Share-Based Compensation Plans

6 Months Ended

Jun. 30, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-based compensation expense was $4 million and $8 million during the three and six months ended June 30, 2015, respectively, and $5 million and $9 million during the three and six months ended June 30, 2014. The unrecognized compensation expense related to our stock options, restricted stock and performance based shares was $8 million, $26 million and $5 million, respectively, at June 30, 2015 and is expected to be recognized over a weighted average period of 2.2, 2.2 and 2.2 years, respectively. The amount of cash received from the exercise of stock options was $9 million and $17 million for the six months ended June 30, 2015 and 2014, respectively.

Stock Option Grants

The following is a summary of the changes in outstanding stock options for the six months ended June 30, 2015:



(shares in thousands)	Shares		Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)
Outstanding at January 1, 2015	2,989		$	28.60	6.5
Granted	677		36.00		10.0
Exercised	(348	)	27.26		5.2
Forfeited	(49	)	33.14		8.5
Outstanding at June 30, 2015	3,269		$	30.22	6.9
Options exercisable at June 30, 2015	2,121		$	27.38	5.8
Vested and expected to vest as of June 30, 2015	3,107		$	29.96	6.8

The aggregate intrinsic value of the outstanding, exercisable, and vested and expected to vest stock options as of June 30, 2015 was $22 million, $20 million and $22 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, 2015 was $3 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 2015 grants:



Dividend yield	1.57		%
Volatility	27.77		%
Risk-free interest rate	1.64		%
Expected term (in years)	5.59
Weighted-average fair value / share	$	8.53

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 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, 2015:



(shares in thousands)	Shares		Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2015	1,171		$	31.80
Granted	388		36.04
Vested	(338	)	27.75
Forfeited	(51	)	32.04
Outstanding at June 30, 2015	1,170		$	34.40

Performance-Based Share Grants

The following is a summary of performance-based share grants for the six months ended June 30, 2015:



(shares in thousands)	Shares		Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2015	124		$	33.95
Granted	98		36.02
Vested	—		—
Forfeited	(10	)	32.17
Outstanding at June 30, 2015	212		$	34.86