UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~June~~September 30, 2021


☐			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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange of which registered

Common Stock, par value $0.01 per share

XYL

New York Stock Exchange

2.250% Senior Notes due 2023

XYL23

New York Stock Exchange

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

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

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

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 ☑

As of ~~July 30,~~October 29, 2021, there were ~~180,162,994~~180,325,272 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	-	Financial Statements:
		Condensed Consolidated Income Statements for the Three and ~~and Six~~Nine Months Ended ~~June~~September 3 0 ,30, 2021 and 2020 (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Six~~Nine Months Ended ~~June~~September 3 0 ,30, 2021 and 2020 (Unaudited)	4
		Condensed Consolidated Balance Sheets as of ~~June~~September 3 0 ,30, 2021 and December 31, 2020 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the ~~Six~~ Nine Months Ended ~~June~~September 3 0 ,30, 2021 and 2020 (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	2931
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	4749
Item 4	-	Controls and Procedures	4749
PART II – Other Information
Item 1	-	Legal Proceedings	4850
Item 1A	-	Risk Factors	4850
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	4850
Item 3	-	Defaults Upon Senior Securities	4850
Item 4	-	Mine Safety Disclosures	4850
Item 5	-	Other Information	4850
Item 6	-	Exhibits	4850
		Signatures	5052

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				Six Months					Three Months				Nine Months

For the period ended June 30,		2021		2020		2021		2020
For the periods ended September 30,										For the periods ended September 30,	2021		2020		2021		2020
Revenue	Revenue	$	1,351	$	1,160	$	2,607	$	2,283	Revenue	$	1,265	$	1,220	$	3,872	$	3,503
Cost of revenue	Cost of revenue	831		726		1,597		1,440		Cost of revenue	793		759		2,390		2,199
Gross profit	Gross profit	520		434		1,010		843		Gross profit	472		461		1,482		1,304
Selling, general and administrative expenses	Selling, general and administrative expenses	304		288		605		585		Selling, general and administrative expenses	273		266		878		851
Research and development expenses	Research and development expenses	53		44		103		93		Research and development expenses	49		45		152		138
Restructuring and asset impairment charges		3		48		9		50

Restructuring and asset impairment (recoveries) charges										Restructuring and asset impairment (recoveries) charges	(2)		19		7		69
Goodwill impairment charge										Goodwill impairment charge	—		58		—		58
Operating income	Operating income	160		54		293		115		Operating income	152		73		445		188
Interest expense	Interest expense	21		18		42		34		Interest expense	21		22		63		56
Other non-operating expense, net		(3)		(1)		(1)		(4)
Other non-operating income (expense), net										Other non-operating income (expense), net	2		(1)		1		(5)
Gain from sale of business	Gain from sale of business	2		0		2		0		Gain from sale of business	—		—		2		—
Income before taxes	Income before taxes	138		35		252		77		Income before taxes	133		50		385		127
Income tax expense	Income tax expense	25		4		52		8		Income tax expense	19		13		71		21
Net income	Net income	$	113	$	31	$	200	$	69	Net income	$	114	$	37	$	314	$	106

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.63	$	0.17	$	1.11	$	0.38	Basic	$	0.63	$	0.20	$	1.74	$	0.59
Diluted	Diluted	$	0.62	$	0.17	$	1.10	$	0.38	Diluted	$	0.63	$	0.20	$	1.73	$	0.58
Weighted average number of shares:	Weighted average number of shares:									Weighted average number of shares:
Basic	Basic	180.1		180.0		180.2		180.1		Basic	180.2		180.0		180.2		180.1
Diluted	Diluted	181.3		180.6		181.4		181.0		Diluted	181.6		181.0		181.5		181.0

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in millions)


		Three Months				Six Months					Three Months				Nine Months
For the period ended June 30,		2021		2020		2021		2020
For the periods ended September 30,										For the periods ended September 30,	2021		2020		2021		2020
Net income	Net income	$	113	$	31	$	200	$	69	Net income	$	114	$	37	$	314	$	106
Other comprehensive income (loss), before tax:	Other comprehensive income (loss), before tax:									Other comprehensive income (loss), before tax:
Foreign currency translation adjustment	Foreign currency translation adjustment	19		35		29		(43)		Foreign currency translation adjustment	(19)		(10)		10		(53)

Net change in derivative hedge agreements:	Net change in derivative hedge agreements:									Net change in derivative hedge agreements:
Unrealized gain (loss)	Unrealized gain (loss)	4		6		(7)		4		Unrealized gain (loss)	(1)		4		(8)		8
Amount of loss (gain) reclassified into net income	Amount of loss (gain) reclassified into net income	1		0		(2)		3		Amount of loss (gain) reclassified into net income	2		(2)		—		1
Net change in post-retirement benefit plans:	Net change in post-retirement benefit plans:									Net change in post-retirement benefit plans:

Amortization of prior service credit	Amortization of prior service credit	0		(1)		(1)		(2)		Amortization of prior service credit	(1)		(1)		(2)		(3)
Amortization of net actuarial loss into net income	Amortization of net actuarial loss into net income	5		5		11		10		Amortization of net actuarial loss into net income	6		5		17		15

Other comprehensive income (loss), before tax	Other comprehensive income (loss), before tax	29		45		30		(28)		Other comprehensive income (loss), before tax	(13)		(4)		17		(32)
Income tax expense (benefit) related to items of other comprehensive income (loss)	Income tax expense (benefit) related to items of other comprehensive income (loss)	1		(7)		15		7		Income tax expense (benefit) related to items of other comprehensive income (loss)	11		(17)		26		(10)
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax	28		52		15		(35)		Other comprehensive income (loss), net of tax	(24)		13		(9)		(22)
Comprehensive income	Comprehensive income	$	141	$	83	$	215	$	34	Comprehensive income	$	90	$	50	$	305	$	84
Less: comprehensive loss attributable to noncontrolling interests	Less: comprehensive loss attributable to noncontrolling interests	0		0		0		(1)		Less: comprehensive loss attributable to noncontrolling interests	—		—		—		(1)
Comprehensive income attributable to Xylem	Comprehensive income attributable to Xylem	$	141	$	83	$	215	$	35	Comprehensive income attributable to Xylem	$	90	$	50	$	305	$	85

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)


		June 30, 2021		December 31, 2020			September 30, 2021		December 31, 2020

ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	1,840	$	1,875	Cash and cash equivalents	$	1,255	$	1,875

Receivables, less allowances for discounts, returns and credit losses of $41 and $46 in 2021 and 2020, respectively		975		923
Receivables, less allowances for discounts, returns and credit losses of $43 and $46 in 2021 and 2020, respectively						Receivables, less allowances for discounts, returns and credit losses of $43 and $46 in 2021 and 2020, respectively	973		923
Inventories	Inventories	642		558		Inventories	679		558
Prepaid and other current assets	Prepaid and other current assets	166		167		Prepaid and other current assets	150		167

Total current assets	Total current assets	3,623		3,523		Total current assets	3,057		3,523
Property, plant and equipment, net	Property, plant and equipment, net	626		657		Property, plant and equipment, net	618		657
Goodwill	Goodwill	2,841		2,854		Goodwill	2,816		2,854
Other intangible assets, net	Other intangible assets, net	1,058		1,093		Other intangible assets, net	1,037		1,093
Other non-current assets	Other non-current assets	637		623		Other non-current assets	623		623
Total assets	Total assets	$	8,785	$	8,750	Total assets	$	8,151	$	8,750
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	599	$	569	Accounts payable	$	577	$	569
Accrued and other current liabilities	Accrued and other current liabilities	760		787		Accrued and other current liabilities	737		787
Short-term borrowings and current maturities of long-term debt	Short-term borrowings and current maturities of long-term debt	600		600		Short-term borrowings and current maturities of long-term debt	—		600
Total current liabilities	Total current liabilities	1,959		1,956		Total current liabilities	1,314		1,956
Long-term debt	Long-term debt	2,466		2,484		Long-term debt	2,455		2,484
Accrued post-retirement benefits	Accrued post-retirement benefits	501		519		Accrued post-retirement benefits	492		519
Deferred income tax liabilities	Deferred income tax liabilities	264		242		Deferred income tax liabilities	270		242
Other non-current accrued liabilities	Other non-current accrued liabilities	546		573		Other non-current accrued liabilities	518		573
Total liabilities	Total liabilities	5,736		5,774		Total liabilities	5,049		5,774
Commitments and contingencies (Note 16)	Commitments and contingencies (Note 16)	0		0		Commitments and contingencies (Note 16)	0		0
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common Stock – par value $0.01 per share:	Common Stock – par value $0.01 per share:					Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 195.3 shares and 194.9 shares in 2021 and 2020, respectively		2		2
Authorized 750.0 shares, issued 195.5 shares and 194.9 shares in 2021 and 2020, respectively						Authorized 750.0 shares, issued 195.5 shares and 194.9 shares in 2021 and 2020, respectively	2		2
Capital in excess of par value	Capital in excess of par value	2,063		2,037		Capital in excess of par value	2,077		2,037
Retained earnings	Retained earnings	2,029		1,930		Retained earnings	2,092		1,930
Treasury stock – at cost 15.2 shares and 14.5 shares in 2021 and 2020, respectively	Treasury stock – at cost 15.2 shares and 14.5 shares in 2021 and 2020, respectively	(656)		(588)		Treasury stock – at cost 15.2 shares and 14.5 shares in 2021 and 2020, respectively	(656)		(588)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(398)		(413)		Accumulated other comprehensive loss	(422)		(413)
Total stockholders’ equity	Total stockholders’ equity	3,040		2,968		Total stockholders’ equity	3,093		2,968
Non-controlling interests	Non-controlling interests	9		8		Non-controlling interests	9		8
Total equity	Total equity	3,049		2,976		Total equity	3,102		2,976
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	8,785	$	8,750	Total liabilities and stockholders’ equity	$	8,151	$	8,750

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

~~(in~~ (in millions)
For the six months ended June 30, 2021 2020
Operating Activities
Net income $ 200 $ 69
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 59 58
Amortization 65 68
Share-based compensation 17 16
Restructuring and asset impairment charges 9 50
Gain from sale of business (2) 0
Other, net 6 18
Payments for restructuring (18) (12)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables (66) 48
Changes in inventories (89) (63)
Changes in accounts payable 36 (86)
Other, net (11) 13
Net Cash – Operating activities 206 179
Investing Activities
Capital expenditures (80) (95)
Proceeds from sale of business 2 0
Other, net 9 7
Net Cash – Investing activities (69) (88)
Financing Activities
Short-term debt issued, net 0 359
Short-term debt repaid 0 (422)
Long-term debt issued, net 0 987
Repurchase of common stock (68) (60)
Proceeds from exercise of employee stock options 9 5
Dividends paid (102) (95)
Other, net (1) 0
Net Cash – Financing activities (162) 774
Effect of exchange rate changes on cash (10) (12)
Net change in cash and cash equivalents (35) 853
Cash and cash equivalents at beginning of year 1,875 724
Cash and cash equivalents at end of period $ 1,840 $ 1,577
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 58 $ 45
Income taxes (net of refunds received) $ 60 $ 11


For the nine months ended September 30,	2021		2020
Operating Activities
Net income	$	314	$	106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	90		88
Amortization	96		101
Share-based compensation	25		19
Restructuring and asset impairment charges	7		69
Goodwill impairment charge	—		58
Gain from sale of business	(2)		—
Other, net	3		33
Payments for restructuring	(21)		(25)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	(78)		43
Changes in inventories	(135)		(48)
Changes in accounts payable	19		(91)

Changes in accrued taxes	—		(5)

Other, net	—		106
Net Cash – Operating activities	318		454
Investing Activities
Capital expenditures	(127)		(136)

Proceeds from sale of business	2		—
Proceeds from the sale of property, plant and equipment	1		1

Cash paid for investments	—		(200)
Other, net	11		9
Net Cash – Investing activities	(113)		(326)
Financing Activities
Short-term debt issued, net	—		359
Short-term debt repaid	—		(600)
Long-term debt issued, net	—		985
Long-term debt repaid	(600)		—
Repurchase of common stock	(68)		(61)
Proceeds from exercise of employee stock options	15		10
Dividends paid	(152)		(142)

Other, net	(1)		(1)
Net Cash – Financing activities	(806)		550
Effect of exchange rate changes on cash	(19)		—
Net change in cash and cash equivalents	(620)		678
Cash and cash equivalents at beginning of year	1,875		724
Cash and cash equivalents at end of period	$	1,255	$	1,402
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	83	$	46
Income taxes (net of refunds received)	$	71	$	27

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 operates in 3 segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note 17, "Segment Information", to the condensed consolidated financial statements for further segment background information.

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 statement 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, 2020 ("2020 Annual Report") in preparing these unaudited condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 2020 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 condensed consolidated 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, post-retirement obligations and assets, revenue recognition, income taxes, valuation of intangible assets, goodwill and indefinite-lived intangible impairment testing and contingent liabilities. Actual results could differ from these estimates. The global outbreak of the novel coronavirus ("COVID-19") disease in March 2020, declared a pandemic by the World Health Organization, has created significant global volatility, uncertainty and economic disruption. The COVID-19 pandemic also has caused increased uncertainty in estimates and assumptions affecting the condensed consolidated financial statements. 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. Revenue

Disaggregation of Revenue

The following table illustrates the sources of revenue:


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
Revenue from contracts with customers	Revenue from contracts with customers	$	1,302	$	1,114	$	2,513	$	2,188	Revenue from contracts with customers	$	1,214	$	1,170	$	3,726	$	3,358
Lease Revenue	Lease Revenue	49		46		94		95		Lease Revenue	51		50		146		145
Total	Total	$	1,351	$	1,160	$	2,607	$	2,283	Total	$	1,265	$	1,220	$	3,872	$	3,503

The following table reflects revenue from contracts with customers by application. The table below also reflects updates to the aggregation of applications to simplify and focus presentation.


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
Water Infrastructure	Water Infrastructure									Water Infrastructure
Transport	Transport	$	414	$	350	$	784	$	668	Transport	$	390	$	374	$	1,173	$	1,042
Treatment	Treatment	106		105		200		176		Treatment	106		100		306		276

Applied Water
Applied Water*										Applied Water*
Commercial Building Services	Commercial Building Services	155		133		302		270		Commercial Building Services	152		136		454		406
Residential Building Services	Residential Building Services	73		54		140		104		Residential Building Services	71		67		211		171
Industrial Water	Industrial Water	186		150		365		301		Industrial Water	177		161		542		462

Measurement & Control Solutions	Measurement & Control Solutions									Measurement & Control Solutions
Water	Water	288		240		571		505		Water	253		254		824		759
Energy	Energy	80		82		151		164		Energy	65		78		216		242

Total	Total	$	1,302	$	1,114	$	2,513	$	2,188	Total	$	1,214	$	1,170	$	3,726	$	3,358

*Items in the prior year footnote disclosures for Applied Water were reclassified to conform to the current presentation.

The following table reflects revenue from contracts with customers by geographical region. The presentation of geographic regions below has been updated to better align to how management currently focuses on revenue and growth platforms by geographic region. There has been no change to the Company's reportable segments.


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
Water Infrastructure	Water Infrastructure									Water Infrastructure
United States	United States	$	142	$	144	$	265	$	265	United States	$	137	$	142	$	402	$	407
Western Europe	Western Europe	190		157		363		299		Western Europe	175		163		538		462
Emerging Markets (a)	Emerging Markets (a)	133		109		255		195		Emerging Markets (a)	137		124		391		319
Other	Other	55		45		101		85		Other	47		45		148		130

Applied Water	Applied Water									Applied Water
United States	United States	202		183		396		374		United States	197		185		593		559
Western Europe	Western Europe	99		70		191		144		Western Europe	90		83		281		227
Emerging Markets (a)	Emerging Markets (a)	81		61		159		111		Emerging Markets (a)	81		69		240		181
Other	Other	32		23		61		46		Other	32		27		93		72

Measurement & Control Solutions	Measurement & Control Solutions									Measurement & Control Solutions
United States	United States	224		212		437		433		United States	189		202		625		636
Western Europe	Western Europe	69		51		143		114		Western Europe	59		58		202		172
Emerging Markets (a)	Emerging Markets (a)	49		39		95		80		Emerging Markets (a)	46		45		141		125
Other	Other	26		20		47		42		Other	24		27		72		68

Total	Total	$	1,302	$	1,114	$	2,513	$	2,188	Total	$	1,214	$	1,170	$	3,726	$	3,358

(a)Emerging Markets ~~revenue~~ includes results from the following regions: Eastern Europe, the Middle East and Africa, Latin America and Asia Pacific (excluding Japan, Australia and New Zealand, which are presented in "Other")

Contract Balances

We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Changes in contract assets and liabilities are due to our performance under the contract.

The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:


(in millions)	(in millions)	Contract Assets (a)		Contract Liabilities		(in millions)	Contract Assets (a)		Contract Liabilities
Balance at January 1, 2020	Balance at January 1, 2020	$	106	$	135	Balance at January 1, 2020	$	106	$	135
Additions, net	Additions, net	63		85		Additions, net	95		98
Revenue recognized from opening balance	Revenue recognized from opening balance	—		(70)		Revenue recognized from opening balance	—		(83)
Billings transferred to accounts receivable	Billings transferred to accounts receivable	(60)		—		Billings transferred to accounts receivable	(89)		—

Other	Other	(2)		(4)		Other	—		(1)
Balance at June 30, 2020		$	107	$	146
Balance at September 30, 2020						Balance at September 30, 2020	$	112	$	149

Balance at January 1, 2021	Balance at January 1, 2021	$	117	$	166	Balance at January 1, 2021	$	117	$	166
Additions, net	Additions, net	78		99		Additions, net	99		109
Revenue recognized from opening balance	Revenue recognized from opening balance	—		(93)		Revenue recognized from opening balance	—		(106)
Billings transferred to accounts receivable	Billings transferred to accounts receivable	(74)		—		Billings transferred to accounts receivable	(85)		—

Other	Other	0		(1)		Other	(1)		(2)
Balance at June 30, 2021		$	121	$	171
Balance at September 30, 2021						Balance at September 30, 2021	$	130	$	167

(a)Excludes receivable balances, which are disclosed on the ~~balance sheet~~Condensed Consolidated Balance Sheets

Performance obligations

Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of ~~June~~September 30, 2021, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to ~~$438~~$489 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

Note 3. Restructuring and Asset Impairment Charges

Restructuring

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.~~itself. During the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recognized net restructuring ~~charges~~recoveries of $3$(2) million and $8$6 million, respectively, of which $2$(2) million and $6$4 million relate to actions previously announced in ~~2020.~~2020 and prior. These charges included reduction of headcount across all segments, ~~and~~ asset impairments within our Measurement & Control Solutions segment and accrual recoveries in our Measurement & Control Solutions segment.

