Share-Based Compensation Plans

6 Months Ended

Jun. 30, 2026

Share-Based Payment Arrangement [Abstract]

Share-based compensation expense was $12 million and $25 million during the three and six months ended June 30, 2026, respectively, and $13 million and $25 million during the three and six months ended June 30, 2025, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $16 million, $56 million and $28 million, respectively, at June 30, 2026 and is expected to be recognized over a weighted average period of 2.2, 2.2 and 2.0 years, respectively. The amount of cash received from the exercise of stock options was $2 million and $8 million for the six months ended June 30, 2026 and 2025, respectively.

As of June 30, 2026, there were 4.0 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 six months ended June 30, 2026:


	Share units (in thousands)	Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2026	1,142	$	95.75	6.4	$	46
Granted	287	128.24
Exercised	(31)	77.93
Forfeited and expired	(23)	128.77
Other	(1)	129.67
Outstanding at June 30, 2026	1,374	$	102.37	6.6	$	28
Options exercisable at June 30, 2026	869	$	86.95	5.0	$	28
Vested and expected to vest as of June 30, 2026	1,307	$	101.02	6.4	$	28

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, 2026 was $1 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 2026 grants:


Volatility	27.10		%
Risk-free interest rate	3.68		%
Dividend yield	1.33		%
Expected term (in years)	5.6
Weighted-average fair value / share	$	36.19

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

Restricted stock units awarded to employees vest over a three-year period. Prior to the time a restricted stock unit becomes fully vested, the awardees cannot transfer, pledge or encumber such units. Prior to the time a restricted stock unit is fully vested, the awardees are not granted certain rights of a stockholder, such as the right to vote and receive dividends; however, dividends accrue during the vesting period and are paid upon vesting. If an employee leaves prior to vesting, whether through resignation or termination for cause, the restricted stock unit and related accrued dividends are forfeited. If an employee retires prior to vesting, a portion or the entirety of the restricted stock unit will vest in accordance with the terms of the applicable grant agreements. Restricted stock units awarded to members of our Board become fully vested upon the day prior to the next annual meeting. The fair value of the restricted stock unit awards is determined using the closing price of our common stock on date of grant.

The following is a summary of restricted stock unit activity for the six months ended June 30, 2026. 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, 2026	506	$	123.27
Granted	289	127.60
Vested	(239)	$	118.75
Forfeited	(20)	129.37
Other	(4)	123.24
Outstanding at June 30, 2026	532	$	127.41

Performance Share Unit Grants

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 of the Company's Board of Directors prior to the grant date. The performance share units were each awarded at a target of 100% with actual payout for each type of grant contingent upon the achievement of performance targets as follows:

•EBITDA performance share units — a third-year adjusted EBITDA performance target

•TSR performance share units — a relative TSR performance target

•Revenue performance share units — a pre-set third-year revenue target

•EPS performance share units — a cumulative three-year EPS performance target

The calculated compensation cost for EBITDA, Revenue and EPS performance share units is adjusted based on an estimate of awards ultimately expected to vest and our assessment of the probable outcome of the performance condition.

Adjusted EBITDA Performance Share Unit Grants

The fair value of the adjusted EBITDA performance share units is determined using the closing share price on the date of the grant.

The following is a summary of our adjusted EBITDA grants for the six months ended June 30, 2026:


	Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2026	47	$	113.89

Adjustment for Performance Condition Achieved (a)	18	100.50
Vested	(42)	100.50
Forfeited	(2)	125.86
Outstanding at June 30, 2026	21	$	127.94

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

TSR Performance Share Unit Grants

The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the six months ended June 30, 2026:


	Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2026	146	$	157.41
Granted	63	108.88
Adjustment for Market Condition Achieved (a)	3	109.04
Vested	(51)	109.04
Forfeited	(7)	169.22
Outstanding at June 30, 2026	154	$	152.08

(a) Represents a decrease 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 2026 grants:


Volatility	22.90	%
Risk-free interest rate	3.49	%

Revenue Performance Share Unit Grants

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 following is a summary of our Revenue performance share unit grants for the six months ended June 30, 2026:


	Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2026	47	$	113.89

Adjustment for Performance Condition Achieved (a)	5	100.50
Vested	(29)	100.50
Forfeited	(1)	125.86
Outstanding at June 30, 2026	22	$	127.94

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

EPS Performance Share Unit Grants

The fair value of the earnings per share ("EPS") performance share unit awards is determined using the closing price of our common stock on date of grant.

The following is a summary of our EPS performance share unit grants for the six months ended June 30, 2026:


	Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2026	52	$	129.82
Granted	63	131.26


Forfeited	(4)	130.22
Outstanding at June 30, 2026	111	$	130.62

Employee Share Purchase Plan

Effective May 18, 2026, we adopted an Employee Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees to contribute up to 15% of their base compensation to purchase shares of our common stock at 85% of the lesser of the closing market price on the first or last day of the offering period. There are 4.0 million shares authorized for sale in connection with the ESPP, which may include treasury or newly issued shares.

The initial offering period under the ESPP began on June 1, 2026 and will close on November 30, 2026. For the three and six months ended June 30, 2026, no shares have been sold under the ESPP. We accrued less than $1 million of expense for the three and six months ended June 30, 2026 associated with the ESPP.