Stock-Based Compensation and Earnings Per Share

Stock-based compensation expense, which is calculated net of an assumed forfeiture rate, and related income tax benefit included within the Condensed Consolidated Statement of Operations is as follows:



	Three Months Ended
	December 31
(in millions)	2017		2016
Stock-based compensation expense included in:
Product cost of sales	$	3	$	2
Selling, general and administrative expenses	6		4
Total	$	9	$	6
Income tax benefit	$	2	$	2

The Company issued awards of equity instruments under the Company's various incentive plans for the three months ended December 31, 2017 and 2016, as follows:



	Options			Performance Shares			Restricted Stock Units
(shares in thousands)	Number Issued	Weighted Average Fair Value		Number Issued	Weighted Average Fair Value		Number Issued	Weighted Average Fair Value
Three months ended December 31, 2017	—	$	—	140.8	$	138.68	252.4	$	133.36
Three months ended December 31, 2016	646.6	$	17.18	125.0	$	87.95	2.8	$	85.37

The maximum number of shares of common stock that can be issued in respect of performance shares granted in 2018 based on the achievement of performance targets for years 2018 through 2020 is approximately 338,000.

In light of the pending UTC merger, the Company replaced the annual stock option grant with a restricted stock unit grant. As a result, no stock options were granted for the three months ended December 31, 2017 and the number of restricted stock units granted increased when compared to the prior year.

The fair value of each option granted was estimated using a binomial lattice pricing model and the following weighted average assumptions:



	2017 Grants
Risk-free interest rate	1.0% - 2.7%
Expected dividend yield	1.3% - 1.5%
Expected volatility	19.0	%
Expected life	7 years

Employee Benefits Paid in Company Stock

During the three months ended December 31, 2017 and 2016, 0.1 million and 0.2 million shares, respectively, of the Company's common stock were issued to employees under the employee stock purchase (ESPP) and defined contribution savings plans at a value of $13 million and $16 million for the respective periods. Further purchases under the ESPP were suspended on September 29, 2017 pursuant to the UTC Merger Agreement. If the UTC merger is completed, the ESPP will be terminated.

Earnings Per Share and Diluted Share Equivalents

The computation of basic and diluted earnings per share is as follows:



	Three Months Ended
	December 31
(in millions, except per share amounts)	2017		2016
Numerator for basic and diluted earnings per share:
Net income	$	280	$	145
Denominator:
Denominator for basic earnings per share – weighted average common shares	163.4		130.4
Effect of dilutive securities:
Stock options	1.3		1.0
Performance shares, restricted stock and restricted stock units	0.7		0.5
Dilutive potential common shares	2.0		1.5
Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion	165.4		131.9
Earnings per share:
Basic	$	1.71	$	1.11
Diluted	$	1.69	$	1.10

The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. Stock options excluded from the average outstanding diluted shares calculation were 0.0 million and 0.7 million for the three months ended December 31, 2017 and 2016, respectively.