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, in June 2020 management committed to a restructuring plan that includes actions across our businesses and functions globally. The plan is designed to support our long-term financial resilience, simplify our operations, strengthen our competitive positioning and better serve our customers. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, we recognized restructuring charges of ~~$38~~$8 million and ~~$40~~$48 million, respectively. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment.

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
By component:	By component:									By component:
Severance and other charges	Severance and other charges	$	4	$	21	$	8	$	23	Severance and other charges	$	1	$	8	$	9	$	31

Asset impairment	Asset impairment	0		17		1		17		Asset impairment	—		—		1		17

Other restructuring charges										Other restructuring charges	—		1		—		1
Reversal of restructuring accruals	Reversal of restructuring accruals	(1)		0		(1)		0		Reversal of restructuring accruals	(3)		(1)		(4)		(1)
Total restructuring charges	Total restructuring charges	$	3	$	38	$	8	$	40	Total restructuring charges	$	(2)	$	8	$	6	$	48
Asset impairment charges	Asset impairment charges	0		10		1		10		Asset impairment charges	—		11		1		21
Total restructuring and asset impairment charges	Total restructuring and asset impairment charges	$	3	$	48	$	9	$	50	Total restructuring and asset impairment charges	$	(2)	$	19	$	7	$	69

By segment:	By segment:									By segment:
Water Infrastructure	Water Infrastructure	$	3	$	6	$	7	$	8	Water Infrastructure	$	—	$	6	$	7	$	14
Applied Water	Applied Water	0		2		1		2		Applied Water	1		1		2		3
Measurement & Control Solutions	Measurement & Control Solutions	0		40		1		40		Measurement & Control Solutions	(3)		12		(2)		52

The following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within "Accrued and other current liabilities" and "Other non-current accrued liabilities", for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


(in millions)	(in millions)	2021		2020		(in millions)	2021		2020
Restructuring accruals - January 1	Restructuring accruals - January 1	$	29	$	27	Restructuring accruals - January 1	$	29	$	27
Restructuring charges		8		40
Restructuring charges,net						Restructuring charges,net	6		48
Cash payments	Cash payments	(18)		(12)		Cash payments	(21)		(25)
Asset impairment	Asset impairment	(1)		(17)		Asset impairment	(1)		(17)
Foreign currency and other	Foreign currency and other	0		(1)		Foreign currency and other	(2)		—
Restructuring accruals - June 30		$	18	$	37
Restructuring accruals - September 30						Restructuring accruals - September 30	$	11	$	33

By segment:	By segment:					By segment:
Water Infrastructure	Water Infrastructure	$	3	$	4	Water Infrastructure	$	1	$	5
Applied Water	Applied Water	1		1		Applied Water	2		1
Measurement & Control Solutions	Measurement & Control Solutions	11		27		Measurement & Control Solutions	6		22
Regional selling locations (a)	Regional selling locations (a)	3		4		Regional selling locations (a)	2		4
Corporate and other	Corporate and other	0		1		Corporate and other	—		1

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

The following table presents expected restructuring spend in 2021 and thereafter:


(in millions)	(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total		(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total
Actions Commenced in 2021:	Actions Commenced in 2021:											Actions Commenced in 2021:
Total expected costs	Total expected costs	$	5	$	0	$	0	$	0	$	5	Total expected costs	$	4	$	—	$	—	$	—	$	4
Costs incurred during Q1 2021	Costs incurred during Q1 2021	1		0		0		0		1		Costs incurred during Q1 2021	1		—		—		—		1
Costs incurred during Q2 2021	Costs incurred during Q2 2021	1		0		0		0		1		Costs incurred during Q2 2021	1		—		—		—		1

Costs incurred during Q3 2021												Costs incurred during Q3 2021	—		—		—		—		—
Total expected costs remaining	Total expected costs remaining	$	3	$	0	$	0	$	0	$	3	Total expected costs remaining	$	2	$	—	$	—	$	—	$	2

Actions Commenced in 2020:	Actions Commenced in 2020:											Actions Commenced in 2020:
Total expected costs	Total expected costs	$	25	$	8	$	33	$	2	$	68	Total expected costs	$	23	$	7	$	31	$	—	$	61
Costs incurred during 2020	Costs incurred during 2020	19		4		30		0		53		Costs incurred during 2020	19		4		30		—		53
Costs incurred during Q1 2021	Costs incurred during Q1 2021	2		1		1		0		4		Costs incurred during Q1 2021	2		1		1		—		4
Costs incurred during Q2 2021	Costs incurred during Q2 2021	2		0		0		0		2		Costs incurred during Q2 2021	2		—		—		—		2

Costs incurred during Q3 2021												Costs incurred during Q3 2021	—		1		—		—		1
Total expected costs remaining	Total expected costs remaining	$	2	$	3	$	2	$	2	$	9	Total expected costs remaining	$	—	$	1	$	—	$	—	$	1

During the third quarter of 2021, we recorded an adjustment of $3 million to decrease the liability within the Measurement & Control Solutions segment, related to 2019 actions. As a result of this adjustment, the estimated total cost of the 2019 actions decreased to $24 million for the Measurement & Control Solutions segment. The 2019 actions are complete.

The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. These actions are expected to continue through the second quarter of 2022.

The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2020 consist primarily of severance charges across segments and asset impairment charges in our Measurement & Control Solutions segment. These actions are expected to continue through the second quarter of 2022.

During the second quarter of 2020 the discontinuance of a product line resulted in ~~$17~~ $17��million of asset impairments, primarily related to customer relationships, trademarks and fixed assets within our Measurement & Control Solutions segment.

Asset Impairment

During the third quarter of 2020, we determined that certain assets including software and proprietary technology within our Measurement & Control Solutions segment were impaired. Accordingly we recognized an impairment charge of $11 million. Refer to Note 7, "Goodwill and Other Intangible Assets," for additional information.

During the second quarter of 2020 we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments. Accordingly, we recognized an impairment charge of $10 million. Refer to Note 7, "Goodwill and Other Intangible Assets," for additional information.

Note 4. 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 and discrete items.

The income tax provision for the three months ended ~~June~~September 30, 2021 was ~~$25~~$19 million resulting in an effective tax rate of ~~18.5%~~13.9%, compared to a $4$13 million expense resulting in an effective tax rate of ~~10.9%~~26.2% for the same period in 2020. The income tax provision for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$52~~$71 million resulting in an effective tax rate of ~~20.7%~~18.3%, compared to ~~an $8~~a $21 million expense resulting in an effective tax rate of ~~10.4%~~16.6% for the same period in 2020. The effective tax rate for the three and ~~six~~nine month periods ended ~~June~~September 30, 2021 was lower than the U.S. federal statutory rate primarily due to favorable earnings mix, partially offset by the Global Intangible Low Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the three and ~~six~~nine month periods ended ~~June~~September 30, ~~2021~~2020 differ from the ~~same periods in 2020 due to unfavorable earnings mix as compared to the prior year and favorable equity compensation deductions in the prior year. The effective tax~~U.S. federal statutory rate ~~for the six month period ended June 30, 2021 differs from the same period in 2020~~primarily due to the ~~impact~~mix of ~~tax settlements~~earnings in foreign jurisdictions, partially offset by the ~~current period.~~

GILTI inclusion and goodwill impairment charge.

Unrecognized Tax Benefits

During 2019, Xylem’s Swedish subsidiary received a tax assessment for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. The assessment asserts an aggregate amount of approximately $80 million for tax, penalties and interest. Xylem filed an appeal with the Administrative Court of Stockholm. Management, in consultation with external legal advisors, believes it is more likely than not that Xylem will prevail on the proposed assessment and is vigorously defending our position through litigation. As of ~~June~~September 30, 2021, we have not recorded any unrecognized tax benefits related to this uncertain tax position.

Note 5. Earnings Per Share

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Net income (in millions)	Net income (in millions)	$	113	$	31	$	200	$	69	Net income (in millions)	$	114	$	37	$	314	$	106
Shares (in thousands):	Shares (in thousands):									Shares (in thousands):
Weighted average common shares outstanding	Weighted average common shares outstanding	180,072		179,933		180,162		180,043		Weighted average common shares outstanding	180,221		180,006		180,182		180,031
Add: Participating securities (a)	Add: Participating securities (a)	34		32		24		29		Add: Participating securities (a)	15		16		21		24
Weighted average common shares outstanding — Basic	Weighted average common shares outstanding — Basic	180,106		179,965		180,186		180,072		Weighted average common shares outstanding — Basic	180,236		180,022		180,203		180,055
Plus incremental shares from assumed conversions: (b)	Plus incremental shares from assumed conversions: (b)									Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options	Dilutive effect of stock options	897		563		845		644		Dilutive effect of stock options	949		656		880		648
Dilutive effect of restricted stock units and performance share units	Dilutive effect of restricted stock units and performance share units	346		79		380		234		Dilutive effect of restricted stock units and performance share units	457		290		405		253

Weighted average common shares outstanding — Diluted	Weighted average common shares outstanding — Diluted	181,349		180,607		181,411		180,950		Weighted average common shares outstanding — Diluted	181,642		180,968		181,488		180,956
Basic earnings per share	Basic earnings per share	$	0.63	$	0.17	$	1.11	$	0.38	Basic earnings per share	$	0.63	$	0.20	$	1.74	$	0.59
Diluted earnings per share	Diluted earnings per share	$	0.62	$	0.17	$	1.10	$	0.38	Diluted earnings per share	$	0.63	$	0.20	$	1.73	$	0.58

(a)Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common ~~shareholders~~stockholders 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 13, "Share-Based Compensation Plans", to the condensed consolidated financial statements for further detail on the performance share units.
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Stock options 1,227 1,766 1,238 1,567
Restricted stock units 318 441 302 377
Performance share units 345 313 349 299


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(in thousands)	2021	2020	2021	2020
Stock options	1,031	1,699	1,169	1,611
Restricted stock units	251	408	285	387
Performance share units	315	334	338	311

Note 6. Inventories

The components of total inventories are summarized as follows:


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	September 30, 2021		December 31, 2020
Finished goods	Finished goods	$	244	$	221	Finished goods	$	252	$	221
Work in process	Work in process	62		49		Work in process	62		49
Raw materials	Raw materials	336		288		Raw materials	365		288
Total inventories	Total inventories	$	642	$	558	Total inventories	$	679	$	558

Note 7. Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying value of goodwill by reportable segment for the ~~six~~nine months ended ~~June~~September 30, 2021 are as follows:


(in millions)	(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Total		(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Total
Balance as of January 1, 2021	Balance as of January 1, 2021	$	668	$	529	$	1,657	$	2,854	Balance as of January 1, 2021	$	668	$	529	$	1,657	$	2,854
Activity in 2021	Activity in 2021									Activity in 2021

Foreign currency and other	Foreign currency and other	0		(5)		(8)		(13)		Foreign currency and other	(7)		(9)		(22)		(38)
Balance as of June 30, 2021		$	668	$	524	$	1,649	$	2,841
Balance as of September 30, 2021										Balance as of September 30, 2021	$	661	$	520	$	1,635	$	2,816

As of ~~June~~September 30, 2021, goodwill included an accumulated impairment loss of $206 million within the Measurement & Control Solutions segment.

During the third quarter of 2020, the Company recorded a goodwill impairment charge of $58 million related to the Advanced Infrastructure Analytics (“AIA”) goodwill reporting unit within our Measurement & Control Solutions segment. The AIA reporting unit is comprised of our assessment services business (primarily the Pure Technologies Ltd. ("Pure") acquisition) as well as our digital solutions business. The impairment resulted from management's updated forecast of future cash flows for the AIA businesses, which reflects significant negative volume impacts from the COVID-19 pandemic, primarily on our assessment services business. Our ongoing investment in the AIA businesses also continues to impact near term profitability. These factors drove the decrease in forecasted cash flows, and as such, the calculated fair value of the AIA reporting unit below its carrying value as of the third quarter. To determine the fair value of the AIA reporting unit, the Company used the income approach. Under the income approach, the fair value of the AIA reporting unit was based on the present value of the estimated cash flows that the reporting unit is expected to generate over its remaining life. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate was based on the weighted average cost of capital appropriate for the AIA reporting unit.

Other Intangible Assets

Information regarding our other intangible assets is as follows:


		June 30, 2021						December 31, 2020							September 30, 2021						December 31, 2020
(in millions)	(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles		(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles
Customer and distributor relationships	Customer and distributor relationships	$	941	$	(436)	$	505	$	941	$	(410)	$	531	Customer and distributor relationships	$	935	$	(446)	$	489	$	941	$	(410)	$	531
Proprietary technology and patents	Proprietary technology and patents	206		(138)		68		206		(131)		75		Proprietary technology and patents	204		(140)		64		206		(131)		75
Trademarks	Trademarks	143		(68)		75		143		(63)		80		Trademarks	142		(70)		72		143		(63)		80
Software	Software	523		(284)		239		500		(265)		235		Software	535		(293)		242		500		(265)		235
Other	Other	21		(19)		2		21		(18)		3		Other	21		(19)		2		21		(18)		3
Indefinite-lived intangibles	Indefinite-lived intangibles	169		0		169		169		0		169		Indefinite-lived intangibles	168		—		168		169		—		169
Other Intangibles	Other Intangibles	$	2,003	$	(945)	$	1,058	$	1,980	$	(887)	$	1,093	Other Intangibles	$	2,005	$	(968)	$	1,037	$	1,980	$	(887)	$	1,093

Amortization expense related to finite-lived intangible assets was ~~$33~~$31 million and ~~$65~~$96 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2021, respectively, and $33 million and ~~$68~~$101 million for the three and ~~six~~nine month periods ended ~~June~~September 30, 2020, respectively.

During the third quarter of 2020, the Company assessed whether the carrying amounts of the AIA reporting unit’s long-lived assets may not be recoverable based on the updated forecast of future cash flows, and therefore impaired. Our assessment resulted in an impairment charge of $11 million, primarily related to software and proprietary technology. The charge was calculated using an 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.

During the second quarter of 2020, we recognized impairment charges of $16 million primarily related to customer relationships and trademarks due to discontinuance of a product line within our Measurement & Control Solutions segment. We also determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments and recognized an impairment charge of $10 million.

Note 8. 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 we 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 also 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 and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling ~~$270~~$130 million and $0 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively. As of ~~June~~September 30, 2021, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar, and to sell Canadian Dollar and purchase Euro. The purchased

notional amounts associated with these currency derivatives are ~~$97~~$47 million, ~~$88~~$42 million, ~~$36~~$17 million, ~~$14~~$7 million, ~~$13~~$7 million and ~~$12~~$5 million, respectively.

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. During the second quarter of 2019 and third quarter of 2020 we entered into additional cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was ~~$1,208~~$1,184 million and $1,249 million as of ~~June~~September 30, 2021 and December 31, 2020, 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 ~~$591~~$579 million and $610 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.

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				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
Cash Flow Hedges	Cash Flow Hedges									Cash Flow Hedges
Foreign Exchange Contracts	Foreign Exchange Contracts									Foreign Exchange Contracts
Amount of (loss) gain recognized in OCI	Amount of (loss) gain recognized in OCI	$	4	$	6	$	(7)	$	4	Amount of (loss) gain recognized in OCI	$	(1)	$	4	$	(8)	$	7
Amount of (gain) loss reclassified from OCI into revenue		1		(1)		(1)		1
Amount of loss (gain) reclassified from OCI into revenue										Amount of loss (gain) reclassified from OCI into revenue	2		(2)		1		—
Amount of (gain) loss reclassified from OCI into cost of revenue	Amount of (gain) loss reclassified from OCI into cost of revenue	0		1		(1)		2		Amount of (gain) loss reclassified from OCI into cost of revenue	—		—		(1)		2

Net Investment Hedges	Net Investment Hedges									Net Investment Hedges
Cross-Currency Swaps	Cross-Currency Swaps									Cross-Currency Swaps
Amount of gain (loss) recognized in OCI	Amount of gain (loss) recognized in OCI	$	2	$	(22)	$	32	$	23	Amount of gain (loss) recognized in OCI	$	27	$	(53)	$	59	$	(30)
Amount of income recognized in Interest Expense	Amount of income recognized in Interest Expense	5		5		$	10	$	9	Amount of income recognized in Interest Expense	6		5		$	16	$	14
Foreign Currency Denominated Debt	Foreign Currency Denominated Debt									Foreign Currency Denominated Debt
Amount of gain (loss) recognized in OCI	Amount of gain (loss) recognized in OCI	$	(6)	$	(15)	$	20	$	(5)	Amount of gain (loss) recognized in OCI	$	12	$	(21)	$	32	$	(26)

As of ~~June~~September 30, 2021, $6$5 million of net losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.

As of ~~June~~September 30, 2021, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration.

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 derivative contracts currently included in our hedging program were as follows:

(in millions)

June 30,
2021

December 31,
2020

(in millions)

September 30,
2021

December 31,
2020

Derivatives designated as hedging instruments

Assets

Net Investment Hedges

Other non-current assets

—

Liabilities

Cash Flow Hedges

Other current liabilities

(5)

Other current liabilities

(4)

—

Net Investment Hedges

Other non-current accrued liabilities

(82)

(117)

Other non-current accrued liabilities

(55)

(117)

The fair value of our long-term debt, due in 2023, designated as a net investment hedge was ~~$614~~$598 million and $640 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively.

Note 9. Accrued and Other Current Liabilities

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


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	September 30, 2021		December 31, 2020
Compensation and other employee-benefits	Compensation and other employee-benefits	$	253	$	258	Compensation and other employee-benefits	$	246	$	258
Customer-related liabilities	Customer-related liabilities	196		186		Customer-related liabilities	189		186
Accrued taxes	Accrued taxes	78		103		Accrued taxes	77		103
Lease liabilities	Lease liabilities	70		63		Lease liabilities	70		63
Accrued warranty costs	Accrued warranty costs	52		54		Accrued warranty costs	46		54
Other accrued liabilities	Other accrued liabilities	111		123		Other accrued liabilities	109		123
Total accrued and other current liabilities	Total accrued and other current liabilities	$	760	$	787	Total accrued and other current liabilities	$	737	$	787

Note 10. Credit Facilities and Debt

Total debt outstanding is summarized as follows:


(in millions)	(in millions)	June 30, 2021		December 31, 2020		(in millions)	September 30, 2021		December 31, 2020

4.875% Senior Notes due 2021 (a)	4.875% Senior Notes due 2021 (a)	$	600	$	600	4.875% Senior Notes due 2021 (a)	$	—	$	600
2.250% Senior Notes due 2023 (a)	2.250% Senior Notes due 2023 (a)	592		612		2.250% Senior Notes due 2023 (a)	580		612
3.250% Senior Notes due 2026 (a)	3.250% Senior Notes due 2026 (a)	500		500		3.250% Senior Notes due 2026 (a)	500		500
1.950% Senior Notes due 2028 ~~(b)~~(a)	1.950% Senior Notes due 2028 ~~(b)~~(a)	500		500		1.950% Senior Notes due 2028 ~~(b)~~(a)	500		500
2.250% Senior Notes due 2031 ~~(b)~~(a)	2.250% Senior Notes due 2031 ~~(b)~~(a)	500		500		2.250% Senior Notes due 2031 ~~(b)~~(a)	500		500
4.375% Senior Notes due 2046 (a)	4.375% Senior Notes due 2046 (a)	400		400		4.375% Senior Notes due 2046 (a)	400		400

Debt issuance costs and unamortized discount ~~(c)~~(b)	Debt issuance costs and unamortized discount ~~(c)~~(b)	(26)		(28)		Debt issuance costs and unamortized discount ~~(c)~~(b)	(25)		(28)

Total debt	Total debt	3,066		3,084		Total debt	2,455		3,084
Less: short-term borrowings and current maturities of long-term debt	Less: short-term borrowings and current maturities of long-term debt	600		600		Less: short-term borrowings and current maturities of long-term debt	—		600
Total long-term debt	Total long-term debt	$	2,466	$	2,484	Total long-term debt	$	2,455	$	2,484

(a)The fair value of our Senior Notes 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 ~~$606~~$0 million and $620 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2023 was ~~$614~~$598 million and $640 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2026 was ~~$548~~$545 million and $563 million as of ~~June~~September 30, 2021 and December 31, 2020 respectively. The fair value of our Senior Notes due 2028 was $505 million and $529 million as of September 30, 2021 and December 31, 2020,

respectively. The fair value of our Senior Notes due 2031 was $503 million and $527 million as of September 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2046 was ~~$483~~$481 million and $496 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively.

