UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2016~~2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-35229

Xylem Inc.

(Exact name of registrant as specified in its charter)



Indiana		45-2080495
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 International Drive, Rye Brook, NY 10573

(Address of principal executive offices) (Zip code)

(914) 323-5700

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of ~~October~~July 28, ~~2016~~2017, there were ~~179,394,836~~179,568,474 outstanding shares of the registrant’s common stock, par value $0.01 per share.

Xylem Inc.

Table of Contents



ITEM			PAGE
PART I – Financial Information
Item 1	-	Condensed Consolidated Financial Statements:
		Condensed Consolidated Income Statements for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ (Unaudited)	4
		Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~ (Unaudited)	6
		Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
Item 2	-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2830
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	4446
Item 4	-	Controls and Procedures	4446
PART II – Other Information
Item 1	-	Legal Proceedings	4547
Item 1A	-	Risk Factors	4547
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	4547
Item 3	-	Defaults Upon Senior Securities	4547
Item 4	-	Mine Safety Disclosures	4547
Item 5	-	Other Information	4547
Item 6	-	Exhibits	4548
		Signatures	4649

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)


	Three Months				Nine Months				Three Months				Six Months
For the periods ended September 30,	2016		2015		2016		2015
For the period ended June 30,									2017		2016		2017		2016
Revenue	$	897	$	902	$	2,676	$	2,659	$	1,164	$	932	$	2,235	$	1,779
Cost of revenue	540		551		1,621		1,645		705		563		1,364		1,081
Gross profit	357		351		1,055		1,014		459		369		871		698
Selling, general and administrative expenses	219		207		665		631		270		227		542		446
Research and development expenses	23		23		75		71		44		27		86		52
Restructuring charges	6		1		18		5
Restructuring and asset impairment charges, net									6		6		18		12
Operating income	109		120		297		307		139		109		225		188
Interest expense	16		13		50		41		21		20		41		34
Other non-operating income, net	2		—		3		—		3		1		2		1
Gain from sale of businesses	—		—		—		9
Gain from sale of business									—		—		5		—
Income before taxes	95		107		250		275		121		90		191		155
Income tax expense	22		19		40		49		21		19		35		18
Net income	$	73	$	88	$	210	$	226	100		71		156		137
Less: Net income attributable to non-controlling interests									1		—		1		—
Net income attributable to Xylem									$	99	$	71	$	155	$	137
Earnings per share:
Basic	$	0.41	$	0.48	$	1.17	$	1.25	$	0.55	$	0.39	$	0.87	$	0.77
Diluted	$	0.41	$	0.48	$	1.17	$	1.24	$	0.55	$	0.39	$	0.86	$	0.76
Weighted average number of shares:
Basic	179.3		180.8		179.0		181.5		179.6		179.1		179.6		178.8
Diluted	180.3		181.6		179.8		182.3		180.6		179.9		180.6		179.6
Dividends declared per share	$	0.1549	$	0.1408	$	0.4647	$	0.4224	$	0.1800	$	0.1549	$	0.3600	$	0.3098

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

Three Months Nine Months
For the periods ended September 30, 2016 2015 2016 2015
Net income $ 73
$ 88
$ 210
$ 226
Other comprehensive (loss) income, before tax:
Foreign currency translation adjustment (8 ) (39 ) (25 ) (142 )
Foreign currency gain reclassified into net income —
—
—
(8 )
Net change in derivative hedge agreements:
Unrealized losses —
—
—
(5 )
Amount of (gain) loss reclassified into net income (1 ) 5
(2 ) 17
Net change in postretirement benefit plans:
Amortization of net actuarial loss into net income 3
4
8
12
Other comprehensive loss, before tax (6 ) (30 ) (19 ) (126 )
Income tax impact related to items of other comprehensive income (3 ) 1
(2 ) 4
Other comprehensive loss, net of tax (3 ) (31 ) (17 ) (130 )
Comprehensive income $ 70
$ 57
$ 193
$ 96



	Three Months						Six Months
For the period ended June 30,	2017			2016			2017			2016
Net income	$	100		$	71		$	156		$	137
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment	30			(29		)	59			(17		)
Net change in derivative hedge agreements:
Unrealized gains (loss)	3			(4		)	5			—
Amount of gain reclassified into net income	(1		)	(1		)	—			(1		)
Net change in postretirement benefit plans:
Amortization of net actuarial loss into net income	2			2			5			5
Other comprehensive income (loss), before tax	34			(32		)	69			(13		)
Income tax (benefit) expense related to items of other comprehensive income	(22		)	8			(29		)	1
Other comprehensive income (loss), net of tax	56			(40		)	98			(14		)
Comprehensive income	$	156		$	31		$	254		$	123

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)


	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016

ASSETS
Current assets:
Cash and cash equivalents	$	659		$	680		$	288		$	308
Receivables, less allowances for discounts and doubtful accounts of $29 and $33 in 2016 and 2015, respectively	792			749
Receivables, less allowances for discounts and doubtful accounts of $28 and $30 in 2017 and 2016, respectively							944			843
Inventories	488			433			554			522
Prepaid and other current assets	153			143			175			166
Total current assets	2,092			2,005			1,961			1,839
Property, plant and equipment, net	440			439			627			616
Goodwill	1,621			1,584			2,717			2,632
Other intangible assets, net	444			435			1,184			1,201
Other non-current assets	181			194			218			186
Total assets	$	4,778		$	4,657		$	6,707		$	6,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	341		$	338		$	442		$	457
Accrued and other current liabilities	438			407			515			521
Short-term borrowings and current maturities of long-term debt	62			78			243			260
Total current liabilities	841			823			1,200			1,238
Long-term debt	1,148			1,196			2,168			2,108
Accrued postretirement benefits	335			335			427			408
Deferred income tax liabilities	114			118			329			352
Other non-current accrued liabilities	113			101			201			161
Total liabilities	2,551			2,573			4,325			4,267
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 191.3 shares and 190.2 shares in 2016 and 2015, respectively	2			2
Authorized 750.0 shares, issued 191.9 shares and 191.4 shares in 2017 and 2016, respectively							2			2
Capital in excess of par value	1,871			1,834			1,894			1,876
Retained earnings	1,011			885			1,117			1,033
Treasury stock – at cost 11.9 shares and 11.8 shares in 2016 and 2015, respectively	(402		)	(399		)
Treasury stock – at cost 12.4 shares and 11.9 shares in 2017 and 2016, respectively							(428		)	(403		)
Accumulated other comprehensive loss	(255		)	(238		)	(220		)	(318		)
Total stockholders’ equity	2,227			2,084			2,365			2,190
Non-controlling interests							17			17
Total equity							2,382			2,207
Total liabilities and stockholders’ equity	$	4,778		$	4,657		$	6,707		$	6,474

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)


For the nine months ended September 30,	2016			2015
For the six months ended June 30,							2017			2016
Operating Activities
Net income	$	210		$	226		$	156		$	137
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	61			69			55			41
Amortization	36			33			61			24
Share-based compensation	15			11			11			10
Restructuring charges	18			5
Gain from sale of businesses	—			(9		)
Restructuring and asset impairment charges							18			12
Gain from sale of business							(5		)	—
Other, net	8			10			4			8
Payments for restructuring	(11		)	(11		)	(17		)	(6		)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	(27		)	(32		)	(70		)	(19		)
Changes in inventories	(42		)	(15		)	(13		)	(39		)
Changes in accounts payable	14			6			(19		)	9
Other, net	(8		)	(33		)	(30		)	(52		)
Net Cash – Operating activities	274			260			151			125
Investing Activities
Capital expenditures	(90		)	(78		)	(77		)	(62		)
Acquisition of business, net of cash acquired	(70		)	—			(6		)	(70		)
Proceeds from sale of businesses	—			1
Proceeds from the sale of property, plant and equipment	—			1
Proceeds from sale of business							11			—
Other, net	5			2			3			5
Net Cash – Investing activities	(155		)	(74		)	(69		)	(127		)
Financing Activities
Short-term debt issued	62			—			33			89
Short-term debt repaid	(80		)	(3		)	(65		)	(77		)
Long-term debt issued	540			—			—			540
Long-term debt repaid	(608		)	—			—			(608		)
Repurchase of common stock	(3		)	(128		)	(25		)	(3		)
Proceeds from exercise of employee stock options	22			14			7			16
Dividends paid	(84		)	(77		)	(65		)	(56		)
Other, net	1			—			—			1
Net Cash – Financing activities	(150		)	(194		)	(115		)	(98		)
Effect of exchange rate changes on cash	10			(44		)	13			6
Net change in cash and cash equivalents	(21		)	(52		)	(20		)	(94		)
Cash and cash equivalents at beginning of year	680			663			308			680
Cash and cash equivalents at end of period	$	659		$	611		$	288		$	586
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	34		$	37		$	46		$	34
Income taxes (net of refunds received)	$	60		$	57		$	47		$	49

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Background and Basis of Presentation

Background

Xylem Inc. ("Xylem" or the "Company") is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment. Xylem was incorporated in Indiana on May 4, 2011.

As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving Xylem’s Analytics business from our Water Infrastructure business to our Sensus business, which was acquired in the fourth quarter of 2016. We believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will lead to operating efficiencies by integrating the supply chain process, and moving to a leaner, shared operations and functional structure. Accordingly, our reportable segments have changed. Beginning with the second quarter of 2017, the Company now reports the financial position and results of operations of its Analytics and Sensus businesses as one new reportable segment, which is currently called Sensus & Analytics. Our Water Infrastructure reportable segment no longer includes the results of our Analytics business. The Company has recast certain historical amounts between the Company's Water Infrastructure and Sensus & Analytics reportable segments, however this change had no impact on the Company's historical consolidated financial position or results of operations. The recast financial information does not represent a restatement of previously issued financial statements. Our Applied Water reportable segment remains unchanged. Refer to Note 18 "Segment Information" for additional segment information.

Xylem operates in ~~two~~three segments, Water Infrastructure, Applied Water and ~~Applied Water.~~Sensus & Analytics. The Water Infrastructure segment focuses on the transportation ~~treatment~~ and ~~testing~~treatment of water, offering a range of products including water and wastewater pumps, treatment ~~and testing~~ equipment, and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on the residential, commercial ~~industrial~~ and ~~agriculture~~industrial markets. The Applied Water segment’s major products include pumps, valves, heat exchangers, controls and dispensing equipment. The Sensus & Analytics segment focuses on developing advanced technology solutions that enable intelligent use and conservation of critical water and energy resources as well as analytical instrumentation used in the testing of water. The Sensus & Analytics segment's major products include smart metering, networked communications, measurement and control technologies, software and services including cloud-based analytics, remote monitoring and data management, and testing equipment.

Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries.

Basis of Presentation

The interim condensed consolidated financial statements reflect our financial position and results of operations in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany transactions between our businesses have been eliminated.

The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 ("~~2015~~2016 Annual Report") in preparing these unaudited condensed consolidated financial statements, with the exception of accounting standard updates described in Note 2. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes ~~thereto~~ included in our ~~2015~~2016 Annual Report.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and

liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, postretirement obligations and assets, revenue recognition, income tax contingency accruals and valuation allowances, goodwill and indefinite lived intangible impairment testing and contingent liabilities. Actual results could differ from these estimates.

Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends on December 31. For ease of presentation, the condensed consolidated financial statements included herein are described as ending on the last day of the calendar quarter.

Note 2.2. Recently Issued Accounting Pronouncements

Pronouncements Not Yet Adopted

In ~~October 2016,~~March 2017, the Financial Accounting Standards Board (“FASB”) issued guidance amending the accounting for income taxes. Under current guidance the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to an outside party. The amended guidance ~~eliminates~~on presentation of net periodic benefit costs. The amendment requires that an employer report the ~~prohibition against immediate recognition~~service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components are required to be presented in the income statement separately and outside a subtotal of ~~current and deferred~~ income ~~tax amounts associated with intra-entity transfers of assets~~from operations, if one is presented. The amendment also requires entities to disclose the income statement lines that contain the other ~~than inventory.~~components if they are not appropriately described. This guidance is effective retrospectively for ~~interim and annual~~ periods beginning

after December 15, 2017, ~~with early~~including interim periods within those annual periods. Early adoption permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The requirements of the amended guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.is permitted. We are evaluating the impact of the guidance on our financial condition and results of operations.

In June 2016, the FASB issued guidance amending the accounting for the impairment of financial instruments, including trade receivables. Under current guidance, credit losses are recognized when the applicable losses are probable of occurring and this assessment is based on past events and current conditions. The amended guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. We are evaluating the impact of the guidance on our financial condition and results of operations.

In February 2016, the FASB issued guidance amending the accounting for leases. Specifically, the amended guidance requires all lessees to record a lease liability at lease inception, with a corresponding right of use asset, except for short-term leases. Lessor accounting is not fundamentally changed. This amended guidance is effective for interim and annual periods beginning after December 15, 2018 using a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of the guidance on our financial condition and results of operations.

In July 2015, the FASB issued guidance regarding simplifying the measurement of inventory. Under prior guidance, inventory is measured at the lower of cost or market, where market is defined as replacement cost, with a ceiling of net realizable value and a floor of net realizable value less a normal profit margin. The amended guidance requires the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2016 and early application is permitted. We are evaluating the impact of the guidance on our financial condition and results of operations.

In May 2014, the FASB issued guidance on recognizing revenue from contracts with customers. The guidance outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the model is that an entity recognizes revenue to portray the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also expands disclosure requirements regarding revenue recognition. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017 and may be applied retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial application. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. We are evaluating the impact of the guidance on our financial condition and results of operations.

Recently Adopted Pronouncements

In ~~March 2016,~~May 2017, the FASB issued ~~an update on~~guidance, which amends the scope of modification accounting guidance for share-based ~~payments.~~payment arrangements. The guidance ~~simplifies several aspects~~outlines the types of changes to the ~~accounting for employee~~terms or conditions of share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the Condensed Consolidated Statements of Cash Flows. This standard is effective for annual reporting periods beginning after December 15, 2016. The Company elected to early adopt this standard in the quarter ended June 30, 2016 retroactively to January 1, 2016. The impact of the early adoption resulted in the following:

The Company recorded tax benefits of $1 million and $3 million within income tax expense for the three and nine months ended September 30, 2016, respectively, related to the excess tax benefit on share-based awards. Prior to adoption this amountarrangements that would ~~have been recorded as an increase of capital in excess of par value. This change could create volatility in the Company's effective tax rate.~~

The Company no longer reflects the cash received from the excess tax benefit within cash flows from financing activities but instead now reflects this benefit within cash flows from operating activities in the

~~Condensed Consolidated Statements of Cash Flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted.~~

~~The Company elected not to change its policy on accounting for forfeitures and continues to estimate the total number of awards for which the requisite service period will not be rendered.~~

At this time, the Company has not changed its policy on statutory withholding requirements and will continue to allow the employee to withhold up to the Company's minimum statutory withholding requirements.

The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and nine months ended September 30, 2016. This increased diluted weighted average common shares outstanding by less than 50,000 shares for each of the aforementioned periods.

~~In March 2016, the FASB amended the guidance regarding~~require the use of the equity method to record certain investments. Under current guidance, if an investor increases its level of ownership interest in a company and consequently qualifies for the equity method, the investor must retroactively adjust its investment, results of operations and retained earnings to reflect balances thatmodification accounting. Specifically, modification accounting would ~~have arisen~~not apply if the ~~equity method had been in effect during all previous periods that the investment was held. The amended guidance eliminates the need to retroactively adjust balances~~fair value, vesting conditions, and ~~instead allows for the prospective application~~classification of the award as equity ~~method.~~or liability are the same immediately before and after the modification. This guidance is effective prospectively for interim and annual reporting periods beginning December 15, 2017 and early adoption is permitted. We elected to early

adopt this guidance effective the second quarter of 2017. The adoption of this guidance did not impact our financial condition or results from operations.

In January 2017, the FASB issued guidance amending the impairment testing of goodwill. Under current guidance, the testing of goodwill for impairment is performed at least annually using a two-step test. Step one involves comparing the fair value of a “reporting unit” to its carrying amount. If the applicable book value exceeds the reporting unit’s fair value then step two must be performed. Step two involves comparing the fair value of the reporting unit’s goodwill to the applicable carrying amount of the asset and recognizing an impairment charge equal to the amount by which the carrying amount of the goodwill exceeds its implied fair value. The amended guidance eliminates step two of the impairment test and allows an entity to record an impairment charge equal to the amount that the carrying amount of the applicable reporting unit exceeds its fair value, up to the value of the recorded goodwill. This guidance is effective prospectively for interim and annual goodwill impairment tests beginning after December 15, ~~2016.~~2019 with early adoption permitted for interim or annual tests after January 1, 2017. We elected to early adopt this guidance effective the first quarter of ~~2016.~~2017. The adoption of this guidance did not impact our financial condition or results of operations.

In ~~March~~October 2016, ~~in response to inconsistency in practice,~~ the FASB issued guidance ~~regarding~~amending the ~~ability to maintain hedge~~ accounting for ~~a derivative instruments when one party to~~income taxes. Under current guidance the ~~instrument~~recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been ~~replaced by a new party (“a novation”).~~sold to an outside party. The ~~new~~amended guidance ~~states that a novation does not preclude~~eliminates the ~~continued application~~prohibition against immediate recognition of ~~hedge accounting to a derivative assuming all~~current and deferred income tax amounts associated with intra-entity transfers of assets other ~~hedge accounting criteria continue to be met.~~than inventory. This guidance is effective ~~using either a prospective or a modified retrospective approach,~~ for interim and annual ~~reporting~~ periods beginning after December 15, ~~2016. We elected to~~2017 with early ~~adopt this~~adoption permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The requirements of the amended guidance ~~on a prospective basis effective the first quarter of 2016. The adoption of this guidance did not impact our financial condition or results of operations.~~

~~In March 2016, the FASB issued guidance clarifying what steps need to~~should be followed when evaluating if call or put options are not clearly and closely related to their debt hosts, and therefore must be accounted for as separate derivatives. The guidance prescribes a four step process to assess whether an event that triggers the ability to exercise a call or put option is clearly and closely related to the debt host. The four step decision sequence requires an entity to consider whether (1) the payoff is adjusted basedapplied on changes in an index; (2) the payoff is indexed to an underlying other than interest rates or credit risk; (3) the debt involves a substantial premium or discount; and (4) the call or put option is contingently exercisable. This guidance is effective using a modified retrospective ~~approach, for interim and annual reporting periods~~basis through a cumulative-effect adjustment directly to retained earnings as of the beginning ~~after December 15, 2016.~~of the period of adoption. We elected to early adopt this guidance effective the first quarter of ~~2016.~~2017. As a result of adopting the amended guidance, prepaid tax assets were reduced by $14 million, long-term deferred tax assets increased $3 million, and accrued taxes were reduced by $4 million. The net impact of these adjustments on retained earnings was a decrease of $7 million.

In July 2015, the FASB issued guidance regarding simplifying the measurement of inventory. Under prior guidance, inventory is measured at the lower of cost or market, where market is defined as replacement cost, with a ceiling of net realizable value and a floor of net realizable value less a normal profit margin. The amended guidance requires the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2016 and early application is permitted. We adopted this guidance effective the first quarter of 2017. The adoption of this guidance did not impact our financial condition or results of operations.

Note 3. Acquisitions and Divestitures

2017 Acquisitions and Divestitures

On ~~August 15,~~February 17, 2017, we divested our United Kingdom and Poland based membranes business for approximately $11 million. The sale resulted in a gain of $5 million, which is reflected in gain from sale of business in our Condensed Consolidated Income Statement. The business, which was part of our Applied Water segment, provided membrane filtration products primarily to customers in the municipal water and industrial sectors. The business reported 2016 ~~we entered into a Share Purchase Agreement to acquire~~annual revenue of approximately $8 million.

2016 Acquisitions and Divestitures

Sensus Worldwide Limited

On October 31, 2016, the Company acquired all of the ~~direct and indirect subsidiaries~~outstanding equity interests of Sensus Worldwide Limited (other than Sensus ~~Industries)~~Industries Limited) (“Sensus”)~~, a global leader in smart meters, network technologies and advanced data analytics services~~ effective October 31, 2016 for ~~the water, gas and electric industries. The purchase price was agreed at $1.7 billion,~~$1,766 million ($1,710 million net of cash ~~acquired. We~~acquired), including a $6 million payment in 2017 for a working capital adjustment. Sensus develops advanced technology solutions that enable intelligent use and conservation of critical water and energy resources. Sensus' major products include smart metering, networked communications, measurement and control technologies, software and services including cloud-based analytics, remote monitoring and data management.

