UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172021
or
¨☐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)
Indiana45-2080495
(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 classTrading Symbol(s)Name of each exchange of which registered
Common Stock, par value $0.01 per shareXYLNew York Stock Exchange
2.250% Senior Notes due 2023XYL23New 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 þ☑   No  ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ☑    No  ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “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☐
Large accelerated filerþAccelerated filer¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company¨
Emerging growth company¨☐



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨☐    No  þ☑
As of October 27, 2017,July 30, 2021, there were 179,599,998180,162,994 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-
3
4
5
6
7
Item 2-
3129
Item 3-
4847
Item 4-
4847
PART II – Other Information
Item 1-
4948
Item 1A-
4948
Item 2-
4948
Item 3-
4948
Item 4-
4948
Item 5-
4948
Item 6-
5048
5150

2

PART I


ITEM 1.             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
(in millions, except per share data)

Three MonthsSix Months
Three Months Nine Months
For the periods ended September 30,2017 2016 2017 2016
For the period ended June 30,For the period ended June 30,2021202020212020
Revenue$1,195
 $897
 $3,430
 $2,676
Revenue$1,351 $1,160 $2,607 $2,283 
Cost of revenue724
 540
 2,088
 1,621
Cost of revenue831 726 1,597 1,440 
Gross profit471
 357
 1,342
 1,055
Gross profit520 434 1,010 843 
Selling, general and administrative expenses270
 219
 812
 665
Selling, general and administrative expenses304 288 605 585 
Research and development expenses45
 23
 131
 75
Research and development expenses53 44 103 93 
Restructuring and asset impairment charges, net4
 6
 22
 18
Restructuring and asset impairment chargesRestructuring and asset impairment charges3 48 9 50 
Operating income152
 109
 377
 297
Operating income160 54 293 115 
Interest expense21
 16
 62
 50
Interest expense21 18 42 34 
Other non-operating income, net1
 2
 3
 3
Other non-operating expense, netOther non-operating expense, net(3)(1)(1)(4)
Gain from sale of business(1) —
 4
 —
Gain from sale of business2 0 2 0 
Income before taxes131
 95
 322
 250
Income before taxes138 35 252 77 
Income tax expense27
 22
 62
 40
Income tax expense25 4 52 8 
Net income104
 73
 260
 210
Net income$113 $31 $200 $69 
Less: Net loss attributable to non-controlling interests(1) —
 —
 —
Net income attributable to Xylem$105
 $73
 $260
 $210
Earnings per share:       Earnings per share:
Basic$0.58
 $0.41
 $1.45
 $1.17
Basic$0.63 $0.17 $1.11 $0.38 
Diluted$0.58
 $0.41
 $1.44
 $1.17
Diluted$0.62 $0.17 $1.10 $0.38 
Weighted average number of shares:       Weighted average number of shares:
Basic179.6
 179.3
 179.6
 179.0
Basic180.1 180.0 180.2 180.1 
Diluted180.9
 180.3
 180.7
 179.8
Diluted181.3 180.6 181.4 181.0 
Dividends declared per share$0.1800
 $0.1549
 $0.5400
 $0.4647
See accompanying notes to condensed consolidated financial statements.



3

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions)
 Three Months Nine Months
For the periods ended September 30,2017 2016 2017 2016
Net income$104
 $73
 $260
 $210
Other comprehensive income (loss), before tax:       
Foreign currency translation adjustment7
 (8) 66
 (25)
Net change in derivative hedge agreements:       
Unrealized (loss) gains(1) —
 4
 —
Amount of gain reclassified into net income—
 (1) —
 (2)
Net change in postretirement benefit plans:       
Amortization of net actuarial loss into net income3
 3
 8
 8
Settlement/Curtailment1
 —
 1
 —
Other comprehensive income (loss), before tax10
 (6) 79
 (19)
Income tax benefit related to items of other comprehensive income(11) (3) (40) (2)
Other comprehensive income (loss), net of tax21
 (3) 119
 (17)
Comprehensive income$125
 $70
 $379
 $193
 Three MonthsSix Months
For the period ended June 30,2021202020212020
Net income$113 $31 $200 $69 
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment19 35 29 (43)
Net change in derivative hedge agreements:
Unrealized gain (loss)4 6 (7)4 
Amount of loss (gain) reclassified into net income1 0 (2)3 
Net change in post-retirement benefit plans:
Amortization of prior service credit0 (1)(1)(2)
Amortization of net actuarial loss into net income5 5 11 10 
Other comprehensive income (loss), before tax29 45 30 (28)
Income tax expense (benefit) related to items of other comprehensive income (loss)1 (7)15 7 
Other comprehensive income (loss), net of tax28 52 15 (35)
Comprehensive income$141 $83 $215 $34 
Less: comprehensive loss attributable to noncontrolling interests0 0 0 (1)
Comprehensive income attributable to Xylem$141 $83 $215 $35 
See accompanying notes to condensed consolidated financial statements.

4

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except per share amounts)
 September 30,
2017		 December 31,
2016
    
ASSETS   
Current assets:   
Cash and cash equivalents$283
 $308
Receivables, less allowances for discounts and doubtful accounts of $30 and $30 in 2017 and 2016, respectively990
 843
Inventories562
 522
Prepaid and other current assets160
 166
Total current assets1,995
 1,839
Property, plant and equipment, net637
 616
Goodwill2,741
 2,632
Other intangible assets, net1,174
 1,201
Other non-current assets236
 186
Total assets$6,783
 $6,474
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$477
 $457
Accrued and other current liabilities562
 521
Short-term borrowings and current maturities of long-term debt97
 260
Total current liabilities1,136
 1,238
Long-term debt2,189
 2,108
Accrued postretirement benefits429
 408
Deferred income tax liabilities324
 352
Other non-current accrued liabilities225
 161
Total liabilities4,303
 4,267
Commitments and contingencies (Note 17)
 
Stockholders’ equity:   
Common Stock – par value $0.01 per share:   
Authorized 750.0 shares, issued 192.0 shares and 191.4 shares in 2017 and 2016, respectively2
 2
Capital in excess of par value1,900
 1,876
Retained earnings1,188
 1,033
Treasury stock – at cost 12.4 shares and 11.9 shares in 2017 and 2016, respectively(428) (403)
Accumulated other comprehensive loss(199) (318)
Total stockholders’ equity2,463
 2,190
Non-controlling interests17
 17
Total equity2,480
 2,207
Total liabilities and stockholders’ equity$6,783
 $6,474

June 30,
2021		December 31,
2020
  
ASSETS
Current assets:
Cash and cash equivalents$1,840 $1,875 
Receivables, less allowances for discounts, returns and credit losses of $41 and $46 in 2021 and 2020, respectively975 923 
Inventories642 558 
Prepaid and other current assets166 167 
Total current assets3,623 3,523 
Property, plant and equipment, net626 657 
Goodwill2,841 2,854 
Other intangible assets, net1,058 1,093 
Other non-current assets637 623 
Total assets$8,785 $8,750 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$599 $569 
Accrued and other current liabilities760 787 
Short-term borrowings and current maturities of long-term debt600 600 
Total current liabilities1,959 1,956 
Long-term debt2,466 2,484 
Accrued post-retirement benefits501 519 
Deferred income tax liabilities264 242 
Other non-current accrued liabilities546 573 
Total liabilities5,736 5,774 
Commitments and contingencies (Note 16)00
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 195.3 shares and 194.9 shares in 2021 and 2020, respectively2 2 
Capital in excess of par value2,063 2,037 
Retained earnings2,029 1,930 
Treasury stock – at cost 15.2 shares and 14.5 shares in 2021 and 2020, respectively(656)(588)
Accumulated other comprehensive loss(398)(413)
Total stockholders’ equity3,040 2,968 
Non-controlling interests9 8 
Total equity3,049 2,976 
Total liabilities and stockholders’ equity$8,785 $8,750 
See accompanying notes to condensed consolidated financial statements.

5

XYLEM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
For the nine months ended September 30,2017 2016
Operating Activities   
Net income$260
 $210
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation83
 61
Amortization91
 36
Share-based compensation16
 15
Restructuring and asset impairment charges22
 18
Gain from sale of business(4) —
Other, net18
 8
Payments for restructuring(25) (11)
Changes in assets and liabilities (net of acquisitions):   
Changes in receivables(114) (27)
Changes in inventories(14) (42)
Changes in accounts payable3
 14
Other, net43
 (8)
Net Cash – Operating activities379
 274
Investing Activities   
Capital expenditures(119) (90)
Acquisition of business, net of cash acquired(16) (70)
Proceeds from sale of assets and business11
 —
Cash received from investments10
 —
Cash paid for investments(11) —
Other, net3
 5
Net Cash – Investing activities(122) (155)
Financing Activities   
Short-term debt issued, net—
 62
  Short-term debt repaid(184) (80)
Long-term debt issued—
 540
  Long-term debt repaid—
 (608)
Repurchase of common stock(25) (3)
Proceeds from exercise of employee stock options8
 22
Dividends paid(97) (84)
Other, net(1) 1
Net Cash – Financing activities(299) (150)
Effect of exchange rate changes on cash17
 10
Net change in cash and cash equivalents(25) (21)
Cash and cash equivalents at beginning of year308
 680
Cash and cash equivalents at end of period$283
 $659
Supplemental disclosure of cash flow information:   
Cash paid during the period for:   
Interest$46
 $34
Income taxes (net of refunds received)$58
 $60
For the six months ended June 30,20212020
Operating Activities
Net income$200 $69 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation59 58 
Amortization65 68 
Share-based compensation17 16 
Restructuring and asset impairment charges9 50 
Gain from sale of business(2)0 
Other, net6 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 payable36 (86)
Other, net(11)13 
Net Cash – Operating activities206 179 
Investing Activities
Capital expenditures(80)(95)
Proceeds from sale of business2 0 
Other, net9 7 
Net Cash – Investing activities(69)(88)
Financing Activities
Short-term debt issued, net0 359 
 Short-term debt repaid0 (422)
Long-term debt issued, net0 987 
Repurchase of common stock(68)(60)
Proceeds from exercise of employee stock options9 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 year1,875 724 
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 
See accompanying notes to condensed consolidated financial statements.

6

XYLEM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1. Background and Basis of Presentation
Background
Xylem Inc. ("Xylem"(“Xylem” or the "Company"“Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment. Xylem was incorporated in Indiana on May 4, 2011.
As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving Xylem’s Analytics business from our Water Infrastructure business to combining it with our Sensus business, which was acquired in the fourth quarter of 2016, to form Measurement & Control Solutions (formerly Sensus & Analytics). We believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will lead to operating efficiencies by integrating the supply chain process and moving to a leaner functional structure.  Accordingly, our reportable segments have changed. Beginning with the second quarter of 2017, the Company now reports the financial position and results of operations of its Analytics and Sensus businesses as one new reportable segment, which is currently called Measurement & Control Solutions. Our Water Infrastructure reportable segment no longer includes the results of our Analytics business. The Company has recast certain historical amounts between the Company's Water Infrastructure and Measurement & Control Solutions reportable segments, however this change had no impact on the Company's historical consolidated financial position or results of operations. The recast financial information does not represent a restatement of previously issued financial statements. Our Applied Water reportable segment remains unchanged. Refer to Note 18 "Segment Information" for additional segment information.
Xylem operates in three3 segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. The Water InfrastructureSee Note 17, "Segment Information", to the condensed consolidated financial statements for further segment focuses on the transportation and treatment of water, offering a range of products including water and wastewater 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, software and services including cloud-based analytics, remote monitoring and data management, leak detection and pressure monitoring solutions and testing equipment.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 presentationstatement 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, 20162020 ("20162020 Annual Report") in preparing these unaudited condensed consolidated financial statements, with the exception of accounting standard updates described in Note 2.statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in our 20162020 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, postretirementpost-retirement obligations and assets, revenue recognition, income tax contingency accruals andtaxes, valuation allowances,of intangible assets, goodwill and indefinite livedindefinite-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.