(b)The fair value of our Senior Notes 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 2028 was $508 million and $529 million as of June 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2031 was $507 million and $527 million as of June 30, 2021 and December 31, 2020, respectively.

~~(c)~~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 June 26, 2020, we issued 1.950% Senior Notes of $500 million aggregate principal amount due January 2028 (the “Senior Notes due 2028”) and 2.250% Senior Notes of $500 million aggregate principal amount due January 2031 (the “Senior Notes due 2031" and, together with the Senior Notes due 2028, the “Green Bond”).

The Green Bond includes covenants that restrict our ability, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Green Bond at any time, at our option, subject to certain conditions, at specified redemption prices, plus accrued and unpaid interest to the redemption date.

If a change of control triggering event (as defined in the applicable Green Bond indenture) occurs, we will be required to make an offer to purchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase.

Interest on the Green Bond is payable on January 30 and July 30 of each year. As of ~~June~~September 30, 2021, we are in compliance with all covenants for the Green Bond.

On September 20, 2011, we issued 4.875% Senior Notes of $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 2021, the Senior Notes due 2023 and the Senior Notes due 2026, the “Senior Notes”).

The Senior Notes include covenants that restrict our ability, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. 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 the Senior Notes in certain other circumstances, as 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.

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. Interest on the Senior Notes due 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of ~~June~~September 30, 2021, we are in compliance with all covenants for the Senior Notes.

On October 1st, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of $600 million.

Credit Facilities

2019 Five-Year Revolving Credit Facility

On March 5, 2019, Xylem entered into a Five-Year Revolving Credit Facility (the “2019 Credit Facility”) with Citibank, N.A., as Administrative Agent, and a syndicate of lenders. The 2019 Credit Facility provides for an aggregate principal amount of up to $800 million (available in U.S. Dollars and in Euros), with increases of up to $200 million for a maximum aggregate principal amount of $1 billion at the request of Xylem and with the consent of the institutions providing such increased commitments.

Interest on all loans under the 2019 Credit Facility is payable either quarterly or at the expiration of any LIBOR or EURIBOR interest period applicable thereto. Borrowings accrue interest at a rate equal to, at Xylem's election, a base rate or an adjusted LIBOR or EURIBOR rate plus an applicable margin. The 2019 Credit Facility includes customary provisions for implementation of replacement rates for LIBOR-based and EURIBOR-based loans. The 2019 Credit Facility also includes a pricing grid that determines the applicable margin based on Xylem's credit rating, with a further adjustment depending on Xylem's annual Sustainalytics Environmental, Social and Governance ("ESG") score, determined based on the methodology in effect as of March 5, 2019. Xylem will also pay quarterly fees to each lender for such lender’s commitment to lend accruing on such commitment at a rate based on our credit rating, whether such commitment is used or unused, as well as a quarterly letter of credit fee accruing on the letter of credit exposure of such lender during the preceding quarter at a rate based on the credit rating of Xylem (as adjusted for the ESG score).

The 2019 Credit Facility requires that Xylem maintain a consolidated total debt to consolidated EBITDA ratio (or maximum leverage ratio), which will be based on the last four fiscal quarters; and in addition contains a number of customary covenants, including limitations on the incurrence of secured debt and debt of subsidiaries, liens, sale and lease-back transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. The 2019 Credit Facility also contains customary events of default. Finally, Xylem has the ability to designate subsidiaries that can borrow under the 2019 Credit Facility, subject to certain requirements and conditions set forth in the 2019 Credit Facility.

On June 22, 2020, Xylem entered into Amendment No. 1 to the 2019 Credit Facility (the "Amendment") which modified the financial covenant from a test based on the maximum leverage ratio (defined as consolidated total debt to consolidated EBITDA) to a test based on the net leverage ratio (defined as consolidated total debt less unrestricted cash and cash equivalents to consolidated EBITDA). This modification is effective through the quarter ending September 30, 2021, after which the covenant will revert back to the prior maximum leverage ratio test. The Amendment also restricted stock repurchases until March 31, 2021, except for shares of common stock in an amount not to exceed the number of shares issued after the date of the Amendment, subject to customary exceptions. As of ~~June~~September 30, 2021, the 2019 Credit Facility was undrawn and we are in compliance with all revolver covenants.

Commercial Paper

U.S. Dollar Commercial Paper Program

Our U.S. Dollar commercial paper program generally serves as a means of short-term funding with a $600 million maximum issuing balance and a combined limit of $800 million inclusive of the 2019 Credit Facility. As of ~~June~~September 30, 2021 and December 31, 2020, none of the Company's $600 million U.S. Dollar commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.

Euro Commercial Paper Program

On June 3, 2019, Xylem entered into a Euro commercial paper program with ING Bank N.V., as administrative agent, and a syndicate of dealers. The Euro commercial paper program provides for a maximum issuing balance of up to €500 million (approximately ~~$592~~$580 million) which may be denominated in a variety of currencies. The maximum issuing balance may be increased in accordance with the Dealer Agreement. As of ~~June~~September 30, 2021 and December 31, 2020, none of the Company's Euro commercial paper program was outstanding. We have the ability to continue borrowing under this program going forward in future periods.

Note 11. Post-retirement Benefit Plans

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


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
Domestic defined benefit pension plans:	Domestic defined benefit pension plans:									Domestic defined benefit pension plans:
Service cost	Service cost	$	0	$	1	$	1	$	2	Service cost	$	1	$	—	$	2	$	2
Interest cost	Interest cost	1		1		2		2		Interest cost	—		1		2		3
Expected return on plan assets	Expected return on plan assets	(1)		(2)		(3)		(4)		Expected return on plan assets	(2)		(1)		(5)		(5)

Amortization of net actuarial loss	Amortization of net actuarial loss	1		1		2		2		Amortization of net actuarial loss	1		—		3		2
Net periodic benefit cost	Net periodic benefit cost	$	1	$	1	$	2	$	2	Net periodic benefit cost	$	—	$	—	$	2	$	2
International defined benefit pension plans:	International defined benefit pension plans:									International defined benefit pension plans:
Service cost	Service cost	$	3	$	3	$	7	$	6	Service cost	$	4	$	3	$	11	$	9
Interest cost	Interest cost	3		3		6		6		Interest cost	2		3		8		11
Expected return on plan assets	Expected return on plan assets	(3)		(3)		(7)		(6)		Expected return on plan assets	(3)		(4)		(10)		(10)

Amortization of net actuarial loss	Amortization of net actuarial loss	4		3		8		6		Amortization of net actuarial loss	5		4		13		10

Net periodic benefit cost	Net periodic benefit cost	$	7	$	6	$	14	$	12	Net periodic benefit cost	$	8	$	6	$	22	$	20
Total net periodic benefit cost	Total net periodic benefit cost	$	8	$	7	$	16	$	14	Total net periodic benefit cost	$	8	$	6	$	24	$	22

The components of net periodic benefit cost, other than the service cost component, are included in the line item "Other non-operating expense, net" in the Condensed Consolidated Income Statements.

The total net periodic benefit cost for other post-retirement employee benefit plans was less than $1 million, including net credits recognized into other comprehensive income of less than $1 million, for both the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively.

We contributed ~~$12~~$16 million and ~~$16~~$19 million to our defined benefit plans during the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively. Additional contributions ranging between approximately $7$4 million and ~~$15~~$8 million are expected to be made during the remainder of 2021.

During the first quarter of 2020, the Company purchased a bulk annuity policy with an insurance company for its largest defined benefit plan in the U.K., as a plan asset, to facilitate the termination and buy-out of the plan. The bulk annuity fully insures the benefits payable to the participants of the plan until a full buy-out of the plan can be executed, which is expected to occur in 2022. Included in the Company's ~~six~~nine months ended ~~June~~September 30, 2020 contributions is $5 million paid to meet the shortfall between the cost of the bulk annuity policy and the plan assets. Subsequent to the end of the quarter, we made a payment of approximately $6 million related to the previously disclosed buy-out of the UK pension plan. The remaining payments will be completed in Q4 2021.

Note 12. Equity

The following table shows the changes in stockholders' equity for the ~~six~~nine months ended ~~June~~September 30, 2021:


		Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Non-Controlling Interest		Total			Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Non-Controlling Interest		Total
Balance at January 1, 2021	Balance at January 1, 2021	$	2	$	2,037	$	1,930	$	(413)	$	(588)	$	8	$	2,976	Balance at January 1, 2021	$	2	$	2,037	$	1,930	$	(413)	$	(588)	$	8	$	2,976
Other	Other	—		—		—		—		—		1		1		Other	—		—		—		—		—		1		1

Net income	Net income	—		—		87		—		—		—		87		Net income	—		—		87		—		—		—		87
Other comprehensive loss, net	Other comprehensive loss, net	—		—		—		(13)		—		0		(13)		Other comprehensive loss, net	—		—		—		(13)		—		—		(13)
Dividends declared ($0.28 per share)	Dividends declared ($0.28 per share)	—		—		(50)		—		—		—		(50)		Dividends declared ($0.28 per share)	—		—		(50)		—		—		—		(50)
Stock incentive plan activity	Stock incentive plan activity	—		12		—		—		(7)		—		5		Stock incentive plan activity	—		12		—		—		(7)		—		5
Repurchase of common stock	Repurchase of common stock	—		—		—		—		(60)		—		(60)		Repurchase of common stock	—		—		—		—		(60)		—		(60)
Balance at March 31, 2021	Balance at March 31, 2021	$	2	$	2,049	$	1,967	$	(426)	$	(655)	$	9	$	2,946	Balance at March 31, 2021	$	2	$	2,049	$	1,967	$	(426)	$	(655)	$	9	$	2,946

Net income	Net income	—		—		113		—		—		—		113		Net income	—		—		113		—		—		—		113
Other comprehensive income, net	Other comprehensive income, net	—		—		—		28		—		—		28		Other comprehensive income, net	—		—		—		28		—		—		28
Dividends declared ($0.28 per share)	Dividends declared ($0.28 per share)	—		—		(51)		—		—		—		(51)		Dividends declared ($0.28 per share)	—		—		(51)		—		—		—		(51)
Stock incentive plan activity	Stock incentive plan activity	—		14		—		—		(1)		—		13		Stock incentive plan activity	—		14		—		—		(1)		—		13

Balance at June 30, 2021	Balance at June 30, 2021	$	2	$	2,063	$	2,029	$	(398)	$	(656)	$	9	$	3,049	Balance at June 30, 2021	$	2	$	2,063	$	2,029	$	(398)	$	(656)	$	9	$	3,049

Net income																Net income	—		—		114		—		—		—		114
Other comprehensive loss, net																Other comprehensive loss, net	—		—		—		(24)		—		—		(24)

Dividends declared ($0.28 per share)																Dividends declared ($0.28 per share)	—		—		(51)		—		—		—		(51)
Stock incentive plan activity																Stock incentive plan activity	—		14		—		—		—		—		14

Balance at September 30, 2021																Balance at September 30, 2021	$	2	$	2,077	$	2,092	$	(422)	$	(656)	$	9	$	3,102

2021

The following table shows the changes in stockholders' equity for the ~~six~~nine months ended ~~June~~September 30, 2020:


		Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Non-Controlling Interest		Total			Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Non-Controlling Interest		Total
Balance at January 1, 2020	Balance at January 1, 2020	$	2	$	1,991	$	1,866	$	(375)	$	(527)	$	10	$	2,967	Balance at January 1, 2020	$	2	$	1,991	$	1,866	$	(375)	$	(527)	$	10	$	2,967
Cumulative effect of change in accounting principle	Cumulative effect of change in accounting principle	—		—		(2)		—		—		—		(2)		Cumulative effect of change in accounting principle	—		—		(2)		—		—		—		(2)
Net income	Net income	—		—		38		—		—		—		38		Net income	—		—		38		—		—		—		38
Other comprehensive loss, net	Other comprehensive loss, net	—		—		—		(86)		—		(1)		(87)		Other comprehensive loss, net	—		—		—		(86)		—		(1)		(87)
Dividends declared ($0.26 per share)	Dividends declared ($0.26 per share)	—		—		(48)		—		—		—		(48)		Dividends declared ($0.26 per share)	—		—		(48)		—		—		—		(48)
Stock incentive plan activity	Stock incentive plan activity	—		13		—		—		(10)		—		3		Stock incentive plan activity	—		13		—		—		(10)		—		3
Repurchase of common stock	Repurchase of common stock	—		—		—		—		(50)		—		(50)		Repurchase of common stock	—		—		—		—		(50)		—		(50)
Balance at March 31, 2020	Balance at March 31, 2020	$	2	$	2,004	$	1,854	$	(461)	$	(587)	$	9	$	2,821	Balance at March 31, 2020	$	2	$	2,004	$	1,854	$	(461)	$	(587)	$	9	$	2,821
Net income	Net income	—		—		31		—		—		—		31		Net income	—		—		31		—		—		—		31
Other comprehensive income, net	Other comprehensive income, net	—		—		—		52		—		—		52		Other comprehensive income, net	—		—		—		52		—		—		52
Dividends declared ($0.26 per share)	Dividends declared ($0.26 per share)	—		—		(47)		—		—		—		(47)		Dividends declared ($0.26 per share)	—		—		(47)		—		—		—		(47)
Stock incentive plan activity	Stock incentive plan activity	—		8		—		—		—		—		8		Stock incentive plan activity	—		8		—		—		—		—		8
Balance at June 30, 2020	Balance at June 30, 2020	$	2	$	2,012	$	1,838	$	(409)	$	(587)	$	9	$	2,865	Balance at June 30, 2020	$	2	$	2,012	$	1,838	$	(409)	$	(587)	$	9	$	2,865

Net income																Net income	—		—		37		—		—		—		37
Other comprehensive income, net																Other comprehensive income, net	—		—		—		13		—		—		13
Distribution to minority stockholders																Distribution to minority stockholders	—		—		—		—		—		(1)		(1)
Dividends declared ($0.26 per share)																Dividends declared ($0.26 per share)	—		—		(47)		—		—		—		(47)
Stock incentive plan activity																Stock incentive plan activity	—		9		—		—		(1)		—		8
Balance at September 30, 2020																Balance at September 30, 2020	$	2	$	2,021	$	1,828	$	(396)	$	(588)	$	8	$	2,875

Note 13. Share-Based Compensation Plans

Share-based compensation expense was $8 million and ~~$17~~$25 million during the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, and $8$3 million and ~~$16~~$19 million during the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $9$8 million, ~~$30~~$27 million and ~~$16~~$15 million, respectively, at ~~June~~September 30, 2021 and is expected to be recognized over a weighted average period of ~~2.1, 2.0~~1.9, 1.9 and ~~2.8~~2.6 years, respectively. The amount of cash received from the exercise of stock options was $9$15 million and $5$10 million for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively.

Stock Option Grants

The following is a summary of the changes in outstanding stock options for the ~~six~~nine months ended ~~June~~September 30, 2021:


		Share units (in thousands)	Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)			Share units (in thousands)	Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2021	Outstanding at January 1, 2021	1,961	$	56.66	6.4			Outstanding at January 1, 2021	1,961	$	56.66	6.4
Granted	Granted	259	102.31					Granted	262	102.61
Exercised	Exercised	(135)	58.39					Exercised	(264)	54.82
Forfeited and expired	Forfeited and expired	(22)	83.88					Forfeited and expired	(24)	84.39
Outstanding at June 30, 2021		2,063	$	61.93	6.3	$	122
Options exercisable at June 30, 2021		1,409	$	51.45	5.0	$	98
Vested and expected to vest as of June 30, 2021		1,987	$	60.98	6.2	$	119
Outstanding at September 30, 2021								Outstanding at September 30, 2021	1,935	$	62.63	6.2	$	113
Options exercisable at September 30, 2021								Options exercisable at September 30, 2021	1,280	$	51.49	4.8	$	89
Vested and expected to vest as of September 30, 2021								Vested and expected to vest as of September 30, 2021	1,872	$	61.89	6.1	$	111

The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$7.1~~$17.1 million.

Stock Option Fair Value

The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for 2021 grants:


Volatility	~~26.30~~26.29		%
Risk-free interest rate	0.86		%
Dividend yield	1.10		%
Expected term (in years)	5.7
Weighted-average fair value / share	$	~~23.20~~23.26

Expected volatility is calculated based on an analysis of historic volatility measures for Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.

Restricted Stock Unit Grants

The following is a summary of restricted stock unit activity for the ~~six~~nine months ended ~~June~~September 30, 2021. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant:
Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2021 537 $ 74.62
Granted 213 103.36
Vested (233) 74.47
Forfeited (15) 85.91
Outstanding at June 30, 2021 502 $ 86.47


	Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2021	537	$	74.62
Granted	230	105.77
Vested	(249)	74.59
Forfeited	(25)	87.02
Outstanding at September 30, 2021	493	$	88.42

ROIC Performance Share Unit Grants

The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the ~~six~~nine months ended ~~June~~September 30, 2021. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant:


		Share units (in thousands)	Weighted Average Grant Date Fair Value /Share			Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2021	Outstanding at January 1, 2021	182	$	76.12	Outstanding at January 1, 2021	182	$	76.12
Granted	Granted	60	102.30		Granted	61	102.69

Forfeited (a)	Forfeited (a)	(65)	76.04		Forfeited (a)	(66)	76.13
Outstanding at June 30, 2021		177	$	84.66
Outstanding at September 30, 2021					Outstanding at September 30, 2021	177	$	84.85

(a) Includes ROIC performance share unit awards forfeited during the period as a result of the final performance condition not being achieved on vest date.