Sensus results of operations were consolidated with the Company effective November 1, 2016 and along with our Analytics business it constitutes a separate reportable segment. Refer to Note 18 "Segment Information" for Sensus segment information.

The preliminary Sensus purchase price allocation as of October 31, 2016 is shown in the following table.



(in millions)	Amount
Cash	$	56
Receivables	104
Inventories	79
Prepaid and other current assets	20
Property, plant and equipment	181
Intangible assets	795
Other long-term assets	6
Accounts payable	(69		)
Accrued and other current liabilities	(91		)
Deferred income tax liabilities	(212		)
Accrued post retirement benefits	(84		)
Other non-current accrued liabilities	(60		)
Total identifiable net assets	725

Goodwill	1,058
Non-controlling interest	(17		)
Total consideration	$	1,766

The fair values of Sensus assets and liabilities were determined based on preliminary estimates and assumptions which management believes are reasonable. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to property, plant and equipment, intangible assets, certain liabilities, and income tax related items. The final determination of the fair value of certain assets and liabilities will be completed as soon as the necessary information is available but no later than one year from the acquisition date.

Goodwill arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of Sensus and Xylem. All of the goodwill was assigned to the Sensus & Analytics segment and is not deductible for tax purposes.

The preliminary estimate of the fair value of Sensus identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes key information underlying identifiable intangible assets related to the Sensus acquisition:



Category	Life	Amount (in millions)
Customer and Distributor Relationships	2 - 18 years	$	556
Tradenames	10 - 25 years	98
Internally Developed Network Software	7 years	60
FCC Licenses	Indefinite lived	24
Technology	5 - 15 years	39
Other	1 - 16 years	18
Total		$	795

The following table summarizes, on an unaudited pro forma basis, the condensed combined results of operations of the Company for the three and six months ended June 30, 2016 assuming the acquisition of Sensus was made on ~~October 31, 2016 pursuant~~January 1, 2015.



(in millions)	Three Months Ended June 30, 2016		Six Months Ended June 30, 2016
Revenue	$	1,167	$	2,242
Net income	$	85	$	183

The foregoing unaudited pro forma results are for informational purposes only and are not necessarily indicative of the actual results of operations that might have occurred had the acquisition occurred on January 1, 2015, nor are they necessarily indicative of future results. The pro forma financial information includes the impact of purchase accounting and other nonrecurring items directly attributable to the ~~terms~~acquisition, which include:

Amortization expense of acquired intangibles

Adjustments to the depreciation of property, plant and equipment reflecting the impact of the ~~Share Purchase Agreement~~calculated fair value of those assets in accordance with purchase accounting

Amortization of the fair value adjustment for warranty liabilities

Adjustments to interest expense to remove historical Sensus interest costs and ~~an Amendment~~reflect Xylem's current debt profile

The related tax impact of the above referenced adjustments

The pro forma results do not include any cost savings or operational synergies that may be generated or realized due to the ~~Share Purchase Agreement dated as~~acquisition of ~~October 31,~~Sensus. The pro forma six-month period reflects the inclusion of a $16 million tax valuation release and a $27 million reduction to warranty expense in the first calendar quarter of 2016. ~~Sensus, headquartered in Raleigh, North Carolina, has approximately 3,300 employees across 28 locations on six continents.~~

Tideland Signal Corporation

On February 1, 2016, we acquired Tideland Signal Corporation (“Tideland”), a leading producer of analytics solutions in the coastal and ocean management sectors, for $70 million. Tideland, a privately-owned company headquartered in Texas, ~~has~~had approximately 160 employees. Our condensed consolidated financial statements include Tideland’s results of operations from February 1, 2016 within the ~~Water Infrastructure~~Sensus & Analytics segment.

~~There were no divestitures for the three months ended September 30, 2015. For the nine months ended September 30, 2015, we divested two businesses for~~ $1 million, which were not material, individually or in the aggregate, to our results of operations or financial position. The sales resulted in a gain of $9 million, reflected in gain from sale of businesses in our Condensed Consolidated Income Statement.

Note 4. Restructuring Charges

From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position ourselves based on the economic environment and customer demand. During the three and ~~nine~~six months ended ~~September~~June 30, 2017, we recognized restructuring charges of $6 million and $13 million million, respectively. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as headcount reductions within our Sensus & Analytics segment.

During the three and six months ended June 30, 2016, we recognized restructuring charges of $6 million and ~~$18~~$12 million, respectively. We incurred these charges primarily in an effort to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as Corporate headcount reductions.

During the three and nine months ended September 30, 2015, we recognized restructuring charges of $1 million and $5 million, respectively. We incurred these charges primarily in an effort to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Water Infrastructure segment.

The following table presents the components of restructuring ~~expense.~~expense and asset impairment charges.

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2016 2015 2016 2015
By component:
Severance and other charges $ 6
$ 1
$ 18
$ 6
Lease related charges 1
—
1
—
Reversal of restructuring accruals (1 ) —
(1 ) (1 )
Total restructuring charges $ 6
$ 1
$ 18
$ 5

By segment:
Water Infrastructure $ 5
$ 1
$ 12
$ 5
Applied Water 1
—
4
—
Corporate and other —
—
2
—



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2017		2016		2017			2016
By component:
Severance and other charges	$	6	$	6	$	14		$	12
Reversal of restructuring accruals	—		—		(1		)	—
Total restructuring charges	$	6	$	6	$	13		$	12
Asset impairment	—		—		5			—
Total restructuring and asset impairment charges	$	6	$	6	$	18		$	12

By segment:
Water Infrastructure	$	3	$	5	$	5		$	7
Applied Water	2		1		10			3
Sensus & Analytics	1		—		3			—
Corporate and other	—		—		—			2

The following table displays a rollforward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within accrued and other current liabilities, for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015.~~2016.

(in millions) 2016 2015
Restructuring accruals - January 1 $ 3
$ 12
Restructuring charges 18
5
Cash payments (11 ) (11 )
Foreign currency and other (1 ) (1 )
Restructuring accruals - September 30 $ 9
$ 5

By segment:
Water Infrastructure $ 4
$ 2
Applied Water —
—
Regional selling locations (a) 3
3
Corporate and other 2
—



(in millions)	2017			2016
Restructuring accruals - January 1	$	15		$	3
Restructuring charges	13			12
Cash payments	(17		)	(6		)
Foreign currency and other	—			—
Restructuring accruals - June 30	$	11		$	9

By segment:
Water Infrastructure	$	1		$	5
Applied Water	4			1
Sensus & Analytics	3			—
Regional selling locations (a)	3			1
Corporate and other	—			2


(a)	Regional selling locations consist primarily of selling and marketing organizations that incurred restructuring expense which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.

The following is a rollforward for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 of employee position eliminations associated with restructuring activities.

2016 2015
Planned reductions - January 1 82
133
Additional planned reductions 364
87
Actual reductions (296 ) (120 )
Planned reductions - September 30 150
100

~~Total~~



	2017		2016
Planned reductions - January 1	188		82
Additional planned reductions	105		223
Actual reductions and reversals	(185	)	(203	)
Planned reductions - June 30	108		102

The following table presents expected ~~costs associated with actions that commenced during 2016 are approximately $20 million for~~restructuring spend:



(in millions)	Water Infrastructure		Applied Water		Sensus & Analytics		Corporate		Total
Actions Commenced in 2017:
Total expected costs	$	14	$	6	$	1	$	—	$	21
Costs incurred during Q1 2017	—		1		1		—		2
Costs incurred during Q2 2017	3		1		—		—		4
Total expected costs remaining	$	11	$	4	$	—	$	—	$	15

Actions Commenced in 2016:
Total expected costs	$	13	$	13	$	10	$	2	$	38
Costs incurred during 2016	11		10		6		2		29
Costs incurred during Q1 2017	2		2		1		—		5
Costs incurred during Q2 2017	—		1		1		—		2
Total expected costs remaining	$	—	$	—	$	2	$	—	$	2

The Water Infrastructure, ~~including $11 million incurred during the nine months ended September 30, 2016. These costs~~Applied Water, and Sensus & Analytics actions commenced in 2017 consist primarily ~~consist~~ of severance ~~charges. We currently expect activity related to these actions~~charges and are expected to continue through the end of ~~2017. Total expected costs associated with~~2018. The Water Infrastructure, Applied

Water, Sensus & Analytics and Corporate actions ~~that~~ commenced ~~during~~in 2016 ~~are approximately $6 million for Applied Water, including $4 million incurred during the nine months ended September 30, 2016. These costs~~consist primarily ~~consist~~ of severance ~~charges. We currently expect activity related to these actions~~charges and are expected to continue through the end of ~~2017. Total expected costs associated with actions~~2018.

Asset Impairment Charges

During the first quarter of 2017 we determined that ~~commenced during 2016 are approximately $2 million~~certain assets within our Applied Water segment, including a tradename, were impaired. Accordingly we recognized an impairment charge of $5 million. Refer to Note 9, "Goodwill and Other Intangible Assets," for ~~Corporate, which we incurred during the nine months ended September 30, 2016. These costs primarily consist of severance charges.~~

Total expected costs associated with actions that commenced during 2015 are approximately $5 million for Water Infrastructure. Approximately $4 million of the expected cost was incurred in 2015 and $1 million was incurred during the nine months ended September 30, 2016. These costs primarily consist of severance charges and substantially all of the costs associated with these actions have been incurred. Total expected costs associated with actions that commenced during 2015 are approximately $1 million for Applied Water. These costs primarily consist of severance charges and substantially all of the costs associated with these actions were incurred in 2015.additional information.

Note 5. Income Taxes

Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction, foreign income tax rate differentials and discrete items.

The income tax provision for the three months ended ~~September~~June 30, ~~2016~~2017 was ~~$22~~$21 million resulting in an effective tax rate of ~~22.9%~~16.8%, compared to $19 million resulting in an effective tax rate of ~~17.4%~~21.6% for the same period in ~~2015.~~2016. The income tax provision for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$40~~$35 million resulting in an effective tax rate of ~~16%~~18.1%, compared to ~~$49~~$18 million resulting in an effective tax rate of ~~17.6%~~11.8% for the same period in ~~2015.~~2016. The effective tax rate was lower than the United States federal statutory rate primarily due to ~~geographic~~the mix of earnings in jurisdictions in both ~~periods~~periods. The decrease in the effective tax rate for the three months ended June 30, 2017 as ~~well as~~compared to the same period in the prior year was primarily due to the mix of earnings in jurisdictions and repatriation of foreign earnings in 2016 that did not recur. Additionally, the effective tax rate for the period ending June 30, 2016 included the release of an unrecognized tax benefit in 2016 ~~as a result of~~due to the effective settlement of a tax examination, offset in part by the establishment of a valuation ~~allowance in 2016.~~allowance.

Unrecognized Tax Benefits

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

The amount of unrecognized tax benefits at ~~September~~June 30, ~~2016~~2017 was ~~$27~~$68 million, which ~~is a reduction of $20 million from the balance as of December 31, 2015, resulting primarily from the effective settlement of a tax examination in 2016. The unrecognized tax benefits,~~ if ultimately recognized will reduce our effective tax rate. We do not believe that the unrecognized tax benefits will significantly change within the next twelve months.

We classify interest expense relating to unrecognized tax benefits as a component of other non-operating expense, net, and tax penalties as a component of income tax expense in our Condensed Consolidated Income Statements. As of ~~September~~June 30, ~~2016,~~2017, we had $2$3 million of interest accrued for unrecognized tax benefits.

Note 6.6. Earnings Per Share

The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share.


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Net income (in millions)	$	73	$	88	$	210	$	226
Net income attributable to Xylem (in millions)									$	99	$	71	$	155	$	137
Shares (in thousands):
Weighted average common shares outstanding	179,272		180,815		178,951		181,428		179,571		179,020		179,557		178,790
Add: Participating securities (a)	36		30		37		43		28		46		31		38
Weighted average common shares outstanding — Basic	179,308		180,845		178,988		181,471		179,599		179,066		179,588		178,828
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options	593		424		462		489		640		459		600		396
Dilutive effect of restricted stock units and performance share units	409		363		388		376		362		365		438		377
Weighted average common shares outstanding — Diluted	180,310		181,632		179,838		182,336		180,601		179,890		180,626		179,601
Basic earnings per share	$	0.41	$	0.48	$	1.17	$	1.25	$	0.55	$	0.39	$	0.87	$	0.77
Diluted earnings per share	$	0.41	$	0.48	$	1.17	$	1.24	$	0.55	$	0.39	$	0.86	$	0.76


(a)	Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share.

(b)

Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 14, "Share-Based Compensation Plans" to the condensed consolidated financial statements for further detail on the performance share units.

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2016 2015 2016 2015
Stock options 1,701
2,703
2,008
2,712
Restricted stock units 529
747
570
754
Performance share units 414
191
360
187



	Three Months Ended		Six Months Ended
	June 30,		June 30,
(in thousands)	2017	2016	2017	2016
Stock options	1,854	2,068	1,813	2,161
Restricted stock units	464	582	427	591
Performance share units	530	409	467	334

Note 7. Inventories

The components of total inventories are summarized as follows:

(in millions) September 30,
2016 December 31,
2015
Finished goods $ 220
$ 188
Work in process 46
32
Raw materials 222
213
Total inventories $ 488
$ 433

~~The amounts in the above table of inventory composition as of December 31, 2015 have been revised to appropriately classify as Raw Materials $25 million previously included in Finished Goods.~~



(in millions)	June 30, 2017		December 31, 2016
Finished goods	$	233	$	220
Work in process	52		42
Raw materials	269		260
Total inventories	$	554	$	522

Note 8. Property, Plant and Equipment

The components of total property, plant and equipment, net are as follows:

(in millions) September 30,
2016 December 31,
2015
Land, buildings and improvements $ 247
$ 240
Machinery and equipment 649
650
Equipment held for lease or rental 225
205
Furniture and fixtures 81
79
Construction work in progress 61
46
Other 19
19
Total property, plant and equipment, gross 1,282
1,239
Less accumulated depreciation 842
800
Total property, plant and equipment, net $ 440
$ 439



(in millions)	June 30, 2017		December 31, 2016
Land, buildings and improvements	$	317	$	299
Machinery and equipment	774		731
Equipment held for lease or rental	233		218
Furniture and fixtures	104		95
Construction work in progress	77		76
Other	20		19
Total property, plant and equipment, gross	1,525		1,438
Less accumulated depreciation	898		822
Total property, plant and equipment, net	$	627	$	616

Depreciation expense of ~~$20~~$27 million and ~~$61~~$55 million million was recognized in the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively, and ~~$22~~$21 million and ~~$69~~$41 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016.

Note 9. Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying value of goodwill by reportable segment for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 are as follows:

(in millions)
Water
Infrastructure
Applied Water Total
Balance as of January 1, 2016 $ 1,066
$ 518
$ 1,584
Activity in 2016
Acquired (a) 39
—
39
Foreign currency and other (2 )

(2 )
Balance as of September 30, 2016 $ 1,103
$ 518
$ 1,621


~~(a)~~	~~On February 1, 2016, we acquired Tideland and recorded $39 million of goodwill. Refer to Note 3, "Acquisitions and Divestitures" for additional information.~~



(in millions)	Water Infrastructure		Applied Water			Sensus & Analytics			Total
Balance as of January 1, 2017	$	1,074	$	505		$	1,053		$	2,632
Activity in 2017
Divested/Acquired	—		(2		)	(5		)	(7		)
Foreign currency and other	34		15			43			92
Balance as of June 30, 2017	$	1,108	$	518		$	1,091		$	2,717

Other Intangible Assets

Information regarding our other intangible assets is as follows:

September 30, 2016 December 31, 2015
(in millions)
Carrying
Amount

Accumulated
Amortization

Net
Intangibles

Carrying
Amount

Accumulated
Amortization

Net
Intangibles
Customer and distributor relationships $ 342
$ (159 ) $ 183
$ 320
$ (140 ) $ 180
Proprietary technology and patents 119
(60 ) 59
116
(54 ) 62
Trademarks 43
(22 ) 21
35
(19 ) 16
Software 168
(119 ) 49
155
(110 ) 45
Other 7
(7 ) —
8
(8 ) —
Indefinite-lived intangibles 132
—
132
132
—
132
$ 811
$ (367 ) $ 444
$ 766
$ (331 ) $ 435



	June 30, 2017							December 31, 2016
(in millions)	Carrying Amount		Accumulated Amortization			Net Intangibles		Carrying Amount		Accumulated Amortization			Net Intangibles
Customer and distributor relationships	$	906	$	(205	)	$	701	$	891	$	(168	)	$	723
Proprietary technology and patents	158		(69		)	89		156		(61		)	95
Trademarks	142		(34		)	108		139		(23		)	116
Software	258		(136		)	122		218		(118		)	100
Other	25		(18		)	7		26		(13		)	13
Indefinite-lived intangibles	157		—			157		154		—			154
Other Intangibles	$	1,646	$	(462	)	$	1,184	$	1,584	$	(383	)	$	1,201

Amortization expense related to finite-lived intangible assets was ~~$12~~$30 million and ~~$36~~$61 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively, and ~~$11~~$12 million and ~~$33~~$24 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015,~~2016, respectively.

During the first quarter of 2017 we determined that the intended use of a finite lived trade name within our Applied Water segment had changed. Accordingly we recorded a $4 million impairment charge. The charge was calculated using income approach, which is considered a Level 3 input for fair value measurement, and is reflected in “Restructuring and asset impairment charges” in our Condensed Consolidated Income Statements.

Note 10. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions, and principally manage our exposures to these risks through management of our core business activities. Certain of our foreign operations expose us to fluctuations of foreign interest rates and exchange rates that may impact revenue, expenses, cash receipts, cash payments, and the value of our stockholders' equity. We enter into derivative financial instruments to protect the value or fix the amount of certain cash flows in terms of the functional currency of the business unit with that exposure and reduce the volatility in stockholders' equity.

Cash Flow Hedges of Foreign Exchange Risk

We are exposed to fluctuations in various foreign currencies against our functional currencies. We use foreign currency derivatives, including currency forward agreements, to manage our exposure to fluctuations in the various exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.

Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty Australian Dollar and ~~Australian Dollar.~~Hungarian Forint. We ~~held forward~~had foreign exchange contracts with purchase notional amounts totaling ~~$21 million~~

~~and $94~~$124 million as of ~~September~~June 30, ~~2016 and December 31, 2015, respectively.~~2017. As of ~~September~~June 30, 2016, our most significant foreign currency derivatives include contracts to purchase Swedish Krona and sell Euro, sell Canadian Dollar and purchase US Dollar, sell Canadian Dollar and purchase Euro, and purchase Polish Zloty and sell Euro. The purchased notional amounts associated with these currency derivatives are $14 million, $2 million, $2 million, and $2 million, respectively. As of December 31, 2015,2017, our most significant foreign currency derivatives included contracts to purchase Swedish Krona and sell Euro, sell U.S. Dollar and purchase Euro, ~~and to~~ sell British Pound and purchase Euro, and to purchase Polish Zloty and sell Euro. The purchased notional amounts associated with these currency derivatives are $51 million, ~~$24~~$29 million, $16 million, and ~~$12~~$13 million, respectively. As of December 31, 2016 we did not hold any foreign exchange contracts.

Hedges of Net Investments in Foreign Operations

We are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.

Cross Currency Swaps

Beginning in 2015, we entered into cross currency swaps to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. The total notional amount of derivative instruments designated as net investment hedges was ~~$419~~$427 million and ~~$411~~$391 million as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

Foreign Currency Denominated Debt

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023. We designated the entirety of the outstanding balance, or ~~$555~~$566 million, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.

~~Forward Contracts~~

On September 23, 2016, we entered into forward contacts to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. The total notional amount of derivative instruments designated as net investment hedges was $336 million as of September 30, 2016.

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income.