7

Note 2. Recently Issued Accounting PronouncementsRevenue
Pronouncements Not Yet AdoptedDisaggregation of Revenue
In August 2017,The following table illustrates the Financial Accounting Standards Board (“FASB”) issued amended guidance on hedging activities. sources of revenue:
Three Months EndedSix Months Ended
June 30,June 30,
(in millions)2021202020212020
Revenue from contracts with customers$1,302 $1,114 $2,513 $2,188 
Lease Revenue49 46 94 95 
Total$1,351 $1,160 $2,607 $2,283 

The amendment better aligns a company’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying for hedging relationships and the presentation of hedge results. Specifically, the guidance:
(1)Eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges
(2)Eliminates the benchmark interest rate concept of variable - rate instruments in cash flow hedges and allows companies to designate the contractually specified interest rate as the hedged risk
(3)Requires a company to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported
(4)Provides the ability to perform subsequent hedge effectiveness tests qualitatively
This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted with the effect of adoption reflected as of the beginning of the fiscal year of adoption. For cash flow and net investment hedges existing at the date of adoption, a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness is required. Other presentation and disclosure guidance is required only prospectively. We are evaluating the impact of the guidance on our financial condition and results of operations.
In March 2017, the FASB issued amended guidance on presentation of net periodic benefit costs.  The amendment requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components are required to be presented in the income statement separately and outside a subtotal of income from operations, if one is presented.  The amendment also requires entities to disclose the income statement lines that contain the other components if they are not appropriately described.  This guidance is effective retrospectively for periods beginning after December 15, 2017, including interim periods within those annual periods.  Early adoption is permitted.  The adoption of this guidance is expected to impact the presentation between operating income and other non operating income within Xylem's Consolidated Income Statement but is not expected to have a material impact on our consolidated financial condition or results of operations.
In June 2016, the FASB issued guidance amending the accounting for the impairment of financial instruments, including trade receivables. Under current guidance, credit losses are recognized when the applicable losses are probable of occurring and this assessment is based on past events and current conditions. The amended guidance eliminates the “probable” threshold and requires an entity to use a broader range of information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. We are evaluating the impact of the guidance on our financial condition and results of operations.

In February 2016, the FASB issued guidance amending the accounting for leases. Specifically, the amended guidance requires all lessees to record a lease liability at lease inception, with a corresponding right of use asset, except for short-term leases. Lessor accounting is not fundamentally changed. This amended guidance is effective for interim and annual periods beginning after December 15, 2018 using a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of the guidance on our financial condition and results of operations.
In May 2014, the FASB issued guidance on recognizingfollowing table reflects revenue from contracts with customers.customers by application. The guidance outlines a single comprehensive modeltable below also reflects updates to use in accounting forthe aggregation of applications to simplify and focus presentation.
Three Months EndedSix Months Ended
June 30,June 30,
(in millions)2021202020212020
Water Infrastructure
     Transport$414 $350 $784 $668 
     Treatment106 105 200 176 
Applied Water
     Commercial Building Services155 133 302 270 
Residential Building Services73 54 140 104 
     Industrial Water186 150 365 301 
Measurement & Control Solutions
     Water288 240 571 505 
     Energy80 82 151 164 
Total$1,302 $1,114 $2,513 $2,188 
8

The following table reflects revenue arising 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 supersedes most currentgrowth platforms by geographic region. There has been no change to the Company's reportable segments.
Three Months EndedSix Months Ended
June 30,June 30,
(in millions)2021202020212020
Water Infrastructure
     United States$142 $144 $265 $265 
Western Europe190 157 363 299 
Emerging Markets (a)133 109 255 195 
Other55 45 101 85 
Applied Water
     United States202 183 396 374 
Western Europe99 70 191 144 
Emerging Markets (a)81 61 159 111 
Other32 23 61 46 
Measurement & Control Solutions
     United States224 212 437 433 
Western Europe69 51 143 114 
Emerging Markets (a)49 39 95 80 
Other26 20 47 42 
Total$1,302 $1,114 $2,513 $2,188 

(a)Emerging Markets revenue recognition guidance, including industry-specific guidance. The core principle ofincludes results from the model is that an entity recognizes revenue to portrayfollowing regions: Eastern Europe, the transfer of goodsMiddle East and services toAfrica, Latin America and Asia Pacific (excluding Japan, Australia and New Zealand, which are presented in "Other")

Contract Balances
We receive payments from customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also expands disclosure requirements regarding revenue recognition. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017 and may be applied retrospectively to each prior period presented or using a modified retrospective approach with the cumulative effect recognized as of the date of initial application. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. The impact of this guidance on our financial condition and results of operations will be 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 typescontracts. Changes in contract assets and liabilities are due to our performance under the contract.

9

The table below provides contract assets, contract liabilities, and significant changes in contract assets and liabilities:
(in millions)Contract Assets (a)Contract Liabilities
Balance at January 1, 2020$106 $135 
  Additions, net63 85 
  Revenue recognized from opening balance— (70)
  Billings transferred to accounts receivable(60)— 
  Other(2)(4)
Balance at June 30, 2020$107 $146 
Balance at January 1, 2021$117 $166 
  Additions, net78 99 
  Revenue recognized from opening balance— (93)
  Billings transferred to accounts receivable(74)— 
  Other0 (1)
Balance at June 30, 2021$121 $171 
(a)Excludes receivable balances which are disclosed on the balance sheet

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 contracts that Xylem is awarded inJune 30, 2021, the future. We currently do not believe that the adoption of this guidance will have a material impact on our financial statements and plan to adopt this guidance effective January 1, 2018 using the modified retrospective approach.
Recently Adopted Pronouncements
In May 2017, the FASB issued guidance, which amends the scope of modification accounting guidance for share-based payment arrangements. The guidance outlines the types of changes to the terms or conditions of share-based payment arrangements that would require the use of modification accounting. Specifically, modification accounting would not apply if the fair value, vesting conditions, and classification of the award as equity or liability are the same immediately before and after the modification. This guidance is effective prospectively for interim and annual reporting periods beginning December 15, 2017 and early adoption is permitted. We elected to early adopt this guidance effective the second quarter of 2017. The adoption of this guidance did not impact our financial condition or results from operations.
In January 2017, the FASB issued guidance amending the impairment testing of goodwill. Under current guidance, the testing of goodwill for impairment is performed at least annually using a two-step test. Step one involves comparing the fair value of a “reporting unit” to its carrying amount. If the applicable book value exceeds the reporting unit’s fair value then step two must be performed. Step two involves comparing the fair value of the reporting unit’s goodwill to the applicable carryingaggregate amount of the asset and recognizing an impairment charge equaltransaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to $438 million. We expect to recognize the amount by whichmajority of revenue upon the carrying amountcompletion of the goodwill exceeds its implied fair value. The amended guidance eliminates step two of the impairment test and allows an entity to record an impairment charge equal to the amount that the carrying amount of the applicable reporting unit exceeds its fair value, up to the value of the recorded goodwill. This guidance is effective prospectively for interim and annual goodwill impairment tests beginning after December 15, 2019 with early adoption permitted for interim or annual tests after January 1, 2017. We elected to early adopt this guidance effective the first quarter of 2017. The adoption of this guidance did not impact our financial condition or results of operations.
In October 2016, the FASB issued guidance amending the accounting for income taxes. Under current guidance the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to an outside party. The amended guidance eliminates the prohibition against immediate recognition of current and deferred income tax amounts associated with intra-entity transfers of assets other than inventory. This guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The requirements of the amended guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We elected to early adopt this guidance effective the first quarter of 2017. As a result of adopting the amended guidance, prepaid tax assets were reduced by $14 million, long-term deferred tax assets increased $3 million, and accrued taxes were reduced by $4 million. The net impact ofsatisfying these adjustments on retained earnings was a decrease of $7 million.
In July 2015, the FASB issued guidance regarding simplifying the measurement of inventory. Under prior guidance, inventory is measured at the lower of cost or market, where market is defined as replacement cost, with

a ceiling of net realizable value and a floor of net realizable value less a normal profit margin. The amended guidance requires the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling pricesperformance obligations in the ordinary coursefollowing 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of business,a contract whose original expected duration is less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2016 and early application is permitted. We adopted this guidance effective the first quarter of 2017. The adoption of this guidance did not impact our financial condition or results of operations.than one year.

Note 3. AcquisitionsRestructuring and DivestituresAsset Impairment Charges
2017 Acquisitions and Divestitures
Acquisitions
During the three and nine months ended September 30, 2017 we spent approximately $10 million and $16 million, respectively, on various acquisition activity.
Divestitures
On February 17, 2017, we divested our United Kingdom and Poland based membranes business for approximately $10 million. The sale resulted in a gain of $4 million, which is reflected in gain from sale of business in our Condensed Consolidated Income Statement. The business, which was part of our Applied Water segment, provided membrane filtration products primarily to customers in the municipal water and industrial sectors. The business reported 2016 annual revenue of approximately $8 million.
2016 Acquisitions and Divestitures
Sensus Worldwide Limited
On October 31, 2016, the Company acquired all of the outstanding equity interests of Sensus Worldwide Limited (other than Sensus Industries Limited) (“Sensus”) effective October 31, 2016 for $1,766 million ($1,710 million net of cash acquired), including a $6 million payment in 2017 for a working capital adjustment. Sensus develops advanced technology solutions that enable intelligent use and conservation of critical water and energy resources. Sensus' major products include smart metering, networked communications, measurement and control technologies, software and services including cloud-based analytics, remote monitoring and data management.

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


The Sensus purchase price allocation as of October 31, 2016 is shown in the following table.
(in millions)Amount
Cash$56
Receivables104
Inventories79
Prepaid and other current assets19
Property, plant and equipment176
Intangible assets782
Other long-term assets5
Accounts payable(69)
Accrued and other current liabilities(90)
Deferred income tax liabilities(198)
Accrued post retirement benefits(84)
Other non-current accrued liabilities(60)
Total identifiable net assets720
  
Goodwill1,063
Non-controlling interest(17)
   Total consideration$1,766

In the third quarter of 2017 we finalized the Sensus purchase price allocation. The fair values of Sensus assets and liabilities were determined based on estimates and assumptions which management believes are reasonable.

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

The estimate of the fair value of Sensus identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes key information underlying identifiable intangible assets related to the Sensus acquisition:
Category Life Amount (in millions)
Customer and Distributor Relationships 2 - 18 years $543
Tradenames 10 - 25 years 98
Internally Developed Network Software 7 years 60
FCC Licenses Indefinite lived 24
Technology 5 - 15 years 39
Other 1 - 16 years 18
Total   $782

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

(in millions)Three Months Ended September 30, 2016Nine Months Ended September 30, 2016
Revenue$1,123
$3,365
Net income$80
$263

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

Amortization expense of acquired intangibles
Adjustments to the depreciation of property, plant and equipment reflecting the impact of the calculated fair value of those assets in accordance with purchase accounting
Amortization of the fair value adjustment for warranty liabilities
Adjustments to interest expense to remove historical Sensus interest costs and reflect Xylem's current debt profile
The related tax impact of the above referenced adjustments

The pro forma results do not include any cost savings or operational synergies that may be generated or realized due to the acquisition of Sensus. The pro forma nine-month period reflects the inclusion of a $16 million tax valuation release and a $27 million reduction to warranty expense in the first calendar quarter of 2016.
Tideland Signal Corporation
On February 1, 2016, we acquired Tideland Signal Corporation (“Tideland”), a leading producer of analytics solutions in the coastal and ocean management sectors, for $70 million. Tideland, a privately-owned company headquartered in Texas, had approximately 160 employees. Our condensed consolidated financial statements include Tideland’s results of operations from February 1, 2016 within the Measurement & Control Solutions segment.
Note 4. Restructuring Charges
From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position ourselves based on the economic environment and customer demand.ourselves. During the three and ninesix months ended SeptemberJune 30, 2017,2021, we recognized restructuring charges of $4$3 million and $17$8 million, respectively. We incurred theserespectively, of which $2 million and $6 million relate to actions previously announced in 2020. These charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across all segments and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as headcount reductionsasset impairments within 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 ninesix months ended SeptemberJune 30, 2016,2020, we recognized restructuring charges of $6$38 million and $18$40 million, respectively. We incurred theseThese charges primarily in an effort to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount across all segments and consolidation of facilitiesasset impairments within our Applied Water and Water Infrastructure segments, as well as Corporate headcount reductions.Measurement & Control Solutions segment.