TSR Performance Share Unit Grants

The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the ~~six~~nine months ended ~~June~~September 30, 2021:


		Share units (in thousands)	Weighted Average Grant Date Fair Value /Share			Share units (in thousands)	Weighted Average Grant Date Fair Value / Share
Outstanding at January 1, 2021	Outstanding at January 1, 2021	182	$	96.98	Outstanding at January 1, 2021	182	$	96.98
Granted	Granted	60	117.56		Granted	61	117.56
Adjustment for Market Condition Achieved (a)	Adjustment for Market Condition Achieved (a)	35	98.79		Adjustment for Market Condition Achieved (a)	35	98.79
Vested	Vested	(93)	98.79		Vested	(93)	98.79
Forfeited	Forfeited	(7)	102.66		Forfeited	(8)	103.10
Outstanding at June 30, 2021		177	$	102.86
Outstanding at September 30, 2021					Outstanding at September 30, 2021	177	$	102.98

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

The fair value of TSR performance share units was calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The following are weighted-average assumptions for 2021 grants:




Volatility	33.5	%
Risk-free interest rate	0.24	%

ESG Performance Share Unit Grants

During the first quarter of 2021, we issued a special grant of less than 0.1 million ESG performance share units. The shares will vest ~~after five years~~on March 1, 2026 based on our performance as of December 31, 2025 against certain of the Company's 2025 sustainability goals.

Note 14. Capital Stock

For the three and ~~six~~nine months ended ~~June~~September 30, 2021, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and approximately 0.7 million shares of common stock for $68 million, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company repurchased less than 0.1 million shares of common stock for ~~less than~~approximately $1 million and approximately 0.8 million shares of common stock for ~~$60~~$61 million, respectively. Repurchases include both share repurchase programs approved by the Board of Directors and

repurchases in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. The details of repurchases by each program are as follows:

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~~stockholders and maintains our focus on growth. There were 0no shares repurchased under the program for the three months ended ~~June~~September 30, 2021. For the ~~six~~nine months ended ~~June~~September 30, 2021, we repurchased approximately 0.6 million shares for $60 million. There were no shares repurchased under the program for the three months ended ~~June~~September 30, 2020. For the ~~six~~nine months ended ~~June~~September 30, 2020, we repurchased approximately 0.7 million shares for $50 million. There are up to $228 million in shares that may still be purchased under this plan as of ~~June~~September 30, 2021.

Aside from the aforementioned repurchase program, we repurchased less than 0.1 million shares and approximately 0.1 million shares for less than $1 million and $8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, 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 approximately 0.1 million shares for ~~less than~~approximately $1 million and ~~$10~~$11 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

Note 15. Accumulated Other Comprehensive Loss

The following table provides the components of accumulated other comprehensive loss for the ~~six~~nine months ended ~~June~~September 30, 2021:


(in millions)	(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total		(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total
Balance at January 1, 2021	Balance at January 1, 2021	$	(86)	$	(330)	$	3	$	(413)	Balance at January 1, 2021	$	(86)	$	(330)	$	3	$	(413)
Foreign currency translation adjustment	Foreign currency translation adjustment	10		—		—		10		Foreign currency translation adjustment	10		—		—		10
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	(14)		—		—		(14)		Tax on foreign currency translation adjustment	(14)		—		—		(14)

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		5		—		5		Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		5		—		5

Income tax impact on amortization of post-retirement benefit plan items	Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)		Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized loss on derivative hedge agreements	Unrealized loss on derivative hedge agreements	—		—		(11)		(11)		Unrealized loss on derivative hedge agreements	—		—		(11)		(11)
Income tax benefit on unrealized loss on derivative hedge agreements	Income tax benefit on unrealized loss on derivative hedge agreements	—		—		1		1		Income tax benefit on unrealized loss on derivative hedge agreements	—		—		1		1

Reclassification of unrealized gain on foreign exchange agreements into revenue	Reclassification of unrealized gain on foreign exchange agreements into revenue	—		—		(2)		(2)		Reclassification of unrealized gain on foreign exchange agreements into revenue	—		—		(2)		(2)
Reclassification of unrealized gain on foreign exchange agreements into cost of revenue	Reclassification of unrealized gain on foreign exchange agreements into cost of revenue	—		—		(1)		(1)		Reclassification of unrealized gain on foreign exchange agreements into cost of revenue	—		—		(1)		(1)

Balance at March 31, 2021	Balance at March 31, 2021	$	(90)	$	(326)	$	(10)	$	(426)	Balance at March 31, 2021	$	(90)	$	(326)	$	(10)	$	(426)
Foreign currency translation adjustment	Foreign currency translation adjustment	19		—		—		19		Foreign currency translation adjustment	19		—		—		19
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	1		—		—		1		Tax on foreign currency translation adjustment	1		—		—		1

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		5		—		5		Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		5		—		5
Income tax impact on amortization of post-retirement benefit plan items	Income tax impact on amortization of post-retirement benefit plan items	—		(2)		—		(2)		Income tax impact on amortization of post-retirement benefit plan items	—		(2)		—		(2)

Unrealized gain on derivative hedge agreements	Unrealized gain on derivative hedge agreements	—		—		4		4		Unrealized gain on derivative hedge agreements	—		—		4		4

Reclassification of unrealized loss on foreign exchange agreements into revenue	Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		1		1		Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		1		1

Balance at June 30, 2021	Balance at June 30, 2021	$	(70)	$	(323)	$	(5)	$	(398)	Balance at June 30, 2021	$	(70)	$	(323)	$	(5)	$	(398)
Foreign currency translation adjustment										Foreign currency translation adjustment	(19)		—		—		(19)
Tax on foreign currency translation adjustment										Tax on foreign currency translation adjustment	(10)		—		—		(10)

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net										Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		5		—		5

Income tax impact on amortization of post-retirement benefit plan items										Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized gain on derivative hedge agreements										Unrealized gain on derivative hedge agreements	—		—		(1)		(1)

Reclassification of unrealized gain on foreign exchange agreements into revenue										Reclassification of unrealized gain on foreign exchange agreements into revenue	—		—		2		2

Balance at September 30, 2021										Balance at September 30, 2021	$	(99)	$	(319)	$	(4)	$	(422)

2426

The following table provides the components of accumulated other comprehensive loss for the ~~six~~nine months ended ~~June~~September 30, 2020:


(in millions)	(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total		(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total
Balance at January 1, 2020	Balance at January 1, 2020	$	(103)	$	(269)	$	(3)	$	(375)	Balance at January 1, 2020	$	(103)	$	(269)	$	(3)	$	(375)

Foreign currency translation adjustment	Foreign currency translation adjustment	(77)		—		—		(77)		Foreign currency translation adjustment	(77)		—		—		(77)
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	(13)		—		—		(13)		Tax on foreign currency translation adjustment	(13)		—		—		(13)

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		4		—		4		Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		4		—		4

Income tax impact on amortization of post-retirement benefit plan items	Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)		Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized loss on derivative hedge agreements	Unrealized loss on derivative hedge agreements	—		—		(2)		(2)		Unrealized loss on derivative hedge agreements	—		—		(2)		(2)

Reclassification of unrealized loss on foreign exchange agreements into revenue	Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		2		2		Reclassification of unrealized loss on foreign exchange agreements into revenue	—		—		2		2
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	—		—		1		1		Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	—		—		1		1

Balance at March 31, 2020	Balance at March 31, 2020	$	(193)	$	(266)	$	(2)	$	(461)	Balance at March 31, 2020	$	(193)	$	(266)	$	(2)	$	(461)

Foreign currency translation adjustment	Foreign currency translation adjustment	35		—		—		35		Foreign currency translation adjustment	35		—		—		35
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	9		—		—		9		Tax on foreign currency translation adjustment	9		—		—		9

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		4		—		4		Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		4		—		4

Income tax impact on amortization of post-retirement benefit plan items	Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)		Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized gain on derivative hedge agreements	Unrealized gain on derivative hedge agreements	—		—		6		6		Unrealized gain on derivative hedge agreements	—		—		6		6
Income tax benefit on unrealized gain on derivative hedge agreements	Income tax benefit on unrealized gain on derivative hedge agreements	—		—		(1)		(1)		Income tax benefit on unrealized gain on derivative hedge agreements	—		—		(1)		(1)
Reclassification of unrealized gain on foreign exchange agreements into revenue	Reclassification of unrealized gain on foreign exchange agreements into revenue	—		—		(1)		(1)		Reclassification of unrealized gain on foreign exchange agreements into revenue	—		—		(1)		(1)
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	—		—		1		1		Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	—		—		1		1
Balance at June 30, 2020	Balance at June 30, 2020	$	(149)	$	(263)	$	3	$	(409)	Balance at June 30, 2020	$	(149)	$	(263)	$	3	$	(409)
Foreign currency translation adjustment										Foreign currency translation adjustment	(10)		—		—		(10)
Tax on foreign currency translation adjustment										Tax on foreign currency translation adjustment	18		—		—		18

Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net										Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		4		—		4
Income tax impact on amortization of post-retirement benefit plan items										Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized gain on derivative hedge agreements										Unrealized gain on derivative hedge agreements	—		—		4		4
Reclassification of unrealized gain on foreign exchange agreements into revenue										Reclassification of unrealized gain on foreign exchange agreements into revenue	—		—		(2)		(2)

Balance at September 30, 2020										Balance at September 30, 2020	$	(141)	$	(260)	$	5	$	(396)

Note 16. Commitments and Contingencies

Legal Proceedings

property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes.

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; acquired by Delticus HoldCo, L.P., a portfolio company of Warburg Pincus LLC, on July 1, 2021), Exelis (acquired by Harris Corporation, now L3Harris Technologies, Inc.) and Xylem, 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 LLC remains a substantial entity with sufficient financial resources to honor its obligations to us.

See Note 4, "Income Taxes", of our condensed consolidated financial statements for a description of a pending tax litigation matter.

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 believe it is reasonably possible 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 $5$5 million and $6 million as of ~~June~~September 30, 2021 and December 31, 2020, respectively, for these general legal matters.

Indemnifications

As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC; acquired by Delticus HoldCo, L.P., a portfolio company of Warburg Pincus LLC, on July 1, 2021), Exelis Inc. (acquired by Harris Corporation, now L3Harris Technologies, 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. ITT LLC'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.

Guarantees

We obtain certain stand-by letters of credit, bank guarantees, surety bonds and insurance letters of credit from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of ~~June~~September 30, 2021 and December 31, 2020, the amount of surety bonds, bank guarantees, insurance letters of credit and stand-by letters of credit was ~~$410~~$417 million and $378 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 our 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 $3 millionand$3 million as of ~~both June~~September 30, 2021 and December 31, 2020 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 changes in the combined current and non-current product warranty accruals over each period:


(in millions)	(in millions)	2021		2020		(in millions)	2021		2020
Warranty accrual – January 1	Warranty accrual – January 1	$	65	$	41	Warranty accrual – January 1	$	65	$	41
Net charges for product warranties in the period	Net charges for product warranties in the period	17		34		Net charges for product warranties in the period	23		44
Settlement of warranty claims	Settlement of warranty claims	(18)		(15)		Settlement of warranty claims	(25)		(24)
Foreign currency and other	Foreign currency and other	(1)		0		Foreign currency and other	(1)		1
Warranty accrual - June 30		$	63	$	60
Warranty accrual - September 30						Warranty accrual - September 30	$	62	$	62

Note 17. Segment Information

Our business has 3 reportable segments: Water Infrastructure, Applied Water and Measurement & Control Solutions. The Water Infrastructure segment focuses on the transportation and treatment of water, offering a range of products including water, wastewater and storm water pumps, treatment equipment, and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on the residential, commercial and industrial markets. The Applied Water segment's major products include pumps, valves, heat exchangers, controls and dispensing equipment. The Measurement & Control Solutions 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 Measurement & Control Solutions segment's major products include smart metering, networked communications, measurement and control technologies, critical infrastructure technologies, software and services including cloud-based analytics, remote monitoring and data management, leak detection and pressure monitoring solutions 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 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.

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The accounting policies of each segment are the same as those described in the ~~summary~~Summary of ~~significant accounting policies (see~~Significant Accounting Policies section of Note 1 in the 2020 Annual ~~Report).~~Report. The following table contains financial information for each reportable segment:


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		June 30,				June 30,					September 30,				September 30,
(in millions)	(in millions)	2021		2020		2021		2020		(in millions)	2021		2020		2021		2020
Revenue:	Revenue:									Revenue:
Water Infrastructure	Water Infrastructure	$	569	$	501	$	1,078	$	939	Water Infrastructure	$	547	$	524	$	1,625	$	1,463
Applied Water	Applied Water	414		337		807		675		Applied Water	400		364		1,207		1,039
Measurement & Control Solutions	Measurement & Control Solutions	368		322		722		669		Measurement & Control Solutions	318		332		1,040		1,001
Total	Total	$	1,351	$	1,160	$	2,607	$	2,283	Total	$	1,265	$	1,220	$	3,872	$	3,503
Operating Income (Loss):	Operating Income (Loss):									Operating Income (Loss):
Water Infrastructure	Water Infrastructure	$	93	$	73	$	164	$	112	Water Infrastructure	$	101	$	89	$	265	$	201
Applied Water	Applied Water	64		41		130		88		Applied Water	60		56		190		144
Measurement & Control Solutions	Measurement & Control Solutions	13		(46)		22		(58)		Measurement & Control Solutions	7		(62)		29		(120)
Corporate and other	Corporate and other	(10)		(14)		(23)		(27)		Corporate and other	(16)		(10)		(39)		(37)
Total operating income	Total operating income	$	160	$	54	$	293	$	115	Total operating income	$	152	$	73	$	445	$	188
Interest expense	Interest expense	$	21	$	18	$	42	$	34	Interest expense	$	21	$	22	$	63	$	56
Other non-operating income (expense), net	Other non-operating income (expense), net	(3)		(1)		(1)		(4)		Other non-operating income (expense), net	2		(1)		1		(5)
Gain from sale of business	Gain from sale of business	2		0		2		0		Gain from sale of business	—		—		2		—
Income before taxes	Income before taxes	$	138	$	35	$	252	$	77	Income before taxes	$	133	$	50	$	385	$	127
Depreciation and Amortization:	Depreciation and Amortization:									Depreciation and Amortization:
Water Infrastructure	Water Infrastructure	$	13	$	16	$	26	$	31	Water Infrastructure	$	12	$	13	$	38	$	44
Applied Water	Applied Water	6		5		12		11		Applied Water	5		7		17		18
Measurement & Control Solutions	Measurement & Control Solutions	37		34		73		70		Measurement & Control Solutions	38		36		111		106
Regional selling locations (a)	Regional selling locations (a)	4		7		9		11		Regional selling locations (a)	6		4		15		15
Corporate and other	Corporate and other	2		0		4		3		Corporate and other	1		3		5		6
Total	Total	$	62	$	62	$	124	$	126	Total	$	62	$	63	$	186	$	189
Capital Expenditures:	Capital Expenditures:									Capital Expenditures:
Water Infrastructure	Water Infrastructure	$	13	$	8	$	24	$	18	Water Infrastructure	$	18	$	9	$	42	$	27
Applied Water	Applied Water	3		3		7		12		Applied Water	4		4		11		16
Measurement & Control Solutions	Measurement & Control Solutions	20		24		41		51		Measurement & Control Solutions	19		22		60		73
Regional selling locations (b)	Regional selling locations (b)	5		8		8		12		Regional selling locations (b)	4		6		12		18
Corporate and other	Corporate and other	0		1		0		2		Corporate and other	2		—		2		2
Total	Total	$	41	$	44	$	80	$	95	Total	$	47	$	41	$	127	$	136

(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.

2830


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, included elsewhere in this report on Form 10-Q (this "Report").

This Report contains “forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” "contemplate," "predict," ~~“project,”~~ “forecast,” “likely,” “believe,” “target,” "goal," “will,” “could,” “would,” “should,” "potential," "may" and similar expressions or their negative, may, but are not necessary to, identify forward-looking statements. By their nature, forward-looking statements address uncertain matters and include any statements that are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals; or address possible or future results of operations or financial performance, including statements relating to orders, revenues, operating margins and earnings per share growth.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, and may continue to be, amplified by the ongoing coronavirus (“COVID-19”) pandemic. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in or implied by our forward-looking statements include, among others, the following: overall industry and economic conditions, including industrial, governmental and private sector spending and the strength of the residential and commercial real estate markets; geopolitical, regulatory, economic and other risks associated with international operations; continued uncertainty around the COVID-19 pandemic’s magnitude, duration and impacts on our business, operations, growth, and financial condition, as well as uncertainty around approved vaccines and the pace of recovery when the pandemic subsides; actual or potential other epidemics, pandemics or global health crises; availability, shortage or delays in receiving products, parts, electronic components and raw materials from our supply chain; manufacturing and operating cost increases due to inflation, prevailing price changes, tariffs and other factors; fluctuations in foreign currency exchange rates; disruption, competition and pricing pressures in the markets we serve; cybersecurity incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; ~~availability of products, parts, electronic components and raw materials from our supply chain;~~ availability, regulation and interference with radio spectrum used by some of our products; our ability to retain and attract senior management and other key talent; uncertainty related to restructuring and realignment actions and related charges and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; risks relating to products, including defects, security, warranty and liability claims, and recalls; difficulty predicting our financial results, including uncertainties due to the nature of our short- and long-cycle businesses; volatility in our results due to weather ~~conditions;~~conditions, including the effects of climate change; our ability to borrow or refinance our existing indebtedness and the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, competition, and the environment and climate change; changes in our effective tax rates or tax expenses; legal, governmental or regulatory claims, investigations or proceedings and associated 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, 2020 ("2020 Annual Report") and in subsequent filings we make with the Securities and Exchange Commission (“SEC”).

All forward-looking statements made herein are based on information currently available to us as of the date of this Report. We undertake 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.

2931

Overview

Xylem is a leading global water technology company. We design, manufacture and service highly engineered products and solutions ranging across a wide variety of critical applications in utility, industrial, residential and commercial building services settings. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test, treatment and analysis of wastewater to the return of water to the environment. Our product and service offerings are organized into three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control Solutions.

•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 and storm water to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. Additionally, our offerings use monitoring and control, smart and connected technologies to allow for remote monitoring of performance and enable products to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for our customers. In the Water Infrastructure segment, we provide the majority of our sales directly to customers along with strong applications expertise, while the remaining amount is through distribution partners.

•Applied Water serves the water 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 and controls provide cooling to power plants and manufacturing facilities, circulation for food and beverage processing, as well as boosting systems for agricultural 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.

•Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and critical infrastructure technologies that allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. We also provide analytical instrumentation used to measure and analyze water quality, flow and level in clean water, wastewater, surface water and coastal environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions. In the Measurement & Control Solutions segment, we generate our sales through a combination of long-standing relationships with leading distributors and dedicated channel partners, as well as direct sales depending on the regional availability of distribution channels and the type of product.

COVID-19 Pandemic Update

Depending on the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences, we anticipate that it will become more difficult to distinguish specific aspects of our operational and financial performance that are most directly related to the pandemic from those more broadly influenced by ongoing macroeconomic, market and industry dynamics that may be, to varying degrees, related to the pandemic and its consequences.

The COVID-19 pandemic, as well as broader global market supply and demand dynamics, have adversely affected, and are expected to continue to adversely affect, our supply chains. We have experienced, and expect to continue ~~experiencing,~~to experience, shortages in the supply of components, including electronics, parts and raw ~~materials, and, in some cases, unpredictable interruptions with our external suppliers in 2021.~~materials. We have also experienced, and continue to experience, increased freight and logistics costs, including delivery delays related to port congestion and other related logistics challenges. To help mitigate the ~~current global capacity shortages. We~~effects of these challenges and increase the resilience of our supply chain, we continue to enhance and augment our risk management activities, including supplier pulsing and ~~redundancy to help mitigate these challenges.~~redundancy. Additionally, we have in the past, and may continue to in the future, take measures with respect to buffer stock, orthe use of alternative suppliers or redesign of certain products to mitigate the impacts of freight and logistics delays and bolster our access to raw materials, parts and components. If these shortages and interruptions ~~are sustained,~~continue, or if additional interruptions occur, they

could have a negative impact on our results of operations. Our current overall operating capacity approximates normal levels globally.

Xylem Watermark, our corporate social responsibility program, continues to support our communities in addressing the challenges posed by this global pandemic by strengthening access to Water, Sanitation and Hygiene (WASH) facilities in schools and health centers through its partnership with Americares and UNICEF, as well as the Partner Community Grants program and matching donations program for employees and partners, and other philanthropic commitments.

Xylem continues to focus on the health and safety of our employees, working with our customers to help them minimize potential disruptions and positively impact our communities. Our support pay program for employees impacted by COVID-19 will remain in place into the fourth quarter of 2021, and ~~is evaluated~~we will continue to evaluate it for continuation, as necessary.

Many of our offices globally remain in a substantially remote work from home status and our COVID-19 Response Team applies a set of Xylem "Return to Workplace" health and safety guidelines for remote workers to return to our facilities.

We continue to assess the evolving nature of the pandemic and its possible implications to our business, employees, supply chain, customers and communities, and to take actions in an effort to mitigate adverse consequences.

Risk related to the impact of COVID-19 as well as our supply chain are described in further detail under "Item 1A. Risk Factors" in the Company's 2020 Annual Report.

Executive Summary

Xylem reported revenue for the ~~second~~third quarter of 2021 of ~~$1,351~~$1,265 million, an increase of ~~16.5%~~3.7% compared to ~~$1,160~~$1,220 million reported in the ~~second~~third quarter of 2020. On a constant currency basis, revenue increased by ~~$125~~$25 million, or ~~10.8%~~2.0%, driven by organic revenue growth ~~across all~~in the Water Infrastructure and Applied Water segments, partially offset by Measurement & Control Solutions. These results were driven by growth in the industrial and commercial end markets, offset by declines in ~~all~~the utilities end ~~markets.~~market.

We generated operating income of ~~$160~~$152 million (margin of ~~11.8%~~12.0%) during the ~~second~~third quarter of 2021, as compared to ~~$54~~$73 million (margin of ~~4.7%~~6.0%) in 2020. Operating income in the ~~second~~third quarter of 2021 benefited from a decrease in restructuring and realignment costs of ~~$37~~$13 million as compared to the ~~second~~third quarter of 2020 and a decrease in special charges of ~~$11 million incurred during 2020 that did not recur.~~$69 million. Excluding the impact of these items, adjusted operating income was ~~$166~~$155 million (adjusted margin of 12.3%) during the ~~second~~third quarter of 2021 as compared to ~~$108~~$158 million (adjusted margin of ~~9.3%~~13.0%) in 2020. The ~~increase~~decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments, increased logistics costs and unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives, ~~and~~price realization, favorable volume, ~~impacted by COVID-19 recovery. These impacts were partially offset by cost inflation~~ and ~~increased spending on strategic investments.~~other lesser impacts.

Additional financial highlights for the quarter ended ~~June~~September 30, 2021 include the following:

•Orders of ~~$1,660~~$1,518 million, up ~~34.7%~~21.8% from ~~$1,232~~$1,246 million in the prior year, and up ~~28.8%~~20.1% on an organic basis.

•Earnings per share of ~~$0.62,~~$0.63, up ~~264.7%~~215.0% when compared to the prior year ($~~0.66,~~0.63, up ~~65.0%~~1.6% on an adjusted basis).

•Net income as a percent of revenue of ~~8.4%~~9.0%, up ~~570~~600 basis points compared to ~~2.7%~~3.0% in the prior year. EBITDA margin of ~~16.2%~~17.0%, up ~~650~~610 basis points when compared to ~~9.7%~~10.9% in the prior year ~~(17.3%~~(17.9%, ~~up 200~~down 30 basis points on an adjusted basis)

•Net cash flow provided by operating activities of ~~$206~~$318 million for the ~~six~~nine months ended ~~June~~September 30, 2021, ~~an increase~~a decrease of ~~$27~~$136 million from cash provided in the same period of the prior year. Free cash flow was ~~$126~~$191 million, ~~up $42~~down $127 million from the prior year.

3133

Key Performance Indicators and Non-GAAP Measures

Management reviews key performance indicators including revenue, gross margins, segment operating income and operating income margins, orders growth, working capital 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 to 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. Excluding revenue, Xylem provides guidance only on a non-GAAP basis due to the inherent difficulty in forecasting certain amounts that would be included in GAAP earnings, such as discrete tax 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 items to represent the non-GAAP measures we consider to be key performance indicators, as well as the related reconciling items to the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures may not be comparable to similarly-titled measures reported by other companies.

•"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 or discontinuance 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 impacts is determined by translating current period and prior period activity using the 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, gain or loss from sale of businesses and tax-related special items, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below.


		Three Months Ended								Six Months Ended									Three Months Ended								Nine Months Ended
		June 30,								June 30,									September 30,								September 30,
(In millions, except for per share data)	(In millions, except for per share data)	2021				2020				2021				2020				(In millions, except for per share data)	2021				2020				2021				2020
Net income & Earnings per share	Net income & Earnings per share	$	113	$	0.62	$	31	$	0.17	$	200	$	1.10	$	69	$	0.38	Net income & Earnings per share	$	114	$	0.63	$	37	$	0.20	$	314	$	1.73	$	106	$	0.58
Restructuring and realignment, net of tax of $1 and $3 for 2021 and $10 and $12 for 2020		5		0.03		33		0.18		11		0.06		40		0.22
Restructuring and realignment, net of tax of $1 and $4 for 2021 and $3 and $15 for 2020																		Restructuring and realignment, net of tax of $1 and $4 for 2021 and $3 and $15 for 2020	1		—		12		0.06		12		0.07		52		0.28

Special charges, net of tax of $1 and $1 for 2021 and $3 and $3 for 2020		2		0.01		10		0.06		5		0.03		11		0.06
Special charges, net of tax of $0 and $1 for 2021 and $6 and $9 for 2020																		Special charges, net of tax of $0 and $1 for 2021 and $6 and $9 for 2020	2		0.01		65		0.36		7		0.04		76		0.42
Tax-related special items	Tax-related special items	1		0.01		(1)		(0.01)		7		0.04		(5)		(0.03)		Tax-related special items	(1)		(0.01)		—		—		6		0.03		(5)		(0.03)
Gain from sale of business, net of tax of $0 for 2021	Gain from sale of business, net of tax of $0 for 2021	(2)		(0.01)		—		—		(2)		—		—		—		Gain from sale of business, net of tax of $0 for 2021	—		—		—		—		(2)		(0.01)		—		—
Adjusted net income & Adjusted earnings per share	Adjusted net income & Adjusted earnings per share	$	119	$	0.66	$	73	$	0.40	$	221	$	1.23	$	115	$	0.63	Adjusted net income & Adjusted earnings per share	$	116	$	0.63	$	114	$	0.62	$	337	$	1.86	$	229	$	1.25

•"adjusted operating expenses" defined as operating expenses adjusted to exclude restructuring and realignment costs and special charges.

•"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue.

3234

•“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense "EBITDA margin" defined as EBITDA divided by total revenue, "adjusted EBITDA" reflects the adjustment to EBITDA to exclude share-based compensation charges, restructuring and realignment costs, special charges and gain or loss from sale of businesses, and "adjusted EBITDA margin" defined as adjusted EBITDA divided by total revenue.


		Three Months Ended						Six Months Ended							Three Months Ended						Nine Months Ended
		June 30,						June 30,							September 30,						September 30,
(in millions)	(in millions)	2021			2020			2021			2020			(in millions)	2021			2020			2021			2020
Net Income	Net Income	$	113		$	31		$	200		$	69		Net Income	$	114		$	37		$	314		$	106
Income tax expense	Income tax expense	25			4			52			8			Income tax expense	19			13			71			21
Interest expense, net	Interest expense, net	19			16			38			30			Interest expense, net	20			20			58			50
Depreciation	Depreciation	29			29			59			58			Depreciation	31			30			90			88
Amortization	Amortization	33			33			65			68			Amortization	31			33			96			101
EBITDA	EBITDA	$	219		$	113		$	414		$	233		EBITDA	$	215		$	133		$	629		$	366
EBITDA Margin	EBITDA Margin	16.2		%	9.7		%	15.9		%	10.2		%	EBITDA Margin	17.0		%	10.9		%	16.2		%	10.5		%
Share-based compensation	Share-based compensation	$	8		$	8		$	17		$	16		Share-based compensation	$	8		$	3		$	25		$	19
Restructuring and realignment	Restructuring and realignment	6			43			14			52			Restructuring and realignment	2			15			16			67
Special charges	Special charges	3			13			6			14			Special charges	2			71			8			85
Gain from sale of business	Gain from sale of business	(2)			—			(2)			—			Gain from sale of business	—			—			(2)			—
Adjusted EBITDA	Adjusted EBITDA	$	234		$	177		$	449		$	315		Adjusted EBITDA	$	227		$	222		$	676		$	537
Adjusted EBITDA Margin	Adjusted EBITDA Margin	17.3		%	15.3		%	17.2		%	13.8		%	Adjusted EBITDA Margin	17.9		%	18.2		%	17.5		%	15.3		%

•“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" defined as costs incurred by the Company, such as acquisition and integration related costs, non-cash impairment charges and both operating and non-operating adjustments for pension costs.

•"tax-related special items" defined as tax items, such as tax return versus tax provision adjustments, tax exam impacts, tax law change impacts, 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 Statement of Cash Flows, less capital expenditures. 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.


		Six Months Ended					Nine Months Ended
		June 30,					September 30,
(In millions)	(In millions)	2021		2020		(In millions)	2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	206	$	179	Net cash provided by operating activities	$	318	$	454
Capital expenditures	Capital expenditures	(80)		(95)		Capital expenditures	(127)		(136)
Free cash flow	Free cash flow	$	126	$	84	Free cash flow	$	191	$	318
Net cash used by investing activities	Net cash used by investing activities	$	(69)	$	(88)	Net cash used by investing activities	$	(113)	$	(326)
Net cash (used) provided by financing activities	Net cash (used) provided by financing activities	$	(162)	$	774	Net cash (used) provided by financing activities	$	(806)	$	550

3335

2021 Outlook

We ~~anticipate~~are updating our anticipated total revenue growth to be in the range of 8%5% to ~~10%~~7% in 2021, with organic revenue growth anticipated to be in the range of 6%3% to ~~8%.~~4%, including negative impacts due to the challenging supply chain environment. The following is a summary of our organic revenue outlook by end markets:

•Utilities revenue increased by approximately 5%1% organically through the ~~first half of the year~~third quarter driven by strength in western Europe and the emerging markets, partially offset by weakness in North America. For 2021, we expect organic revenue ~~growth in the mid~~ to ~~high-single-digit range~~be essentially flat with continued resilience on the wastewater side, as utilities remain focused on mission-critical applications and anticipate modest growth on a global basis through the year. The timing of large clean water utility project deployments has been impacted by the global shortage of electronic components, which we expect to continue throughout the remainder of 2021. We anticipate that these deployments will ramp up when supply constraints ease based on our strong backlog position and orders momentum. Additionally, we expect healthy momentum in the test and treatment markets globally and increased demand for our smart water solution and digital offerings.

•Industrial revenue increased by approximately ~~15%~~14% organically through the ~~first half of the year~~third quarter driven by ~~strength~~strong across all major geographic regions. For 2021, we expect organic revenue growth in the high-single-digit range as activity across all segments rebounds globally and our dewatering business continues to recover, especially in the emerging markets, as demand increases and site access restrictions continue to ease. We anticipate growth to continue in ~~during~~ the ~~second half~~remainder of the year led by ~~North America, with growth in~~the emerging markets and western Europe ~~as well.~~with North America modest lagging growth.

•In the commercial markets, organic revenue growth was approximately 8%9% through the ~~first half of the year~~third quarter driven by strength in ~~western Europe, North America~~the U.S. and the emerging markets. For 2021, we expect organic revenue growth in the mid to high-single-digit range. We expect replacement business in the U.S. to be ~~stable~~solid during the year and anticipate continued healthy activity in Europe. We expect new construction activity in North America ~~to be soft, however we are optimistic that conditions will begin to recover late in~~strengthening, through the year.

•In the residential markets, organic revenue growth was approximately ~~30%~~20% through the ~~first half of the year~~third quarter driven by strength in the emerging markets, North America and western Europe. This market is primarily driven by replacement revenue serviced through our distribution network. For 2021, we expect organic revenue growth in the low-teens, driven by healthy demand activity from increased residential users in the U.S. and western Europe. Additionally, we anticipate strong demand in China for secondary water supply product applications.

We will continue to strategically execute restructuring and realignment actions in an effort to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. During 2021, we expect to incur ~~between $30 million and $40~~approximately $20 million in restructuring and realignment costs. We expect to realize ~~between~~approximately $35 ~~million and $40~~ million of net savings in 2021, consisting of ~~between~~approximately $33 ~~million and $35~~ million of incremental net savings from restructuring and realignment actions initiated in 2020, and ~~between~~approximately $2 ~~million and $5~~ million of net savings from the restructuring, realignment and other structural cost actions initiated during this year.

3436

Results of Operations


		Three Months Ended								Six Months Ended									Three Months Ended								Nine Months Ended
		June 30,								June 30,									September 30,								September 30,
(In millions)	(In millions)	2021			2020			Change		2021			2020			Change		(In millions)	2021			2020			Change		2021			2020			Change
Revenue	Revenue	$	1,351		$	1,160		16.5	%	$	2,607		$	2,283		14.2	%	Revenue	$	1,265		$	1,220		3.7	%	$	3,872		$	3,503		10.5	%
Gross profit	Gross profit	520			434			19.8	%	1,010			843			19.8	%	Gross profit	472			461			2.4	%	1,482			1,304			13.7	%
Gross margin	Gross margin	38.5		%	37.4		%	110	bp	38.7		%	36.9		%	180	bp	Gross margin	37.3		%	37.8		%	(50)	bp	38.3		%	37.2		%	110	bp

Total operating expenses	Total operating expenses	360			380			(5.3)	%	717			728			(1.5)	%	Total operating expenses	320			388			(17.5)	%	1,037			1,116			(7.1)	%
Expense to revenue ratio	Expense to revenue ratio	26.6		%	32.8		%	(620)	bp	27.5		%	31.9		%	(440)	bp	Expense to revenue ratio	25.3		%	31.8		%	(650)	bp	26.8		%	31.9		%	(510)	bp
Restructuring and realignment costs	Restructuring and realignment costs	6			43			(86.0)	%	14			52			(73.1)	%	Restructuring and realignment costs	2			15			(86.7)	%	16			67			(76.1)	%

Special charges	Special charges	—			11			—	%	2			11			(81.8)	%	Special charges	1			70			(98.6)	%	3			81			(96.3)	%
Adjusted operating expenses	Adjusted operating expenses	354			326			8.6	%	701			665			5.4	%	Adjusted operating expenses	317			303			4.6	%	1,018			968			5.2	%
Adjusted operating expenses to revenue ratio	Adjusted operating expenses to revenue ratio	26.2		%	28.1		%	(190)	bp	26.9		%	29.1		%	(220)	bp	Adjusted operating expenses to revenue ratio	25.1		%	24.8		%	30	bp	26.3		%	27.6		%	(130)	bp
Operating income	Operating income	160			54			196.3	%	293			115			154.8	%	Operating income	152			73			108.2	%	445			188			136.7	%
Operating margin	Operating margin	11.8		%	4.7		%	710	bp	11.2		%	5.0		%	620	bp	Operating margin	12.0		%	6.0		%	600	bp	11.5		%	5.4		%	610	bp
Interest and other non-operating expense, net	Interest and other non-operating expense, net	24			19			26.3	%	43			38			13.2	%	Interest and other non-operating expense, net	19			23			(17.4)	%	62			61			1.6	%
Gain from sale of business	Gain from sale of business	2			—			NM		2			—			NM		Gain from sale of business	—			—			NM		2			—			NM
Income tax expense	Income tax expense	25			4			525.0	%	52			8			550.0	%	Income tax expense	19			13			46.2	%	71			21			238.1	%
Tax rate	Tax rate	18.5		%	10.9		%	760	bp	20.7		%	10.4		%	1,030	bp	Tax rate	13.9		%	26.2		%	(1,230)	bp	18.3		%	16.6		%	170	bp
Net income	Net income	$	113		$	31		264.5	%	$	200		$	69		189.9	%	Net income	$	114		$	37		208.1	%	$	314		$	106		196.2	%

NM - Not meaningful change

Revenue

Revenue generated during the three and ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$1,351~~$1,265 million and ~~$2,607~~$3,872 million, reflecting increases of ~~$191~~$45 million, or ~~16.5%~~3.7%, and ~~$324~~$369 million, or ~~14.2%~~10.5%, respectively, compared to the same prior year periods. On a constant currency basis, revenue grew ~~10.8%~~2.0% and ~~9.4%~~6.8% for the three and ~~six~~nine months ended ~~June~~September 30, 2021. The increases on a constant currency basis were driven by organic revenue growth of ~~$128~~$27 million and ~~$219~~$246 million, ~~respectively, reflecting~~respectively. During the quarter, we experienced strong organic growth across the emerging markets and in western Europe, partially offset by declines in the U.S. On a year-to-date basis, we saw organic growth across all major ~~geographic regions and segments.~~geographies, where we recovered nicely from the significant impacts of the COVID-19 pandemic in the prior year.

