
(75
)
 
$
29.21

Outstanding at June 30, 2014
1,338

 
$
29.91


Performance-Based Share Grants
The following is a summary of performance-based share grants for the six months ended June 30, 2014:
(shares in thousands)
Shares
 
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2014
52

 
$
27.49

Granted
84

 
$
37.87

Vested
—

 
$
—

Forfeited
—

 
$
—

Outstanding at June 30, 2014
136

 
$
33.85