10

The following table presents the components of restructuring expense and asset impairment charges.charges:
Three Months EndedSix Months Ended
June 30,June 30,
(in millions)2021202020212020
By component:
Severance and other charges$4 $21 $8 $23 
Asset impairment0 17 1 17 
Reversal of restructuring accruals(1)0 (1)0 
Total restructuring charges$3 $38 $8 $40 
Asset impairment charges0 10 1 10 
Total restructuring and asset impairment charges$3 $48 $9 $50 
By segment:
Water Infrastructure$3 $6 $7 $8 
Applied Water0 2 1 2 
Measurement & Control Solutions0 40 1 40 
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in millions)2017 2016 2017 2016
By component:       
Severance and other charges$3
 $6
 $17
 $18
Lease related charges—
 1
 —
 1
Other restructuring charges1
 —
 1
 —
Reversal of restructuring accruals—
 (1) (1) (1)
Total restructuring charges$4
 $6
 $17
 $18
Asset impairment—
 —
 5
 —
Total restructuring and asset impairment charges$4
 $6
 $22
 $18
        
By segment:       
Water Infrastructure$1
 $4
 $6
 $11
Applied Water2
 1
 12
 4
Measurement & Control Solutions1
 1
 4
 1
      Corporate and other—
 —
 —
 2
The following table displays a rollforwardroll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within accrued"Accrued and other current liabilities,liabilities" and "Other non-current accrued liabilities", for the ninesix months ended SeptemberJune 30, 20172021 and 2016.2020:
(in millions)20212020
Restructuring accruals - January 1$29 $27 
Restructuring charges8 40 
Cash payments(18)(12)
Asset impairment(1)(17)
Foreign currency and other0 (1)
Restructuring accruals - June 30$18 $37 
By segment:
Water Infrastructure$3 $4 
Applied Water1 1 
Measurement & Control Solutions11 27 
Regional selling locations (a)3 4 
Corporate and other0 1 
(in millions) 2017 2016
Restructuring accruals - January 1 $15
 $3
Restructuring charges 17
 18
Cash payments (25) (11)
Foreign currency and other —
 (1)
Restructuring accruals - September 30 $7
 $9
     
By segment:    
Water Infrastructure $—
 $3
Applied Water 1
 —
Measurement & Control Solutions 3
 1
Regional selling locations (a) 3
 3
Corporate and other —
 2
(a)(a)Regional selling locations consist primarily of selling and marketing organizations and related support services that incurred restructuring expense which was allocated to the segments. The liabilities associated with restructuring expense were not allocated to the segments.

The following is a rollforward for the nine months ended September 30, 2017 and 2016 of employee position eliminations associated with restructuring activities.expense were not allocated to the segments.
11

  2017 2016
Planned reductions - January 1 188
 82
Additional planned reductions 140
 364
Actual reductions and reversals (223) (296)
Planned reductions - September 30 105
 150

The following table presents expected restructuring spend:spend in 2021 and thereafter:
(in millions)Water InfrastructureApplied WaterMeasurement & Control SolutionsCorporateTotal
Actions Commenced in 2021:
Total expected costs$5 $0 $0 $0 $5 
Costs incurred during Q1 20211 0 0 0 1 
Costs incurred during Q2 20211 0 0 0 1 
Total expected costs remaining$3 $0 $0 $0 $3 
Actions Commenced in 2020:
Total expected costs$25 $8 $33 $2 $68 
Costs incurred during 202019 4 30 0 53 
Costs incurred during Q1 20212 1 1 0 4 
Costs incurred during Q2 20212 0 0 0 2 
Total expected costs remaining$2 $3 $2 $2 $9 
(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2017:          
Total expected costs $12
 $4
 $2
 $—
 $18
Costs incurred during Q1 2017 —
 1
 1
 —
 2
Costs incurred during Q2 2017 3
 1
 —
 —
 4
Costs incurred during Q3 2017 1
 1
 1
 —
 3
Total expected costs remaining $8

$1

$—

$—

$9
           
Actions Commenced in 2016:          
Total expected costs $13
 $14
 $10
 $2
 $39
Costs incurred during 2016 11
 10
 6
 2
 29
Costs incurred during Q1 2017 2
 2
 1
 —
 5
Costs incurred during Q2 2017 —
 1
 1
 —
 2
Costs incurred during Q3 2017 —
 1
 —
 —
 1
Total expected costs remaining $—

$—

$2

$—

$2
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 20172020 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 endsecond quarter of 2018. The Water Infrastructure, Applied Water,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 and Corporate actions commenced in 2016 consist primarily of severance charges and are expected to continue through the end of 2018.segment.
Asset Impairment Charges
During the firstsecond quarter of 20172020 we determined that certain assetsinternally developed in-process software within our Applied WaterMeasurement & Control Solutions segment includingwas impaired as a tradename, were impaired.result of actions taken to prioritize strategic investments. Accordingly, we recognized an impairment charge of $5$10 million. Refer to Note 9,7, "Goodwill and Other Intangible Assets," for additional information.

Note 5.4. 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 foreign income tax rate differentials and discrete items.
The income tax provision for the three months ended SeptemberJune 30, 20172021 was $27$25 million resulting in an effective tax rate of 21.1%18.5%, compared to $22a $4 million expense resulting in an effective tax rate of 10.9% for the same period in 2020. The income tax provision for the six months ended June 30, 2021 was $52 million resulting in an effective tax rate of 22.9% for the same period in 2016. The income tax provision for the nine months ended September 30, 2017 was $6220.7%, compared to an $8 million expense resulting in an effective tax rate of 19.4%, compared to $40 million resulting in an effective tax rate of 16.0%10.4% for the same period in 2016.2020. The effective tax rate for the three and six month periods ended June 30, 2021 was lower than the United StatesU.S. federal statutory rate primarily due to favorable earnings mix, partially offset by the mix of earnings in jurisdictions in both periods.Global Intangible Low Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the nine monthsthree and six month periods ended SeptemberJune 30, 2016

was lower than2021 differ from the currentsame 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 rate for the six month period ended June 30, 2021 differs from the same period in 2020 due to the releaseimpact of an unrecognized tax benefitsettlements in 2016 due to the effective settlement of a tax examination, partially offset by the nonrecurring repatriation of foreign earnings from 2016.current period.
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Unrecognized Tax Benefits
We recognizeDuring 2019, Xylem’s Swedish subsidiary received a tax benefits from uncertainassessment for the 2013 tax positions only ifyear 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 the tax positionXylem will be sustained on examination by the taxing authorities, basedprevail on the technical meritsproposed assessment and is vigorously defending our position through litigation. As of the position. The tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
The amount ofJune 30, 2021, we have not recorded any unrecognized tax benefits at September 30, 2017 was $75 million, as comparedrelated to $67 million at December 31, 2016, which if ultimately recognized will reduce our effectivethis uncertain tax rate. We do not believe that the unrecognized tax benefits will significantly change within the next twelve months.position.
We classify interest expense relating to unrecognized tax benefits as a component of other non-operating expense, net, and tax penalties as a component of income tax expense in our Condensed Consolidated Income Statements. As of September 30, 2017, we had $3.6 million of interest accrued for unrecognized tax benefits.
Note 6.5. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
Three Months EndedSix Months Ended
 June 30,June 30,
2021202020212020
Net income (in millions)$113 $31 $200 $69 
Shares (in thousands):
Weighted average common shares outstanding180,072 179,933 180,162 180,043 
Add: Participating securities (a)34 32 24 29 
Weighted average common shares outstanding — Basic180,106 179,965 180,186 180,072 
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options897 563 845 644 
Dilutive effect of restricted stock units and performance share units346 79 380 234 
Weighted average common shares outstanding — Diluted181,349 180,607 181,411 180,950 
Basic earnings per share$0.63 $0.17 $1.11 $0.38 
Diluted earnings per share$0.62 $0.17 $1.10 $0.38 
(a)Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share.
(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 13, "Share-Based Compensation Plans", to the condensed consolidated financial statements for further detail on the performance share units.
Three Months EndedSix Months Ended
 June 30,June 30,
(in thousands)2021202020212020
Stock options1,227 1,766 1,238 1,567 
Restricted stock units318 441 302 377 
Performance share units345 313 349 299 

13
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Net income attributable to Xylem (in millions)$105
 $73
 $260
 $210
Shares (in thousands):       
Weighted average common shares outstanding179,578
 179,272
 179,564
 178,951
Add: Participating securities (a)23
 36
 28
 37
Weighted average common shares outstanding — Basic179,601
 179,308
 179,592
 178,988
Plus incremental shares from assumed conversions: (b)       
Dilutive effect of stock options774
 593
 658
 462
Dilutive effect of restricted stock units and performance share units502
 409
 460
 388
Weighted average common shares outstanding — Diluted180,877
 180,310
 180,710
 179,838
Basic earnings per share$0.58
 $0.41
 $1.45
 $1.17
Diluted earnings per share$0.58
 $0.41
 $1.44
 $1.17
(a)Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share.
(b)
Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 14, "Share-Based Compensation Plans" to the condensed consolidated financial statements for further detail on the performance share units.

 Three Months Ended Nine Months Ended
 September 30, September 30,
(in thousands)2017 2016 2017 2016
Stock options1,556
 1,701
 1,727
 2,008
Restricted stock units376
 529
 410
 570
Performance share units594
 414
 509
 360

Note 7.6. Inventories
The components of total inventories are summarized as follows:
(in millions)June 30,
2021		December 31,
2020
Finished goods$244 $221 
Work in process62 49 
Raw materials336 288 
Total inventories$642 $558 

(in millions)September 30,
2017		 December 31,
2016
Finished goods$234
 $220
Work in process55
 42
Raw materials273
 260
Total inventories$562
 $522
Note 8. Property, Plant and Equipment
The components of total property, plant and equipment, net are as follows:
(in millions)September 30,
2017		 December 31,
2016
Land, buildings and improvements$325
 $299
Machinery and equipment791
 731
Equipment held for lease or rental242
 218
Furniture and fixtures108
 95
Construction work in progress89
 76
Other21
 19
Total property, plant and equipment, gross1,576
 1,438
Less accumulated depreciation939
 822
Total property, plant and equipment, net$637
 $616
Depreciation expense of $28 million and $83 million million was recognized in the three and nine months ended September 30, 2017, respectively, and $20 million and $61 million for the three and nine months ended September 30, 2016.