The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to revenue during the three and ~~six~~nine months ended ~~June~~September 30, 2021:


		Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem				Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(In millions)	(In millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change			(In millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Revenue	2020 Revenue	$	501			$	337			$	322			$	1,160				2020 Revenue	$	524			$	364			$	332			$	1,220
Organic Growth	Organic Growth	32		6.4	%	59		17.5	%	37		11.5	%	128		11.0	%		Organic Growth	13		2.5	%	29		8.0	%	(15)		(4.5)	%	27		2.2	%
Divestitures	Divestitures	—		—	%	—		—	%	(3)		(0.9)	%	(3)		(0.2)	%		Divestitures	—		—	%	—		—	%	(2)		(0.6)	%	(2)		(0.2)	%
Constant Currency	Constant Currency	32		6.4	%	59		17.5	%	34		10.6	%	125		10.8	%		Constant Currency	13		2.5	%	29		8.0	%	(17)		(5.1)	%	25		2.0	%
Foreign currency translation (a)	Foreign currency translation (a)	36		7.2	%	18		5.3	%	12		3.7	%	66		5.7	%		Foreign currency translation (a)	10		1.9	%	7		1.9	%	3		0.9	%	20		1.7	%
Total change in revenue	Total change in revenue	68		13.6	%	77		22.8	%	46		14.3	%	191		16.5	%		Total change in revenue	23		4.4	%	36		9.9	%	(14)		(4.2)	%	45		3.7	%
2021 Revenue	2021 Revenue	$	569			$	414			$	368			$	1,351				2021 Revenue	$	547			$	400			$	318			$	1,265

(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Chinese Yuan, the British Pound, the Canadian Dollar, the Euro and the South African Rand.


	Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(In millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Revenue	$	1,463			$	1,039			$	1,001			$	3,503
Organic Growth	92		6.3	%	132		12.7	%	22		2.2	%	246		7.0	%
Divestitures	—		—	%	—		—	%	(7)		(0.7)	%	(7)		(0.2)	%
Constant Currency	92		6.3	%	132		12.7	%	15		1.5	%	239		6.8	%
Foreign currency translation (a)	70		4.8	%	36		3.5	%	24		2.4	%	130		3.7	%
Total change in revenue	162		11.1	%	168		16.2	%	39		3.9	%	369		10.5	%
2021 Revenue	$	1,625			$	1,207			$	1,040			$	3,872

(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, the Chinese Yuan, the British Pound, ~~and the Australian Dollar.~~

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2020 Revenue $ 939 $ 675 $ 669 $ 2,283
Organic Growth 79 8.4 % 103 15.3 % 37 5.5 % 219 9.6 %
Divestitures — — % — — % (5) (0.7) % (5) (0.2) %
Constant Currency 79 8.4 % 103 15.3 % 32 4.8 % 214 9.4 %
Foreign currency translation (a) 60 6.4 % 29 4.3 % 21 3.1 % 110 4.8 %
Total change in revenue 139 14.8 % 132 19.6 % 53 7.9 % 324 14.2 %
2021 Revenue $ 1,078 $ 807 $ 722 $ 2,607

~~(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, the Chinese Yuan,~~ the Australian Dollar and the ~~British Pound.~~Canadian Dollar.

Water Infrastructure

Water Infrastructure revenue increased ~~$68~~$23 million, or ~~13.6%~~4.4%, for the ~~second~~third quarter of 2021 ~~(6.4%~~(2.5% increase on a constant currency basis) as compared to the prior year. Revenue benefited from ~~$36~~$10 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of ~~$32~~$13 million. Organic growth for the quarter was driven by strength in the industrial end market, particularly across the emerging markets, ~~and, to a lesser extent,~~as well as in western Europe. Organic growth for the quarter was ~~also driven~~partially offset by ~~strength~~weakness in the utility end market, ~~primarily~~particularly in ~~western Europe where we saw strong demand~~emerging markets driven by project revenue in ~~utilities' operational spending coupled with recovery from~~India and China in the prior year ~~COVID-19 impacts. Organic growth~~that did not recur, as well as in the ~~utility end market was marginally offset by declines~~U.S., with weakness in ~~North America during~~ the ~~quarter.~~dewatering construction and municipal business due to project timing.

From an application perspective, organic revenue growth for the ~~second~~third quarter was driven by our transport ~~application.~~applications. The transport ~~application~~applications had strong revenue growth in the emerging markets, where the dewatering business in Latin America and Africa benefited from strong market conditions in mining, ~~during the quarter~~as well as modest oil and ~~Asia Pacific had strong revenue growth~~gas recovery, during the quarter and in western Europe, ~~where we had~~driven by strong industrial and wastewater utility ~~demand, positively impacted by COVID-19 recovery. Organic revenue~~demand. This growth ~~from our transport application~~ was partially offset by ~~a modest decline~~softness in the ~~treatment application, driven by the timing of project deliveries~~transport applications in the U.S. ~~as compared~~due to supply chain constraints. The treatment applications also had organic growth in the ~~prior year.~~quarter, primarily in western Europe.

For the ~~six~~nine months ended ~~June~~September 30, 2021, revenue increased ~~$139~~$162 million, or ~~14.8% (8.4%~~11.1% (6.3% increase on a constant currency basis) as compared to the prior year. Revenue benefited from ~~$60~~$70 million of foreign currency translation during the ~~six~~nine month period, with the change at constant currency coming entirely from organic growth of ~~$79~~$92 million. Organic growth during the year was driven by strength in ~~the~~ both the industrial and utility ~~and~~end markets. Organic growth in the industrial end ~~markets.~~market was particularly strong across the emerging markets, which included recovery from prior year COVID-19 impacts, particularly in Asia, Africa and Latin America, and in western Europe with continued strength in general industrial. Strength in the utility end market was led by western Europe, where ~~utilities' operational~~operation spending ~~continues to be~~was strong in the first half of the year, and in the emerging markets, where China benefited from healthy order intake coming into the year. ~~Organic~~This utility growth was partially offset by weakness in the industrial end market was particularly strong across the emerging markets, which included growth from the COVID-19 recovery in Latin America and healthy order intake in China and Africa, and in western Europe.U.S.

From an application perspective, organic revenue growth during the ~~six~~nine month period was primarily driven by our transport ~~application.~~applications. The transport ~~application was driven by~~applications had strong revenue growth across the emerging markets, where we benefited from healthy order intake in ~~Asia Pacific~~China and Africa and a ~~favorable prior year comparison~~strong recovery in Latin America, particularly in the dewatering application, as well as growth ~~from~~in western Europe, where the COVID-19 ~~recovery~~pandemic had a significant impact in ~~western Europe.~~the first half of the prior year. Transport application growth in these regions was partially offset by weakness in the U.S. driven by our dewatering application. Organic revenue from our treatment ~~application~~applications also contributed to the segment's growth during the period, driven by ~~strength in the emerging markets, particularly~~project orders in China and Korea, as well as in western Europe and Australia, which ~~was~~were partially offset by the timing of project deliveries in ~~the U.S. during the year.~~North America.

Applied Water

Applied Water revenue increased ~~$77~~$36 million, or ~~22.8%~~9.9%, for the ~~second~~third quarter of 2021 ~~(17.5%~~(8.0% increase on a constant currency basis) as compared to the prior year. Revenue benefited from ~~$18~~$7 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of ~~$59~~$29 million. Organic growth for the quarter was driven by strength in ~~every end market and across all major geographic regions, with particular strength~~commercial building services, particularly in ~~North America and western Europe.~~the U.S, as we continued to execute

3638

~~From an application perspective, organic revenue growth~~on healthy backlog and order intake, and in ~~the second quarter was led by strength in the industrial water application which was primarily driven by market growth across~~ the emerging markets, driven by recovery in China. The industrial water business also grew organically in the quarter across all of our major geographic regions, where we benefited from strong order intake ~~in North America, with particular~~and timing of price increases, as well as strength in the specialty flow control applications (marine and food & beverage)~~, and market recovery in western Europe, where the industry was more significantly impacted by the COVID-19 pandemic in the prior year.~~. The residential building services application ~~also~~ had strong organic growth, primarily driven by western Europe, as market conditions recover from the COVID-19 pandemic, strength in North America, where we benefited from healthy backlog execution, and the emerging markets, specifically driven by strong second water supply business in China. The commercial building services application also contributed organiccontinued modest growth during the ~~quarter, primarily driven by strength in the U.S. and western Europe, where the industry was more significantly impacted by the COVID-19 pandemic in the prior year.~~quarter.

For the ~~six~~nine months ended ~~June~~September 30, 2021, revenue increased ~~$132~~$168 million, or ~~19.6% (15.3%~~16.2% (12.7% increase on a constant currency basis) as compared to the prior year. Revenue benefited from ~~$29~~$36 million of foreign currency translation during the ~~six~~nine month period, with the change at constant currency coming entirely from organic growth of ~~$103~~$132 million. Organic growth during the period ~~was driven by strength in every end market and~~included growth across all ~~major geographic regions.~~

~~From an application perspective,~~three of the applications and end markets in the segment. The organic ~~revenue~~ growth ~~during the six month period~~ was led by strength in ~~the~~ industrial, ~~water application,~~ which was primarily driven by market ~~growth~~recovery and good backlog execution in the emerging markets, particularly in ~~Asia Pacific where the industry was more significantly impacted~~China and India, as well as strong performance in western Europe, driven by ~~the~~market recovery from COVID-19 ~~pandemic~~impacts and strength in ~~the first half of the prior year,~~specialty flow control applications. Commercial building services had strong ~~order intake~~organic growth in North America, ~~and western Europe, reflecting recovery from the COVID-19 pandemic during the second quarter of~~as we executed on healthy backlog coming into the year. ~~The residential~~Residential building services ~~application revenue also~~ had strong organic growth during the first half of the year, primarily driven by the emerging markets, where we experienced strong second water supply business and a favorable prior year comparison in China, as markets conditions ~~recover~~recovered from the COVID-19 pandemic. Strength in North America also contributed to the growth in ~~the~~ residential building services ~~application,~~for the year-to-date, as we ~~benefited from~~executed on healthy backlog ~~execution~~ coming into the year, and market growth in western Europe during the period. The commercial building services application contributed organic growth during the first half of the year, primarily driven by strength in western Europe, North America and the emerging markets, particularly Asia Pacific.year.

Measurement & Control Solutions

Measurement & Control Solutions revenue ~~increased $46~~decreased $14 million, or ~~14.3%~~4.2%, for the ~~second~~third quarter of 2021 ~~(10.6% increase~~(5.1% decrease on a constant currency basis) as compared to the prior year. Revenue benefited from ~~$12~~$3 million of foreign currency translation, with the change at constant currency ~~driven by~~coming from an organic ~~growth~~decline of ~~$37~~$15 million ~~which was partially offset by~~and reduced revenue related to divestiture impacts of $3$2 million. Organic ~~revenue growth during~~weakness in the quarter was driven by declines in the utility end market, primarily in North America, which more than offset modest strength in ~~both~~ the ~~utility and~~ industrial end ~~markets and across all major geographic regions.~~market.

In order to simplify and focus the application discussion, beginning with the first quarter of 2021, we are aggregating the test application into the water application and the software as a service and other application into the water and energy applications, as applicable, as both of these sub-applications provide products and services to the broader, ultimate applications of water and energy. From an application perspective, organic revenue ~~growth~~decline during the quarter was driven by ~~the timing of project deployments~~declines in the electric business within the energy application in North America, marginally offset by increased revenue in the gas business. The water application ~~coupled with COVID-19 recovery in the U.S. and western Europe during the quarter. The energy application~~also experienced a ~~modest~~ decrease, ~~during the quarter,~~ primarily ~~driven project timing and~~due to supply chain constraints in ~~the U.S.~~North America in our metrology business, which were partially offset by growth in our test and assessment service businesses.

For the ~~six~~nine months ended ~~June~~September 30, 2021, revenue increased ~~$53~~$39 million, or ~~7.9% (4.8%~~3.9% (1.5% increase on a constant currency basis) as compared to the prior year. Revenue benefited from ~~$21~~$24 million of foreign currency translation during the ~~six~~nine month period, with the change at constant currency driven by organic growth of ~~$37~~$22 million which was partially offset by reduced revenue related to divestiture impacts of $5$7 million. Organic revenue growth during the period was driven by strength in ~~both~~the industrial end ~~markets and~~market across all of our major geographic ~~regions, particularly~~regions. Organic growth in ~~western Europe.~~the industrial end market was marginally offset by weakness in the utility end market in North America.

From an application perspective, organic revenue growth during the period was driven by the water application, ~~particularly in the U.S. and western Europe, where~~with growth across all major geographic regions, ~~benefited from a favorable prior year comparison during the period~~driven by COVID-19 recovery, coupled with strong backlog execution. ~~This organic~~Growth in the water applications was largely attributable to our test business, as well as growth in our metrology business in the first half of the year. Organic revenue growth was partially offset by a decline in the energy application during the period driven by both the electric and gas businesses, primarily in the U.S. Declines in the electric business resulted from electronic component shortages while declines in the gas business ~~where~~reflect large project deployments in the U.S. during the prior year that did not repeat, ~~and we experienced~~as well as project delays during the year driven by the COVID-19 ~~pandemic during the year.~~

pandemic.

Orders / Backlog

An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the ~~second~~third quarter of 2021 were ~~$1,660~~$1,518 million, an

increase of ~~$428~~$272 million, or ~~34.7%~~21.8%, over the prior year ~~(28.7%~~(19.9% increase on a constant currency basis). Orders received during the ~~six~~nine months ended ~~June~~September 30, 2021 were ~~$3,198~~$4,716 million, an increase of ~~$705~~$977 million, or ~~28.3%~~26.1%, over the prior year ~~(23.3%~~(22.2% increase on a constant currency basis). Order intake benefited from ~~$74~~$24 million and ~~$123~~$147 million of foreign currency translation for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively. The increase on a constant currency basis was primarily driven by organic order growth of ~~$355~~$250 million and ~~$590~~$840 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively.

The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three and ~~six~~nine months ended ~~June~~September 30, 2021:


		Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem					Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(in millions)	(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change		(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Orders	2020 Orders	$	598			$	326			$	308			$	1,232			2020 Orders	$	558			$	375			$	313			$	1,246
Organic Growth	Organic Growth	—		—	%	140		42.9	%	215		69.8	%	355		28.8	%	Organic Growth	53		9.5	%	64		17.1	%	133		42.5	%	250		20.1	%
Divestitures	Divestitures	—		—	%	—		—	%	(1)		(0.3)	%	(1)		(0.1)	%	Divestitures	—		—	%	—		—	%	(2)		(0.6)	%	(2)		(0.2)	%
Constant Currency	Constant Currency	—		—	%	140		42.9	%	214		69.5	%	354		28.7	%	Constant Currency	53		9.5	%	64		17.1	%	131		41.9	%	248		19.9	%
Foreign currency translation (a)	Foreign currency translation (a)	41		6.9	%	20		6.1	%	13		4.2	%	74		6.0	%	Foreign currency translation (a)	12		2.2	%	7		1.9	%	5		1.6	%	24		1.9	%
Total change in orders	Total change in orders	41		6.9	%	160		49.1	%	227		73.7	%	428		34.7	%	Total change in orders	65		11.6	%	71		18.9	%	136		43.5	%	272		21.8	%
2021 Orders	2021 Orders	$	639			$	486			$	535			$	1,660			2021 Orders	$	623			$	446			$	449			$	1,518


	Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Orders	$	1,670			$	1,073			$	996			$	3,739
Organic Growth	123		7.4	%	296		27.6	%	421		42.3	%	840		22.5	%
Divestitures	—		—	%	—		—	%	(10)		(1.0)	%	(10)		(0.3)	%
Constant Currency	123		7.4	%	296		27.6	%	411		41.3	%	830		22.2	%
Foreign currency translation (a)	80		4.8	%	40		3.7	%	27		2.7	%	147		3.9	%
Total change in orders	203		12.2	%	336		31.3	%	438		44.0	%	977		26.1	%
2021 Orders	$	1,873			$	1,409			$	1,434			$	4,716

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2020 Orders $ 1,112 $ 698 $ 683 $ 2,493
Organic Growth 70 6.3 % 232 33.2 % 288 42.2 % 590 23.7 %
Divestitures — — % — — % (8) (1.2) % (8) (0.4) %
Constant Currency 70 6.3 % 232 33.2 % 280 41.0 % 582 23.3 %
Foreign currency translation (a) 68 6.1 % 33 4.7 % 22 3.2 % 123 4.9 %
Total change in orders 138 12.4 % 265 38.0 % 302 44.2 % 705 28.3 %
2021 Orders $ 1,250 $ 963 $ 985 $ 3,198

Water Infrastructure

Water Infrastructure segment orders increased ~~$41~~$65 million, or ~~6.9%~~11.6%, to ~~$639~~$623 million ~~(flat~~(9.5% on a constant currency basis) for the ~~second~~third quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from ~~$41~~$12 million of foreign currency translation. Organic orders ~~remained essentially flat~~increased during the quarter as strength in the ~~treatment~~transport application ~~which was driven by~~benefited from strong order intake ~~across all major geographies, was offset by decline~~ in the transport application, which included a significant project order of greater than $100 million in India during the second quarter of 2020 that did not recur. Excluding the impact of the significant India order in 2020, the transport application had organic order growthNorth America and western Europe driven by healthy ~~market conditions in western Europe and North America during the quarter, including order growth~~demand, as well as increased demand for dewatering applications in the ~~dewatering business.~~

emerging markets. Treatment orders were down slightly for the quarter.

For the ~~six~~nine months ended ~~June~~September 30, 2021, orders increased ~~$138~~$203 million, or ~~12.4%~~12.2%, to ~~$1,250~~$1,873 million ~~(6.3%~~(7.4% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from ~~$68~~$80 million of foreign currency translation. The order increase on a constant currency basis consisted ~~primarily~~ of organic order growth in both the transport and treatment ~~application.~~applications. Organic growth in the ~~treatment~~transport application was ~~driven by strength in North America, the emerging markets, particularly in China, and western Europe. Organic orders for the transport application also increased during the period, primarily~~ driven by healthy market conditions in North America and western Europe, ~~and North America which were partially~~marginally offset by ~~weakness~~a slight net decline in the emerging markets, where we had a significant project order of greater than $100 million in India during the second quarter of 2020 which ~~more than~~ offset order strength in ~~Latin~~the rest of the emerging markets during period. Organic orders for the treatment application also increased during the period due to order growth in the

first half of the year, driven by strength in North America, emerging markets, particularly in China, and ~~Africa during period.~~western Europe.