	Three Months Ended					Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,					September 30,						June 30,						June 30,
(in millions)	2016			2015		2016			2015			2017			2016			2017			2016
Cash Flow Hedges
Foreign Exchange Contracts
Amount of (loss) recognized in OCI (a)	$	—		$	—	$	—		$	(5	)
Amount of (gain) loss reclassified from OCI into revenue (a)	(1		)	5		(1		)	16
Amount of gain (loss) recognized in OCI (a)												$	3		$	(4	)	$	5		$	—
Amount of gain reclassified from OCI into revenue (a)												(1		)	(1		)	(1		)	—
Amount of (gain) loss reclassified from OCI into cost of revenue (a)	—			—		(1		)	1			—			—			1			(1		)

Net Investment Hedges
Cross Currency Swaps
Amount of (loss) recognized in OCI (a)	$	(7	)	$	—	$	(7	)	$	—
Amount of gain (loss) recognized in OCI (a)												$	(23	)	$	11		$	(31	)	$	—
Foreign Currency Denominated Debt
Amount of (loss) recognized in OCI (a)	$	(5	)	$	—	$	(10	)	$	—
Amount of gain (loss) recognized in OCI (a)												$	(34	)	$	10		$	(48	)	$	(5	)


(a)	Effective portion

As of ~~September~~June 30, ~~2016, $1~~2017, $4 million of net ~~unrealized losses~~gains on cash flow hedges are expected to be reclassified into earnings in the next 12 months. The ineffective portion of a cash flow hedge is recognized immediately in selling, general and administrative expenses in the Condensed Consolidated Income Statements and was not material for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015.~~

2016.

As of ~~September~~June 30, ~~2016,~~2017, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration. The net investment hedges did not experience any ineffectiveness for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017.

The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and are determined through the use of models that consider various assumptions including yield curves, time value and other measurements.

The fair values of our foreign exchange contracts currently included in our hedging program designated as hedging instruments were as follows:

(in millions) September 30,
2016 December 31,
2015
Derivatives designated as hedging instruments
Assets
Cash Flow Hedges
Other current assets $ —
$ 2
Liabilities
Cash Flow Hedges
Other current liabilities $ (1 ) $ —
Net Investment Hedges
Other non-current liabilities $ (30 ) $ (18 )



(in millions)	June 30, 2017			December 31, 2016
Derivatives designated as hedging instruments
Assets
Cash Flow Hedges
Other current assets	$	3		$	—
Liabilities
Cash Flow Hedges
Other current liabilities	$	(1	)	$	—
Net Investment Hedges
Other non-current liabilities	$	(40	)	$	(6	)

The fair value of our long-term debt, due in 2023, designated as a net investment hedge was ~~$608~~$609 million and $555 million as of ~~September~~June 30, ~~2016.~~2017 and December 31, 2016, respectively.

Note 11. Accrued and Other Current Liabilities

The components of total accrued and other current liabilities are as follows:

(in millions) September 30,
2016 December 31,
2015
Compensation and other employee benefits $ 163
$ 156
Customer-related liabilities 70
64
Accrued warranty costs 35
33
Accrued taxes 67
64
Other accrued liabilities 103
90
Total accrued and other current liabilities $ 438
$ 407



(in millions)	June 30, 2017		December 31, 2016
Compensation and other employee benefits	$	182	$	182
Customer-related liabilities	99		80
Accrued taxes	66		63
Accrued warranty costs	58		64
Other accrued liabilities	110		132
Total accrued and other current liabilities	$	515	$	521

Note 12. Credit Facilities and Debt

Total debt outstanding is summarized as follows:


(in millions)	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
3.550% Senior Notes due 2016	$	—		$	600
4.875% Senior Notes due 2021 (a)	600			600			$	600		$	600
2.250% Senior Notes due 2023 (a)	560			—			571			522
3.250% Senior Notes due 2026 (a)							500			500
4.375% Senior Notes due 2046 (a)							400			400
Commercial paper	20			—			99			65
Research and development facility agreement	42			76			42			38
Other	—			2
Research and development finance contract							120			110
Term loan							103			157
Debt issuance costs and unamortized discount (b)	(12		)	(4		)	(24		)	(24		)
Total debt	1,210			1,274			2,411			2,368
Less: short-term borrowings and current maturities of long-term debt	62			78			243			260
Total long-term debt	$	1,148		$	1,196		$	2,168		$	2,108

(a)

The fair value of our Senior Notes ~~(as defined below)~~ was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due 2021 was ~~$654~~$650 million and ~~$640~~$651 million as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. The fair value of our Senior Notes due 2023 was ~~$608~~$609 million and $555 million as of ~~September~~June 30, ~~2016.~~2017 and December 31, 2016, respectively. The fair value of our Senior Notes due 2026 was $500 million and $487 million as of June 30, 2017 and December 31, 2016, respectively.The fair value of our Senior Notes due 2046 was $416 million and $397 million as of June 30, 2017 and December 31, 2016, respectively.


(b)	The debt issuance costs and unamortized discount are recognized as a reduction in the carrying value of the Senior Notes in the Condensed Consolidated Balance Sheets and are being amortized to interest expense in our Condensed Consolidated Income Statements over the expected remaining terms of the Senior Notes.

Senior Notes

On September 20, 2011, we issued 3.550% Senior Notes of ~~$600~~$600 million aggregate principal amount due September 2016 (the "Senior Notes due 2016") and 4.875% Senior Notes of ~~$600~~$600 million aggregate principal amount due October 2021 (the "Senior Notes due 2021"). On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023 (the "Senior Notes due 2023"). On October 11, 2016, we issued 3.250% Senior Notes of $500 million aggregate principal amount due October 2026 (the “Senior Notes due 2026”) and 4.375% Senior Notes of $400 million aggregate principal amount due October 2046 (the “Senior Notes due 2046” and, together with the Senior Notes due ~~2016 and~~ 2021, the ~~"Senior Notes"~~Senior Notes due 2023 and the Senior Notes due 2026, the “Senior Notes”).

The Senior Notes include covenants ~~which~~that restrict our ability, subject to exceptions, to incur debt secured by liens and engage in sale and leaseback transactions, as well as provide for customary events of default (subject, in certain cases, to receipt of notice of default and/or customary grace and cure periods). We may redeem the

Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may also redeem ~~all or a portion of~~ the Senior Notes due 2023 at our option at any time on or after December 11, 2022 (three months prior to their maturity), at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the redemption date. We may also redeem all, but not part, of the Senior Notes due 2023 in ~~the event of specified tax events~~certain other circumstances, as ~~described~~set forth in the applicable Senior Notes indenture.

If a change of control triggering event (as defined in the applicable Senior Notes indenture) occurs, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase. ~~As of~~ ~~September 30, 2016, we were in compliance with all covenants for the Senior Notes.~~

Interest on the Senior Notes ~~due 2016 was payable on March 20 and September 20 of each year. Interest on the Senior Not~~es due 2021 is payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable on March 11 of each year.

~~On April 11, 2016, our~~ Interest on the Senior Notes due ~~2016~~2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year beginning on May 1, 2017. As of June 30, 2017, we were ~~settled~~in compliance with all covenants for ~~a total of~~ ~~$607 million~~ ~~which included make-whole interest expense of~~ ~~$7 million.~~ ~~The Company recorded this loss on extinguishment~~the Senior Notes.

We used the net proceeds of the ~~debt in~~Senior Notes due 2026 and the ~~second quarter of 2016 as interest expense.~~

~~Bridge Facility~~

~~On August 15, 2016, we entered into a~~ ~~$1.3 billion~~ senior unsecured bridge facility (the “Bridge Facility”). The Bridge Facility was put in place to finance the Sensus acquisition and to pay the related fees and expenses to the extent we were unable to finance the Sensus acquisition through availableSenior Notes due 2046, together with cash on hand, ~~a new term loan~~proceeds from issuances under our existing commercial paper program and borrowings under the

~~issuance~~ Term Facility (as described below), to fund the acquisition of ~~the Notes~~Sensus (refer to Note 153 for further information on the ~~issuance of the Notes). The Bridge Facility was terminated on October 31, 2016 in connection with the~~ Sensus ~~acquisition.~~ acquisition).

Credit Facilities

Five-Year Revolving Credit Facility

Effective March 27, 2015, Xylem entered into a Five-Year Revolving Credit Facility (the "Credit Facility") with Citibank, N.A., as administrative agent, and a syndicate of lenders. The Credit Facility provides for an aggregate principal amount of up to ~~$600~~$600 million of: (i) revolving extensions of credit (the "revolving loans") outstanding at any time and (ii) the issuance of letters of credit in a face amount not in excess of ~~$100~~$100 million outstanding at any time. The Credit Facility provides for increases of up to $200 million for a possible maximum total of $800 million in aggregate principal amount at our request and with the consent of the institutions providing such increased commitments.

At our election, the interest rate per annum applicable to the revolving loans will be based on either (i) a Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin or (ii) a fluctuating rate of interest determined by reference to the greatest of: (a) the prime rate of Citibank, N.A., (b) the U.S. Federal funds effective rate plus half of 1% or (c) the Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, in each case, plus an applicable margin.

In accordance with the terms of an amendment to the Credit Facility dated August 30, 2016, we may not exceed a maximum leverage ratio of 4.00to 1.00 (based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) for a period of ~~12-months~~four full fiscal quarters following the Sensus acquisition and a maximum leverage ratio of 3.50 to 1.00 through the rest of the term. The Credit Facility also contains limitations on, among other things, incurring secured debt, granting liens, entering into sale and leaseback transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. In addition, the Credit Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default. As of ~~September~~ June 30, ~~2016~~,2017 the Credit Facility was undrawn and we ~~were~~are in compliance with all ~~covenants~~.covenants.

European Investment Bank - R&D Finance Contract

On October 28, 2016, the Company entered into a Finance Contract (the “Finance Contract”) with the European Investment Bank (the “EIB”). The Company's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the Finance Contract and Xylem Inc. is the Guarantor. The Finance Contract provides for up to €105 million (approximately $120 million) to finance research, development and innovation projects in the field of sustainable water and wastewater solutions during the period from 2017 through 2019 in Sweden, Germany, Italy, UK, Hungary and Austria. The Company has unconditionally guaranteed the performance of the borrowers under the Finance Contract.Under the Finance Contract, the borrowers are able to draw loans on or before April 28, 2018, with a maturity of no longer than 11 years.

Both the Finance Contract and the R&D Facility Agreement (described below) are subject to the same leverage ratio as the Credit Facility. Both agreements also contain limitations on, among other things, incurring debt, granting liens, and entering into sale and leaseback transactions, as well as other terms and conditions, such as customary representations and warranties, additional covenants and customary events of default.

Both the Finance Contract and the R&D Facility Agreement provide for fixed rate loans and floating rate loans. Under the Finance Contract, the interest rate per annum applicable to fixed rate loans is at a fixed percentage rate per annum specified by the EIB which includes the applicable margin. The interest rate per annum applicable to floating rate loans is at the rate determined by reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in Pounds Sterling or U.S. Dollars, plus an applicable spread specified by the EIB which includes the applicable margin. The applicable margin is 59 basis points (0.59%). As of ~~September~~June 30, 2017 and December 31, 2016,, $120 million and $110 million were outstanding under the ~~Credit Facility was undrawn.~~Finance Contract, respectively.

~~Commercial Paper~~

~~Our commercial paper program generally serves as a means of short-term funding and has a combined outstanding limit of $600 million inclusive of the Five-Year Revolving Credit Facility. As of~~ ~~September 30, 2016, $20 million~~ ~~of the Company’s~~ ~~$600 million~~ ~~commercial paper program was outstanding at a weighted average interest rate of~~ ~~0.75%. We will periodically borrow under this program and may borrow under it in future periods.~~

~~Research and Development~~European Investment Bank - R&D Facility Agreement

On December 3, 2015, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D Facility Agreement") with ~~The European Investment Bank (the "EIB")~~the EIB to amend the maturity date. The ~~facility~~Facility provides an aggregate principal amount of up to €120 million (approximately ~~$135~~$137 million) to finance research projects and infrastructure development in the European Union. The Company's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the R&D Facility Agreement. The obligations of the borrowers under the R&D Facility Agreement are guaranteed by the Company under an Amended and Restated Deed of Guarantee, dated as of December 4, 2013, in favor of the EIB. ~~The funds are available during the period from 2013 through 2016 at the Company's facilities in Sweden, Germany, Italy, the United Kingdom, Austria, Norway and Hungary.~~

Under the R&D Facility Agreement, the borrower was able to draw loans on or before March 31, 2016 with a maturity of no longer than 12 ~~years~~. The R&D Facility Agreement provides for Fixed Rate loans and Floating Rate loans. The interest rate per annum applicable to Fixed Rate loans is at a fixed percentage rate per annum specified by the EIB which includes the applicable margin. The interest rate per annum applicable to Floating Rate loans is at the rate determined by reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in Pounds Sterling or U.S. Dollars, plus an applicable spread specified by the EIB which includes the applicable margin. The applicable margin for both Fixed Rate loans and Floating Rate loans is determined by reference to the credit rating of the Company.

~~In accordance with the terms of the R&D Facility Agreement, we may not exceed a maximum leverage ratio of~~ ~~3.50~~ to 1.00 (based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) throughout the term. The R&D Facility Agreement also contains limitations on, among other things, incurring debt, granting liens, and entering into sale and leaseback transactions. In addition, the R&D Facility Agreement contains other terms and conditions, such as customary representations and warranties, additional covenants and customary events of default. As of ~~September 30, 2016, we were in compliance with all covenants.~~

years. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016 $42 million and ~~$76~~$38 million ~~was~~ were outstanding, respectively, under the R&D Facility Agreement. Although the borrowing term for this arrangement is up to five years, we have classified it as short-term debt on our ~~Condensed~~ Consolidated Balance Sheets since we intend to repay this obligation in less than a year.

Term Loan Facility

On October 24, 2016, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month €150 million (approximately $171 million) term loan facility (the “Term Facility”) the terms of which are set forth in a term loan agreement, among the borrower, the Company, as parent guarantor and ING Bank. The Company has entered into a parent guarantee in favor of ING Bank also dated October 24, 2016 to secure all present and future obligations of the borrower under the Term Loan Agreement. The Term Facility was used to partially fund the acquisition of Sensus. The Term Facility will mature on October 26, 2017. The Term Facility bears interest at EURIBOR plus 0.35%. The agreement contains certain representations and warranties, certain affirmative covenants, certain negative covenants, a financial covenant, certain conditions and events of default that are customarily required for similar financings. As of June 30, 2017 and December 31, 2016, $103 million and $157 million were outstanding under the Term Loan Facility, respectively.

Commercial Paper

Our commercial paper program generally serves as a means of short-term funding and has a combined outstanding limit of $600 million inclusive of the Five-Year Revolving Credit Facility. As of June 30, 2017 and December 31, 2016 $99 million and $65 million of the Company’s $600 million commercial paper program was outstanding at a weighted average interest rate of 1.44% and 1.12%, respectively. We will periodically borrow under this program and may borrow under it in future periods.

Note 13. Postretirement Benefit Plans

The components of net periodic benefit cost for our defined benefit pension plans are as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2016 2015 2016 2015
Domestic defined benefit pension plans:
Service cost $ 1
$ 1
$ 2
$ 2
Interest cost 1
1
3
3
Expected return on plan assets (2 ) (2 ) (4 ) (4 )
Amortization of net actuarial loss 1
1
2
2
Net periodic benefit cost $ 1
$ 1
$ 3
$ 3
International defined benefit pension plans:
Service cost $ 3
$ 3
$ 8
$ 9
Interest cost 6
6
18
18
Expected return on plan assets (8 ) (8 ) (25 ) (25 )
Amortization of net actuarial loss 2
3
6
10
Net periodic benefit cost $ 3
$ 4
$ 7
$ 12
Total net periodic benefit cost $ 4
$ 5
$ 10
$ 15



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2017			2016			2017			2016
Domestic defined benefit pension plans:
Service cost	$	1		$	1		$	2		$	1
Interest cost	1			1			2			2
Expected return on plan assets	(1		)	(1		)	(3		)	(2		)
Amortization of net actuarial loss	—			—			1			1
Net periodic benefit cost	$	1		$	1		$	2		$	2
International defined benefit pension plans:
Service cost	$	3		$	2		$	6		$	5
Interest cost	5			6			10			12
Expected return on plan assets	(8		)	(8		)	(16		)	(17		)
Amortization of net actuarial loss	2			2			4			4
Net periodic benefit cost	$	2		$	2		$	4		$	4
Total net periodic benefit cost	$	3		$	3		$	6		$	6

The total net periodic benefit cost for other postretirement employee benefit plans was less than $1 million and $2$1 million including amounts recognized in other comprehensive income ("OCI") of less than $1 million, for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, respectively.~~2017. The total net periodic benefit cost for other postretirement employee benefit plans was $1 million and $3$2 million, including amounts recognized in OCI of less than $1 million, for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2015, respectively.~~2016.

We contributed ~~$22~~$13 million and ~~$21~~$14 million to our defined benefit plans during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Additional contributions ranging between approximately $6$9 million and ~~$10~~$15 million are expected during the remainder of ~~2016.~~2017.

Note 14.14. Share-Based Compensation Plans

Share-based compensation expense was $5 ~~million and $15 million during the three and nine months ended September 30, 2016, respectively, and $3~~ million and $11 million during the three and ~~nine~~six months ended ~~September~~June 30,~~2015,~~ 2017, respectively, and $5 million and $10 million during the three and six months ended June 30,2016, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $6$8 million, ~~$19~~$25 million and ~~$10~~$15 million, respectively, at ~~September~~June 30, ~~2016~~2017 and is expected to be recognized over a weighted average period of ~~1.9, 1.8~~2.1, 2.1 and 2.2 years, respectively. The amount of cash received from the exercise of stock options was ~~$22~~$7 million and ~~$14~~$16 million for the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016, ~~and 2015,~~ respectively.

Stock Option Grants

The following is a summary of the changes in outstanding stock options for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017.

Shares (in thousands)

Weighted
Average
Exercise
Price / Share

Weighted Average
Remaining
Contractual
Term (Years)

Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2016 2,561
$ 31.16
6.8
Granted 463
37.90

Exercised (797 ) 27.91

Forfeited and expired (44 ) 35.55

Outstanding at September 30, 2016 2,183
$ 33.68
7.2 $ 41
Options exercisable at September 30, 2016 1,222
$ 29.40
5.9 $ 26
Vested and expected to vest as of September 30, 2016 2,098
$ 33.53
7.1 $ 40



	Share units (in thousands)		Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2017	2,126		$	33.71	6.9
Granted	498		48.33
Exercised	(217	)	31.70
Forfeited and expired	(47	)	42.00
Outstanding at June 30, 2017	2,360		$	36.81	7.2	$	44
Options exercisable at June 30, 2017	1,423		$	32.89	6.0	$	32
Vested and expected to vest as of June 30, 2017	2,239		$	36.32	7.1	$	43

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~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$12~~$4.5 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 ~~2016~~2017 grants.

Volatility 28.87
%
Risk-free interest rate 1.41
%
Dividend yield 1.63
%
Expected term (in years) 5.6

Weighted-average fair value / share $ 9.05



Volatility	25.40		%
Risk-free interest rate	2.07		%
Dividend yield	1.49		%
Expected term (in years)	5.1
Weighted-average fair value / share	$	10.65

Expected volatility is calculated based on a weighted analysis of historic and implied volatility measures for a set of peer companies and 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 ~~units~~unit activity for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017. The fair value of the restricted stock units is equal to the closing share price on the date of the grant.

Shares (in thousands)

Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2016 1,013
$ 34.52
Granted 300
38.99
Vested (291 ) 29.61
Forfeited (75 ) 36.75
Outstanding at September 30, 2016 947
$ 37.27



	Share units (in thousands)		Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2017	899		$	37.67
Granted	332		49.26
Vested	(353	)	38.27
Forfeited	(42	)	40.74
Outstanding at June 30, 2017	836		$	36.05

ROIC Performance Share Unit Grants

The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant.

Shares (in thousands)

Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2016 160
$ 35.48
Granted 111
37.87
Vested —
—
Forfeited (20 ) 28.31
Outstanding at September 30, 2016 251
$ 37.09



	Share units (in thousands)		Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2017	250		$	37.11
Granted	110		48.33
Vested	—		—
Forfeited	(67	)	38.40
Outstanding at June 30, 2017	293		$	41.01

TSR Performance Share Units Grants

The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017.