Note 9.7. Goodwill and Other Intangible Assets
Goodwill    
Changes in the carrying value of goodwill by reportable segment for the ninesix months ended SeptemberJune 30, 20172021 are as follows:
(in millions)
Water
Infrastructure
Applied WaterMeasurement & Control SolutionsTotal
Balance as of January 1, 2021$668 $529 $1,657 $2,854 
Activity in 2021
Foreign currency and other0 (5)(8)(13)
Balance as of June 30, 2021$668 $524 $1,649 $2,841 
(in millions)
Water
Infrastructure
 Applied Water Measurement & Control Solutions Total
Balance as of January 1, 2017$1,074
 $505
 $1,053
 $2,632
Activity in 2017       
Divested/Acquired—
 (2) 3
 1
Foreign currency and other46
 20
 42
 108
Balance as of September 30, 2017$1,120
 $523
 $1,098
 $2,741
As of June 30, 2021, goodwill included an accumulated impairment loss of $206 million within the Measurement & Control Solutions segment.
Other Intangible Assets
Information regarding our other intangible assets is as follows:
 September 30, 2017 December 31, 2016
(in millions)
Carrying
Amount
 
Accumulated
Amortization
 
Net
Intangibles
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
Intangibles
Customer and distributor relationships$905
 $(224) $681
 $891
 $(168) $723
Proprietary technology and patents162
 (72) 90
 156
 (61) 95
Trademarks142
 (37) 105
 139
 (23) 116
Software251
 (118) 133
 218
 (118) 100
Other25
 (19) 6
 26
 (13) 13
Indefinite-lived intangibles159
 —
 159
 154
 —
 154
Other Intangibles$1,644
 $(470) $1,174
 $1,584
 $(383) $1,201
June 30, 2021December 31, 2020
(in millions)
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor relationships$941 $(436)$505 $941 $(410)$531 
Proprietary technology and patents206 (138)68 206 (131)75 
Trademarks143 (68)75 143 (63)80 
Software523 (284)239 500 (265)235 
Other21 (19)2 21 (18)3 
Indefinite-lived intangibles169 0 169 169 0 169 
Other Intangibles$2,003 $(945)$1,058 $1,980 $(887)$1,093 
Amortization expense related to finite-lived intangible assets was $30$33 million and $91$65 million for the three and nine monthssix month periods ended SeptemberJune 30, 2017,2021, respectively, and $12$33 million and $36$68 million for the three and nine monthssix month periods ended SeptemberJune 30, 2016,2020, respectively.
During the firstsecond quarter of 20172020, 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 the intended use of a finite lived trade nameinternally developed in-process software within our Applied WaterMeasurement & Control Solutions segment had changed. Accordingly we recordedwas impaired as a $4 millionresult of actions taken to prioritize strategic investments and recognized an impairment charge. The charge was calculated using income approach, which is considered a Level 3 input for fair value measurement, and is reflected in “Restructuring and asset impairment charges” in our Condensed Consolidated Income Statements.of $10 million.

14

Note 10.8. 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 and Hungarian Forint.Dollar. We had foreign exchange contracts with purchasepurchased notional amounts totaling $58$270 million and $0 million as of SeptemberJune 30, 2017.2021 and December 31, 2020, respectively. As of SeptemberJune 30, 2017,2021, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell U.S. Dollar and purchase Euro, sell British Pound and purchase Euro, and to 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 $26$97 million, $9$88 million, $8$36 million, $14 million, $13 million and $7$12 million, respectively. As of December 31, 2016 we did not hold any foreign exchange contracts.
Hedges of Net Investments in Foreign Operations
We are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.
Cross CurrencyCross-Currency Swaps
Beginning in 2015, we entered into cross currencycross-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 $440$1,208 million and $391$1,249 million as of SeptemberJune 30, 20172021 and December 31, 2016,2020, 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 $583$591 million and $610 million as of June 30, 2021 and December 31, 2020, respectively, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.
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The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income.Income:
Three Months EndedSix Months Ended
 June 30,June 30,
(in millions)2021202020212020
Cash Flow Hedges
Foreign Exchange Contracts
Amount of (loss) gain recognized in OCI$4 $6 $(7)$4 
Amount of (gain) loss reclassified from OCI into revenue1 (1)(1)1 
Amount of (gain) loss reclassified from OCI into cost of revenue0 1 (1)2 
Net Investment Hedges
Cross-Currency Swaps
Amount of gain (loss) recognized in OCI$2 $(22)$32 $23 
Amount of income recognized in Interest Expense5 5 $10 $9 
Foreign Currency Denominated Debt
Amount of gain (loss) recognized in OCI$(6)$(15)$20 $(5)
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in millions)2017 2016 2017 2016
Cash Flow Hedges       
Foreign Exchange Contracts       
Amount of gain recognized in OCI (a)$1
 $—
 $6
 $—
Amount of gain reclassified from OCI into revenue (a)(2) (1) (3) (1)
Amount of (gain) loss reclassified from OCI into cost of revenue (a)—
 —
 1
 (1)
        
Net Investment Hedges       
Cross Currency Swaps       
Amount of loss recognized in OCI (a)$(14) $(7) $(45) $(7)
Foreign Currency Denominated Debt       
Amount of loss recognized in OCI (a)$(17) $(5) $(65) $(10)
(a)Effective portion
As of SeptemberJune 30, 2017, $32021, $6 million of net gainslosses on cash flow hedges are expected to be reclassified into earnings in the next 12 months. The ineffective portion of a cash flow hedge is recognized immediately in selling, general and administrative expenses in the Condensed Consolidated Income Statements and was not material for the three and nine months ended September 30, 2017 and 2016.
As of SeptemberJune 30, 2017,2021, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration. The net investment hedges did not experience any ineffectiveness for the three and nine months ended September 30, 2017.
The fair values of our derivative assets and liabilities are measured on a recurring basis using Level 2 inputs and are determined through the use of models th atthat consider various assumptions including yield curves, time value and other measurements.

The fair values of our foreign exchangederivative contracts currently included in our hedging program designated as hedging instruments were as follows:
(in millions)September 30,
2017		 December 31,
2016
Derivatives designated as hedging instruments   
Assets   
Cash Flow Hedges   
  Other current assets$1
 $—
Liabilities   
Net Investment Hedges   
Other non-current liabilities$(55) $(6)
(in millions)June 30,
2021		December 31,
2020
Derivatives designated as hedging instruments
Liabilities
Cash Flow Hedges
  Other current liabilities$(5)$0 
Net Investment Hedges
Other non-current accrued liabilities$(82)$(117)
The fair value of our long-term debt, due in 2023, designated as a net investment hedge was $630$614 million and $555$640 million as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.

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Note 11.9. Accrued and Other Current Liabilities
The components of total accrued and other current liabilities are as follows:
(in millions)June 30,
2021		December 31,
2020
Compensation and other employee-benefits$253 $258 
Customer-related liabilities196 186 
Accrued taxes78 103 
Lease liabilities70 63 
Accrued warranty costs52 54 
Other accrued liabilities111 123 
Total accrued and other current liabilities$760 $787 

(in millions)September 30,
2017		 December 31,
2016
Compensation and other employee benefits$196
 $182
Customer-related liabilities104
 80
Accrued taxes70
 63
Accrued warranty costs60
 64
Other accrued liabilities132
 132
Total accrued and other current liabilities$562
 $521
Note 12.10. Credit Facilities and Debt
Total debt outstanding is summarized as follows:
(in millions)June 30,
2021		December 31,
2020
4.875% Senior Notes due 2021 (a)$600 $600 
2.250% Senior Notes due 2023 (a)592 612 
3.250% Senior Notes due 2026 (a)500 500 
1.950% Senior Notes due 2028 (b)500 500 
2.250% Senior Notes due 2031 (b)500 500 
4.375% Senior Notes due 2046 (a)400 400 
Debt issuance costs and unamortized discount (c)(26)(28)
Total debt3,066 3,084 
Less: short-term borrowings and current maturities of long-term debt600 600 
Total long-term debt$2,466 $2,484 
(in millions)September 30,
2017		 December 31,
2016
4.875% Senior Notes due 2021 (a)$600
 $600
2.250% Senior Notes due 2023 (a)588
 522
3.250% Senior Notes due 2026 (a)500
 500
4.375% Senior Notes due 2046 (a)400
 400
Commercial paper30
 65
Research and development facility agreement43
 38
Research and development finance contract124
 110
Term loan24
 157
Debt issuance costs and unamortized discount (b)(23) (24)
Total debt2,286
 2,368
Less: short-term borrowings and current maturities of long-term debt97
 260
Total long-term debt$2,189
 $2,108
(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 $653 million and $651 million as of September 30, 2017 and December 31, 2016,(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 million and $620 million as of June 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2023 was $614 million and $640 million as of June 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2026 was $548 million and $563 million as of June 30, 2021 and December 31, 2020 respectively. The fair value of our Senior Notes due 2023 was $630 million and $555 million as of September 30, 2017 and December 31, 2016, respectively. The fair value of our Senior Notes due 2026 was $499 million and $487 million as of September 30, 2017 and December 31, 2016, respectively.The fair value of

our Senior Notes due 2046 was $419$483 million and $397$496 million as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.
(b)The debt issuance costs and unamortized discount are recognized as a reduction in the carrying value of the Senior Notes in the Condensed Consolidated Balance Sheets and are being amortized to interest expense in our Condensed Consolidated Income Statements over the expected remaining terms of the Senior Notes.
(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.
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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 30, 2021, we are in compliance with all covenants for the Green Bond.
On September 20, 2011, we issued 3.550% Senior Notes of $600 million aggregate principal amount due September 2016 (the "Senior Notes due 2016") and 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, subject to exceptions,and the ability of our restricted subsidiaries, to incur debt secured by liens andon certain property above a threshold, to engage in certain sale and leaseback transactions as well as provide for customary eventsinvolving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of default (subject, in certain cases, to receipt of notice of default and/or customary grace and cure periods).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 beginning on May 1, 2017.year. As of SeptemberJune 30, 2017,2021, we wereare in compliance with all covenants for the Senior Notes.
We used the net proceeds of the Senior Notes due 2026 and the Senior Notes due 2046, together with cash on hand, proceeds from issuances under our existing commercial paper program and borrowings under the Term Facility (as described below), to fund the acquisition of Sensus (refer to Note 3 for further information on the Sensus acquisition).
Credit Facilities
2019 Five-Year Revolving Credit Facility
EffectiveOn March 27, 2015,5, 2019, Xylem entered into a Five-Year Revolving Credit Facility (the "Credit Facility"“2019 Credit Facility”) with Citibank, N.A., as administrative agent,Administrative Agent, and a syndicate of lenders. The 2019 Credit Facility provides for an aggregate principal amount of up to $600$800 million of: (i) revolving extensions of credit (the "revolving loans") outstanding at any time(available in U.S. Dollars and (ii) the issuance of letters of credit in a face amount not in excess of $100 million outstanding at any time. The Credit Facility provides forEuros), with increases of up to $200 million for a possible maximum total of $800 million in aggregate principal amount of $1 billion at ourthe request of Xylem and with the consent of the institutions providing such increased commitments.
AtInterest 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 election,credit rating, whether such commitment is used or unused, as well as a quarterly letter of credit fee accruing on the interestletter of credit exposure of such lender during the preceding quarter at a rate per annum applicablebased 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 the revolving loansconsolidated EBITDA ratio (or maximum leverage ratio), which will be based on either (i)the last four fiscal quarters; and in addition contains a Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin or (ii) a fluctuating ratenumber of interest determined by reference to the greatest of: (a) the prime rate of Citibank, N.A., (b) the U.S. Federal funds effective rate plus half of 1% or (c) the Eurodollar rate determined by reference to LIBOR, adjusted for statutory reserve requirements, in each case, plus an applicable margin.