Applied Water

Applied Water segment orders increased ~~$160~~$71 million, or ~~49.1%~~18.9%, to ~~$486~~$446 million ~~(42.9%~~(17.1% increase on a constant currency basis) for the ~~second~~third quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from ~~$20~~$7 million of foreign currency translation. The order increase on a constant currency basis was driven entirely by organic order growth, ~~across all end markets,~~ primarily in the U.S., commercial building services and industrial end markets, where we benefited from strong demand recovery, amplified by longer lead times for delivering product, and to a lesser extent, in ~~western Europe and~~ the emerging ~~markets.~~markets and western Europe.

For the ~~six~~nine months ended ~~June~~September 30, 2021, orders increased ~~$265~~$336 million, or ~~38.0%~~31.3%, to ~~$963~~$1,409 million ~~(33.2%~~(27.6% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from ~~$33~~$40 million of foreign currency translation. The order increase on a constant currency basis was driven by organic order growth in the U.S. across all end markets ~~during the first half of the year, primarily in the U.S.,~~and applications, where we benefited from strong demand, amplified by early ordering to mitigate longer lead ~~times, and to a lesser extent,~~times; in ~~western Europe and~~ the emerging markets, particularly in China where order intake was weakened by COVID-19 impacts in the prior ~~year.~~year; as well as in western Europe.

Measurement & Control Solutions

Measurement & Control Solutions segment orders increased ~~$227~~$136 million, or ~~73.7%~~43.5%, to ~~$535~~$449 million ~~(69.5%~~(41.9% increase on a constant currency basis) for the ~~second~~third quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from ~~$13~~$5 million of foreign currency translation. The order increase on a constant currency basis consisted almost entirely of organic order growth of ~~$215~~$133 million, or ~~69.8%~~42.5%. Organic order growth was led by the energy application, primarily in our metrology business, where the electric and gas businesses benefited from COVID-19 recovery, coupled with increased order intake due to electronic component shortages. Order intake in the water application also grew organically during the quarter, which experienced strong order intake in the U.S.~~, amplified by~~ metrology business, which also benefited from COVID-19 recovery and increased ~~ordering~~order intake due to electronic component shortages, and benefited from a favorable comparison, driven by COVID-19 recovery, as well as strength in western Europe. Order intake in the energy application also grew organically during the quarter, primarily in North America where the gas business benefited from a favorable comparison, driven by COVID-19 recovery, coupled with project related ordering in the electric business during the quarter.shortages.

For the ~~six~~nine months ended ~~June~~September 30, 2021, orders increased ~~$302~~$438 million, or ~~44.2%~~44.0%, to ~~$985~~$1,434 million ~~(41.0%~~(41.3% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from ~~$22~~$27 million of foreign currency translation. The order increase on a constant currency basis included organic order growth of ~~$288~~$421 million, or ~~42.2%~~42.3%, which was partially offset by a $8$10 million reduction in orders related to divestiture impacts during the period. Organic order growth was led by the water application, ~~which was driven by strong order intake~~primarily in ~~the U.S., amplified by increased ordering due to component shortages, and in western Europe, coupled with a favorable comparison, driven by COVID-19 recovery. Order intake in the~~our metrology business, but also from our test business as well. The energy ~~application~~applications also ~~grew organically~~had good organic growth during the ~~first half of~~period. The growth on a year-to-date basis across all the ~~year, primarily driven~~applications in this segment was impacted by ~~large projects in North America.~~similar dynamics impacting the order growth for the quarter.

Backlog

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 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 occur from time to time. Total backlog was ~~$2,779~~$2,964 million at ~~June~~September 30, 2021, an increase of ~~$766~~$772 million or ~~38.1%~~35.2%, as compared to ~~June~~September 30, 2020 backlog of ~~$2,013~~$2,192 million, and an increase of ~~$655~~$840 million or ~~30.8%~~39.5%, as compared to December 31, 2020 backlog of $2,124 million driven by the significant increase in orders in the year. We anticipate that approximately ~~50%~~35% of the backlog at ~~June~~September 30,

2021 will be recognized as revenue in the remainder of ~~2021.~~2021, subject to supply constraints. There were no significant order cancellations during the quarter.

Gross Margin

Gross margin as a percentage of revenue ~~increased 110 and 180~~decreased 50 basis points to ~~38.5%~~37.3% and ~~38.7%~~increased 110 basis points to 38.3% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, as compared to ~~37.4%~~37.8% and ~~36.9%~~37.2% for the comparative 2020 periods. The gross margin ~~increase~~decrease for ~~both periods~~the quarter was primarily driven by cost inflation and increased logistics costs, partially offset by cost reductions from our global procurement and productivity improvement initiatives. The gross margin increase for the nine month period was primarily driven by cost

reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, ~~impacted by COVID-19 recovery, which were~~ partially offset by ~~cost~~ inflation.

Operating Expenses

The following table presents operating expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020:


		Three Months Ended								Six Months Ended									Three Months Ended								Nine Months Ended
		June 30,								June 30,									September 30,								September 30,
(In millions)	(In millions)	2021			2020			Change		2021			2020			Change		(In millions)	2021			2020			Change		2021			2020			Change
Selling, general and administrative expenses ("SG&A")	Selling, general and administrative expenses ("SG&A")	$	304		$	288		5.6	%	$	605		$	585		3.4	%	Selling, general and administrative expenses ("SG&A")	$	273		$	266		2.6	%	$	878		$	851		3.2	%
SG&A as a % of revenue	SG&A as a % of revenue	22.5		%	24.8		%	(230)	bp	23.2		%	25.6		%	(240)	bp	SG&A as a % of revenue	21.6		%	21.8		%	(20)	bp	22.7		%	24.3		%	(160)	bp
Research and development expenses ("R&D")	Research and development expenses ("R&D")	53			44			20.5	%	103			93			10.8	%	Research and development expenses ("R&D")	49			45			8.9	%	152			138			10.1	%
R&D as a % of revenue	R&D as a % of revenue	3.9		%	3.8		%	10	bp	4.0		%	4.1		%	(10)	bp	R&D as a % of revenue	3.9		%	3.7		%	20	bp	3.9		%	3.9		%	—	bp
Restructuring and asset impairment charges	Restructuring and asset impairment charges	3			48			(93.8)	%	9			50			(82.0)	%	Restructuring and asset impairment charges	(2)			19			(110.5)	%	7			69			(89.9)	%

Goodwill impairment charge																		Goodwill impairment charge	—			58			—	%	—			58			—	%
Operating expenses	Operating expenses	$	360		$	380		(5.3)	%	$	717		$	728		(1.5)	%	Operating expenses	$	320		$	388		(17.5)	%	$	1,037		$	1,116		(7.1)	%
Expense to revenue ratio	Expense to revenue ratio	26.6		%	32.8		%	(620)	bp	27.5		%	31.9		%	(440)	bp	Expense to revenue ratio	25.3		%	31.8		%	(650)	bp	26.8		%	31.9		%	(510)	bp

Selling, General and Administrative ("SG&A") Expenses

SG&A expenses increased by ~~$16~~$7 million to ~~$304~~$273 million, or ~~22.5%~~21.6% of revenue, in the ~~second~~third quarter of 2021, as compared to ~~$288~~$266 million, or ~~24.8%~~21.8% of revenue, in the comparable 2020 period; and increased by ~~$20~~$27 million to ~~$605~~$878 million, or ~~23.2%~~22.7% of revenue, in the ~~six~~nine months ended ~~June~~September 30, 2021, as compared to ~~$585~~$851 million, or ~~25.6%~~24.3% of revenue, in the comparable 2020 period. ~~The improvement~~Revenue growth driven by favorable volume was higher than SG&A increases resulting in a lower SG&A as a ~~percent~~percentage of ~~revenue for~~sales. Cost increases in both periods ~~was primarily~~were driven by cost inflation and increased investments in strategic growth initiatives, partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives and decreased quality management ~~costs, which were partially offset by cost inflation, additional investments in strategic growth initiatives and other~~ costs.

Research and Development ("R&D") Expenses

R&D expense was ~~$53~~$49 million, or 3.9% of revenue, in the ~~second~~third quarter of 2021, as compared to ~~$44~~$45 million, or ~~3.8%~~3.7% of revenue, in the comparable 2020 period; and was ~~$103~~$152 million, or ~~4.0%~~3.9% of revenue, in the ~~six~~nine months ended ~~June~~September 30, 2021, as compared to ~~$93~~$138 million, or ~~4.1%~~3.9% of revenue, in the comparable 2020 period.

Restructuring and Asset Impairment Charges

Restructuring

During the three and ~~six~~nine months ended ~~June~~September 30, 2021, we recognized restructuring net charges of $3$(2) million and $8$6 million, respectively, of which $2$(2) million and $6$4 million relate to actions previously announced in ~~2020.~~2020 and prior. These charges included reduction of headcount across all segments, ~~and~~ asset impairments within our Measurement & Control Solutions segment, and accrual recoveries in our Measurement & Control Solutions segment.

The following is a roll-forward for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020 of employee position eliminations associated with restructuring activities:


		2021	2020		2021	2020
Planned reductions - January 1	Planned reductions - January 1	319	196	Planned reductions - January 1	319	196
Additional planned reductions	Additional planned reductions	72	579	Additional planned reductions	73	670
Actual reductions and reversals	Actual reductions and reversals	(202)	(115)	Actual reductions and reversals	(234)	(604)
Planned reductions - June 30		189	660
Planned reductions - September 30				Planned reductions - September 30	158	262

The following table presents expected restructuring spend in 2021 and thereafter:


(in millions)	(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total		(in millions)	Water Infrastructure		Applied Water		Measurement & Control Solutions		Corporate		Total
Actions Commenced in 2021:	Actions Commenced in 2021:											Actions Commenced in 2021:
Total expected costs	Total expected costs	$	5	$	—	$	—	$	—	$	5	Total expected costs	$	4	$	—	$	—	$	—	$	4
Costs incurred during Q1 2021	Costs incurred during Q1 2021	1		—		—		—		1		Costs incurred during Q1 2021	1		—		—		—		1
Costs incurred during Q2 2021	Costs incurred during Q2 2021	1		—		—		—		1		Costs incurred during Q2 2021	1		—		—		—		1

Costs incurred during Q3 2021												Costs incurred during Q3 2021	—		—		—		—		—
Total expected costs remaining	Total expected costs remaining	$	3	$	—	$	—	$	—	$	3	Total expected costs remaining	$	2	$	—	$	—	$	—	$	2

Actions Commenced in 2020:	Actions Commenced in 2020:											Actions Commenced in 2020:
Total expected costs	Total expected costs	$	25	$	8	$	33	$	2	$	68	Total expected costs	$	23	$	7	$	31	$	—	$	61
Costs incurred during 2020	Costs incurred during 2020	19		4		30		—		53		Costs incurred during 2020	19		4		30		—		53
Costs incurred during Q1 2021	Costs incurred during Q1 2021	2		1		1		—		4		Costs incurred during Q1 2021	2		1		1		—		4
Costs incurred during Q2 2021	Costs incurred during Q2 2021	2		—		—		—		2		Costs incurred during Q2 2021	2		—		—		—		2
Costs incurred during Q3 2021												Costs incurred during Q3 2021	—		1		—		—		1
Total expected costs remaining	Total expected costs remaining	$	2	$	3	$	2	$	2	$	9	Total expected costs remaining	$	—	$	1	$	—	$	—	$	1

During the third quarter of 2021, we recorded an adjustment of $3 million to decrease the liability within the Measurement & Control Solutions segment, related to our 2019 actions. As a result of this adjustment, the estimated total cost of the 2019 actions decreased to $24 million for the Measurement & Control Solutions segment. The 2019 actions are complete.

The Water Infrastructure actions commenced in 2021 consist primarily of severance charges. These actions are expected to continue through the second quarter of 2022.

During the second quarter of 2020 the discontinuance of a product line resulted in $17 million of asset impairments, primarily related to customer relationships, trademarks and fixed assets within our Measurement & Control Solutions segment.

We currently expect to incur ~~between $15 million and $25~~approximately $8 million in restructuring costs for the full year. These

restructuring charges are primarily related to actions taken in response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic as well as other efforts to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. We expect to realize ~~between~~approximately $33 ~~million and $35~~ million of incremental net savings in 2021 from restructuring actions initiated in 2020. As a result of all of the actions taken and expected to be taken in 2021, we anticipate ~~between~~approximately $1 ~~million and $3~~ million of total net savings to be realized during 2021.

Asset Impairment

Operating Income

Operating income during the ~~second~~third quarter of 2021 was ~~$160~~$152 million, reflecting an increase of ~~196.3%~~108.2% compared to ~~$54~~$73 million in the ~~second~~third quarter of 2020. Operating margin was ~~11.8%~~12.0% for the ~~second~~third quarter of 2021 versus ~~4.7%~~6.0% for the comparable period in 2020, an increase of ~~710~~600 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of ~~$37~~$13 million as compared to the ~~second~~third quarter of 2020 and a decrease in special charges of ~~$11 million incurred during 2020 that did not recur.~~$69 million. Excluding the impact of these items, adjusted operating income was ~~$166~~$155 million with an adjusted operating margin of 12.3% in the ~~second~~third quarter of 2021 as compared to adjusted operating income of ~~$108~~$158 million with an adjusted operating margin of ~~9.3%~~13.0% in the ~~second~~third quarter of 2020. The ~~increase~~decrease in adjusted operating margin was primarily due to cost inflation, increased spending on strategic investments, increased logistics costs and unfavorable mix. These impacts were partially offset by cost reductions from our productivity, restructuring and other cost saving initiatives, ~~and~~price realization, favorable volume, ~~impacted by COVID-19 recovery. These impacts were partially offset by cost inflation~~ and ~~increased spending on strategic investments.~~other lesser impacts.

Operating income for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$293~~$445 million, reflecting an increase of ~~154.8%~~136.7% compared to ~~$115~~$188 million in 2020. Operating margin was ~~11.2%~~11.5% for the ~~six~~nine months ended ~~June~~September 30, 2021 versus ~~5.0%~~5.4% for the comparable period in 2020, an increase of ~~620~~610 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of ~~$38~~$51 million and a decrease in special charges of $9$78 million as compared to 2020. Excluding the impact of these items, adjusted operating income was ~~$309~~$464 million with an adjusted operating margin of ~~11.9%~~12.0% for the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to adjusted operating income of ~~$178~~$336 million with an adjusted operating margin of ~~7.8%~~9.6% in 2020. The increase in adjusted operating margin was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation and increased spending on strategic investments.

4244

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								Six Months Ended									Three Months Ended								Nine Months Ended
		June 30,								June 30,									September 30,								September 30,
(In millions)	(In millions)	2021			2020			Change		2021			2020			Change		(In millions)	2021			2020			Change		2021			2020			Change
Water Infrastructure	Water Infrastructure																	Water Infrastructure
Operating income	Operating income	$	93		$	73		27.4	%	$	164		$	112		46.4	%	Operating income	$	101		$	89		13.5	%	$	265		$	201		31.8	%
Operating margin	Operating margin	16.3		%	14.6		%	170	bp	15.2		%	11.9		%	330	bp	Operating margin	18.5		%	17.0		%	150	bp	16.3		%	13.7		%	260	bp
Restructuring and realignment costs	Restructuring and realignment costs	4			8			(50.0)	%	9			13			(30.8)	%	Restructuring and realignment costs	1			8			(87.5)	%	10			21			(52.4)	%

Adjusted operating income	Adjusted operating income	$	97		$	81		19.8	%	$	173		$	125		38.4	%	Adjusted operating income	$	102		$	97		5.2	%	$	275		$	222		23.9	%
Adjusted operating margin	Adjusted operating margin	17.0		%	16.2		%	80	bp	16.0		%	13.3		%	270	bp	Adjusted operating margin	18.6		%	18.5		%	10	bp	16.9		%	15.2		%	170	bp
Applied Water	Applied Water																	Applied Water
Operating income	Operating income	$	64		$	41		56.1	%	$	130		$	88		47.7	%	Operating income	$	60		$	56		7.1	%	$	190		$	144		31.9	%
Operating margin	Operating margin	15.5		%	12.2		%	330	bp	16.1		%	13.0		%	310	bp	Operating margin	15.0		%	15.4		%	(40)	bp	15.7		%	13.9		%	180	bp
Restructuring and realignment costs	Restructuring and realignment costs	2			4			(50.0)	%	3			6			(50.0)	%	Restructuring and realignment costs	2			2			—	%	5			8			(37.5)	%
Special charges	Special charges	—			—			—	%	1			—			NM		Special charges	—			—			—	%	1			—			NM
Adjusted operating income	Adjusted operating income	$	66		$	45		46.7	%	$	134		$	94		42.6	%	Adjusted operating income	$	62		$	58		6.9	%	$	196		$	152		28.9	%
Adjusted operating margin	Adjusted operating margin	15.9		%	13.4		%	250	bp	16.6		%	13.9		%	270	bp	Adjusted operating margin	15.5		%	15.9		%	(40)	bp	16.2		%	14.6		%	160	bp
Measurement & Control Solutions	Measurement & Control Solutions																	Measurement & Control Solutions
Operating income (loss)	Operating income (loss)	$	13		$	(46)		128.3	%	$	22		$	(58)		137.9	%	Operating income (loss)	$	7		$	(62)		111.3	%	$	29		$	(120)		124.2	%
Operating margin	Operating margin	3.5		%	(14.3)		%	1,780	bp	3.0		%	(8.7)		%	1,170	bp	Operating margin	2.2		%	(18.7)		%	2,090	bp	2.8		%	(12.0)		%	1,480	bp

Restructuring and realignment costs	Restructuring and realignment costs	—			31			NM		2			33			(93.9)	%	Restructuring and realignment costs	(1)			5			120.0	%	1			38			(97.4)	%
Special charges	Special charges	—			10			NM		—			10			NM		Special charges	—			69			NM		—			79			NM
Adjusted operating income (loss)	Adjusted operating income (loss)	$	13		$	(5)		360.0	%	$	24		$	(15)		260.0	%	Adjusted operating income (loss)	$	6		$	12		50.0	%	$	30		$	(3)		1,100.0	%
Adjusted operating margin	Adjusted operating margin	3.5		%	(1.6)		%	510	bp	3.3		%	(2.2)		%	550	bp	Adjusted operating margin	1.9		%	3.6		%	(170)	bp	2.9		%	(0.3)		%	320	bp
Corporate and other	Corporate and other																	Corporate and other
Operating loss	Operating loss	$	(10)		$	(14)		(28.6)	%	$	(23)		$	(27)		(14.8)	%	Operating loss	$	(16)		$	(10)		60.0	%	$	(39)		$	(37)		5.4	%

Special charges	Special charges	—			1			NM		1			1			—	%	Special charges	1			1			—	%	2			2			—	%
Adjusted operating loss	Adjusted operating loss	$	(10)		$	(13)		(23.1)	%	$	(22)		$	(26)		(15.4)	%	Adjusted operating loss	$	(15)		$	(9)		66.7	%	$	(37)		$	(35)		5.7	%
Total Xylem	Total Xylem																	Total Xylem
Operating income	Operating income	$	160		$	54		196.3	%	$	293		$	115		154.8	%	Operating income	$	152		$	73		108.2	%	$	445		$	188		136.7	%
Operating margin	Operating margin	11.8		%	4.7		%	710	bp	11.2		%	5.0		%	620	bp	Operating margin	12.0		%	6.0		%	600	bp	11.5		%	5.4		%	610	bp
Restructuring and realignment costs	Restructuring and realignment costs	6			43			(86.0)	%	14			52			(73.1)	%	Restructuring and realignment costs	2			15			(86.7)	%	16			67			(76.1)	%

Special charges	Special charges	—			11			NM		2			11			(81.8)	%	Special charges	1			70			(98.6)	%	3			81			(96.3)	%
Adjusted operating income	Adjusted operating income	$	166		$	108		53.7	%	$	309		$	178		73.6	%	Adjusted operating income	$	155		$	158		(1.9)	%	$	464		$	336		38.1	%
Adjusted operating margin	Adjusted operating margin	12.3		%	9.3		%	300	bp	11.9		%	7.8		%	410	bp	Adjusted operating margin	12.3		%	13.0		%	(70)	bp	12.0		%	9.6		%	240	bp

NM - Not meaningful percentage change

Water Infrastructure

Operating income for our Water Infrastructure segment increased ~~$20~~$12 million, or ~~27.4%~~13.5%, for the ~~second~~third quarter of 2021 compared to the prior year, with operating margin also increasing from ~~14.6%~~17.0% to ~~16.3%~~18.5%. Operating margin benefited from a decrease in restructuring and realignment costs of $4$7 million during the quarter. Excluding these restructuring and realignment costs, adjusted operating income increased ~~$16~~$5 million, or ~~19.8%~~5.2%, with adjusted operating margin increasing from ~~16.2%~~18.5% to ~~17.0%~~18.6%. The increase in adjusted operating margin for the quarter was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives, ~~favorable volume and~~ decreased inventory management ~~costs.~~cost, and other lesser impacts. These ~~impacts~~items were partially offset by cost inflation and increased spending on strategic ~~investments, increased employee-related costs and negative foreign currency impacts.~~investments.