Shares (in thousands)

Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2016 —
$ —
Granted 111
46.13
Vested —
—
Forfeited (2 ) 45.34
Outstanding at September 30, 2016 109
$ 46.14



	Share units (in thousands)		Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2017	108		$	46.15
Granted	110		45.43
Vested	—		—
Forfeited	(9	)	44.14
Outstanding at June 30, 2017	209		$	47.20

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 ~~2016~~2017 grants.



Volatility	~~31.7~~30.5	%
Risk-free interest rate	~~0.88~~1.51	%
Dividend yield	~~1.64~~1.49	%

Note 15. Capital Stock

On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. For the three and six months ended June 30, 2017 we repurchased 0.1 million shares for $7 million. There were no shares repurchased under this program during the three and ~~nine~~six months ended ~~September~~June 30, 2016. There are up to ~~$420~~$413 million in shares that may still be purchased under this plan as of ~~September~~June 30, ~~2016.~~

On August 20, 2013, the Board of Directors authorized the repurchase of up to $250 million in shares with no expiration date. The program's objective was to deploy our capital in a manner that benefited our shareholders and maintained our focus on growth. For the three and nine months ended September 30, 2015, we repurchased 0.6 million and 2.0 million shares for $20 million and $70 million, respectively. As of December 31, 2015, we have exhausted the authorized amount to repurchase shares under this plan.

2017.

On August 18, 2012, our Board of Directors authorized the repurchase of up to 2.0 million shares of common stock with no expiration date. The program's objective is to offset dilution associated with various Xylem employee stock plans by acquiring shares in the open market from time to time. For the three and six months ended June 30, 2017 we repurchased 0.25 million shares for $13 million. There were no shares repurchased under this program during the three and ~~nine~~six months ended ~~September~~June 30, 2016. ~~During~~As of June 30, 2017, we have exhausted the ~~three and nine months ended September 30, 2015 we repurchased 0.8 million~~authorized amount to repurchase shares ~~for $25 million in both periods. There are up to 0.3 million shares (approximately $13 million in value) that may still be purchased~~ under this ~~plan as of September 30, 2016.~~plan.

Aside from the aforementioned repurchase programs, we repurchased less than 0.1 million shares and 0.1 million shares for less than $1 million and $3$5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016 and 2015,~~2017, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. Likewise, we repurchased less than 0.1 million shares and 0.1 million shares for less than $1 million and $3 million for the three and six months ended June 30, 2016, respectively.

Note 16. Accumulated Other Comprehensive Income (Loss)

The following table provides the components of accumulated other comprehensive income (loss) for the three months ended ~~September~~June 30, ~~2016:~~2017:


(in millions)	Foreign Currency Translation			Postretirement Benefit Plans			Derivative Instruments			Total			Foreign Currency Translation			Postretirement Benefit Plans			Derivative Instruments			Total
Balance at July 1, 2016	$	(69	)	$	(183	)	$	—		$	(252	)
Balance at April 1, 2017													$	(103	)	$	(175	)	$	2		$	(276	)
Foreign currency translation adjustment	(8		)	—			—			(8		)	30			—			—			30
Tax on foreign currency translation adjustment	4			—			—			4			22			—			—			22
Amortization of net actuarial loss on postretirement benefit plans into:
Selling, general and administrative expenses	—			2			—			2			—			1			—			1
Other non-operating expense, net	—			1			—			1
Other non-operating income													—			1			—			1
Income tax impact on amortization of postretirement benefit plan items	—			(1		)	—			(1		)	—			—			—			—
Unrealized gain on derivative hedge agreements													—			—			3			3
Reclassification of unrealized gain on derivative hedge agreements into revenue	—			—			(1		)	(1		)	—			—			(1		)	(1		)
Balance at September 30, 2016	$	(73	)	$	(181	)	$	(1	)	$	(255	)
Balance at June 30, 2017													$	(51	)	$	(173	)	$	4		$	(220	)

The following table provides the components of accumulated other comprehensive income (loss) for the ~~nine~~six months ended ~~September~~June 30, ~~2016:~~2017:

(in millions) Foreign Currency Translation Postretirement Benefit Plans Derivative Instruments Total
Balance at January 1, 2016 $ (43 ) $ (185 ) $ (10 ) $ (238 )
Foreign currency translation adjustment (25 ) —
—
(25 )
Tax on foreign currency translation adjustment 6
—
—
6
Amortization of net actuarial loss on postretirement benefit plans into:
Cost of revenue —
2
—
2
Selling, general and administrative expenses —
5
—
5
Other non-operating expense, net —
1
—
1
Income tax impact on amortization of postretirement benefit plan items —
(4 ) —
(4 )
Reclassification of unrealized gain on derivative hedge agreements into cost of revenue —
—
(1 ) (1 )
Reclassification of unrealized gain on derivative hedge agreements into revenue —
—
(1 ) (1 )
Reclassification of unrealized loss on net investment hedge (11 ) —
11
—
Balance at September 30, 2016 $ (73 ) $ (181 ) $ (1 ) $ (255 )



(in millions)	Foreign Currency Translation			Postretirement Benefit Plans			Derivative Instruments			Total
Balance at January 1, 2017	$	(140	)	$	(177	)	$	(1	)	$	(318	)
Foreign currency translation adjustment	59			—			—			59
Tax on foreign currency translation adjustment	30			—			—			30
Amortization of net actuarial loss on postretirement benefit plans into:
Cost of revenue	—			1			—			1
Selling, general and administrative expenses	—			3			—			3
Other non-operating income	—			1			—			1
Income tax impact on amortization of postretirement benefit plan items	—			(1		)	—			(1		)
Unrealized gain on derivative hedge agreements	—			—			5			5
Reclassification of unrealized loss on derivative hedge agreements into cost of revenue	—			—			1			1
Reclassification of unrealized gain on derivative hedge agreements into revenue	—			—			(1		)	(1		)
Balance at June 30, 2017	$	(51	)	$	(173	)	$	4		$	(220	)

Note 17.17. Commitments and Contingencies

Legal Proceedings

From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses, including acquisitions and divestitures, intellectual property matters, product liability and personal injury claims, employment and pension matters, government and commercial contract disputes.

On or about February 17, 2009, following a statement submitted to the Spanish Competition Authority (Comision Nacional de la Competencia, "CNC") by Grupo Industrial Ercole Marelli, S.A. regarding an anti-competitive agreement in which it said it had been participating, the CNC conducted an investigation at ITT Water &

Wastewater España S.A. (now named Xylem Water Solutions España S.A.), at the Spanish Association of Fluid Pump Manufacturers (the "Association"), and at the offices of other members of the Association. On September 16, 2009, the Directorate of Investigation of the CNC commenced formal proceedings for alleged restrictive practices allegedly prohibited under applicable law. Following the conclusion of the formal proceedings, the CNC Council imposed fines on the Association and nineteen Spanish manufacturers and distributors of fluid pumps, including a fine of Euro 2.4 million applied to ITT Water & Wastewater España S.A. and ITT Corporation (now ITT LLC). The Company's appeals of the decision were rejected and the fine was paid in March 2016. This matter is now closed.

From time to time claims may be asserted against Xylem alleging injury caused by any of our products resulting from asbestos exposure. We believe there are numerous legal defenses available for such claims and would defend ourselves vigorously. Pursuant to the Distribution Agreement among ITT Corporation (now ITT LLC), Exelis and Xylem, ITT Corporation (now ITT LLC) has an obligation to indemnify, defend and hold Xylem harmless for asbestos product liability matters, including settlements, judgments, and legal defense costs associated with all pending and future claims that may arise from past sales of ITT’s legacy products. We believe ITT Corporation (now ITT LLC) remains a substantial entity with sufficient financial resources to honor its obligations to us.

Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claims, we do not expect that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of operations, or financial condition. We have estimated and accrued $11 million and $11 million as of June 30, 2017 and December 31, 2016, respectively, for these general litigation matters.

Indemnifications

As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC), Exelis Inc. and Xylem will indemnify, defend and hold harmless each of the other parties with respect to such parties’ assumed or retained liabilities under the Distribution Agreement and breaches of the Distribution Agreement or related spin agreements. The former parent’s indemnification obligations include asserted and unasserted asbestos and silica liability claims that relate to the presence or alleged presence of asbestos or silica in products manufactured, repaired or sold prior to October 31, 2011, the Distribution Date, subject to limited exceptions with respect to certain employee claims, or in the structure or material of any building or facility, subject to exceptions with respect to employee claims relating to Xylem buildings or facilities. The indemnification associated with pending and future asbestos claims does not expire. Xylem has not recorded a liability for material matters for which we expect to be indemnified by the former parent or Exelis Inc. through the Distribution Agreement and we are not aware of any claims or other circumstances that would give rise to material payments from us under such indemnifications. On May 29, 2015, Harris Inc. acquired Exelis. As the parent of Exelis, Harris Inc. is responsible for Exelis’s indemnification obligations under the Distribution Agreement.

Guarantees

We obtain certain stand-by letters of credit, bank guarantees and surety bonds from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance related requirements. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the amount of stand-by letters of credit, bank guarantees and surety bonds was ~~$177~~$248 million and ~~$161~~$218 million, respectively.

Environmental

In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned and/or operated by Xylem or for which we are responsible under the Distribution Agreement, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.

Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing

technologies. Our accrued liabilities for these environmental matters represent the best estimates related to the

investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis. We have estimated and accrued $4 million and $4 million as of ~~both September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively, for environmental matters.

It is difficult to estimate the final costs of investigation and remediation due to various factors, including incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the extent of investigation or remediation and our share, if any, of liability for such conditions, the selection of alternative remedial approaches, and changes in environmental standards and regulatory requirements. We believe the total amount accrued is reasonable based on existing facts and circumstances.

Warranties

We warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and specific non-performance. The table below provides the changes in our product warranty accrual.

(in millions) 2016 2015
Warranty accrual – January 1 $ 33
$ 31
Net charges for product warranties in the period 20
21
Settlement of warranty claims (21 ) (21 )
Foreign currency and other 3
—
Warranty accrual - September 30 $ 35
$ 31



(in millions)	2017			2016
Warranty accrual – January 1	$	99		$	33
Net charges for product warranties in the period	17			13
Settlement of warranty claims	(24		)	(15		)
Foreign currency and other	2			1
Warranty accrual - June 30	$	94		$	32

Note 18. Segment Information

Our business has ~~two~~three reportable segments: Water Infrastructure, Applied Water and ~~Applied Water.~~Sensus & Analytics. When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics. The Water Infrastructure segment focuses on the transportation ~~treatment~~ and ~~testing~~treatment of water, offering a range of products including water and wastewater pumps, treatment ~~and testing~~ equipment, and controls and systems. The Applied Water segment ~~encompasses~~serves many of the primary uses of water and focuses on the residential, commercial and industrial ~~and agriculture markets offering a wide range of~~markets. The Applied Water segment’s major products ~~including~~include pumps, valves, heat exchangers, controls and ~~heat exchangers.~~dispensing equipment. The Sensus & Analytics segment focuses on developing advanced technology solutions that enable intelligent use and conservation of critical water and energy resources as well as analytical instrumentation used in the testing of water. The Sensus & Analytics segment's major products include smart metering, networked communications, measurement and control technologies, software and services including cloud-based analytics, remote monitoring and data management, and testing equipment.

Additionally, we have Regional selling locations, which consist primarily of selling and marketing organizations and related support services, that offer products and services across ~~both of~~ our reportable segments. Corporate and other consists of corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs, as well as charges related to certain matters, such as environmental matters that are managed at a corporate level and are not included in the business segments in evaluating performance or allocating resources.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1 in the ~~2015~~2016 Annual Report). The following tables contain financial information for each reportable segment:

Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2016 2015 2016 2015
Revenue:
Water Infrastructure $ 554
$ 551
$ 1,634
$ 1,602
Applied Water 343
351
1,042
1,057
Total $ 897
$ 902
$ 2,676
$ 2,659
Operating Income:
Water Infrastructure $ 79
$ 83
$ 203
$ 195
Applied Water 50
46
140
143
Corporate and other (20 ) (9 ) (46 ) (31 )
Total $ 109
$ 120
$ 297
$ 307
Depreciation and Amortization:
Water Infrastructure $ 22
$ 22
$ 65
$ 70
Applied Water 6
7
18
19
Regional selling locations (a) 2
3
8
8
Corporate and other 2
1
6
5
Total $ 32
$ 33
$ 97
$ 102
Capital Expenditures:
Water Infrastructure $ 19
$ 12
$ 53
$ 49
Applied Water 4
5
15
15
Regional selling locations (b) 4
3
19
9
Corporate and other 1
1
3
5
Total $ 28
$ 21
$ 90
$ 78



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2017			2016			2017			2016
Revenue:
Water Infrastructure	$	482		$	484		$	901		$	924
Applied Water	361			366			694			699
Sensus & Analytics	321			82			640			156
Total	$	1,164		$	932		$	2,235		$	1,779
Operating Income:
Water Infrastructure	$	74		$	66		$	114		$	117
Applied Water	49			51			85			90
Sensus & Analytics	29			4			54			7
Corporate and other	(13		)	(12		)	(28		)	(26		)
Total operating income	$	139		$	109		$	225		$	188
Interest expense	$	21		$	20		$	41		$	34
Other non-operating income	3			1			2			1
Gain from sale of business	—			—			5			—
Income before taxes	$	121		$	90		$	191		$	155
Depreciation and Amortization:
Water Infrastructure	$	15		$	16		$	31		$	33
Applied Water	6			6			12			12
Sensus & Analytics	30			5			61			10
Regional selling locations (a)	4			4			8			6
Corporate and other	2			2			4			4
Total	$	57		$	33		$	116		$	65
Capital Expenditures:
Water Infrastructure	$	13		$	13		$	27		$	32
Applied Water	3			3			10			11
Sensus & Analytics	15			2			32			2
Regional selling locations (b)	3			5			8			15
Corporate and other	—			1			—			2
Total	$	34		$	24		$	77		$	62


(a)	Depreciation and amortization expense incurred by the Regional selling locations was included in an overall allocation of Regional selling location costs to the segments; however, a certain portion of that expense was not specifically identified to a segment. That expense is captured in this Regional selling location line.


(b)	Represents capital expenditures incurred by the Regional selling locations not allocated to the segments.

The following table contains the total assets for each reportable segment:

(in millions) September 30,
2016 December 31,
2015
Water Infrastructure $ 2,107
$ 2,024
Applied Water 1,042
1,054
Regional selling location (a) 1,021
905
Corporate and other (b) 608
674
Total $ 4,778
$ 4,657



(in millions)	June 30, 2017		December 31, 2016
Water Infrastructure	$	1,218	$	1,179
Applied Water	1,010		990
Sensus & Analytics	3,200		3,102
Regional selling locations (a)	1,057		965
Corporate and other (b)	222		238
Total	$	6,707	$	6,474


(a)	The Regional selling locations have assets that consist primarily of cash, accounts receivable and inventory which are not allocated to the segments.


(b)	Corporate and other consists of items pertaining to our corporate headquarters function, which principally consist of cash, deferred tax assets, pension assets and certain property, plant and equipment.

~~Note 19. Subsequent Events~~

~~Senior Notes~~

~~On October 11, 2016, we issued~~ ~~3.250% Senior Notes of $500 million~~ ~~aggregate principal amount due October 2026 (the “Senior Notes due 2026”) and~~ ~~4.375% Senior Notes of $400 million~~ aggregate principal amount due October 2046 (the “Senior Notes due 2046” and, together with the Senior Notes due 2026, the “Notes”). Interest on the Notes is payable semiannually on May 1 and November 1 of each year beginning on May 1, 2017.

We used the net proceeds of the Notes, together with cash on hand, proceeds from issuances under our existing commercial paper program and borrowings under the Term Loan (as described below), to partially fund the acquisition of the direct and indirect subsidiaries of Sensus (other than Sensus Industries Limited) (refer to Note 3 for further information on the Sensus acquisition).

~~Term Loan~~

~~On October 24, 2016, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month~~ ~~€150 million (approximately $164 million~~ as of October 28, 2016) term loan facility (the “Term Facility”) the terms of which are set forth in a term loan agreement, among the borrower, the Company, as parent guarantor and ING Bank. The Company has entered into a parent guarantee in favor of ING Bank also dated October 24, 2016 to secure all present and future obligations of the borrower under the Term Loan Agreement. The Term Facility was used to partially fund the Sensus Acquisition. The Term Facility will mature on October 27, 2017. The Term Facility bears interest at EURIBOR plus ~~0.35%.~~ The Agreement contains certain representations and warranties, certain affirmative covenants, certain negative covenants, a financial covenant, certain conditions and events of default that are customarily required for similar financings.

~~Finance Contract with the European Investment Bank~~

On October 28, 2016, the Company entered into a Finance Contract (the “Finance Contract”) with the European Investment Bank (the “EIB”). The Company's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the Finance Contract and Xylem Inc. is the Guarantor. The Finance Contract provides for up to ~~€105 million (approximately $115 million~~ as of October 28, 2016) to finance research, development and innovation projects in the field of sustainable water and wastewater solutions during the period from 2017 through 2019 in Sweden, Germany, Italy, UK, Hungary and Austria. The Company has unconditionally guaranteed the performance of the borrowers under the Finance Contract.

Under the Finance Contract, the borrowers are able to draw loans on or before April 28, 2018, with a maturity of no longer than 11 years. The Finance Contract contains the same leverage ratio as the Credit Facility. The Finance Contract also contains limitations on, among other things, incurring debt, granting liens, and entering into sale and leaseback transactions. In addition, the Finance Contract contains other terms and conditions, such as customary representations and warranties, additional covenants and customary events of default.

The Finance Contract provides for Fixed Rate loans and Floating Rate loans. The interest rate per annum applicable to Fixed Rate loans is at a fixed percentage rate per annum specified by the EIB which includes the applicable margin. The interest rate per annum applicable to Floating Rate loans is at the rate determined by reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in Pounds Sterling or U.S. Dollars, plus an applicable spread specified by the EIB which includes the applicable margin. The applicable margin is 59 basis points (0.59%). We have not drawn any funds under the Finance Contract.

~~Acquisitions~~

On October 18, 2016, we acquired Visenti Pte. Ltd. (“Visenti”), a smart water analytics company focused on leak detection and pressure monitoring solutions to help water utilities manage their water networks for $8 million with additional contingent consideration of up to $4 million. Visenti, a privately-owned company headquartered in Singapore, has approximately 25 employees.



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes, ~~thereto,~~ included elsewhere in this report on Form 10-Q (this "Report"). Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries. References in the condensed consolidated financial statements to "ITT" or the "former parent" refer to ITT Corporation (now ITT LLC) and its consolidated subsidiaries ~~(other than Xylem Inc.)~~ as of the applicable periods.

This Report contains information that may constitute “forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” “believe,” “target,” “will,” “could,” “would,” “should” and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements include statements about the capitalization of the Company, the Company’s restructuring and realignment, future strategic plans and other statements that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals. All statements that address operating or financial performance, events or developments that we expect or anticipate will occur in the future - including statements relating to orders, revenue, operating margins and earnings per share growth, and statements expressing general views about future operating results - are forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements.

Factors that could cause results to differ materially from those anticipated include: overall economic and business conditions, political and other risks associated with our international operations, including military actions, economic sanctions or trade embargoes that could affect customer markets, and non-compliance with laws, including foreign corrupt practice laws, export and import laws and competition laws; potential for unexpected cancellations or delays of customer orders in our reported backlog; our exposure to fluctuations in foreign currency exchange rates; competition and pricing pressures in the markets we serve; the strength of housing and related markets; weather conditions; ability to retain and attract key members of management; our relationship with and the performance of our channel partners; our ability to successfully identify, complete and integrate acquisitions, including the integration of Sensus; our ability to borrow or to refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; changes in the value of goodwill or intangible assets; risks relating to product defects, product liability and recalls; governmental investigations; security breaches or other disruptions of our information technology systems; litigation and contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 ("~~2015~~2016 Annual Report") and with subsequent filings we make with the Securities and Exchange Commission ("SEC").

