Share-Based Compensation Plans

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

Share-based compensation expense was $8 million and $9 million during the three months ended March 31, 2020 and 2019, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $9 million, $29 million and $15 million, respectively, at March 31, 2020 and is expected to be recognized over a weighted average period of 2.3, 2.2 and 2.4 years, respectively. The amount of cash received from the exercise of stock options was $5 million and $4 million for the three months ended March 31, 2020 and 2019, respectively.

Stock Option Grants

The following is a summary of the changes in outstanding stock options for the three months ended March 31, 2020:


	Share units (in thousands)	Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2020	2,040	$	48.56	6.3
Granted	334	80.66
Exercised	(130)	41.18
Forfeited and expired	(5)	74.37
Outstanding at March 31, 2020	2,239	$	53.72	6.7	$	37
Options exercisable at March 31, 2020	1,615	$	44.45	5.7	$	36
Vested and expected to vest as of March 31, 2020	2,146	$	52.67	6.5	$	36

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 three months ended March 31, 2020 was $5.6 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 2020 grants:


Volatility	22.90		%
Risk-free interest rate	1.15		%
Dividend yield	1.29		%
Expected term (in years)	5.8
Weighted-average fair value / share	$	16.03

Expected volatility is calculated based on an analysis of historic volatility measures for 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 United States Treasury yield curve in effect at the time of option grant.

Restricted Stock Unit Grants

The following is a summary of restricted stock unit activity for the three months ended March 31, 2020. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant:


	Share units (in thousands)	Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2020	512	$	68.95
Granted	219	80.66
Vested	(200)	64.84
Forfeited	(9)	71.20
Outstanding at March 31, 2020	522	$	75.34

ROIC Performance Share Unit Grants

The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the three months ended March 31, 2020. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant:


	Share units (in thousands)	Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2020	225	$	64.51
Granted	67	80.66

Vested	(89)	49.15
Forfeited	(1)	74.17
Outstanding at March 31, 2020	202	$	76.60

TSR Performance Share Unit Grants

The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the three months ended March 31, 2020:


	Share units (in thousands)	Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2020	225	$	75.80
Granted	67	105.66
Adjustment for Market Condition Achieved (a)	35	49.15
Vested	(124)	49.15
Forfeited	(1)	74.17
Outstanding at March 31, 2020	202	$	97.97

(a) Represents an increase in the number of original TSR performance share units awarded based on the final market condition achievement at the end of the performance period of such awards.

The fair value of TSR performance share units was calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The following are weighted-average assumptions for 2020 grants:




Volatility	22.6	%
Risk-free interest rate	1.08	%