4345

For the ~~six~~nine months ended ~~June~~September 30, 2021, operating income for our Water Infrastructure segment increased ~~$52~~$64 million, or ~~46.4%~~31.8%, as compared to the prior year, with operating margin also increasing from ~~11.9%~~13.7% to ~~15.2%~~16.3%. Operating margin benefited from a decrease in restructuring and realignment costs of $4$11 million in 2021. Excluding these restructuring and realignment costs, adjusted operating income increased ~~$48~~$53 million, or ~~38.4%~~23.9%, with adjusted operating margin increasing from ~~13.3%~~15.2% to ~~16.0%~~16.9%. The increase in adjusted operating margin during the period was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume. These impacts were partially offset by cost inflation, increased spending on strategic investments, unfavorable mix, and increased ~~employee-related costs and other lesser impacts.~~logistics costs.

Applied Water

Operating income for our Applied Water segment increased ~~$23~~$4 million, or ~~56.1%~~7.1%, for the ~~second~~third quarter of 2021 compared to the prior year, with operating margin ~~also increasing~~decreasing from ~~12.2%~~15.4% to ~~15.5%~~15.0%. Operating margin ~~benefited from a decrease in~~was impacted by restructuring and realignment costs of $2 million ~~during the quarter.~~in both years. Excluding these restructuring and realignment costs, adjusted operating income increased ~~$21~~$4 million, or ~~46.7%~~6.9%, with adjusted operating margin ~~increasing~~decreasing from ~~13.4%~~15.9% to ~~15.9%~~15.5%. The ~~increase~~decrease in adjusted operating margin for the quarter was primarily due to ~~favorable volume, impacted~~cost inflation, increased spending on strategic investments, increased logistics costs, and inventory management costs. These impacts were partially offset by ~~COVID-19 recovery, and~~increased cost ~~reductions~~reduction from our productivity, restructuring and other cost saving ~~initiatives. These impacts were partially offset by cost inflation, increased logistics costs, increased employee-related costs~~initiatives, favorable volume, and ~~increased spending on strategic investments.~~price realization.

For the ~~six~~nine months ended ~~June~~September 30, 2021, operating income for our Applied Water segment increased ~~$42~~$46 million, or ~~47.7%~~31.9%, as compared to the prior year, with operating margin also increasing from ~~13.0%~~13.9% to ~~16.1%~~15.7%. Operating margin benefited from a decrease in restructuring and realignment costs of $3 million during the year which was partially offset by $1 million of special charges incurred in 2021. Excluding these items, adjusted operating income increased ~~$40~~$44 million, or ~~42.6%~~28.9%, with adjusted operating margin increasing from ~~13.9%~~14.6% to ~~16.6%~~16.2%. The increase in adjusted operating margin during the period was primarily due to cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by cost inflation, increased logistics ~~costs,~~cost, increased spending on strategic investments, and increased ~~employee-related~~inventory management costs.

Measurement & Control Solutions

Operating income for our Measurement & Control Solutions segment increased ~~$59~~$69 million, or ~~128.3%~~111.3%, for the ~~second~~third quarter of 2021 compared to the prior year, with operating margin increasing from ~~(14.3)~~(18.7)% to ~~3.5%~~2.2%. Operating margin benefited from ~~$31 million of~~decreased restructuring and realignment costs of $6 million, and ~~$10~~$69 million of special charges that were incurred during 2020 that did not recur during the quarter. Excluding these items, adjusted operating income ~~increased $18~~decreased $6 million, or ~~360.0%~~50.0%, with adjusted operating margin ~~increasing~~decreasing from ~~(1.6)%~~3.6% to ~~3.5%~~1.9%. The ~~increase~~decrease in adjusted operating margin for the quarter was primarily due to cost inflation, unfavorable volume, and unfavorable mix. These impacts were partially offset by increased cost reductions from our restructuring, productivity and other cost saving initiatives, ~~favorable volume, impacted by COVID-19 recovery,~~decreased quality management costs, and ~~favorable mix. These impacts were partially offset by cost inflation, increased spending on strategic investments and increased employee-related costs.~~price realization.

For the ~~six~~nine months ended ~~June~~September 30, 2021, operating income for our Measurement & Control Solutions segment increased ~~$80~~$149 million, or ~~137.9%~~124.2%, as compared to the prior year, with operating margin increasing from ~~(8.7)~~(12.0)% to ~~3.0%~~2.8%. Operating margin benefited from a decrease in restructuring and realignment costs of ~~$31~~$37 million during the year and ~~$10~~$79 million of special charges incurred in 2020 that did not recur. Excluding these items, adjusted operating income increased ~~$39~~$33 million, ~~or 260.0%,~~ with adjusted operating margin increasing from ~~(2.2)~~(0.3)% to ~~3.3%~~2.9%. The increase in adjusted operating margin during the period was primarily due to cost reductions from our restructuring, productivity and other cost saving initiatives and decreased quality management costs, primarily due to a specific warranty charge recorded during the prior year that did not recur related to a firmware issue that was identified and addressed ~~timely, favorable volume, driven by COVID-19 recovery and favorable mix.~~timely. These impacts were partially offset by cost ~~inflation, increased spending on strategic investments, increased employee-related costs and other lesser impacts.~~inflation.

Corporate and other

Operating loss for corporate and other ~~decreased $4~~increased $6 million, or ~~28.6%~~60.0%, during the ~~second~~third quarter of 2021 compared to the prior year ~~period.~~period primarily due to increased spending on strategic initiatives and timing of employee related costs across quarters. For the ~~six~~nine months ended ~~June~~September 30, 2021, operating loss for corporate and other ~~decreased $4~~increased $2 million, or ~~14.8%~~5.4%, compared to the same prior year period. The ~~decreases~~increase in cost ~~are~~is primarily driven by increased spending on strategic initiatives partially offset by reduced costs related to COVID-19 initiatives.

4446

Interest Expense

Interest expense was $21 million for the three months ended September 30, 2021, essentially flat with the comparative prior year period. Interest expense was $63 million and ~~$42~~$56 million for the ~~three and six~~nine months ended ~~June~~September 30, 2021 and ~~$18 million and $34 million for the three and six months ended June 30, 2020.~~2020, respectively. The increase in interest expense ~~for both periods~~ is primarily driven by the issuance of our Green Bond during the second quarter of ~~2020.~~2020, partially offset by reduced interest expense in 2021 due to our net investment hedges and interest expense on 2020 short term borrowings. See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt and related interest.

Income Tax Expense

The income tax provision for the three months ended ~~June~~September 30, 2021 was ~~$25~~$19 million resulting in an effective tax rate of ~~18.5%~~13.9%, compared to a $4$13 million expense resulting in an effective tax rate of ~~10.9%~~26.2% for the same period in 2020. The income tax provision for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$52~~$71 million resulting in an effective tax rate of ~~20.7%~~18.3%, compared to a $8$21 million expense resulting in an effective tax rate of ~~10.4%~~16.6% for the same period in 2020. The effective tax rate for the three ~~and six~~ month ~~periods~~period ended ~~June~~September 30, 2021 was lower than the U.S. federal statutory rate primarily due to favorable earnings mix, partially offset by the Global Intangible Low Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the three and six month periods ended June 30, 2021 differdiffers from the same ~~periods~~period in 2020 due to unfavorable earnings mix as compared to the prior year and favorable equity compensation deductions and goodwill impairment charge in the prior year. The effective tax rate for the ~~six~~nine month period ended ~~June~~September 30, 2021 differs from the same period in 2020 due to the impact of tax settlements in the current period.

Liquidity and Capital Resources

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


		Six Months Ended							Nine Months Ended
		June 30,							September 30,
(In millions)	(In millions)	2021		2020		Change		(In millions)	2021		2020		Change
Operating activities	Operating activities	$	206	$	179	$	27	Operating activities	$	318	$	454	$	(136)
Investing activities	Investing activities	(69)		(88)		19		Investing activities	(113)		(326)		213
Financing activities	Financing activities	(162)		774		(936)		Financing activities	(806)		550		(1,356)
Foreign exchange (a)	Foreign exchange (a)	(10)		(12)		2		Foreign exchange (a)	(19)		—		(19)
Total	Total	$	(35)	$	853	$	(888)	Total	$	(620)	$	678	$	(1,298)

(a)The impact is primarily due to weakening of the Euro, partially offset by the strengthening of the Canadian ~~Dollar, the Chinese Yuan, the Russian Ruble and various other currencies against the U.S.~~ Dollar.

Sources and Uses of Liquidity

Operating Activities

Net cash provided by operating activities was ~~$206~~$318 million for the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to ~~$179~~$454 million in the comparable prior year period. This ~~increase~~decrease was primarily driven byhigher working capital levels, higher interest payments, and increased cash used for income taxes and payroll and other taxes, partially from delayed timing of payments in the prior year related to COVID-19 related concessions. Partially offsetting these items was increased net cash earnings ~~partially offset by higher tax payments~~ and ~~increased working capital levels to support year-over-year growth.~~lower prepayments.

Investing Activities

Cash used in investing activities was ~~$69~~$113 million for the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to ~~$88~~$326 million in the comparable prior year period. This decrease in cash used of ~~$19~~$213 million was mainly driven by ~~lower~~ spending on ~~capital expenditures compared to the prior year.~~time deposit investments in 2020 that did not reoccur in 2021.

Financing Activities

Cash used by financing activities was ~~$162~~$806 million for the ~~six~~nine months ended ~~June~~September 30, 2021 as compared to cash generated of ~~$774~~$550 million in the comparable prior year period. This net decrease in cash generated by financing activities during the period was primarily driven by the issuance of our Green Bond and ~~higher levels of short-term~~short term debt ~~during the prior year period, partially offset by~~in 2020, and the repayment of ~~short-term~~Senior Notes due 2021. Partially offsetting these items was the repayment of short term debt ~~during 2020 and an increase~~ in ~~share repurchase activity of $8 million.~~2020.

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. As a result of uncertainties caused by the COVID-19 pandemic, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends. We will continue to evaluate aspects of our spending ~~as the year progresses~~ and anticipate our capital expenditures will gradually begin to increase to normal levels ~~during the year~~ as the markets we operate in recover.

Historically, we have generated operating cash flow sufficient to fund our primary cash needs. We will continue to monitor the economic effects of the COVID-19 pandemic and its impact on the Company's future operating cash flows going forward. 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 securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.

We monitor our global funding requirements and seek to meet our liquidity needs on a cost-effective basis. As of ~~June~~September 30, 2021, the COVID-19 pandemic has not materially impacted our borrowing costs or other costs of capital, however the future impact of the COVID-19 pandemic is uncertain and may increase our borrowing costs and other costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity.

We have considered the impacts of the COVID-19 pandemic on our liquidity and capital resources and do not currently expect it to impact our ability to meet future liquidity needs or continue to comply with debt covenants. Based on our current global cash positions, cash flows from operations and access to the capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other obligations in both the U.S. and outside of the U.S. during the year. In addition, we believe our existing committed credit facilities and access to the public debt markets would provide further liquidity if required. Currently, we have available liquidity of approximately ~~$2.6~~$2.1 billion, consisting of ~~$1.8~~$1.3 billion of cash and $800 million of available credit facilities as disclosed in Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements. ~~Our debt repayment obligations in~~On October 1st, 2021 ~~consist~~our Senior Notes due 2021 were settled with cash on hand for a total of $600 ~~million in Senior Notes, which we expect to pay out of cash.~~million. Our next long-term debt maturity is March 2023.

~~Risk~~Risks related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our 2020 Annual Report.

Credit Facilities & Long-Term Contractual Commitments

See Note 10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.

Non-U.S. Operations

We generated approximately 56% of our revenue from non-U.S. operations for both the three and ~~six~~nine months ended ~~June~~September 30, 2021 and approximately ~~51%~~54% and ~~50%~~52% for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of the U.S., we expect to continue to generate significant revenue from non-U.S. operations and expect that 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, and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. As of ~~June~~September 30, 2021, we have provided a deferred tax liability of $6 million for net foreign withholding taxes and state income taxes on ~~$235~~$116 million of earnings expected to be repatriated to the U.S. parent as deemed necessary in the future.

4648

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, particularly at this time and moving forward given the uncertainty around the magnitude and duration of the COVID-19 pandemic. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 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. Other than as discussed below, there have been no significant changes in the information concerning our critical accounting estimates as stated in our 2020 Annual Report.

In the third quarter of 2020, management updated forecasts of future cash flows for the Advanced Infrastructure Analytics ("AIA") businesses, which reflected significant negative volume impacts from the COVID-19 pandemic, primarily on our assessment services business. Our ongoing investment in the AIA businesses also continues to impact near-term profitability. Based on these factors, we determined that there were indicators that the AIA reporting unit’s goodwill may be impaired, and accordingly, we performed an interim goodwill impairment test as of July 1, 2020. The results of the impairment test showed that the fair value of the AIA reporting unit was lower than the carrying value, resulting in a $58 million goodwill impairment charge. As of ~~June~~September 30, 2021, the remaining goodwill balance in our AIA reporting unit after recording the goodwill impairment charge was $112 million.

The uncertainty of the future impact of the COVID-19 pandemic may also contribute to further deterioration of our future cash flows. If we do not achieve our forecasts, it is possible that the goodwill of the AIA reporting unit could be deemed to be impaired again in a future period. The risks and potential impacts of COVID-19 on the fair value of our assets are included in our risk factor disclosures referenced under “Item 1A. Risk Factors" in the Company's 2020 Annual Report.

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 2020 Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of 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 (as defined in Rule 13a-15(f) under the 1934 Act) during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

4749

PART II

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations of previously-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes. See Note 16, "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 "Item 1A. Risk Factors" of our 2020 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 ~~June~~September 30, 2021:


(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)
4/7/1/21 - ~~4/30/21~~	—	—	—	~~$228~~
~~5/1/21 - 5/~~7/31/21	—	—	—	$228
6/8/1/21 - 6/8/31/21	—	—	—	$228
9/1/21 - 9/30/21	—	—	—	$228

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~~stockholders and maintains our focus on growth. There were no shares repurchased under this program during the three months ended ~~June~~September 30, 2021. There are up to $228 million in shares that may still be purchased under this plan as of ~~June~~September 30, 2021.

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 for a list of exhibits filed as part of this report and incorporated herein by reference.

4850

XYLEM INC.

EXHIBIT INDEX


Exhibit Number		Description	Location

3.1		Fourth Amended and Restated Articles of Incorporation of Xylem Inc.	Incorporated by reference to Exhibit 3.1 of Xylem Inc.’s Form 8-K filed on May 15, 2017 (CIK No. 1524472, File No. 1-35229).

3.2		Fourth Amended and Restated By-laws of Xylem Inc.	Incorporated by reference to Exhibit 3.2 of Xylem Inc.’s Form 8-K filed on May 15, 2017 (CIK No. 1524472, File No. 1-35229).

~~10.1~~	#	~~Form of Xylem 2011 Omnibus Incentive Plan Non-Qualified Stock Option Award Agreement for Certain Executives and Executive Officers as Approved by the Leadership Development & Compensation Committee~~	~~Filed herewith.~~

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.

101.0		The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended ~~June~~September 30, 2021, formatted in Inline Extensible Business Reporting Language (Inline XBRL): (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.
104.0		The cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended ~~June~~September 30, 2021 formatted in Inline XBRL and contained in Exhibit 101.0.

~~# Management contract or compensatory plan or arrangement~~

4951

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/ Geri McShane
						Geri McShane
						Vice President, Controller and Chief Accounting Officer

~~August 3,~~November 2, 2021

5052


For the six months ended June 30,	2021		2020
Operating Activities
Net income	$	200	$	69
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	59		58
Amortization	65		68
Share-based compensation	17		16
Restructuring and asset impairment charges	9		50

Gain from sale of business	(2)		0
Other, net	6		18
Payments for restructuring	(18)		(12)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables	(66)		48
Changes in inventories	(89)		(63)
Changes in accounts payable	36		(86)



Other, net	(11)		13
Net Cash – Operating activities	206		179
Investing Activities
Capital expenditures	(80)		(95)

Proceeds from sale of business	2		0



Other, net	9		7
Net Cash – Investing activities	(69)		(88)
Financing Activities
Short-term debt issued, net	0		359
Short-term debt repaid	0		(422)
Long-term debt issued, net	0		987

Repurchase of common stock	(68)		(60)
Proceeds from exercise of employee stock options	9		5
Dividends paid	(102)		(95)

Other, net	(1)		0
Net Cash – Financing activities	(162)		774
Effect of exchange rate changes on cash	(10)		(12)
Net change in cash and cash equivalents	(35)		853
Cash and cash equivalents at beginning of year	1,875		724
Cash and cash equivalents at end of period	$	1,840	$	1,577
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	58	$	45
Income taxes (net of refunds received)	$	60	$	11