All forward-looking statements made herein are based on information available to the Company as of the date of this Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends on December 31. For ease of presentation, the reporting periods included herein are described as ending on the last day of the calendar quarter.

Overview

Xylem is a leading ~~equipment~~global water technology company. We design, manufacture and service ~~provider for water and wastewater applications with~~highly engineered solutions ranging across a wide variety of critical applications. Our broad portfolio of ~~products~~solutions addresses customer needs across the water cycle, from the delivery and ~~services addressing~~use of drinking water to the ~~full cycle~~collection and treatment of ~~water, from collection, distribution and use~~wastewater to the return of water to the environment. Our ~~business focuses on providing technology-intensive equipment and services. Our~~ product and service offerings are organized into ~~two~~three reportable ~~segments:~~segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and ~~Applied Water. Our segments are aligned with each of~~Sensus & Analytics.

Water Infrastructure serves the ~~sectors in the cycle of water,~~ water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and ~~usage applications.~~

•

~~Water Infrastructure~~ serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in

seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. In the Water Infrastructure segment, we provide the majority of our sales directly

to customers with strong applications expertise, while the remaining amount is through distribution partners.

Applied Water serves the usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers, valves and controls provide cooling to power plants and manufacturing facilities, as well as circulation for food and beverage processing. We also provide boosting systems for farming irrigation, pumps for dairy operations and rainwater reuse systems for small scale crop and turf irrigation. In the Applied Water segment, we provide the majority of our sales through long-standing relationships with many of the leading independent distributors in the markets we serve, with the remainder going directly to customers.

Sensus & Analytics primarilyserves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and services that allow customers to more effectively use their distribution networks for the delivery of critical resources such as water, electricity and natural gas. In the Sensus & Analytics segment, we also provide analytical instrumentation used to measure water quality, flow and level in wastewater, surface water and coastal environments. Additionally, we sell software and services including cloud-based analytics, remote monitoring and data management, and we also sell smart lighting products and solutions that improve efficiency and public safety efforts across communities. In the ~~Water Infrastructure~~Sensus & Analytics segment we ~~provide the majority of our sales directly to customers with strong application expertise, while the remaining amount is through distribution partners.~~

•

~~Applied Water~~ serves the usage applications sector with water pressure boosting systems for heating, ventilation and air conditioning and for fire protection systems to the residential and commercial building services markets. In addition, our pumps, heat exchangers, valves and controls provide cooling to power plants and manufacturing facilities, as well as circulation for food and beverage processing. We also provide boosting systems for farming irrigation, pumps for dairy operations and rainwater reuse systems for small scale crop and turf irrigation. In the Applied Water segment, we provide the majority of our sales through long-standing relationships with the world’s leading distributors, with the remainder going directly to customers.

We sell our equipment and services through direct and indirect channels that serve the needs of each customer type. In the Water Infrastructure segment, we provide the majority of our sales direct to customers with strong application expertise, while the remaining amount is through distribution partners. In the Applied Water segment, we provide the majority ofgenerate our sales through a combination of long-standing relationships with ~~the world’s~~ leading distributors ~~with~~and dedicated channel partners as well as direct sales depending on the ~~remainder going direct to customers.~~regional availability of distribution channels and the type of product.

Executive Summary

Xylem reported revenue for the ~~third~~second quarter of ~~2016~~2017 of ~~$897~~$1,164 million, ~~a decrease~~an increase of ~~0.6%~~24.9% compared to ~~$902~~$932 million ~~during~~reported in the ~~third~~second quarter of ~~2015.~~2016. Revenue increased ~~1.0%~~26.4% on a constant currency basis ~~primarily~~mostly due to $238 million of revenue related to the Sensus business acquisition and organic revenue growth of $10 million driven by growth in the ~~public utility market as well as modest~~industrial, residential and commercial ~~and residential market growth and contributions of 0.9% from the recent acquisitions within our Water Infrastructure segment,~~end markets which were partially offset by declines in the ~~industrial~~public utility end market.

Operating income for the ~~third~~second quarter of ~~2016~~2017 was ~~$109~~$139 million, reflecting ~~a decrease~~an increase of ~~9.2%~~27.5% compared to ~~$120~~$109 million in the ~~third~~second quarter of ~~2015.~~2016. Operating margin was ~~12.2%~~11.9% for 2017 versus 11.7% for 2016, ~~versus 13.3% for 2015, a decrease~~an increase of ~~110~~20 basis points. ~~This decline~~The increase in operating ~~income included increased~~margin was due to several contributing factors with cost reductions resulting from progress in our productivity and global procurement initiatives and restructuring savings being amongst the largest. These favorable impacts on operating margin were largely offset by cost inflation and ~~realignment charges~~the impact of Sensus acquisition related costs and ~~special charges, which increased $8 million and $10 million, respectively, in the third quarter as compared to the prior year.~~Sensus purchase accounting impacts.

Adjusted operating income was ~~$131~~$155 million with an operating margin of ~~14.6%~~13.3% in ~~2016~~2017 as compared to adjusted operating income of ~~$124~~$121 million with an adjusted operating margin of ~~13.7%. The~~13.0% in the second quarter of 2016. This increase in adjusted operating margin was due to ~~increased cost reductions~~all of the factors noted above with the exception of the impact of Sensus acquisition related costs of $4 million which ~~were partially offset by cost inflation, strategic investments and unfavorable sales mix.~~are excluded from adjusted operating margin.

Additional financial highlights for the quarter ended ~~September~~June 30, ~~2016~~2017 include the following:

Orders of ~~$946~~$1,212 million, up ~~0.7%~~31.3% from ~~$939~~$923 million in the prior year, up ~~1.3%~~8.1% on an organic basis

Earnings per share of ~~$0.41, down 14.6%~~$0.55, up 41.0% from the prior year ($~~0.54~~0.59, up 22.9% on an adjusted ~~basis,~~basis)

Cash flow from operating activities of $151 million for the six months ended June 30, 2017, up ~~10.2%)~~20.8% from the prior year, and free cash flow, excluding Sensus acquisition related costs, of $96 million as compared to $63 million in the prior year


•	Cash flow from operating activities of $274 million for the nine months ended September 30, 2016, up 5.4% from prior year, and free cash flow of $184 million as compared to $182 million in the prior year, up 1.1%

Key Performance Indicators and Non-GAAP Measures

Management reviews key performance indicators including revenue, gross margin, segment operating income and margins, earnings per share, orders growth, working capital ~~free cash flow~~ and backlog, among others. In addition, we consider certain non-GAAP (or “adjusted”) measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, dividends, acquisitions, share repurchases and debt repayment. ~~However, other than with respect to total~~Excluding revenue, ~~we only provide~~Xylem provides guidance on a non-GAAP basis ~~and do not provide reconciliations of such forward-looking measures to GAAP~~ due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as ~~integration and acquisition-related costs, special charges and~~discrete tax ~~related special items.~~items, without unreasonable effort. These adjusted metrics are consistent with how management views our business and are used to make financial, operating and planning decisions. These metrics, however, are not measures of financial performance under GAAP and should not be considered a substitute for revenue, operating income, net income, earnings per share (basic and diluted) or net cash from operating activities as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation ~~assumes no change in exchange rates from~~impacts is determined by translating current period and prior period activity using the ~~prior period.~~same currency conversion rate.

"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This approach is used for countries whose functional currency is not the U.S. Dollar.

"adjusted net income" and "adjusted earnings per share" defined as net income and earnings per share, respectively, adjusted to exclude restructuring and realignment costs, ~~special charges, tax-related special items and~~Sensus acquisition related costs, gain from sale of ~~businesses.~~business and special charges and tax-related special items, as applicable. A reconciliation of adjusted net income is provided below.


	Three Months Ended					Nine Months Ended						Three Months Ended					Six Months Ended
	September 30,					September 30,						June 30,					June 30,
(In millions, except for per share data)	2016		2015			2016			2015			2017			2016		2017			2016
Net income	$	73	$	88		$	210		$	226
Restructuring and realignment, net of tax benefit of $4 and $9 for 2016 $1 and $4 for 2015	8		3			23			12
Special charges, net of tax benefit of $2 and $7 for 2016 and $0 for 2015	12		2			20			5
Net income attributable to Xylem												$	99		$	71	$	155		$	137
Restructuring and realignment, net of tax of $5 and $7 for 2017 and net of tax benefit of $3 and $5 for 2016												7			8		16			15
Sensus acquisition related costs, net of tax of $1 and $5 for 2017												3			—		9			—
Special charges, net of tax of $0 and $2 for 2017 and net of tax benefit of $4 and $5 for 2016												—			5		3			8
Tax-related special items	4		(3		)	(7		)	(6		)	(3		)	3		(3		)	(11		)
Gain from sale of businesses, net of $0 tax	—		—			—			(9		)
Gain from sale of business, net of tax of $2 for 2017												—			—		(3		)	—
Adjusted net income	$	97	$	90		$	246		$	228		$	106		$	87	$	177		$	149
Weighted average number of shares - Diluted	180.3		181.6			179.8			182.3			180.6			179.9		180.6			179.6
Adjusted earnings per share	$	0.54	$	0.49		$	1.37		$	1.25		$	0.59		$	0.48	$	0.98		$	0.83

"operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and special charges" defined as operating expenses, adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs and special charges.

"adjusted operating ~~income (loss)"~~income" defined as operating income, ~~(loss),~~ adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue.

“realignment costs” defined as costs not included in restructuring costs that are incurred as part of actions taken to reposition our business, including items such as professional fees, severance, relocation, travel, facility set-up and other costs.

~~“special charges”~~"Sensus acquisition related costs" defined as costs incurred by the Company associated with the acquisition of Sensus that are being reported within operating income. These costs include integration costs and costs related to the recognition of the backlog intangible asset recorded in purchase accounting.

“special charges" defined as costs incurred by the Company, such as non-cash impairment charges, initial acquisition costs not related to Sensus and other special non-operating items, as well as interest expense related to the early extinguishment of debt during Q2 2016, initial acquisition related costs (including financing costs related to the bridge loan entered into in Q3 2016 for the Sensus acquisition), costs incurred for the contractual indemnification of tax obligations to ITT and other special non-operating items.2016.

"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, significant reserves for cash repatriation, excess tax benefits/losses and other discrete tax adjustments.

"free cash flow" defined as net cash from operating activities, as reported in the ~~Condensed Consolidated Statements~~statement of ~~Cash Flows,~~cash flow, less capital expenditures, as well as adjustments for other significant items that impact current results ~~that~~which management believes are not related to our ongoing operations and performance. Our definition of free cash flow does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.


	Nine Months Ended						Six Months Ended
	September 30,						June 30,
(In millions)	2016			2015			2017			2016
Net cash provided by operating activities	$	274		$	260		$	151		$	125
Capital expenditures	(90		)	(78		)	(77		)	(62		)
Free cash flow	$	184		$	182		$	74		$	63
Cash paid for Sensus related acquisition costs							$	(22	)	$	—
Free cash flow, excluding Sensus acquisition related costs							$	96		$	63

~~2016~~

“EBITDA” defined as earnings before interest, taxes, depreciation, amortization expense, and share-based compensation and “Adjusted EBITDA” reflects the adjustment to EBITDA to exclude restructuring and realignment costs, Sensus acquisition related costs, gain from sale of business and special charges.



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2017		2016		2017			2016
Net Income	$	100	$	71	$	156		$	137
Income tax expense	21		19		35			18
Interest expense (income), net	20		19		40			33
Depreciation	27		21		55			41
Amortization	30		12		61			24
Stock compensation	5		5		11			10
EBITDA	$	203	$	147	$	358		$	263
Restructuring and realignment	12		11		23			20
Sensus acquisition related costs	2		—		9			—
Special charges	—		1		5			5
Gain from sale of business	—		—		(5		)	—
Adjusted EBITDA	$	217	$	159	$	390		$	288

2017 Outlook

We ~~continue~~anticipate total revenue growth in the range of 24% to ~~anticipate~~25% in 2017 with organic revenue growth in the ~~low single digits in 2016.~~low-single-digits and the Sensus and Visenti acquisitions contributing the additional revenue growth. The following is a summary of our organic revenue outlook by end market.

Industrial market ~~performance decreased 5%~~revenue was up slightly on an organic basis through the third quarter due to continued decreases in the oil and gas market as well as weakness in the mining market driven by dewatering declines. We expect these trends to continue in the fourth quarter resulting in a declinefirst half of ~~mid-single-digit performance for~~ the year. ~~This projection assumes flat to down low-single-digits in light industrial applications, and mid-single-digit declines in~~We expect oil and gas and mining ~~applications.~~

~~Through September, public utilities increased 12%. We expect growth in~~markets to stabilize through the ~~high-single to low-double-digits for 2016 due in part to tougher comparisons in the fourth quarter~~balance of the ~~year. We anticipate continued strength~~year, and we expect market conditions in the United States to improve modestly throughout the year. As a result, we expect organic revenue of low-single-digits for 2017.

Public utility revenue declined 4% organically through the first half of the year primarily due to a difficult comparison to double-digit growth in the United States in the prior year. We expect organic revenue growth in the low-single-digits for 2017 with project activity fueling growth in emerging markets, primarily in China and ~~western Europe.~~India, and growth in the UK from the AMP6 investment cycle. We also anticipate revenue from Sensus to contribute mid-single-digit growth over their historical performance, driven by expected project deployments and traction from new products. On a pro forma basis that includes Sensus, we expect organic revenue growth of low-to-mid-single-digits for 2017.

In the commercial markets, growth was 3% through the ~~third quarter~~first half of the year driven by growth in ~~Europe which was partially offset by weakness in China.~~the United States and Asia Pacific. In ~~the fourth quarter~~2017 we expect ~~this trend to continue and expect~~organic revenue growth in the ~~low-single-digit~~low to mid-single-digit range as we see the United States market stabilizing while the European market is experiencing growth related to new energy efficient products and sales channel investments.

In residential markets, growth was 14% for the ~~year.~~

~~Residential markets declined 2% through September~~first half of the year driven by ~~Asia Pacific and the Middle East. While we do anticipate modest growth~~strength in the ~~fourth quarter,~~United States and Asia Pacific. In 2017 we expect full year organic revenue performance will be ~~down~~up in the ~~low-single-digits.~~

~~Our agriculture markets, which is our smallest end~~high-single-digits. We continue to expect the United States market ~~declined 3% through September.~~to be competitive given the replacement nature of the sector we serve. We expect ~~2016~~growth from the European market, which looks to be ~~down in~~modestly stronger as increased residential building permitting provides an indicator of sales. Additionally, we expect to benefit from market share gains from channel disruption throughout the ~~mid-single-digits as we will likely continue to see unfavorable market conditions.~~remainder of the year.

We will continue to strategically execute restructuring and realignment actions primarily to reposition our European and North American ~~businesses~~business in an effort to optimize our cost structure and improve our operational efficiency and effectiveness. During ~~2016,~~2017, we expect to incur approximately ~~$45~~$40 million in Sensus integration, restructuring and realignment costs. We expect to realize approximately $1$20 million of incremental net savings in ~~2016~~2017 from actions initiated in ~~2015,~~2016, and an additional ~~$10~~$5 million of net savings from our ~~2016~~2017 actions.

Additional strategic actions we are taking include strategic initiatives to drive above-market growth, advance continuous improvement activities to increase productivity, focus on improving cash performance and drive a disciplined capital deployment strategy. Additionally, with the acquisition of Sensus, we anticipate increased spending on research and development as a percentage of revenue as Sensus brings a higher profile of R&D given the investment required to support growth and new product launches.

As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving Xylem’s Analytics business from our Water Infrastructure business to our Sensus business, which was acquired in the fourth quarter of 2016. We believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will lead to operating efficiencies by integrating the supply chain process, and moving to a leaner, shared operations and functional structure. Accordingly, our reportable segments have changed. Beginning with the second quarter of 2017, the Company now reports the financial position and results of operations of its Analytics and Sensus businesses as one new reportable segment, which is called Sensus & Analytics. Our Water Infrastructure reportable segment no longer includes the results of our Analytics business. The Company has recast certain historical amounts between the Company's Water Infrastructure and Sensus & Analytics reportable segments, however this change had no impact on the Company's historical consolidated financial position or results of operations. The recast financial information does not represent a restatement of previously issued financial statements. Our Applied Water reportable segment remains unchanged.

Results of Operations


	Three Months Ended									Nine Months Ended									Three Months Ended									Six Months Ended
	September 30,									September 30,									June 30,									June 30,
(In millions)	2016			2015			Change			2016			2015			Change			2017			2016			Change			2017			2016			Change
Revenue	$	897		$	902		(0.6	)	%	$	2,676		$	2,659		0.6		%	$	1,164		$	932		24.9		%	$	2,235		$	1,779		25.6		%
Gross profit	357			351			1.7		%	1,055			1,014			4.0		%	459			369			24.4		%	871			698			24.8		%
Gross margin	39.8		%	38.9		%	90		bp	39.4		%	38.1		%	130		bp	39.4		%	39.6		%	(20	)	bp	39.0		%	39.2		%	(20	)	bp
Operating expenses excluding restructuring and realignment costs and special charges	226			227			(0.4	)	%	711			690			3.0		%
Operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and special charges																			304			248			22.6		%	604			485			24.5		%
Expense to revenue ratio	25.2		%	25.2		%	—		bp	26.6		%	25.9		%	70		bp	26.1		%	26.6		%	(50	)	bp	27.0		%	27.3		%	(30	)	bp
Restructuring and realignment costs	12			4			200.0		%	32			16			100.0		%	12			11			9.1		%	23			20			15.0		%
Sensus acquisition related charges																			4			—			NM			14			—			NM
Special charges	10			—			NM			15			1			NM			—			1			NM			5			5			—		%
Total operating expenses	248			231			7.4		%	758			707			7.2		%	320			260			23.1		%	646			510			26.7		%
Operating income	109			120			(9.2	)	%	297			307			(3.3	)	%	139			109			27.5		%	225			188			19.7		%
Operating margin	12.2		%	13.3		%	(110	)	bp	11.1		%	11.5		%	(40	)	bp	11.9		%	11.7		%	20		bp	10.1		%	10.6		%	(50	)	bp
Interest and other non-operating expense, net	14			13			7.7		%	47			41			14.6		%	18			19			(5.3	)	%	39			33			18.2		%
Gain on sale of businesses	—			—			NM			—			9			NM
Gain on sale of business																			—			—			NM			5			—			NM
Income tax expense	22			19			15.8		%	40			49			(18.4	)	%	21			19			10.5		%	35			18			94.4		%
Tax rate	22.9		%	17.4		%	550		bp	16.0		%	17.6		%	(160	)	bp	16.8		%	21.6		%	(480	)	bp	18.1		%	11.8		%	630		bp
Net income	$	73		$	88		(17.0	)	%	$	210		$	226		(7.1	)	%	$	100		$	71		40.8		%	$	156		$	137		13.9		%

NM - Not meaningful percentage change

Revenue

Revenue generated during the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$897~~$1,164 million and $2,235 million, reflecting ~~a decrease~~increases of ~~0.6%,~~$232 million or 24.9% and ~~$2,676~~$456 million ~~reflecting an increase of 0.6%~~or 25.6%, respectively, compared to the same prior year periods. On a constant currency basis, revenue grew ~~1.0%~~26.4% and ~~2.7%~~27.0% for the three and ~~nine~~six months ended ~~September~~June 30, 2017. These increases in revenue were primarily driven by an additional $238 million and $481 million, respectively, of revenue from the businesses acquired in the fourth quarter of 2016. Organic revenue increased $10 million and $3 million for the three and six months ended June 30, 2017, respectively, compared to the same prior year periods. These increases reflect ~~additional revenue from our recent acquisitions,~~strong organic growth in emerging markets for both periods, particularly in Asia Pacific, as well as ~~strong~~strength in Canada. This organic growth was partially offset by declines within western Europe for both periods, particularly in the United Kingdom, and ~~organic growth~~a decline in the United States for ~~both periods. The Asia Pacific region also contributed to~~ the ~~organic growth in both periods, particularly in India and Hong Kong. The organic growth in~~first half of the ~~quarter was offset largely by declines in the Middle East and Latin America.~~year.

