v2.4.0.6
Stock-Based Compensation Plans
 9 Months Ended
Sep. 30, 2012
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation Plans
Stock-Based Compensation Plans
The following table provides detail related to share-based compensation expense.
 
Three Months Ended September 30,
 
 
 
 
 
 
 
(in millions)
2012
 
2011
 
Xylem
Employees
 
Xylem
Employees
 
Other
Employee
Allocations
 
2011
Total
Equity-based Compensation
$
6

 
$
1

 
$
1

 
$
2

Liability-based Compensation
—

 
—

 
(1
)
 
(1
)
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
(in millions)
2012
 
2011
 
Xylem
Employees
 
Xylem
Employees
 
Other
Employee
Allocations
 
2011
Total
Equity-based Compensation
$
16

 
$
3

 
$
4

 
$
7

Liability-based Compensation
—

 
—

 
—

 
—


For 2011, a significant component of these charges related to costs allocated to Xylem for ITT corporate employees as well as other ITT employees not solely dedicated to Xylem. These allocated costs are not necessarily indicative of awards and amounts that would have been granted if we were an independent, publicly traded company for the periods presented.
The unamortized compensation expense related to our stock options and restricted shares was $14 million and $23 million, respectively, at September 30, 2012 and is expected to be recognized over a weighted average period of 2.1 and 2.0 years, respectively. The amount of cash received from the exercise of stock options was $22 million for the nine months ended September 30, 2012. We classify as a financing activity the cash flows attributable to excess tax benefits arising from stock option exercises and restricted stock lapses.
Restricted Stock Grants
The following is a summary of restricted stock activity for the nine months ended September 30, 2012:
 
(in thousands, except for per share amounts)
Shares
 
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at December 31, 2011
1,488

 
$
25.93

Granted
546

 
$
26.54

Vested
(304
)
 
$
21.39

Forfeited
(110
)
 
$
27.27

Outstanding at September 30, 2012
1,620

 
$
26.90






Stock Option Grants
The following is a summary of the changes in outstanding stock options for the nine months ended September 30, 2012:
 
(in thousands, except for per share amounts)
Shares
 
Weighted
Average
Exercise
Price /Share
 
Weighted  Average
Remaining
Contractual
Term (Years)
Outstanding at December 31, 2011
4,590

 
$
25.83

 
5.4
Granted
861

 
$
26.57

 
10.0
Exercised
(924
)
 
$
24.03

 
0.1
Forfeited
(327
)
 
$
27.85

 
6.7
Outstanding at September 30, 2012
4,200

 
$
26.22

 
6.5
Options exercisable at September 30, 2012
1,642

 
$
25.49

 
2.6

The aggregate intrinsic value of all outstanding and exercisable stock options as of September 30, 2012 was $5 million and $4 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 nine months ended September 30, 2012 was $2 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 our annual March 2012 grants (there were subsequent grants during 2012 which were not material).
 
Dividend yield
1.52%
Volatility
33.4%
Risk-free interest rate
1.42%
Expected term (in years)
7.0
Weighted-average fair value / share
$8.10

Expected volatility is calculated based on an analysis of historic and implied volatility measures for a set of peer companies. 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.