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Share-Based Compensation Plans | 3 Months Ended
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Mar. 31, 2023
Share-Based Payment Arrangement [Abstract] |
Share-Based Compensation Plans | Share-Based Compensation Plans Share-based compensation expense was $12 million and $9 million during the three months ended March 31, 2023 and 2022, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $10 million, $41 million and $21 million, respectively, at March 31, 2023 and is expected to be recognized over a weighted average period of 2.3, 2.3 and 2.4 years, respectively. The amount of cash received from the exercise of stock options was $7 million and $1 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there were approximately 3 million shares of common stock available for future awards. Stock Option Grants The following is a summary of the changes in outstanding stock options for the three months ended March 31, 2023:
| Share units (in thousands) |  | Weighted Average Exercise Price / Share |  | Weighted Average Remaining Contractual Term (Years) |  | Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2023 | 1,935 |  |  | $ | 67.55 |  |  | 5.9 |  | $ | 83 |
Granted | 227 |  |  | 101.09 |  |  |  |  |
Exercised | (132) |  |  | 48.39 |  |  |  |  |
Forfeited and expired | (4) |  |  | 102.22 |  |  |  |  |
Other | 14 |  |  | 73.16 |  |  |  |  |
Outstanding at March 31, 2023 | 2,040 |  |  | $ | 72.48 |  |  | 6.3 |  | $ | 66 |
Options exercisable at March 31, 2023 | 1,495 |  |  | $ | 65.08 |  |  | 5.3 |  | $ | 59 |
Vested and expected to vest as of March 31, 2023 | 1,962 |  |  | $ | 71.53 |  |  | 5.9 |  | $ | 65 |
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, 2023 was $7.0 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 employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for 2023 grants:
Volatility | 27.30 |  | %
Risk-free interest rate | 4.25 |  | %
Dividend yield | 1.31 |  | %
Expected term (in years) | 5.4 |
Weighted-average fair value / share | $ | 29.06 |  |
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 U.S. 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, 2023. 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, 2023 | 553 |  |  | $ | 88.88 |
Granted | 259 |  |  | 101.09 |
Vested | (211) |  |  | 101.85 |
Forfeited | (9) |  |  | 96.03 |
Outstanding at March 31, 2023 | 592 |  |  | $ | 94.12 |
Performance Share Units Performance share units awarded under the long-term incentive plan vest based upon performance by the Company over a three-year period against targets approved by the Leadership Development & Compensation Committee ("LDCC") of the Company's Board of Directors prior to the grant date. For the 2023-2025 performance period, the LDCC approved granting performance share units under two plan designs: (I) on the basis of the Evoqua acquisition closing by 1/22/2024 ("Combined Company" Design) or (II) on the basis that the Evoqua acquisition does not close by 1/22/2024 ("Xylem Stand-Alone" Design). The Xylem Stand-Alone Design makes no change to our existing grant structure in which performance share units are awarded at 100% of target with actual payout contingent upon the achievement of a pre-set, three-year adjusted Return on Invested Capital ("ROIC") performance target for ROIC performance share unit grants, a pre-set third-year revenue target for Revenue performance share unit grants and a three-year relative TSR performance for TSR performance share unit grants. For simplicity, the performance share unit grants tied to the ROIC performance target will be referred to as the “ROIC performance share unit grants” prior to the acquisition closing. The Combined Company Design would replace the ROIC metric with a pre-set, third-year adjusted earnings before interest, taxes, depreciation and amortization expense (“EBITDA”) performance target for the combined company. ROIC Performance Share Unit Grants The following is a summary of ROIC performance share unit grants for the three months ended March 31, 2023. 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, 2023 | 146 |  |  |  |  |  |  | $ | 88.78 |
Granted | 33 |  |  |  |  |  |  | 101.09 |
Forfeited (a) | (63) |  |  |  |  |  |  | 81.13 |
Outstanding at March 31, 2023 | 116 |  |  |  |  |  |  | $ | 97.75 |
(a) Includes ROIC performance share unit awards forfeited during the period as a result of the final performance condition not being achieved on vest date. 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, 2023:
| Share units (in thousands) |  |  |  |  |  | Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2023 | 178 |  |  |  |  |  |  | $ | 100.67 |
Granted | 65 |  |  |  |  |  |  | 109.68 |
Adjustment for Market Condition Achieved (a) | 40 |  |  |  |  |  |  | 102.55 |
Vested | (102) |  |  |  |  |  |  | 102.55 |
Forfeited | — |  |  |  |  |  |  | — |
Outstanding at March 31, 2023 | 181 |  |  |  |  |  |  | $ | 103.82 |
(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 2023 grants:
Volatility | 35.9 |  | %
Risk-free interest rate | 4.66 |  | %
Revenue Performance Share Unit Grants The following is a summary of our Revenue performance share unit grants for the three months ended March 31, 2023:
| Share units (in thousands) |  |  |  |  |  | Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2023 | 32 |  |  |  |  |  |  | 86.77 |
Granted | 33 |  |  |  |  |  |  | 101.09 |
Forfeited | — |  |  |  |  |  |  | — |
Outstanding at March 31, 2023 | 65 |  |  |  |  |  |  | $ | 94.01 |
The fair value of the Revenue performance share unit awards is determined using the closing price of our common stock on date of grant. The shares will vest contingent upon the achievement of a pre-set, three-year Revenue target.

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