The following ~~table illustrates~~tables illustrate the impact from organic growth, recent acquisitions and divestitures, and foreign currency translation in relation to revenue during the three and ~~nine~~six months ended ~~September~~June 30, ~~2016:~~2017:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,					Water Infrastructure					Applied Water					Sensus & Analytics				Total Xylem
(In millions)	Change			% Change		Change			% Change		$ Change			% Change		$ Change			% Change		$ Change		% Change		$ Change			% Change
2015 Revenue	$	902				$	2,659
2016 Revenue											$	484				$	366				$	82			$	932
Organic growth	1			0.1	%	46			1.7	%	7			1.4	%	2			0.5	%	1		1.2	%	10			1.1	%
Acquisitions	8			0.9	%	25			1.0	%
Acquisitions/Divestitures											—			NM		(2		)	(0.5	)%	238		290.2	%	236			25.3	%
Constant currency	9			1.0	%	71			2.7	%	7			1.4	%	—			—	%	239		291.5	%	246			26.4	%
Foreign currency translation (a)	(14		)	(1.6	)%	(54		)	(2.1	)%	(9		)	(1.9	)%	(5		)	(1.4	)%	—		—	%	(14		)	(1.5	)%
Total change in revenue	(5		)	(0.6	)%	17			0.6	%	(2		)	(0.4	)%	(5		)	(1.4	)%	239		291.5	%	232			24.9	%
2016 Revenue	$	897				$	2,676
2017 Revenue											$	482				$	361				$	321			$	1,164



	Water Infrastructure					Applied Water					Sensus & Analytics				Total Xylem
(In millions)	$ Change			% Change		$ Change			% Change		$ Change		% Change		$ Change			% Change
2016 Revenue	$	924				$	699				$	156			$	1,779
Organic growth	(8		)	(0.9	)%	8			1.1	%	3		1.9	%	3			0.2	%
Acquisitions/Divestitures	—			—	%	(3		)	(0.4	)%	481		308.3	%	478			26.9	%
Constant currency	(8		)	(0.9	)%	5			0.7	%	484		310.3	%	481			27.0	%
Foreign currency translation (a)	(15		)	(1.6	)%	(10		)	(1.4	)%	—		—	%	(25		)	(1.4	)%
Total change in revenue	(23		)	(2.5	)%	(5		)	(0.7	)%	484		310.3	%	456			25.6	%
2017 Revenue	$	901				$	694				$	640			$	2,235


(a)	Foreign currency translation impact ~~primarily~~ due to fluctuations in the value of various currencies against the U.S. Dollar, the largest being the British Pound ~~Argentine Peso, Chinese Yuan, South African Rand, Canadian Dollar~~ and ~~Norwegian Krone against~~ the ~~U.S. Dollar.~~Euro.

~~The following table summarizes revenue by segment:~~

Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2016 2015 Change
Constant Currency
Change
2016 2015

Change

Constant
Currency
Change
Water Infrastructure $ 554
$ 551
0.5 % 2.2 % $ 1,634
$ 1,602
2.0 % 4.6 %
Applied Water 343
351
(2.3 )% (0.9 )% 1,042
1,057
(1.4 )% (0.2 )%
Total $ 897
$ 902
(0.6 )% 1.0 % $ 2,676
$ 2,659
0.6 % 2.7 %

Water Infrastructure

Water Infrastructure revenue ~~increased $3~~decreased $2 million, or ~~0.5%~~0.4%, for the ~~third~~second quarter of ~~2016 (2.2%~~2017 (1.4% increase at constant currency) and ~~increased $32~~decreased $23 million, or ~~2.0%~~2.5%, for the ~~nine~~six months ended ~~September~~June 30, ~~2016 (4.6% increase~~2017 (0.9% decease at constant currency) compared to the respective ~~2015~~2016 periods. Revenue was negatively impacted by $9 million and ~~$41~~$15 million due to foreign currency translation for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017, respectively. The change at constant currency ~~was driven by~~included organic growth of $4$7 million, or ~~0.7%~~1.4%, in the ~~third~~second quarter and ~~$48~~a organic decline of $8 million, or ~~3.0%~~a 0.9% decrease, for the ~~nine~~six months ended ~~September~~June 30, ~~2016 due to continued strength~~2017. Organic growth for the quarter consisted of growth in the industrial end market, particularly in the emerging markets and North America, which was partially offset by declines in the public utility end market ~~reflecting~~in western Europe and the United States. Organic declines for the six months ended June 30, 2017 were driven by the public utility end market which had a ~~strong recovery~~difficult comparison to 2016 where we had double digit growth rates in the United ~~States, AMP 6 cycle growth in the United Kingdom and project activity from infrastructure investments in India.~~States. This ~~growth~~organic decline was partially offset by ~~industrial market declines, primarily due to continued decreases in dewatering applications~~improvement in the ~~oil and gas and mining~~industrial end market in the emerging markets. ~~Additionally, revenue increased by $8 million and $25 million for the three and nine months ended September 30, 2016 due to our recent acquisitions.~~

From an application perspective for the ~~third~~second quarter of ~~2016,~~2017, organic revenue ~~grew in transport and treatment applications while test applications declined. Organic revenue performance from transport applications~~growth was driven by ~~public utility~~our transport application in the industrial end market due to strength in the ~~United States due to~~dewatering business which benefited from improved backlog execution, AMP 6 cycle growth in the United Kingdom and increased infrastructure projects in India. These gains were partially offset by declines in industrial dewatering applications from weakness in the oil and gasconstruction and mining markets and weak demand in the Middle East in public utility, due to lower oil revenue and the lapping of a large project in 2015. Revenue from treatment applications was also driven by public utility strength, primarily in the United States, mainly due to strong backlog execution and project deliveries. These increases were partially offset by non-repeat prior year industrial projects. Revenue from test applications declined mainly due to a decline in Latin America as we lapped a large prior year project and in the United States, primarily due to decreased government spending as well as weak oil and gas markets.

For the nine months ended September 30, 2016, organic revenue grew in transport and treatment applications while test applications declined. Organic revenue performance from transport applications was driven by public utility strength in the United States due to improved backlog execution, increased infrastructure projects, market strength and share gains in the water and wastewater pump market and in India from a large water circulation project as well as public utility strength in western Europe, primarily driven by the growth attributable to the AMP 6 cycle in the United Kingdom. These gains were partially offset by declines in industrial dewatering applications from weakness in the oil and gas and mining markets. Revenue from treatment applications was also driven by public utility strength, primarily due to strong backlog execution in the United States, large project deliveriesparticularly in the emerging markets and Canada. This strength was partially offset by the declines against a strong prior year in the transport and treatment applications in the United States.

For the six months ended June 30, 2017, organic revenue decline was driven primarily by decreases in our treatment application in the public utility ~~strength~~end market. Organic declines in ~~western Europe, primarily in Germany and~~ the ~~United Kingdom. Revenue from test~~treatment applications ~~declined mainly due to weakness~~were driven by a difficult prior year comparison in the United States, ~~primarily~~ as ~~a result of lower government agency spending~~well as slower bidding activity in the Middle East where the oil and gas market downturn impacted municipal spending. Declines were partially offset by strength in ~~Latin America due to lapping a large prior year project.~~

emerging markets in both the treatment and and dewatering transport applications.

Applied Water

Applied Water revenue ~~declined $8 million, or 2.3%, during the third quarter of 2016 (0.9% decline at constant currency) and declined $15~~decreased $5 million, or 1.4%, for the ~~nine~~second quarter of 2017 (flat at constant currency) and decreased $5 million, or 0.7%, for the six months ended ~~September~~June 30, ~~2016 (0.2% decline~~2017 (0.7% increase at constant currency) compared to the respective ~~2015~~2016 periods. Revenue was negatively impacted by $5 million and ~~$13~~$10 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively, due to foreign currency translation. ~~The decline~~Organic revenue growth was $2 million, or 0.5%, in the ~~third~~second quarter ~~at constant currency~~of 2017 and $8 million, or 1.1%, for the six months ended June 30, 2017, which was driven by ~~a decline in the industrial end market partially offset by~~ growth in ~~the commercial and residential end markets. For the nine months ended September 30, 2016 declines at constant currency in the~~ residential and ~~industrial~~commercial end markets, ~~were~~ partially ~~offset by growth in the commercial end markets.~~

From an application perspective for the third quarter of 2016, declines in the industrial water application were due to continued weakness in the oil and gas and food and beverage sectors in the United States which was partially offset by strength in general industrial applications in Europe and Latin America. Commercial building services revenue grew primarily due to continued strength in western Europe, partially offset by slow downs in the United States. Revenue from residential building services mainly increased in western Europe and the United States due to increased promotional activity, groundwater business recovery and favorable weather conditions. Revenue from agricultural applications was flat for the quarter.

For the nine months ended September 30, 2016, organic revenue grew in the building services applications. Building services growth was driven by strong commercial building services revenue due to market share gains from new products in western Europe, partially offset by declines within the residential building services primarily in Asia Pacific and the Middle East due to market softness and project delays. Growth from building services was more than offset by declines in the industrial ~~water and agricultural applications. The industrial water decline was mainly due to the continued weakness~~market.

From an application perspective, organic revenue growth in the ~~oil and gas sector~~second quarter of 2017 was led by growth in residential building services, driven by strength in the United States and Asia Pacific where we benefited from timing of promotions and modest share gains. Commercial building services also grew organically, primarily driven by strong book and ship business in ~~addition to softness~~the United States from the institutional building market. This organic growth was partially offset by a decline in industrial applications, primarily driven by unfavorable weather conditions and weaker market conditions in the United States.

For the six months ended June 30, 2017, growth in residential building services was driven by strength in the United States and Asia ~~Pacific. These declines were~~Pacific where we benefited from timing of promotions and modest share gains. Commercial building services also grew, primarily in the United States and Asia Pacific, driven by new product traction and sales channel investments. This growth was partially offset by a decline in industrial applications, primarily driven by weaker than expected industrial market conditions in the United States, partially offset by strength in western ~~Europe due~~Europe.

Sensus & Analytics

Sensus & Analytics revenue increased $239 million, or 291.5%, for the second quarter of 2017 (291.5% at constant currency) and increased $484 million, or 310.3%, for the six months ended June 30, 2017 (310.3% at a constant currency) compared to ~~several large projects combined with strength in general industrial applications. Agricultural applications declined~~the respective 2016 periods. The revenue increase for the three and six months ended June 30, 2017 was almost entirely made up of the revenue of $238 million and $481 million, respectively, contributed by the fourth quarter 2016 acquisitions, primarily Sensus. Over 60% of the Sensus revenue was generated in the United States with additional revenue coming primarily ~~due to market weakness~~from western Europe and ~~unfavorable weather conditions.~~China. The majority of Sensus revenue came from water applications with gas and electric applications making up most of the remaining sales in both periods. Organic revenue growth in the Sensus & Analytics segment was $1 million, or 1.2%, and $3 million, or 1.9%, for the three six months ended June 30, 2017, respectively. The organic growth in both periods was driven by strength in the test applications from the environmental monitoring business in the United States.

Orders / Backlog

Orders received during the ~~third~~second quarter of ~~2016~~2017 were ~~$946~~$1,212 million, an increase of $7$289 million, or ~~0.7%~~31.3%, over the second quarter of the prior year ~~(2.3%~~(32.8% increase at constant currency). Orders received during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 were ~~$2,757~~$2,349 million, ~~a decrease~~an increase of ~~$41~~$538 million, or ~~1.5%~~29.7%, from the prior year ~~(0.6%~~(31.1% increase at constant currency). ~~Organic~~The order growth ~~increased 1.3%~~at constant currency was primarily driven by additional orders from the fourth quarter 2016 acquisitions as well as organic order growth of 8.1% and ~~decreased 0.2%~~5.5% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively.

Water Infrastructure segment orders ~~for the quarter~~ increased ~~$14~~$38 million, or ~~2.4%~~7.9%, to ~~$604~~$521 million ~~(3.9%~~(9.7% increase at constant currency) for the quarter as compared to the same prior ~~year.~~year period. The order increase ~~in orders at~~on a constant currency ~~consisted of~~basis was driven completely by an increase in organic ~~orders of 2.2% and an increase in orders of 1.7% from recent acquisitions.~~orders. Organic order growth spanned all of the

applications. The transport applications had growth driven by increased distributor orders in the ~~quarter was predominately due to increases~~United States, strong project orders in ~~the treatment applications as a result of a large ozone project in~~ China and India, as well as ~~an increase in~~increased dewatering rental orders in ~~China in test applications. Additionally, while orders~~Latin America due to increased activity in the ~~transport~~mining industry. The treatment applications ~~were essentially flat, there was a large custom pump~~had strong order ~~awarded during the quarter~~intake in ~~India, which offset a similar large project~~Canada as well as order strength in the ~~prior year.~~

~~Water Infrastructure segment orders for~~emerging markets. For the ~~nine~~six months ended ~~September~~June 30, ~~2016 decreased $37~~2017 orders increased $44 million, or ~~2.1%~~4.7%, to ~~$1,700~~$988 million ~~(0.4%~~(6.4% increase at constant currency) as compared to the same prior year period. The order increase ~~in orders at~~on a constant currency ~~consisted of an decrease in organic orders of 1.0%, more than offset~~basis was driven completely by an increase in ~~orders of 1.4% from recent acquisitions.~~organic orders. Organic order growth spanned all applications. The ~~decrease in organic orders was mainly due to declines within~~ transport applications ~~primarily due to decreased dewatering orders impacted~~had growth driven by the ~~continued weakness~~same dynamics driving the order growth in ~~oil~~the second quarter. The treatment applications had strong order intake in North America and ~~gas,~~the emerging markets, as well as the lapping of a large order in Latin America in 2015. These decreases were partially offset by order strength in Europe and the Nordics. Treatment orders decreased as well, particularly in the United States, partially offset by the aforementioned large ozone project in China.Oceania.

Applied Water segment orders increased $14 million, or 3.9%, to $375 million (5.3% increase at constant currency) for the second quarter ~~decreased $7~~as compared to the same prior year period. The order increase for the second quarter on a constant currency basis included organic order growth of 5.8% driven by strength in the emerging markets and in residential building services in the Unites States. For the six months ended June 30, 2017 orders increased $14 million, or 2.0%, to ~~$342~~$729 million ~~(0.3% decrease~~(3.4% increase at constant currency). as compared to the same prior year period. The ~~decrease at~~order increase on a constant currency ~~was due to~~basis included organic order growth of 3.8% driven by strength in the emerging markets, strong residential performance in the United States as well as industrial strength in the Americas, partially offset by project delays in commercial building ~~services~~services.

Sensus & Analytics segment orders increased $237 million, or 300.0%, to $316 million (300.0% increase at constant currency) for the second quarter of 2017 as compared to the same prior year period. The order increase included orders from recent acquisitions, mostly Sensus, of $230 million and organic order growth of $7 million, or 8.9% from test application strength in the United States ~~partially offset by order strength in Europe.~~

and China. For the ~~nine~~six months ended ~~September~~ended June 30, ~~2016 Applied Water segment~~2017 orders ~~decreased $4~~increased $480 million, or ~~0.4%~~315.8%, to ~~$1,057~~$632 million ~~(1.0%~~(315.8% increase at constant currency)~~. This increase at constant currency is due~~ as compared to the same prior year period and included orders from recent acquisitions, primarily Sensus, of $468 million and organic order

growth ~~driven by~~of $12 million, or 7.9% from test application strength ~~in Europe from new product launches that was partially offset by project delays and weakness in commercial building services~~ in the United ~~States.~~States and China.

Backlog includes orders on hand as well as contractual customer agreements at the end of the period. Delivery schedules vary from customer to customer based ~~upon~~on their requirements. Annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. As such, beginning total backlog, plus orders, minus revenues, will not equal ending total backlog due to contract adjustments, foreign currency fluctuations, and other factors. Typically, large projects require longer lead production cycles and deployment schedules and delays can occur from time to time. Total backlog was ~~$775~~$1,531 million at ~~September~~June 30, ~~2016, a decrease~~2017, an increase of ~~$37~~$804 million or ~~4.6%~~110.6% as compared to ~~September~~June 30, ~~2015~~2016, which did not include the Sensus acquisition, and an increase of ~~$59~~$239 million or ~~8.2%~~18.5%, as compared to December 31, ~~2015.~~2016 backlog of $1,292 million. The December 31, 2016 backlog balance has been revised to include contractual agreements that Sensus has with customers that do not have minimum commitments but which we believe will be executed upon over the terms of the contracts. We anticipate that ~~over 55%~~approximately 50% of the backlog at ~~September~~June 30, ~~2016~~2017 will be recognized as revenue in the remainder of ~~2016.~~2017.

Gross Margin

Gross margin as a percentage of revenue ~~increased~~decreased 20 basis points to ~~39.8%~~39.4% and ~~39.4%~~39.0%, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, compared to ~~38.9%~~39.6% and ~~38.1%~~39.2%, respectively, for ~~the~~ comparative ~~2015~~2016 periods. The slight gross margin ~~increases~~declines were ~~primarily due~~driven by cost inflation, unfavorable product mix and volume, as well as the inclusion of Sensus gross margins. The negative impacts to ~~benefits realized~~gross margin were largely offset by cost reductions from ~~cost saving initiatives through~~ global ~~sourcing~~procurement and continuous improvement initiatives ~~which more than offset cost inflation.~~as well as restructuring savings.

Operating Expenses

The following table presents operating expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015:~~2016:


	Three Months Ended								Nine Months Ended								Three Months Ended									Six Months Ended
	September 30,								September 30,								June 30,									June 30,
(In millions)	2016			2015			Change		2016			2015			Change		2017			2016			Change			2017			2016			Change
Selling, general and administrative expenses ("SG&A")	$	219		$	207		5.8	%	$	665		$	631		5.4	%	$	270		$	227		18.9		%	$	542		$	446		21.5		%
SG&A as a % of revenue	24.4		%	22.9		%	150	bp	24.9		%	23.7		%	120	bp	23.2		%	24.4		%	(120	)	bp	24.3		%	25.1		%	(80	)	bp
Research and development expenses ("R&D")	23			23			—	%	75			71			5.6	%	44			27			63.0		%	86			52			65.4		%
R&D as a % of revenue	2.6		%	2.5		%	10	bp	2.8		%	2.7		%	10	bp	3.8		%	2.9		%	90		bp	3.8		%	2.9		%	90		bp
Restructuring charges	6			1			500.0	%	18			5			260.0	%
Restructuring and asset impairment charges, net																	6			6			—		%	18			12			50.0		%
Operating expenses	$	248		$	231		7.4	%	$	758		$	707		7.2	%	$	320		$	260		23.1		%	$	646		$	510		26.7		%
Expense to revenue ratio	27.6		%	25.6		%	200	bp	28.3		%	26.6		%	170	bp	27.5		%	27.9		%	(40	)	bp	28.9		%	28.7		%	20		bp

Selling, General and Administrative Expenses

SG&A increased by ~~$12~~$43 million to ~~$219~~$270 million or 23.2% of revenue in the second quarter of 2017, as compared to $227 million or 24.4% of revenue in the ~~third quarter of~~comparable 2016 ~~as compared~~period; and increased $96 million to ~~$207~~$542 million or ~~22.9%~~24.3% of revenue in the ~~comparable 2015 period; and increased $34 million to $665 million or 24.9% of revenue in the nine~~six months ended ~~September~~June 30, ~~2016,~~2017, as compared to ~~$631~~$446 million or ~~23.7%~~25.1% of revenue for the ~~nine~~six months ended ~~2015.~~in 2016. The ~~increase~~increases in SG&A expenses includes ~~$10~~approximately $46 million and ~~$13~~$96 million of additional SG&A spending for the Sensus business, as well as Sensus acquisition related ~~to initial acquisition~~costs of $4 million and ~~integration costs~~$14 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively. ~~The remaining increases in~~Excluding the increase from Sensus acquisition impacts, SG&A expenses declined by $7 million and $14 million over the three and six months periods, respectively, as inflation increases were ~~primarily due to additional operating expenses from recent acquisitions, investments in regional sales channels and operational capabilities and inflation, which were partially~~more than offset by savings from restructuring ~~actions.~~actions and global procurement and continuous improvement initiatives.