In accordance with the terms of an amendment to the Credit Facility dated August 30, 2016, we may not exceed a maximum leverage ratio of 4.00 to 1.00 (based on a ratio of total debt to earnings before interest, taxes, depreciation and amortization) for a period of four full fiscal quarters following the Sensus acquisition and a maximum leverage ratio of 3.50 to 1.00 through the rest of the term. The Credit Facility also containscustomary covenants, including limitations on among other things, incurringthe incurrence of secured debt grantingand debt of subsidiaries, liens, entering into sale and leasebacklease-back transactions, mergers, consolidations, liquidations, dissolutions and sales of assets. In addition, theThe 2019 Credit Facility also contains other terms and conditions such as customary representations and warranties, additional covenants and 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. 
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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 SeptemberJune 30, 20172021, the 2019 Credit Facility was undrawn and we are in compliance with all revolver covenants.
European Investment Bank - R&D Finance Contract
On October 28, 2016, the Company entered into a Finance Contract (the “Finance Contract”) with the European Investment Bank (the “EIB”). The Company's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the Finance Contract and Xylem Inc. is the Guarantor.  The Finance Contract provides for up to €105 million (approximately $124 million) to finance research, development and innovation projects in the field of sustainable water and wastewater solutions during the period from 2017 through 2019 in Sweden, Germany, Italy, UK, Hungary and Austria. The Company has unconditionally guaranteed the performance of the borrowers under the Finance Contract.Under the Finance Contract, the borrowers are able to draw loans on or before April 28, 2018, with a maturity of no longer than 11 years.
Both the Finance Contract and the R&D Facility Agreement (described below) are subject to the same leverage ratio as the Credit Facility. Both agreements also contain limitations on, among other things, incurring debt, granting liens, and entering into sale and leaseback transactions, as well as other terms and conditions, such as customary representations and warranties, additional covenants and customary events of default.
Both the Finance Contract and the R&D Facility Agreement provide for fixed rate loans and floating rate loans. Under the Finance Contract, the interest rate per annum applicable to fixed rate loans is at a fixed percentage rate per annum specified by the EIB which includes the applicable margin. The interest rate per annum applicable to floating rate loans is at the rate determined by reference to EURIBOR for loans drawn in Euros and LIBOR for loans drawn in Pounds Sterling or U.S. Dollars, plus an applicable spread specified by the EIB which includes the applicable margin. The applicable margin is 59 basis points (0.59%). As of September 30, 2017 and December 31, 2016, $124 million and $110 million were outstanding under the Finance Contract, respectively.
European Investment Bank - R&D Facility Agreement
On December 3, 2015, the Company amended and restated its Risk Sharing Finance Facility Agreement (the "R&D Facility Agreement") with the EIB to amend the maturity date. The Facility provides an aggregate principal amount of up to €120 million (approximately $141 million) to finance research projects and infrastructure development in the European Union. The Company's wholly owned subsidiaries in Luxembourg, Xylem Holdings S.á r.l. and Xylem International S.á r.l., are the borrowers under the R&D Facility Agreement. The obligations of the borrowers under the R&D Facility Agreement are guaranteed by the Company under an Amended and Restated Deed of Guarantee, dated as of December 4, 2013, in favor of the EIB.
Under the R&D Facility Agreement, the borrower was able to draw loans on or before March 31, 2016 with a maturity of no longer than 12 years. As of September 30, 2017 and December 31, 2016 $43 million and $38 million were outstanding, respectively, under the R&D Facility Agreement. Although the borrowing term for this arrangement is up to five years, we have classified it as short-term debt on our Consolidated Balance Sheets since we intend to repay this obligation in less than a year.
Term Loan Facility
On October 24, 2016, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month €150 million (approximately $177 million) term loan facility (the “Term Facility”) the terms of which are set forth in a term loan agreement, among the borrower, the Company, as parent guarantor and ING Bank.  The Company has entered into a parent guarantee in favor of ING Bank also dated October 24, 2016 to secure all present and future obligations of the borrower under the Term Loan Agreement.  The Term Facility was used to partially fund the acquisition of Sensus. The Term Facility will mature on October 26, 2017. The Term Facility bears interest at EURIBOR plus 0.35%. The agreement contains certain representations and warranties, certain affirmative covenants, certain negative covenants, a financial covenant, certain conditions and events of default that are customarily required for similar financings. As of September 30, 2017 and December 31, 2016, $24 million and

$157 million were outstanding under the Term Loan Facility, respectively. The remaining outstanding balance was paid off in October 2017.
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 has a combined outstanding limit of $600$800 million inclusive of the Five-Year Revolving2019 Credit Facility. As of SeptemberJune 30, 20172021 and December 31, 2016 $30 million and $65 million2020, none of the Company’sCompany's $600 million U.S. Dollar commercial paper program was outstanding at a weighted average interest rate of 1.44% and 1.12%, respectively.outstanding. We will periodically borrowhave the ability to continue borrowing under this program and may borrow under itgoing 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 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 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 13. Postretirement11. Post-retirement Benefit Plans
The components of net periodic benefit cost for our defined benefit pension plans are as follows:
Three Months EndedSix Months Ended
 June 30,June 30,
(in millions)2021202020212020
Domestic defined benefit pension plans:
Service cost$0 $1 $1 $2 
Interest cost1 1 2 2 
Expected return on plan assets(1)(2)(3)(4)
Amortization of net actuarial loss1 1 2 2 
Net periodic benefit cost$1 $1 $2 $2 
International defined benefit pension plans:
Service cost$3 $3 $7 $6 
Interest cost3 3 6 6 
Expected return on plan assets(3)(3)(7)(6)
Amortization of net actuarial loss4 3 8 6 
Net periodic benefit cost$7 $6 $14 $12 
Total net periodic benefit cost$8 $7 $16 $14 
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in millions)2017 2016 2017 2016
Domestic defined benefit pension plans:       
Service cost$1
 $1
 $3
 $2
Interest cost1
 1
 3
 3
Expected return on plan assets(1) (2) (4) (4)
Amortization of net actuarial loss—
 1
 1
 2
Net periodic benefit cost$1
 $1
 $3
 $3
International defined benefit pension plans:       
Service cost$2
 $3
 $8
 $8
Interest cost4
 6
 14
 18
Expected return on plan assets(8) (8) (24) (25)
Amortization of net actuarial loss3
 2
 7
 6
Settlement/Curtailment1
 —
 1
 —
Net periodic benefit cost$2
 $3
 $6
 $7
Total net periodic benefit cost$3
 $4
 $9
 $10
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 postretirementpost-retirement employee benefit plans was $1 million and $2less than$1 million, including amountsnet credits recognized ininto other comprehensive income ("OCI") of less than $1 million, for both the three and ninesix months ended SeptemberJune 30, 2017. The total net periodic benefit cost for other postretirement employee benefit plans was $1 million2021 and $2 million, including amounts recognized in OCI of less than $1 million, for both the three and nine months ended September 30, 2016.2020, respectively.
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We contributed $28$12 million and $22$16 million to our defined benefit plans during the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. A discretionary $6 million contribution was made to the U.S. plan in Q3 2017 to increase the funding ratio and reduce regulatory fees. Additional contributions ranging between approximately $3$7 million and $9$15 million are expected to be made during the remainder of 2017.2021.
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 months ended June 30, 2020 contributions is $5 million paid to meet the shortfall between the cost of the bulk annuity policy and the plan assets.

Note 12. Equity
The following table shows the changes in stockholders' equity for the six months ended June 30, 2021:
Common
Stock		Capital in Excess of Par ValueRetained
Earnings		Accumulated Other
Comprehensive Loss		Treasury StockNon-Controlling InterestTotal
Balance at January 1, 2021$2 $2,037 $1,930 $(413)$(588)$8 $2,976 
Other— — — — — 1 1 
Net income— — 87 — — — 87 
Other comprehensive loss, net— — — (13)— 0 (13)
Dividends declared ($0.28 per share)— — (50)— — — (50)
Stock incentive plan activity— 12 — — (7)— 5 
Repurchase of common stock— — — — (60)— (60)
Balance at March 31, 2021$2 $2,049 $1,967 $(426)$(655)$9 $2,946 
Net income— — 113 — — — 113 
Other comprehensive income, net— — — 28 — — 28 
Dividends declared ($0.28 per share)— — (51)— — — (51)
Stock incentive plan activity— 14 — — (1)— 13 
Balance at June 30, 2021$2 $2,063 $2,029 $(398)$(656)$9 $3,049 
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The following table shows the changes in stockholders' equity for the six months ended June 30, 2020:
Common
Stock
Capital in Excess of Par Value		Retained
Earnings		Accumulated Other
Comprehensive Loss		Treasury StockNon-Controlling InterestTotal
Balance at January 1, 2020$2 $1,991 $1,866 $(375)$(527)$10 $2,967 
Cumulative effect of change in accounting principle— — (2)— — — (2)
Net income— — 38 — — — 38 
Other comprehensive loss, net— — — (86)— (1)(87)
Dividends declared ($0.26 per share)— — (48)— — — (48)
Stock incentive plan activity— 13 — — (10)— 3 
Repurchase of common stock— — — — (50)— (50)
Balance at March 31, 2020$2 $2,004 $1,854 $(461)$(587)$9 $2,821 
Net income— — 31 — — — 31 
Other comprehensive income, net— — — 52 — — 52 
Dividends declared ($0.26 per share)— — (47)— — — (47)
Stock incentive plan activity— 8 — — — — 8 
Balance at June 30, 2020$2 $2,012 $1,838 $(409)$(587)$9 $2,865 

Note 14.13. Share-Based Compensation Plans
Share-based compensation expense was $5$8 million and $17 million during the three and six months ended June 30, 2021, respectively, and $8 million and $16 million during the three and ninesix months ended SeptemberJune 30, 2017, respectively, and $5 million and $15 million during the three and nine months ended September 30,2016,2020, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $7$9 million, $21$30 million and $14$16 million, respectively, at SeptemberJune 30, 20172021 and is expected to be recognized over a weighted average period of 1.9,2.1, 2.0 and 2.02.8 years, respectively. The amount of cash received from the exercise of stock options was $8$9 million and $22$5 million for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.

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Stock Option Grants
The following is a summary of the changes in outstanding stock options for the ninesix months ended SeptemberJune 30, 2017.
 
Share units            (in thousands)
 
Weighted
Average
Exercise
Price / Share
 
Weighted  Average
Remaining
Contractual
Term (Years)
 
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 20172,126
 $33.71
 6.9  
Granted501
 48.43
    
Exercised(257) 31.87
    
Forfeited and expired(50) 42.08
    
Outstanding at September 30, 20172,320
 $36.91
 7.0 $60
Options exercisable at September 30, 20171,383
 $32.89
 5.8 $41
Vested and expected to vest as of September 30, 20172,219
 $35.87
 6.8 $58
2021:
Share units
(in thousands)
Weighted
Average
Exercise
Price / Share
Weighted  Average
Remaining
Contractual
Term (Years)
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 20211,961 $56.66 6.4
Granted259 102.31 
Exercised(135)58.39 
Forfeited and expired(22)83.88 
Outstanding at June 30, 20212,063 $61.93 6.3$122 
Options exercisable at June 30, 20211,409 $51.45 5.0$98 
Vested and expected to vest as of June 30, 20211,987 $60.98 6.2$119 
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 ninesix months ended SeptemberJune 30, 20172021 was $5.5$7.1 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 2017 grants.
Volatility25.40
%
Risk-free interest rate2.07
%
Dividend yield1.49
%
Expected term (in years)5.1
 
Weighted-average fair value / share$10.66
 
2021 grants:
Volatility26.30%
Risk-free interest rate0.86%
Dividend yield1.10%
Expected term (in years)5.7
Weighted-average fair value / share$23.20
Expected volatility is calculated based on a weightedan analysis of historic and implied volatility measures for a set of peer companies and Xylem. We use historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant.
Restricted Stock Unit Grants
The following is a summary of restricted stock unit activity for the ninesix months ended SeptemberJune 30, 20172021. The fair value of the restricted stock unitsshare unit awards is equal todetermined using the closing share price of our common stock on the date of the grant. grant:
Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2021537 $74.62 
Granted213 103.36 
Vested(233)74.47 
Forfeited(15)85.91 
Outstanding at June 30, 2021502 $86.47 
22
 
Share units (in thousands)
 
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2017899
 $37.67
Granted344
 49.69
Vested(357) 38.24
Forfeited(60) 40.78
Outstanding at September 30, 2017826
 $35.53


ROIC Performance Share Unit Grants
The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the ninesix months ended SeptemberJune 30, 2017.2021. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant. grant:
Share units
 (in thousands)
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2021182 $76.12 
Granted60 102.30 
Forfeited (a)(65)76.04 
Outstanding at June 30, 2021177 $84.66 
 
Share units (in thousands)
 
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2017250
 $37.11
Granted117
 49.15
Vested—
 —
Forfeited(68) 38.44
Outstanding at September 30, 2017299
 $41.50
(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 UnitsUnit Grants
The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the ninesix months ended SeptemberJune 30, 2017.
2021:
Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2021182 $96.98 
Granted60 117.56 
Adjustment for Market Condition Achieved (a)35 98.79 
Vested(93)98.79 
Forfeited(7)102.66 
Outstanding at June 30, 2021177 $102.86 
 
Share units (in thousands)
 
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2017108
 $46.15
Granted117
 47.79
Vested—
 —
Forfeited(11) 43.98
Outstanding at September 30, 2017214
 $47.03
(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 2017 grants.
2021 grants:
Volatility30.2%
Volatility33.5%
Risk-free interest rate1.500.24%


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 based on our performance against certain of the Company's 2025 sustainability goals.