Research and Development Expenses

R&D spending was ~~$23~~$44 million or ~~2.6%~~3.8% of revenue in the ~~third~~second quarter of ~~2016~~2017 as compared to ~~$23~~$27 million or ~~2.5%~~2.9% of revenue in the comparable period of ~~2015;~~2016; and was ~~$75~~$86 million or ~~2.8%~~3.8% of revenue in the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 as compared to ~~$71~~$52 million or ~~2.7%~~2.9% of revenue in the comparable period of ~~2015.~~2016. The increase in R&D spending for the ~~nine~~three and six months ended ~~September~~June 30, ~~2016~~2017 was primarily due to ~~investments~~higher rates of investment in new products and technology, primarily within ~~both segments.~~our newly acquired Sensus business.

Restructuring Charges and Asset Impairment

Restructuring

During the three and ~~nine~~six months ended ~~September~~June 30, 2017, we recognized restructuring charges of $6 million and $13 million, respectively. We incurred these charges related to actions taken in 2017 primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as headcount reductions within our Sensus & Analytics segment. Included in the charges recorded during the three and six months ended June 30, 2017 were $2 million and $7 million, respectively, related to actions commenced in prior years.

During the three and six months ended June 30, 2016, we recognized restructuring charges of $6 million and ~~$18~~$12 million, respectively. We incurred these charges related to actions taken in 2016 primarily in an effort to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Applied Water segment and Water Infrastructure segments, as well as Corporate headcount reductions. ~~Included~~No additional costs related to actions commenced in prior years were included in the charges recorded during the three ~~and nine~~ months ended ~~September~~June 30, ~~2016 were $1 million~~2016.

~~related to~~

The following table presents expected restructuring spend:



(in millions)	Water Infrastructure		Applied Water		Sensus & Analytics		Corporate		Total
Actions Commenced in 2017:
Total expected costs	$	14	$	6	$	1	$	—	21
Costs incurred during Q1 2017	—		1		1		—		2
Costs incurred during Q2 2017	3		1		—		—		4
Total expected costs remaining	$	11	$	4	$	—	$	—	$	15

Actions Commenced in 2016:
Total expected costs	$	13	$	13	$	10	$	2	$	38
Costs incurred during 2016	11		10		6		2		29
Costs incurred during Q1 2017	2		2		1		—		5
Costs incurred during Q2 2017	—		1		1		—		2
Total expected costs remaining	$	—	$	—	$	2	$	—	$	2

The Water Infrastructure, Applied Water, and Sensus & Analytics actions commenced in ~~prior years.~~

~~During the three and nine months ended September 30, 2015, we recognized restructuring charges of $1 million and $5 million, respectively. We incurred these charges related to actions taken in 2015~~2017 consist primarily in an effort to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. These charges related to the reduction in structural costs, including the reduction of headcount and consolidation of facilities within our Water Infrastructure segment.

Total expected costs associated with actions that commenced during the nine months ended September 30, 2016 are approximately $20 million for Water Infrastructure, approximately $6 million for Applied Water, and approximately $2 million for Corporate. Related to these actions Water Infrastructure incurred $11 million, Applied Water incurred $4 million, and Corporate incurred $2 million during the nine months ended September 30, 2016. These costs primarily consist of severance ~~charges. We currently expect activity related to these actions~~charges and are expected to continue through the end of ~~2017 with the exception of the~~2018. The Water Infrastructure, Applied Water, Sensus & Analytics and Corporate actions ~~which are substantially complete. As a result of actions initiated during the nine months ended September 30, 2016, we estimate net savings of approximately $9 million~~commenced in 2016 consist primarily of severance charges and ~~annual future net savings beginning in 2017~~are expected to continue through the end of ~~approximately $23 million.~~2018.

We currently expect to incur approximately ~~$30~~$18 million in restructuring costs for the full ~~year, which contemplates additional actions beyond those discussed above.~~year. As a result of all of the actions taken and expected to be taken in ~~2016,~~2017, we anticipate approximately $9$4 million of total net savings to be realized during ~~2016.~~2017.

Asset Impairment

During the first quarter of 2017 we determined that certain assets within our Applied Water segment, including a tradename were impaired. Accordingly we recognized an impairment charge of $5 million. Refer to Note 9, "Goodwill and Other Intangible Assets," for additional information.

Operating Income

We generated operating income of $139 million (margin of 11.9%) during the second quarter of 2017, a $30 million increase compared to $109 million (margin of ~~12.2%) during the third quarter of 2016, an $11 million decrease compared to $120 million (margin of 13.3%~~11.7%) in ~~2015. Restructuring~~2016. The increase in operating margin was largely due to cost reductions resulting from progress in our productivity and ~~realignment~~global procurement initiatives and restructuring savings. These favorable impacts on operating margin were largely offset by cost inflation and the impact of Sensus acquisition related costs and ~~special charges which consist of initial acquisition and integration costs, increased $8 million and $10 million, respectively, in the third quarter as compared to the prior year.~~ Sensus purchase accounting impacts.

Adjusted operating income was ~~$131~~$155 million ~~(margin~~(adjusted margin of ~~14.6%~~13.3%) ~~for~~during the ~~third~~second quarter of ~~2016~~2017 as compared to ~~$124~~$121 million ~~(margin~~(adjusted margin of ~~13.7%~~13.0%) in ~~2015. These increases~~2016. This increase in adjusted operating margin ~~were primarily~~was due to ~~increased cost reductions and volume leverage~~the factors noted above with the exception of the impact of Sensus acquisition related costs of $4 million which ~~were partially offset by cost inflation, strategic investments and unfavorable mix.~~are excluded from adjusted operating margin.

We generated operating income of ~~$297~~$225 million (margin of ~~11.1%~~10.1%) during the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, a ~~$10~~$37 million ~~decrease~~increase compared to ~~$307~~the $188 million (margin of ~~11.5%~~10.6%) in ~~2015. Restructuring~~2016. Sensus acquisition related costs and restructuring and realignment costs increased $14 million and $3 million, respectively, while special charges ~~which consist mostly of initial acquisition and integration costs, increased $16 million and $14 million, respectively,~~remained flat as compared to the ~~nine~~six months ended ~~2015. Adjusted~~June 30, 2016. Excluding these costs, adjusted operating income was ~~$344~~$267 million ~~(margin~~(adjusted margin of ~~12.9%~~11.9%) for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 as compared to ~~$324~~$213 million ~~(margin~~(adjusted margin of ~~12.2%~~12.0%) in ~~2015.~~2016. Adjusted operating margin was negatively impacted by several factors including cost inflation, strategic investments and declines in product mix, as well as the negative impact of the Sensus purchase accounting. These ~~increases in~~negative impacts on adjusted operating margin were ~~driven~~largely offset by ~~the same dynamics impacting the increase for the third quarter.~~cost savings from our global procurement and productivity initiatives, as well as restructuring savings.

The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:


	Three Months Ended									Nine Months Ended									Three Months Ended									Six Months Ended
	September 30,									September 30,									June 30,									June 30,
(In millions)	2016			2015			Change			2016			2015			Change			2017			2016			Change			2017			2016			Change
Water Infrastructure
Operating income	$	79		$	83		(4.8	)	%	$	203		$	195		4.1		%	$	74		$	66		12.1		%	$	114		$	117		(2.6	)	%
Operating margin	14.3		%	15.1		%	(80	)	bp	12.4		%	12.2		%	20		bp	15.4		%	13.6		%	180		bp	12.7		%	12.7		%	—		bp
Restructuring and realignment costs	9			2			350.0		%	21			11			90.9		%	5			6			(16.7	)	%	9			9			—		%
Special charges	—			—			NM			5			1			400.0		%	—			—			NM			—			2			NM
Adjusted operating income	$	88		$	85		3.5		%	$	229		$	207		10.6		%	$	79		$	72		9.7		%	$	123		$	128		(3.9	)	%
Adjusted operating margin	15.9		%	15.4		%	50		bp	14.0		%	12.9		%	110		bp	16.4		%	14.9		%	150		bp	13.7		%	13.9		%	(20	)	bp
Applied Water
Operating income	$	50		$	46		8.7		%	$	140		$	143		(2.1	)	%	$	49		$	51		(3.9	)	%	$	85		$	90		(5.6	)	%
Operating margin	14.6		%	13.1		%	150		bp	13.4		%	13.5		%	(10	)	bp	13.6		%	13.9		%	(30	)	bp	12.2		%	12.9		%	(70	)	bp
Restructuring and realignment costs	3			2			50.0		%	9			5			80.0		%	5			3			66.7		%	9			6			50.0		%
Special charges																			—			—			NM			5			—			NM
Adjusted operating income																			$	54		$	54		—		%	$	99		$	96		3.1		%
Adjusted operating margin																			15.0		%	14.8		%	20		bp	14.3		%	13.7		%	60		bp
Sensus & Analytics
Operating income																			$	29		$	4		625.0		%	$	54		$	7		671.4		%
Operating margin																			9.0		%	4.9		%	410		bp	8.4		%	4.5		%	390		bp
Sensus acquisition related costs																			3			—			NM			9			—			NM
Restructuring and realignment costs																			2			2			—		%	5			3			66.7		%
Special charges																			—			1			NM			—			3			NM
Adjusted operating income	$	53		$	48		10.4		%	$	149		$	148		0.7		%	$	34		$	7		385.7		%	$	68		$	13		423.1		%
Adjusted operating margin	15.5		%	13.7		%	180		bp	14.3		%	14.0		%	30		bp	10.6		%	8.5		%	210		bp	10.6		%	8.3		%	230.0		bp
Corporate and other
Operating loss	$	(20	)	$	(9	)	122.2		%	$	(46	)	$	(31	)	48.4		%	$	(13	)	$	(12	)	8.3		%	$	(28	)	$	(26	)	7.7		%
Restructuring and realignment costs	—			—			NM			2			—			NM			—			—			NM			—			2			NM
Special charges	10			—			NM			10			—			NM
Sensus acquisition related costs																			1			—			NM			5			—			NM
Adjusted operating loss	$	(10	)	$	(9	)	11.1		%	$	(34	)	$	(31	)	9.7		%	$	(12	)	$	(12	)	—		%	$	(23	)	$	(24	)	(4.2	)	%
Total Xylem
Operating income	$	109		$	120		(9.2	)	%	$	297		$	307		(3.3	)	%	$	139		$	109		27.5		%	$	225		$	188		19.7		%
Operating margin	12.2		%	13.3		%	(110	)	bp	11.1		%	11.5		%	(40	)	bp	11.9		%	11.7		%	20		bp	10.1		%	10.6		%	(50	)	bp
Restructuring and realignment costs	12			4			200.0		%	32			16			100.0		%	12			11			9.1		%	23			20			15.0		%
Sensus acquisition related costs																			4			—			NM			14			—			NM
Special charges	10			—			NM			15			1			NM			—			1			NM			5			5			—		%
Adjusted operating income	$	131		$	124		5.6		%	$	344		$	324		6.2		%	$	155		$	121		28.1		%	$	267		$	213		25.4		%
Adjusted operating margin	14.6		%	13.7		%	90		bp	12.9		%	12.2		%	70		bp	13.3		%	13.0		%	30		bp	11.9		%	12.0		%	(10	)	bp

NM - Not meaningful percentage change

Water Infrastructure

Operating income for our Water Infrastructure segment ~~decreased $4~~increased $8 million, or ~~4.8%~~12.1%, for the ~~third~~second quarter of 2017 compared to the prior year, with operating margin also increasing from 13.6% to 15.4%. Operating margin was positively impacted by decreased restructuring and realignment costs of $1 million in 2017. Excluding these restructuring and realignment costs, adjusted operating income increased $7 million, or 9.7%, with adjusted operating margin increasing from 14.9% to 16.4%. The increase in adjusted operating margin for the quarter was due to cost reductions from global procurement and continuous improvement initiatives, favorable volume and price, as well as restructuring savings which were partially offset by cost inflation and unfavorable price impacts.

For the six months ended June 30, 2017, operating income decreased $3 million, or 2.6%, as compared to the prior year, with operating margin remaining flat at 12.7%. Operating margin was positively impacted by special charges of $2 million in 2016 that did not recur while restructuring and realignment costs remained flat compared with the same respective prior year period. Excluding these items, adjusted operating income decreased $5 million, or 3.9%, with adjusted operating margin decreasing from 13.9% to 13.7%.The decrease in adjusted operating margin was primarily due to cost inflation, strategic investments and unfavorable volume and mix, which were partially offset by cost reductions from global procurement and continuous improvement initiatives, as well as restructuring savings.

Applied Water

Operating income for our Applied Water segment decreased $2 million, or 3.9%, for the second quarter of 2017 compared to the prior year, with operating margin also decreasing from ~~15.1%~~13.9% to ~~14.3%~~13.6%. Operating margin was negatively impacted by increased restructuring and realignment costs of $7$2 million. ~~Adjusted~~Excluding restructuring and realignment costs, adjusted operating income ~~increased $3 million, or 3.5%,~~was flat, with adjusted operating margin increasing from ~~15.4%~~14.8% to ~~15.9%~~15.0%. The increase in adjusted operating margin ~~for the third quarter~~ was due to cost ~~savings~~reductions from global procurement and continuous improvement initiatives as well as ~~favorable foreign currency impacts,~~lower spending on strategic initiatives, which were partially offset by cost inflation and ~~increased investment spending in growth initiatives, including new product development.~~

unfavorable mix and currency impacts.

For the ~~nine~~six months ended ~~September 30, 2016,~~June 30,2017, operating income ~~increased $8~~decreased $5 million, or ~~4.1%~~5.6%, ~~with operating margin increasing from 12.2% to 12.4%~~ as compared to the prior year. Operating margin was negatively impacted by increased restructuring and realignment costs of $10 million as well as higher special charges of $4 million, primarily from initial acquisition related costs. Adjusted operating income increased $22 million, or 10.6%,year, with ~~adjusted~~ operating margin ~~increasing~~also decreasing from 12.9% to ~~14.0%~~12.2%. ~~The increases in adjusted operating margin for the nine months ended September 30, 2016 were largely due to the same dynamics impacting the third quarter, as well as favorable volume.~~

~~Applied Water~~

~~For the third quarter of 2016 operating income for our Applied Water segment increased $4 million, or 8.7%, with operating margin increasing from 13.1% to 14.6% as compared to the prior year.~~ Operating margin was negatively impacted by higher special charges for a non-cash impairment of $5 million and increased restructuring and realignment ~~changes~~costs of $1$3 million. ~~Adjusted~~Excluding these items, adjusted operating income increased $5$3 million, or ~~10.4%~~3.1%, with adjusted operating margin increasing from 13.7% to ~~15.5%~~14.3%. The ~~increases~~increase in adjusted operating margin ~~were~~was due to cost ~~savings~~reductions from global procurement and ~~productivity gains,~~continuous improvement initiatives as well as lower spending on strategic initiatives and higher volumes, which were partially offset by cost inflation and unfavorable mix and ~~strategic investments.~~currency impacts.

~~For the nine months ended September 30, 2016, operating~~Sensus & Analytics

Operating income ~~decreased $3~~for our Sensus & Analytics segment increased $25 million, or ~~2.1%~~625%, for the second quarter of 2017 compared to the prior year, with operating margin ~~decreasing slightly~~also increasing from ~~13.5%~~4.9% to ~~13.4% as compared with the prior year.~~9.0%. Operating margin was negatively impacted by ~~higher restructuring~~$3 million of Sensus acquisition related costs incurred during the quarter which was partially offset by a positive impact of $1 million related to special charges in 2016 that did not recur. Restructuring and realignment ~~changes of $4 million. Adjusted~~costs remained flat for the period. Excluding these items, adjusted operating income increased $1$27 million, or ~~0.7%~~385.7%, with ~~adjusted~~adjusting operating margin increasing from ~~14.0%~~8.5% to ~~14.3%~~10.6%. The ~~increases~~increase in adjusted operating income and margin ~~were~~was almost entirely due to ~~cost savings~~the inclusion of the higher relative margins from ~~global procurement~~the Sensus acquisition, which includes 250 basis points of negative impact to the segment's adjusted operating margin from purchase accounting.

For the six months ended June 30, 2017, operating income increased $47 million, or 671.4%, as compared to the prior year, with operating margin also increasing from 4.5% to 8.4%. Operating margin was negatively impacted by $9 million of Sensus acquisition related costs and ~~productivity gains~~increased restructuring and realignment costs of $2 million. These items were partially offset by ~~inflation, strategic investments~~a positive impact of $3 million related to special charges in 2016 that did not recur. Excluding these items, adjusted operating income increased $55 million, or 423.1%, with adjusting operating margin increasing from 8.3% to 10.6%. The increase in adjusted operating income and ~~unfavorable mix. Strategic investments included building emerging market product localization capabilities, sales channel development and new product development.~~margin was largely due to the higher relative margins from the Sensus acquisition, which includes 250 basis points of negative impact to the segment's operating margin from purchase accounting.

Corporate and other

Operating expense for corporate and other increased ~~$11~~$1 million, ~~(increased $1 million~~(remained flat on an adjusted basis) for the ~~third~~second quarter of ~~2016~~2017 as compared to the prior year, primarily due to ~~$10~~$1 million of ~~transaction and integration costs incurred~~Sensus acquisition related ~~to the Sensus acquisition.~~costs. For the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 operating expense increased ~~$15~~$2 million ~~(increased $3~~(decreased $1 million on an adjusted basis) compared with ~~the~~ prior year. ~~These increases~~This decrease in adjusted operating expense ~~were~~was primarily due to ~~the aforementioned $10~~$5 million of ~~transaction and integration costs incurred related to the~~ Sensus acquisition ~~higher~~related costs which were partially offset by a reduction in restructuring and realignment ~~charges~~costs of $2 ~~million and increased compensation cost.~~million.

Interest Expense

Interest expense was ~~$16 million and $50 million for the three and nine months ended September 30, 2016, and $13~~$21 million and $41 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015, respectively, primarily~~2017, and $20 million and $34 million for the three and six months ended June 30, 2016. The increased interest expense for the three and six month periods includes additional interest expense in 2017 related to debt entered into in the third quarter of 2016 to fund our acquisition of Sensus. The increase in interest ~~on our Senior Notes, including a~~expense was partially offset by additional interest expense related to make-whole ~~interest~~ premium of $7 million that was ~~paid~~incurred in the second quarter of 2016 in connection with the early extinguishment of our Senior Notes due in 2016 that did not recur in 2017. See Note 12, "Credit Facilities and ~~fees~~Debt" of ~~$4 million~~our consolidated financial statements for a description of our credit facilities and long-term debt and related ~~to the Bridge Facility entered into for the Sensus acquisition. See "Liquidity and Capital Resources" for further details.~~interest.

Income Tax Expense

The income tax provision for the three months ended ~~September~~June 30, ~~2016~~2017 was ~~$22~~$21 million resulting in an effective tax rate of ~~22.9%~~16.8%, compared to $19 million resulting in an effective tax rate of ~~17.4%~~21.6% for the same period in ~~2015.~~2016. The income tax provision for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$40~~$35 million resulting in an effective tax rate of ~~16.0%~~18.1%, compared to ~~$49~~$18 million resulting in an effective tax rate of ~~17.6%~~11.8% for the same period in ~~2015.~~2016. The decrease in the effective tax rate for the three months ended June 30, 2017 as compared to the same period in the prior year was primarily due to the mix of earnings in jurisdictions and repatriation of foreign earnings in 2016 that did not recur. The variance in the effective tax rates for the ~~three~~six months ended ~~September~~June 30, ~~2016 was primarily due~~2017 as compared to ~~changes in~~ the ~~geographic mix of earnings. For the nine~~six months ended ~~September~~June 30, 2016, ~~the variance in the effective tax rate~~ was primarily due to the release of an unrecognized tax benefit in 2016 ~~as a result of~~related to the effective settlement of a tax examination offset in part by the establishment of a valuation ~~allowance in 2016.~~

allowance.