Note 15.14. Capital Stock
For the three and ninesix months ended SeptemberJune 30, 20172021, the Company repurchased less than 0.1 million shares of common stock for $1 million and approximately 0.7 million shares of common stock for $68 million, respectively. For the three and six months ended June 30, 2020, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and 0.5approximately 0.8 million shares for $25 million of common stock for $60 million, respectively. Repurchases include both share repurchase programs approved by the Board of Directors and
23

repurchases in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. The detaildetails 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 and maintains our focus on growth. There were no0 shares repurchased under thisthe program for the three months ended SeptemberJune 30, 2017.2021. For the ninesix months ended SeptemberJune 30, 20172021, we repurchased 0.1approximately 0.6 million shares for $7$60 million. There were no shares repurchased under thisthe program duringfor the three and nine months ended SeptemberJune 30, 2016.2020. For the six months ended June 30, 2020, we repurchased approximately 0.7 million shares for $50 million. There are up to $413$228 million in shares that may still be purchased under this plan as of September 30, 2017.

On August 18, 2012, our Board of Directors authorized the repurchase of up to 2.0 million shares of common stock with no expiration date. The program's objective is to offset dilution associated with various Xylem employee stock plans by acquiring shares in the open market from time to time. There were no shares repurchased under this program for the three months ended September 30, 2017. For the nine months ended September 30, 2017 we repurchased 0.25 million shares for $13 million. There were no shares repurchased under this program during the three and nine months ended September 30, 2016. As of June 30, 2017, we have exhausted the authorized amount to repurchase shares under this plan.2021.
Aside from the aforementioned repurchase programs,program, we repurchased less than 0.1 million shares and approximately 0.1 million shares for less than $1 million and $5$8 million for the three and ninesix months ended SeptemberJune 30, 2017,2021, 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 $1 million and $3$10 million for the three and ninesix months ended SeptemberJune 30, 2016,2020, respectively.


Note 16.15. Accumulated Other Comprehensive Income (Loss)Loss
The following table provides the components of accumulated other comprehensive income (loss)loss for the threesix months ended SeptemberJune 30, 2017:2021:
(in millions)Foreign Currency TranslationPost-retirement Benefit PlansDerivative InstrumentsTotal
Balance at January 1, 2021$(86)$(330)$3 $(413)
Foreign currency translation adjustment10 — — 10 
Tax on foreign currency translation adjustment(14)— — (14)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net— 5 — 5 
Income tax impact on amortization of post-retirement benefit plan items— (1)— (1)
Unrealized loss on derivative hedge agreements— — (11)(11)
Income tax benefit on unrealized loss on derivative hedge agreements— — 1 1 
Reclassification of unrealized gain on foreign exchange agreements into revenue— — (2)(2)
Reclassification of unrealized gain on foreign exchange agreements into cost of revenue— — (1)(1)
Balance at March 31, 2021$(90)$(326)$(10)$(426)
Foreign currency translation adjustment19 — — 19 
Tax on foreign currency translation adjustment1 — — 1 
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net— 5 — 5 
Income tax impact on amortization of post-retirement benefit plan items— (2)— (2)
Unrealized gain on derivative hedge agreements— — 4 4 
Reclassification of unrealized loss on foreign exchange agreements into revenue— — 1 1 
Balance at June 30, 2021$(70)$(323)$(5)$(398)

24

(in millions)Foreign Currency Translation Postretirement Benefit Plans Derivative Instruments Total
Balance at July 1, 2017$(51) $(173) $4
 $(220)
Foreign currency translation adjustment7
 —
 —
 7
Tax on foreign currency translation adjustment12
 —
 —
 12
Amortization of net actuarial loss on postretirement benefit plans into:       
Cost of revenue—
 1
 —
 1
Selling, general and administrative expenses—
 2
 —
 2
Restructuring  1
   1
Income tax impact on amortization of postretirement benefit plan items—
 (1) —
 (1)
Unrealized gain on derivative hedge agreements—
 —
 1
 1
Reclassification of unrealized gain on derivative hedge agreements into revenue—
 —
 (2) (2)
Balance at September 30, 2017$(32) $(170) $3
 $(199)
The following table provides the components of accumulated other comprehensive income (loss)loss for the ninesix months ended SeptemberJune 30, 2017:2020:
(in millions)Foreign Currency TranslationPost-retirement Benefit PlansDerivative InstrumentsTotal
Balance at January 1, 2020$(103)$(269)$(3)$(375)
Foreign currency translation adjustment(77)— — (77)
Tax on foreign currency translation adjustment(13)— — (13)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net— 4 — 4 
Income tax impact on amortization of post-retirement benefit plan items— (1)— (1)
Unrealized loss on derivative hedge agreements— — (2)(2)
Reclassification of unrealized loss on foreign exchange agreements into revenue— — 2 2 
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue— — 1 1 
Balance at March 31, 2020$(193)$(266)$(2)$(461)
Foreign currency translation adjustment35 — — 35 
Tax on foreign currency translation adjustment9 — — 9 
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net— 4 — 4 
Income tax impact on amortization of post-retirement benefit plan items— (1)— (1)
Unrealized gain on derivative hedge agreements— — 6 6 
Income tax benefit on unrealized gain on derivative hedge agreements— — (1)(1)
Reclassification of unrealized gain on foreign exchange agreements into revenue— — (1)(1)
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue— — 1 1 
Balance at June 30, 2020$(149)$(263)$3 $(409)

(in millions)Foreign Currency Translation Postretirement Benefit Plans Derivative Instruments Total
Balance at January 1, 2017$(140) $(177) $(1) $(318)
Foreign currency translation adjustment66
 —
 —
 66
Tax on foreign currency translation adjustment42
 —
 —
 42
Amortization of net actuarial loss on postretirement benefit plans into:       
Cost of revenue—
 2
 —
 2
Selling, general and administrative expenses—
 5
 —
 5
Other non-operating income—
 1
 —
 1
Restructuring—
 1
   1
Income tax impact on amortization of postretirement benefit plan items—
 (2) —
 (2)
Unrealized gain on derivative hedge agreements—
 —
 6
 6
Reclassification of unrealized loss on derivative hedge agreements into cost of revenue—
 —
 1
 1
Reclassification of unrealized gain on derivative hedge agreements into revenue—
 —
 (3) (3)
Balance at September 30, 2017$(32) $(170) $3
 $(199)
Note 17.16. Commitments and Contingencies
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 acquisitions and divestitures,environmental, tax, intellectual property, matters,acquisitions or divestitures, product liability, andproperty damage, personal injury, claims,privacy, employment, labor and pension, matters, government contract issues and commercial contractor 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)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 Corporation (now ITT LLC)LLC has an obligation to indemnify, defend and hold Xylem harmless for asbestos product liability matters, including settlements, judgments, and legal defense costs associated with all pending and future claims that may arise from past sales of ITT’s legacy products. We believe ITT Corporation (now ITT LLC)LLC remains a substantial entity with sufficient financial resources to honor its obligations to us.
25

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 expectbelieve 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 $10$5 million and $11$6 million as of SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively, for these general litigationlegal matters.
Indemnifications
As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC)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. The former parent’sITT 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. On May 29, 2015, Harris Inc. acquired Exelis.  As the parent of Exelis, Harris Inc. is responsible for Exelis’s indemnification obligations under the Distribution Agreement.
Guarantees
We obtain certain stand-by letters of credit, bank guarantees, and surety bonds and insurance letters of credit from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance relatedinsurance-related requirements. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the amount of surety bonds, bank guarantees, insurance letters of credit and stand-by letters of credit bank guarantees and surety bonds was $235$410 million and $218$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 theour best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis. We have estimated and accrued $4$3 million and $4 million as of Septemberboth June 30, 20172021 and December 31, 2016, respectively,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.
26

Warranties
We warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and specific non-performance. The table below provides the changes in ourthe combined current and non-current product warranty accrual, which for 2017 includes warranty related to the Sensus acquisition.accruals over each period:
(in millions)20212020
Warranty accrual – January 1$65 $41 
Net charges for product warranties in the period17 34 
Settlement of warranty claims(18)(15)
Foreign currency and other(1)0 
Warranty accrual - June 30$63 $60 

(in millions)2017 2016
Warranty accrual – January 1$99
 $33
Net charges for product warranties in the period25
 20
Settlement of warranty claims(36) (21)
Foreign currency and other3
 3
Warranty accrual - September 30$91
 $35
Note 18.17. Segment Information
Our business has three3 reportable segments: Water Infrastructure, Applied Water and Measurement & Control Solutions. When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics. The Water Infrastructure segment focuses on the transportation and treatment of water, offering a range of products including water, wastewater and wastewaterstorm 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’ssegment'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.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.



27


The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1 in the 20162020 Annual Report). The following tables containtable contains financial information for each reportable segment:
Three Months EndedSix Months Ended
 June 30,June 30,
(in millions)2021202020212020
Revenue:
Water Infrastructure$569 $501 $1,078 $939 
Applied Water414 337 807 675 
Measurement & Control Solutions368 322 722 669 
Total$1,351 $1,160 $2,607 $2,283 
Operating Income (Loss):
Water Infrastructure$93 $73 $164 $112 
Applied Water64 41 130 88 
Measurement & Control Solutions13 (46)22 (58)
Corporate and other(10)(14)(23)(27)
Total operating income$160 $54 $293 $115 
Interest expense$21 $18 $42 $34 
Other non-operating income (expense), net(3)(1)(1)(4)
Gain from sale of business2 0 2 0 
Income before taxes$138 $35 $252 $77 
Depreciation and Amortization:
Water Infrastructure$13 $16 $26 $31 
Applied Water6 5 12 11 
Measurement & Control Solutions37 34 73 70 
Regional selling locations (a)4 7 9 11 
Corporate and other2 0 4 3 
Total$62 $62 $124 $126 
Capital Expenditures:
Water Infrastructure$13 $8 $24 $18 
Applied Water3 3 7 12 
Measurement & Control Solutions20 24 41 51 
Regional selling locations (b)5 8 8 12 
Corporate and other0 1 0 2 
Total$41 $44 $80 $95 
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in millions)2017 2016 2017 2016
Revenue:       
Water Infrastructure$520
 $478
 $1,421
 $1,402
Applied Water354
 343
 1,048
 1,042
Measurement & Control Solutions321
 76
 961
 232
Total$1,195
 $897
 $3,430
 $2,676
Operating Income:       
Water Infrastructure$91
 $75
 $205
 $192
Applied Water51
 50
 136
 140
Measurement & Control Solutions26
 4
 80
 11
Corporate and other(16) (20) (44) (46)
Total operating income$152
 $109
 $377
 $297
Interest expense$21
 $16
 $62
 $50
Other non-operating income1
 2
 3
 3
Gain from sale of business(1) —
 4
 —
Income before taxes$131
 $95
 $322
 $250
Depreciation and Amortization:       
Water Infrastructure$17
 $17
 $48
 $50
Applied Water6
 6
 18
 18
Measurement & Control Solutions29
 5
 90
 15
Regional selling locations (a)4
 2
 12
 8
Corporate and other2
 2
 6
 6
Total$58
 $32
 $174
 $97
Capital Expenditures:       
Water Infrastructure$16
 $17
 $43
 $48
Applied Water4
 4
 14
 15
Measurement & Control Solutions16
 2
 48
 5
Regional selling locations (b)3
 4
 11
 19
Corporate and other3
 1
 3
 3
Total$42
 $28
 $119
 $90
(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.
(a)Depreciation and amortization expense incurred by the Regional selling locations was included in an overall allocation of Regional selling location costs to the segments; however, a certain portion of that expense was not specifically identified to a segment. That expense is captured in this Regional selling location line.
(b)Represents capital expenditures incurred by the Regional selling locations not allocated to the segments.