Other Comprehensive Income ~~(Loss)~~

~~OCI~~Other comprehensive income was ~~a loss of $3~~$56 million for the three months ended ~~September~~June 30, ~~2016~~2017 compared to a loss of ~~$31~~$40 million for the same period in~~2015.~~2016. This ~~change~~increase in other comprehensive income was driven primarily by favorable foreign currency translation impacts, primarily due to the strengthening of the Euro and ~~Australian~~the Great British Pound against the U.S. Dollar in 2017 as compared the weakening of these same currencies in the prior year, which was partially offset by the Euro movement on the Company's net investment hedge during this same period. The tax impact on the foreign currency translation related to the net investment hedge also contributed to the year over year increase. For the six months ended June 30, 2017 Other comprehensive income was $98 million as compared to a loss of $14 million for the same period in 2016. This increase was driven primarily by favorable foreign currency translation impacts, primarily due to the increased strengthening of the Euro and the Brazilian Real against the U.S. Dollar as compared to the prior year. These increases are partially offset by increased weakening of ~~these currencies~~the Chinese Yuan against the U.S. Dollar ~~in the same period in 2015. For the nine months ended September 30, 2016 OCI was a loss of $17 million as compared to a loss of $130 million for the same period in~~2015. This change was driven almost entirely from favorable foreign currency translation impacts primarily due to significantly less weakening of the Swedish Krona against the U.S. Dollar for the first nine months of 2016 as compared to the ~~same period in 2015.~~prior year, as well as the Euro movement on the Company's net investment hedge. The tax impact on the foreign currency translation related to the net investment hedge also contributed to the year over year increase.

Liquidity and Capital Resources

The following table summarizes our sources and (uses) of cash:


	Nine Months Ended									Six Months Ended
	September 30,									June 30,
(In millions)	2016			2015			Change			2017			2016			Change
Operating activities	$	274		$	260		$	14		$	151		$	125		$	26
Investing activities	(155		)	(74		)	(81		)	(69		)	(127		)	58
Financing activities	(150		)	(194		)	44			(115		)	(98		)	(17		)
Foreign exchange (a)	10			(44		)	54			13			6			7
Total	$	(21	)	$	(52	)	$	31		$	(20	)	$	(94	)	$	74


(a)	The impact is primarily due to the strengthening of the Euro against the U.S. Dollar.

Sources and Uses of Liquidity

Operating Activities

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, net cash provided by operating activities increased by ~~$14~~$26 million as compared to the same prior year period. The year-over-year increase was primarily ~~due to a government repayment~~driven by increased cash from the operating activities of ~~a foreign value-added tax receivable and timing~~the Sensus business acquired in the fourth quarter of ~~payroll related accruals, which were~~2016. This increase was partially offset by an increased use of working ~~capital.~~capital as well as increased payments for interest and restructuring charges as compared to the prior year.

Investing Activities

Cash used in investing activities was ~~$155~~$69 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 as compared to ~~$74~~$127 million in the comparable prior year period. This ~~increase~~decrease was mainly driven by the $70 million spent on ~~our~~the acquisition of Tideland Signal ~~Corporation.~~Corporation during the six months ended June 30, 2016 versus only the $6 million purchase price adjustment paid for Sensus in 2017. Additionally, ~~capital expenditures~~we received $11 million of proceeds from the sale of a business we divested in the first quarter of 2017, which was offset by increased ~~by $12~~spending of $15 million ~~as compared to~~over the prior year ~~due to~~on capital projects, including increased ~~investments~~spending on software in our ~~factories, primarily in Dubai, China and Sweden.~~recently acquired Sensus business.

Financing Activities

Cash used inby financing activities was ~~$150~~$115 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 as compared to ~~$194~~cash used of $98 million in the comparable prior year period. The net ~~decrease~~increase in cash used by financing activities was ~~mostly due to a decrease~~primarily driven by increases in share repurchase activity of ~~$125 million. This decrease was largely~~$22 million and dividends paid of $9 million, as well as reductions to proceeds from stock option exercises of $9 million, all partially offset by ~~net repayments~~the decrease in cash used for the repayment of debt, ~~(see "Senior Notes" for further information) and higher dividend payments.~~net of debt issuance proceeds, of $24 million during the six months ended June 30, 2016 as compared to the same period in 2017.

Funding and Liquidity Strategy

Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations, and access to bank financing and the capital markets. Historically, we have generated operating cash flow sufficient to fund our primary cash needs centered on operating activities, working capital, capital expenditures, and strategic investments. If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all.

~~Our~~We monitor our global funding requirements ~~are continually monitored with appropriate strategies executed~~and seek to ~~ensure~~meet our liquidity needs ~~are met~~on a cost ~~effectively.~~effective basis. Based on our current global cash positions, cash flows from operations and access to the commercial paper markets, we believe there is sufficient liquidity to meet our funding requirements. In addition, our existing committed credit facilities and access to the public debt markets would provide further liquidity if required.

We anticipate that our present sources of funds, including funds from operations and additional borrowings, will provide us with sufficient liquidity and capital resources to meet our liquidity and capital needs in both the United States and outside of the United States over the next twelve months.

~~Senior Notes~~Credit Facilities & Long-Term Contractual Commitments

~~On September 20, 2011, we issued~~ ~~3.550%~~ ~~Senior Notes~~See Note 12, "Credit Facilities and Debt" of ~~$600 million aggregate principal amount due September 2016 and 4.875%~~ ~~Senior Notes of~~ ~~$600 million aggregate principal amount due October 2021. On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due 2023.~~

~~The Senior Notes include covenants which restrict~~ our ability, subject to exceptions, to incur debt secured by liens and engage in sale and leaseback transactions, as well as provide for customary events of default (subject, in certain cases, to receipt of notice of default and/or customary grace and cure periods). We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may redeem all or a portion of the Senior Notes due 2023 at our option at any time on or after December 11, 2022 (three months prior to their maturity), at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the redemption date. We may also redeem all, but not part, of the Senior Notes due 2023 in the event of specified tax events as described in the applicable Senior Notes indenture. If a change of control triggering event (as defined in the applicable Senior Notes indenture) occurs, we will be required to make an offer to purchase the Senior Notes at a price equal to ~~101%~~ ~~of their principal amount plus accrued and unpaid interest to the date of repurchase. As of~~ ~~September 30, 2016, we were in compliance with all covenants for the Senior Notes.~~

Interest on the Senior Notes due 2016 was payable on March 20 and September 20 of each year. Interest on the Senior Notes due 2021 is payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable on March 11 of each year.

~~On April 11, 2016, our Senior Notes due 2016 were settled~~consolidated financial statements for a ~~total~~description of ~~$607 million~~ ~~which included make-whole interest expense of~~ ~~$7 million.~~ ~~The Company recorded this loss on extinguishment of the debt in the second quarter of 2016 as interest expense.~~

~~On August 15, 2016, we entered into a~~ ~~$1.3 billion~~ ~~senior unsecured bridge facility (the “Bridge Facility”). The Bridge Facility was put in place to finance the Sensus acquisition~~our credit facilities and to pay the related fees and expenses to the extent we were unable to finance the Sensus acquisition through available cash on hand, a new term loan and the issuance of the Notes (refer to Note 15 for further information on the issuance of the Notes). The Bridge Facility was terminated on October 31, 2016 in connection with the Sensus acquisition.

~~Term Loan~~

~~On October 24, 2016, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month~~ ~~€150 million (approximately $164 million~~ as of October 28, 2016) term loan facility (the “Term Facility”) the terms of which are set forth in a term loan agreement, among the borrower, the Company, as parent guarantor and ING Bank. The Company has entered into a parent guarantee in favor of ING Bank also dated October 24, 2016 to secure all present and future obligations of the borrower under the Term Loan Agreement. The Term Facility was used to partially fund the Sensus Acquisition. The Term Facility will mature on October 27, 2017. The Term Facility bears interest at EURIBOR plus ~~0.35%.~~ ~~The Agreement contains certain representations and warranties,~~

~~certain affirmative covenants, certain negative covenants, a financial covenant, certain conditions and events of default that are customarily required for similar financings.~~

~~Finance Contract with the European Investment Bank~~

On October 28, 2016, the Company entered into a Finance Contract (the “Finance Contract”) with the European Investment Bank (the “EIB”). The Company's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the Finance Contract and Xylem Inc. is the Guarantor. The Finance Contract provides for up to ~~€105 million (approximately $115 million~~ as of October 28, 2016) to finance research, development and innovation projects in the field of sustainable water and wastewater solutions during the period from 2017 through 2019 in Sweden, Germany, Italy, UK, Hungary and Austria. The Company has unconditionally guaranteed the performance of the borrowers under the Finance Contract.

~~Credit Facility~~

Effective March 27, 2015, Xylem entered into a Five-Year Revolving Credit Facility with Citibank, N.A., as administrative agent, and a syndicate of lenders. The Credit Facility provides for an aggregate principal amount of up to $600 million of: (i) revolving extensions of credit outstanding at any time and (ii) the issuance of letters of credit in a face amount not in excess of $100 million outstanding at any time. The Credit Facility provides for increases of up to $200 million for a possible maximum total of $800 million in aggregate principal amount at our request and with the consent of the institutions providing such increased commitments.

At our election, the interest rate per annum applicable to the revolving loans will be based on either (i) a Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin or (ii) a fluctuating rate of interest determined by reference to the greatest of: (a) the prime rate of Citibank, N.A., (b) the U.S. Federal funds effective rate plus half of 1% ~~or (c) the Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, in each case, plus an applicable margin.~~

~~In accordance with the terms of an amendment to the Credit Facility dated August 30, 2016, we may not exceed a maximum leverage ratio of~~ ~~4.00~~to ~~1.00~~ (based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) for a period of 12-months following the Sensus acquisition and a maximum leverage ratio of 3.50 to 1.00 through the rest of the term. The Credit Facility also contains limitations on, among other things, incurring secured debt, granting liens, entering into sale and leaseback transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. In addition, the Credit Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default. As of ~~September 30, 2016, we were in compliance with all covenants~~.

~~As of~~ ~~September 30, 2016, the Credit Facility was undrawn.~~

~~Commercial Paper~~

~~Research and Development Facility Agreement~~

On December 3, 2015, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D Facility Agreement") with The European Investment Bank (the "EIB") to amend the maturity date. The

~~facility provides an aggregate principal amount of up to €120 million (approximately $135 million)~~ to finance research projects and infrastructure development in the European Union. The Company's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the R&D Facility Agreement. The obligations of the borrowers under the R&D Facility Agreement are guaranteed by the Company under an Amended and Restated Deed of Guarantee, dated as of December 4, 2013, in favor of the EIB. The funds are available during the period from 2013 through 2016 at the Company's facilities in Sweden, Germany, Italy, the United Kingdom, Austria, Norway and Hungary.

~~Under the R&D Facility Agreement, the borrower was able to draw loans on or before March 31, 2016 with a maturity of no longer than~~ ~~12 years~~. The R&D Facility Agreement provides for Fixed Rate loans and Floating Rate loans. The interest rate per annum applicable to Fixed Rate loans is at a fixed percentage rate per annum specified by the EIB which includes the applicable margin. The interest rate per annum applicable to Floating Rate loans is at the rate determined by reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in Pounds Sterling or U.S. Dollars, plus an applicable spread specified by the EIB which includes the applicable margin. The applicable margin for both Fixed Rate loans and Floating Rate loans is determined by reference to the credit rating of the Company.

As of September 30, 2016, $42 million was outstanding under the R&D Facility Agreement. Although the borrowing term for this arrangement is up to five years, we have classified it as short-term debt on our Condensed Consolidated Balance Sheets since we intend to repay this obligation in less than a year.long-term debt.

Non-U.S. Operations

We generated approximately ~~59%~~54% of our revenue from non-U.S. operations for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~and 60% and 59% for the three and six months ended June 30, 2016, respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of the United States, we expect to continue to generate significant revenue from non-U.S. operations and we expect a substantial portion of our cash will be predominately held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when we believe it is cost effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, which support our current designation of a portion of these funds as being indefinitely reinvested and reassess whether there is a demonstrated need to repatriate funds held internationally to support our U.S. operations. If, as a result of our review, it is determined that all or a portion of the funds may be needed for our operations in the United States, we may be required to accrue additional U.S. taxes. As of ~~September~~June 30, ~~2016,~~2017, our foreign subsidiaries were holding ~~$637~~$270 million in cash or marketable securities. ~~On October 31, 2016, $375 million of this cash was used to acquire certain foreign subsidiaries of Sensus and Visenti.~~

Critical Accounting Estimates

Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We believe the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the ~~2015~~2016 Annual Report describes the critical accounting estimates used in preparation of the condensed consolidated financial statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in the information concerning our critical accounting estimates as stated in our ~~2015~~2016 Annual Report.

New Accounting Pronouncements

See Note 2, "Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements for a complete discussion of recent accounting pronouncements. We are currently evaluating the impact of certain recently issued guidance on our financial condition and results of operations in future periods.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the information concerning market risk as stated in our ~~2015~~2016 Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. Some of these proceedings seek remedies relating to environmental matters, intellectual property matters, personal injury claims, employment and pension matters, government contract issues and commercial or contractual disputes, sometimes related to acquisitions or divestitures. See Note 17 "Commitments and Contingencies" to the condensed consolidated financial statements for further information and any updates.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our ~~2015~~2016 Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended ~~September~~June 30, ~~2016~~2017:



~~(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)~~ ~~PERIOD~~	~~TOTAL NUMBER OF SHARES PURCHASED~~	~~AVERAGE PRICE PAID PER SHARE (a)~~	~~TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b)~~	~~APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b)~~
~~7/1/16 - 7/31/16~~	—	—	—	~~$432~~
~~8/1/16 - 8/31/16~~	—	—	—	~~$433~~
~~9/1/16 - 9/30/16~~	—	—	—	~~$433~~



(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PERIOD	TOTAL NUMBER OF SHARES PURCHASED	AVERAGE PRICE PAID PER SHARE (a)	TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b)	APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b)
4/1/17 - 4/30/17	—	—	—	$433
5/1/17 - 5/31/17	0.4	51.82	0.4	$413
6/1/17 - 6/30/17	—	—	—	$413

This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.


(a)	Average price paid per share is calculated on a settlement basis.

(b)

On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. ~~There were no shares repurchased under this program during~~For the three months ended ~~September~~June 30, ~~2016.~~2017, we repurchased 0.1 million shares for $7 million. There are up to ~~$420~~$413 million in shares that may still be purchased under this plan as of ~~September~~June 30, ~~2016.~~2017.

On August 18, 2012, our Board of Directors authorized the repurchase of up to 2.0 million shares of common stock with no expiration date. The program's objective is to offset dilution associated with various Xylem employee stock plans by acquiring shares in the open market from time to time. ~~There were no shares repurchased under this program during~~For the three months ended ~~September~~June 30, ~~2016. There are up~~2017 we repurchased 0.25 million shares for $13 million. As of June 30, 2017, we have exhausted the authorized amount to ~~0.3 million of~~repurchase shares ~~(approximately $13 million in value) that may still be purchased~~ under this ~~plan as of September 30, 2016.~~plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See the Exhibit Index following the signature page hereto for a list of exhibits filed as part of this report and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		XYLEM INC.
		(Registrant)

		/s/ E. Mark Rajkowski
		E. Mark Rajkowski
		Senior Vice President and Chief Financial Officer

~~November~~August 1, ~~2016~~2017

XYLEM INC.

EXHIBIT INDEX



Exhibit Number	Description	Location

(2.1)	Share Purchase Agreement, dated as of August 15, 2016, by and among Xylem Inc., Xylem Luxembourg S.à r.l., Sensus Worldwide Limited, Sensus Industries Limited, and Sensus USA Inc.	Incorporated by reference to Exhibit 2.1 to Xylem Inc.’s Current Report on Form 8-K filed on August 15, 2016(CIK No. 1524472, File No. 1-35229).

(2.2)	First Amendment to Share Purchase Agreement, dated as of November 1, 2016, by and among Xylem Inc., Xylem Luxembourg S.à r.l., Sensus Worldwide Limited, Sensus Industries Limited, and Sensus USA Inc.	Incorporated by reference to Exhibit 2.2 to Xylem Inc.’s Current Report on Form 8-K filed on October 31, 2016 (CIK No. 1524472, File No. 1-35229).

(3.1)	~~Third~~Forth Amended and Restated Articles of Incorporation of Xylem Inc.	Incorporated by reference to Exhibit 3.1 of Xylem Inc.’s Form ~~10-Q~~8-K filed on ~~July 29, 2014~~May 15, 2017 (CIK No. 1524472, File No. 1-35229).

(3.2)	Forth Amended and Restated By-laws of Xylem Inc.	Incorporated by reference to Exhibit 3.1 of Xylem Inc.’s Form 8-K filed on ~~February 25, 2016 (CIK No. 1524472, File No. 1-35229).~~

~~(4.1)~~	~~Senior Indenture, dated March 11, 2016, by and between the Company and Deutsche Bank Trust Company Americas, as trustee.~~	~~Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-K filed on March 11, 2016 (CIK No. 1524472, File No. 1-35229).~~

~~(4.2)~~	~~Third Supplemental Indenture, dated October 11, 2016, by and between the Company and Deutsche Bank Trust Company Americas, as trustee.~~	~~Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-K filed on October 11, 2016 (CIK No. 1524472, File No. 1-35229).~~

~~(4.3)~~	~~Form of 3.250% Senior Notes due 2026~~	~~Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-K filed on October 11, 2016 (CIK No. 1524472, File No. 1-35229).~~

~~(4.4)~~	~~Form of 4.375% Senior Notes due 2046~~	~~Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Form 8-K filed on October 11, 2016~~May 15, 2017 (CIK No. 1524472, File No. 1-35229).

(10.1)	Amendment No.1, dated as of August 30, 2016, to the Five-Year Revolving Credit Facility, dated as of March 27, 2015, among Xylem Inc., the lenders named therein and Citibank N.A. as Administrative Agent.Senior Executive Severance Pay Plan	Filed herewith.

~~(10.2)~~	~~Finance Contract, dated October 28,2016, between Xylem Holdings S.a.r.l. and Xylem International S.a.r.l., as borrowers, Xylem Inc., as guarantor and the European Investment Bank.~~	~~Filed herewith.~~

~~(10.3)~~	~~Term Loan Agreement, dated as of October 24, 2016 among Xylem Europe GmbH, as borrower, Xylem Inc., as parent guarantor and ING Bank, as lender (including Form of Parent Guarantee).~~	~~Incorporated by reference to Exhibit 10.1 of Xylem~~ ~~Inc.’s Form 8-K filed on October 28, 2016 (CIK No.~~ ~~1524472, File No. 1-35229).~~

(11.0)	Statement Re-Computation of Per Share Earnings	Information required to be presented in Exhibit 11 is provided under “Earnings Per Share” in Note 6 to the Condensed Consolidated Financial Statements in Part I, Item 1 “Condensed Consolidated Financial Statements” of this Report in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share.



~~Exhibit~~ ~~Number~~	~~Description~~	~~Location~~
(31.1)	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith.

(31.2)	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith.

(32.1)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference.

(32.2)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference.



Exhibit Number	Description	Location
(101.0)	The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended ~~September~~June 30, ~~2016,~~2017, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Income Statements, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements	The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

4851



	September 30, 2016							December 31, 2015
(in millions)	Carrying Amount		Accumulated Amortization			Net Intangibles		Carrying Amount		Accumulated Amortization			Net Intangibles
Customer and distributor relationships	$	342	$	(159	)	$	183	$	320	$	(140	)	$	180
Proprietary technology and patents	119		(60		)	59		116		(54		)	62
Trademarks	43		(22		)	21		35		(19		)	16
Software	168		(119		)	49		155		(110		)	45
Other	7		(7		)	—		8		(8		)	—
Indefinite-lived intangibles	132		—			132		132		—			132
	$	811	$	(367	)	$	444	$	766	$	(331	)	$	435



	Shares (in thousands)		Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2016	2,561		$	31.16	6.8
Granted	463		37.90
Exercised	(797	)	27.91
Forfeited and expired	(44	)	35.55
Outstanding at September 30, 2016	2,183		$	33.68	7.2	$	41
Options exercisable at September 30, 2016	1,222		$	29.40	5.9	$	26
Vested and expected to vest as of September 30, 2016	2,098		$	33.53	7.1	$	40



Volatility	28.87		%
Risk-free interest rate	1.41		%
Dividend yield	1.63		%
Expected term (in years)	5.6
Weighted-average fair value / share	$	9.05