The following table contains the total assets for each reportable segment: 
(in millions)September 30,
2017		 December 31,
2016
Water Infrastructure$1,236
 $1,179
Applied Water1,018
 990
Measurement & Control Solutions3,209
 3,102
Regional selling locations (a)1,097
 965
Corporate and other (b)223
 238
Total$6,783
 $6,474
(a)The Regional selling locations have assets that consist primarily of cash, accounts receivable and inventory which are not allocated to the segments.
(b)Corporate and other consists of items pertaining to our corporate headquarters function, which principally consist of cash, deferred tax assets, pension assets and certain property, plant and equipment.


28

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"). Except as otherwise indicated or unless the context otherwise requires, "Xylem," "we," "us," "our" and the "Company" refer to Xylem Inc. and its subsidiaries. References in the condensed consolidated financial statements to "ITT" or the "former parent" refer to ITT Corporation (now ITT LLC) and its consolidated subsidiaries as of the applicable periods.
This Report contains information that may constitute “forward-looking statements" within the meaning of Section 27A of the Private Securities Litigation Act of 1995. Forward-looking statements by their nature address matters that are, to different degrees, uncertain.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,” “will,” “could,” “would,” “should”“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 which generallyaddress uncertain matters and include any statements that are not historical, in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements includesuch as statements about the capitalization of the Company, the Company’s restructuring and realignment, future strategicour strategy, financial plans, and other statements that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals. All statements thatgoals; or address operatingpossible or future results of operations or financial performance, events or developments that we expect or anticipate will occur in the future - including statements relating to orders, revenue,revenues, operating margins and earnings per share growth, andgrowth.
Although we believe that the expectations reflected in any of our forward-looking statements expressing general views about future operatingare reasonable, actual results - arecould differ materially from those projected or assumed in any of our forward-looking statements. Forward-lookingOur future financial condition and results of operations, as well as any forward-looking statements, involve knownare subject to change and unknownto inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and other importantuncertainties are, and may continue to be, amplified by the coronavirus (“COVID-19”) pandemic. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from those expressedestimates or projections contained in or implied in, or reasonably inferred from, suchby our forward-looking statements.
Factors that could cause results to differ materially from those anticipated include:statements include, among others, the following: overall industry and economic conditions, including industrial, governmental and business conditions, politicalprivate 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 internationalbusiness, operations, including military actions, economic sanctionsgrowth, and financial condition, as well as uncertainty around approved vaccines and the pace of recovery when the pandemic subsides; actual or trade embargoes that could affect customer markets,potential other epidemics, pandemics or global health crises; manufacturing and non-compliance with laws, including foreign corrupt practice laws, exportoperating cost increases due to inflation, prevailing price changes, tariffs and import laws and competition laws; potential for unexpected cancellations or delays of customer orders in our reported backlog; our exposure toother factors; fluctuations in foreign currency exchange rates; disruption, competition and pricing pressures in the markets we serve; the strengthcybersecurity incidents or other disruptions of housinginformation 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 related markets; weather conditions;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 members of management;talent; uncertainty related to restructuring and realignment actions and related charges and savings; our relationship with and the performance of our channel partners;ability to continue strategic investments for growth; our ability to successfully identify, completeexecute and integrate acquisitions,acquisitions; risks relating to products, including defects, security, warranty and liability claims, and recalls; difficulty predicting our financial results, including uncertainties due to the integrationnature of Sensus;our short- and long-cycle businesses; volatility in our results due to weather conditions; our ability to borrow or to 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 value of goodwillenvironment and climate change; changes in our effective tax rates or intangible assets; risks relating to product defects, product liabilitytax expenses; legal, governmental or regulatory claims, investigations or proceedings and recalls; governmental investigations; security breaches or other disruptions of our information technology systems; litigation andassociated 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, 20162020 ("20162020 Annual Report") and within subsequent filings we make with the Securities and Exchange Commission ("SEC"(“SEC”).
All forward-looking statements made herein are based on information currently available to the Companyus as of the date of this Report. The Company undertakesWe 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.
Our quarterly financial periods end on the Saturday closest to the last day of the calendar quarter, except for the fourth quarter which ends on December 31. For ease of presentation, the reporting periods included herein are described as ending on the last day of the calendar quarter.
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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.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 treatmentanalysis 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 (formerly Sensus & Analytics).Solutions.
As previously announced, in the second quarter of 2017 we implemented an organizational redesign by moving Xylem’s Analytics business from our •Water Infrastructure business to combining it with our Sensus business, which was acquired in the fourth quarter of 2016, to form Measurement & Control Solutions. We believe that the combination of these businesses will enhance our focus on advanced sensing technologies and will lead to operating efficiencies by integrating the supply chain process and moving to a leaner functional structure.

 Accordingly, our reportable segments have changed. Beginning with the second quarter of 2017, the Company now reports the financial position and results of operations of its Analytics and Sensus businesses as one new reportable segment, which is called Measurement & Control Solutions . Our Water Infrastructure reportable segment no longer includes the results of our Analytics business. The Company has recast certain historical amounts between the Company's Water Infrastructure and Measurement & Control Solutions reportable segments, however this change had no impact on the Company's historical consolidated financial position or results of operations. The recast financial information does not represent a restatement of previously issued financial statements. Our Applied Water reportable segment remains unchanged.
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 valves and controls provide cooling to power plants and manufacturing facilities, as well as circulation for food and beverage processing. We also provideprocessing, as well as boosting systems for farming irrigation and pumps for dairy operations.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 Solutionsprimarilyserves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and servicescritical 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. In the Measurement & Control Solutions segment, weWe 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 selloffer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions and we also sell smart lighting products and solutions that improve efficiency and public safety efforts across communities.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 market dynamics have adversely affected, and are expected to continue to adversely affect, our supply chains. We have experienced, and expect to continue experiencing, shortages in the supply of components, parts and raw materials, and, in some cases, unpredictable interruptions with our external suppliers in 2021. We have also experienced increased logistics costs related to the current global capacity shortages. We continue to enhance our supplier pulsing and redundancy to help mitigate these challenges. Additionally, we have in the past and may continue to take measures with respect to buffer stock or use of alternative suppliers to mitigate the impacts of freight and logistics delays and bolster our access to raw materials and components. If these shortages and interruptions are sustained, 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.
30

Xylem Watermark, our corporate social responsibility program, continues to support our communities in addressing the challenges posed by this global pandemic 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 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 thirdsecond quarter of 20172021 of $1,195$1,351 million, an increase of 33.2%16.5% compared to $897$1,160 million reported in the thirdsecond quarter of 2016.2020. On a constant currency basis, revenue increased 30.8% mostly due to $234by $125 million, of revenue related to the Sensus business acquisition andor 10.8%, driven by organic revenue growth of $44 million driven by growthacross all segments and in all end markets.
We generated operating income of $160 million (margin of 11.8%) during the second quarter of 2021, as compared to $54 million (margin of 4.7%) in 2020. Operating income forin the thirdsecond quarter of 2017 was $1522021 benefited from a decrease in restructuring and realignment costs of $37 million reflecting an increase of 39.4%as compared to $109 million in the thirdsecond quarter of 2016. Operating2020 and special charges of $11 million incurred during 2020 that did not recur. Excluding the impact of these items, adjusted operating income was $166 million (adjusted margin was 12.7% for 2017 versus 12.2% for 2016, an increase of 50 basis points.12.3%) during the second quarter of 2021 as compared to $108 million (adjusted margin of 9.3%) in 2020. The increase in adjusted operating margin was primarily due to cost reductions resulting from progress in our global procurement and productivity, initiatives, restructuring savings and a decrease in Sensus acquisition related costs and restructuring and realignment charges.other cost saving initiatives and favorable volume, impacted by COVID-19 recovery. These favorable impacts on operating margin were largely offset by cost inflation increases, Sensus purchase accounting impacts and special charges.
Adjusted operating income was $169 million with an operating margin of 14.1% in 2017 as compared to adjusted operating income of $131 million with an adjusted operating margin of 14.6% in the third quarter of 2016. The decrease in adjusted operating margin was mostly due to cost inflation increases and Sensus purchase accounting impacts which were partially offset by cost reductions resulting from progress in our global procurementinflation and productivity initiatives and restructuring savings. The non-cash Sensus purchase accounting impactincreased spending on adjusted operating margin for the quarter was 70 basis points, which if excluded would bring the adjusted operating margin to 14.8%, a 20 basis point increase over the prior year.



strategic investments.
Additional financial highlights for the quarter ended SeptemberJune 30, 20172021 include the following:
•Orders of $1,249$1,660 million, up 32.0%34.7% from $946$1,232 million in the prior year, and up 6.1%28.8% on an organic basisbasis.
•Earnings per share of $0.58,$0.62, up 41.5%264.7% when compared to the prior year ($0.66, up 65.0% on an adjusted basis).
•Net income as a percent of revenue of 8.4%, up 570 basis points compared to 2.7% in the prior year. EBITDA margin of 16.2%, up 650 basis points when compared to 9.7% in the prior year (17.3%, up 200 basis points on an adjusted basis)
•Net cash flow provided by operating activities of $206 million for the six months ended June 30, 2021, an increase of $27 million from cash provided in the same period of the prior year. Free cash flow was $126 million, up $42 million from the prior year ($0.65, up 20.4% on an adjusted basis)year.
Cash flow from operating activities of $379 million for the nine months ended September 30, 2017, up 38.3% from the prior year, and free cash flow, excluding Sensus acquisition related costs, of $283 million as compared to $187 million, up 51.3% from the prior year

31

Key Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue, gross margin,margins, segment operating income and operating income margins, earnings per share, orders growth, working capital and backlog, among others. In addition, we consider certain non-GAAP (or “adjusted”"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 whichwe 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 titledsimilarly-titled measures reported by other companies, to be key performance indicators: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, Sensus acquisition related costs, special charges, gain or loss from sale of businesses and tax-related special items, and gain from sale of business, as applicable. A reconciliation of adjusted net income and adjusted earnings per share is provided below.
Three Months EndedSix Months Ended
 June 30,June 30,
(In millions, except for per share data)2021202020212020
Net income & Earnings per share$113 $0.62 $31 $0.17 $200 $1.10 $69 $0.38 
Restructuring and realignment, net of tax of $1 and $3 for 2021 and $10 and $12 for 20205 0.03 33 0.18 11 0.06 40 0.22 
Special charges, net of tax of $1 and $1 for 2021 and $3 and $3 for 20202 0.01 10 0.06 5 0.03 11 0.06 
Tax-related special items1 0.01 (1)(0.01)7 0.04 (5)(0.03)
Gain from sale of business, net of tax of $0 for 2021(2)(0.01)— — (2)— — — 
Adjusted net income & Adjusted earnings per share$119 $0.66 $73 $0.40 $221 $1.23 $115 $0.63 

 Three Months Ended Nine Months Ended
 September 30, September 30,
(In millions, except for per share data)2017 2016 2017 2016
Net income attributable to Xylem$105
 $73
 $260
 $210
Restructuring and realignment, net of tax of $4 and $11 for 2017 and net of tax of $4 and $9 for 20165
 8
 21
 23
Sensus acquisition related costs, net of tax of $2 and $7 for 20173
 10
 12
 10
Special charges, net of tax of $1 and $3 for 2017 and net of tax of $2 and $7 for 20162
 2
 5
 10
Tax-related special items3
 4
 —
 (7)
Gain from sale of business, net of tax of $0 and $2 for 20171
 —
 (2) —
Adjusted net income$119
 $97
 $296
 $246
Weighted average number of shares - Diluted180.9
 180.3
 180.7
 179.8
Adjusted earnings per share$0.65
 $0.54
 $1.64
 $1.37

•"adjusted operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and special charges"expenses" defined as operating expenses adjusted to exclude restructuring and realignment costs Sensus acquisition related costs and special charges.
•"adjusted operating income" defined as operating income, adjusted to exclude restructuring and realignment costs, Sensus acquisition related costs and special charges, and "adjusted operating margin" defined as adjusted operating income divided by total revenue.
32

•“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 EndedSix Months Ended
June 30,June 30,
(in millions)2021202020212020
Net Income$113 $31 $200 $69 
Income tax expense25 4 52 8 
Interest expense, net19 16 38 30 
Depreciation29 29 59 58 
Amortization33 33 65 68 
EBITDA$219 $113 $414 $233 
EBITDA Margin16.2 %9.7 %15.9 %10.2 %
Share-based compensation$8 $8 $17 $16 
Restructuring and realignment6 43 14 52 
Special charges3 13 6 14 
Gain from sale of business(2)— (2)— 
Adjusted EBITDA$234 $177 $449 $315 
Adjusted EBITDA Margin17.3 %15.3 %17.2 %13.8 %

•“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.
"Sensus acquisition related costs" defined as costs incurred by the Company associated with the acquisition of Sensus that are being reported within operating income. These costs include transaction costs, integration costs and costs related to the recognition of the backlog intangible asset recorded in purchase accounting.
•“special charges" defined as costs incurred by the Company, such as acquisition and integration related costs, non-cash impairment charges due diligence costs, initial acquisition costs not related to Sensus and other specialboth operating and non-operating items, as well as interest expense related to the early extinguishment of debt and financing costs on the bridge loan entered intoadjustments for the Sensus acquisition during 2016.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, significant reserves for cash repatriation, excess tax benefits/losses and other discrete tax adjustments.
•"free cash flow" defined as net cash from operating activities, as reported in the statementStatement of cash flow,Cash Flows, less capital expenditures, as well as adjustments for other significant items that impact current results which management believes are not related to our ongoing operations and performance.expenditures. Our definition of free"free cash flowflow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.
Six Months Ended
 June 30,
(In millions)20212020
Net cash provided by operating activities$206 $179 
Capital expenditures(80)(95)
Free cash flow$126 $84 
Net cash used by investing activities$(69)$(88)
Net cash (used) provided by financing activities$(162)$774 


33

 Nine Months Ended
 September 30,
(In millions)2017 2016
Net cash provided by operating activities$379
 $274
Capital expenditures(119) (90)
Free cash flow$260
 $184
Cash paid for Sensus related acquisition costs$(23) $(3)
Free cash flow, excluding Sensus acquisition related costs$283
 $187

“EBITDA” defined as earnings before interest, taxes, depreciation, amortization expense, and share-based compensation and “Adjusted EBITDA” reflects the adjustment to EBITDA to exclude restructuring and realignment costs, Sensus acquisition related costs, special charges and gain from sale of business.
 Three Months Ended Nine Months Ended
 September 30, September 30,
(in millions)2017 2016 2017 2016
Net Income$104
 $73
 $260
 $210
Income tax expense27
 22
 62
 40
Interest expense (income), net20
 16
 60
 49
Depreciation28
 20
 83
 61
Amortization30
 12
 91
 36
Stock compensation5
 5
 16
 15
EBITDA$214
 $148
 $572
 $411
Restructuring and realignment9
 12
 32
 32
Sensus acquisition related costs3
 10
 12
 10
Special charges3
 —
 8
 5
Gain from sale of business1
 —
 (4) —
Adjusted EBITDA$230
 $170
 $620
 $458

20172021 Outlook
We anticipate total revenue growth in the range of 24%8% to 25%10% in 20172021, with organic revenue growth anticipated to be in the low-single-digits and the Sensus acquisition contributing mostrange of the additional revenue growth.6% to 8%. The following is a summary of our organic revenue outlook by end market.markets:
Industrial market•Utilities revenue was up low-single-digits on an organic basisincreased by approximately 5% organically through the third quarter. We expect oil and gas and mining markets to stabilize in North America through the balancefirst half of the year driven by strength in western Europe and we expect market conditions in the United States to improve modestly throughout the remainder of the year. As a result, we expect organic revenue of low-single-digits for 2017.
Public utility revenue declined slightly through the September on an organic basis, primarily due to a difficult comparison to double-digit growth in the United States in the prior year.  We expect organic revenue growth in the low-single-digits for 2017 with project activity fueling growth in emerging markets, primarilypartially offset by weakness in China and India. We also anticipate revenue from Sensus to contribute mid-single-digit growth over their historical performance, driven by expected project deployments and traction from new products. On a pro forma basis that includes Sensus, we expect organic revenue growth of low to mid-single-digits for 2017.
In the commercial markets, organic growth was approximately 5% through the September, primarily driven by growth in the United States. In 2017North America. For 2021, we expect organic revenue growth in the mid-single-digitmid to high-single-digit range 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% organically through the first half of the year driven by strength 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 in during the second half of the year led by North America, with growth in emerging markets and western Europe as well.
•In the commercial markets, organic revenue growth was approximately 8% through the first half of the year driven by strength in western Europe, North America and the emerging markets. For 2021, we seeexpect organic revenue growth in the United States market continuingmid to high-single-digit range. We expect replacement business in the U.S. to be strong whilestable during the European market is experiencing growth relatedyear and anticipate continued healthy activity in Europe. We expect new construction activity in North America to new energy efficient products and sales channel investments.be soft, however we are optimistic that conditions will begin to recover late in the year.
•In the residential markets, organic revenue growth was into the low-double-digitsapproximately 30% through the third quarter primarilyfirst half of the year driven by strength in the United Statesemerging markets, North America and Asia Pacific. In 2017western Europe. This market is primarily driven by replacement revenue serviced through our distribution network. For 2021, we expect full year organic revenue performance will be upgrowth in the high-single-digits. We continue to expect the United States market to be competitive given the replacement nature of the sector we serve. We expect growthlow-teens, driven by healthy demand activity from the European market, which looks to be modestly stronger as increased residential building permitting provides an indicator of sales.users in the U.S. and Europe. Additionally, we expect to benefit from market share gains from channel disruption throughout the remainder of the year.anticipate strong demand in China for secondary water supply product applications.
We will continue to strategically execute restructuring and realignment actions primarily to reposition our European and North American business in an effort to optimize our cost structure, and improve our operational efficiency and effectiveness.effectiveness, strengthen our competitive positioning and better serve our customers. During 2017,2021, we expect to incur approximately $50between $30 million and $40 million in restructuring and realignment costs, as well as Sensus acquisition related costs. We expect to realize approximately $20between $35 million and $40 million of

net savings in 2021, consisting of between $33 million and $35 million of incremental net savings in 2017 from restructuring and realignment actions initiated in 2016,2020, and an additional $6between $2 million and $5 million of net savings from our 2017 actions.the restructuring, realignment and other structural cost actions initiated during this year.
Additional strategic actions we are taking include strategic initiatives to drive above-market growth, advance continuous improvement activities to increase productivity, focus on improving cash performance and drive a disciplined capital deployment strategy. Additionally, with the acquisition of Sensus, we anticipate increased spending on research and development as a percentage of revenue as Sensus brings a higher profile of R&D given the investment required to support growth and new product launches.
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Results of Operations
 Three Months Ended Nine Months Ended
 September 30, September 30,
(In millions)2017 2016 Change 2017 2016 Change
Revenue$1,195
 $897
 33.2
% $3,430
 $2,676
 28.2
%
Gross profit471
 357
 31.9
% 1,342
 1,055
 27.2
%
Gross margin39.4% 39.8% (40)bp  39.1% 39.4% (30)bp 
Operating expenses excluding restructuring and realignment costs, Sensus acquisition related costs and special charges302
 226
 33.6
% 906
 711
 27.4
%
Expense to revenue ratio25.3% 25.2% 10
bp  26.4% 26.6% (20)bp 
Restructuring and realignment costs9
 12
 (25.0)% 32
 32
 —
%
Sensus acquisition related charges5
 —
 NM
  19
 —
 NM
 
Special charges3
 10
 NM
  8
 15
 (46.7)%
Total operating expenses319
 248
 28.6
% 965
 758
 27.3
%
Operating income152
 109
 39.4
% 377
 297
 26.9
%
Operating margin12.7% 12.2% 50
bp  11.0% 11.1% (10)bp 
Interest and other non-operating expense, net20
 14
 42.9
% 59
 47
 25.5
%
Gain on sale of business(1) —
 NM
  4
 —
 NM
 
Income tax expense27
 22
 22.7
% 62
 40
 55.0
%
Tax rate21.1% 22.9% (180)bp 19.4% 16.0% 340
bp 
Net income$104
 $73
 42.5
% $260
 $210
 23.8
%
Three Months EndedSix Months Ended
June 30,June 30,
(In millions)20212020Change20212020Change
Revenue$1,351 $1,160 16.5 %$2,607 $2,283 14.2 %
Gross profit520 434 19.8 %1,010 843 19.8 %
Gross margin38.5 %37.4 %110 bp 38.7 %36.9 %180 bp 
Total operating expenses360 380 (5.3)%717 728 (1.5)%
Expense to revenue ratio26.6 %32.8 %(620)bp 27.5 %31.9 %(440)bp 
Restructuring and realignment costs6 43 (86.0)%14 52 (73.1)%
Special charges— 11 — %2 11 (81.8)%
Adjusted operating expenses354 326 8.6 %701 665 5.4 %
Adjusted operating expenses to revenue ratio26.2 %28.1 %(190)bp26.9 %29.1 %(220)bp
Operating income160 54 196.3 %293 115 154.8 %
Operating margin11.8 %4.7 %710 bp 11.2 %5.0 %620 bp 
Interest and other non-operating expense, net24 19 26.3 %43 38 13.2 %
Gain from sale of business2 — NM2 — NM
Income tax expense25 4 525.0 %52 8 550.0 %
Tax rate18.5 %10.9 %760 bp20.7 %10.4 %1,030 bp
Net income$113 $31 264.5 %$200 $69 189.9 %
NM - Not meaningful percentage change
Revenue
Revenue generated during the three and ninesix months ended SeptemberJune 30, 20172021 was $1,195$1,351 million and $3,430$2,607 million, reflecting increases of $298$191 million, or 33.2%16.5%, and $754$324 million, or 28.2%14.2%, respectively, compared to the same prior year periods. On a constant currency basis, revenue grew 30.8%10.8% and 28.3%9.4% for the three and ninesix months ended SeptemberJune 30, 2017, respectively. These2021. The increases in revenueon a constant currency basis were primarily driven by an additional $234organic revenue growth of $128 million and $715$219 million, respectively, of revenue from the businesses acquired in the fourth quarter of 2016. Organic revenue increased from the prior year by $44 million and $47 million for the three and nine months ended September 30, 2017, respectively. These increases reflectreflecting strong organic growth in emerging markets for both periods, particularly in Asia Pacific, as well as strength in North America for both periods. There was also organic growth in the quarter for western Europe; however, this region had slight organic declines year-to-date, driven by the United Kingdom.across all major geographic regions and segments.

The following tables illustratetable illustrates the impact from organic growth, recent acquisitions and divestitures, and foreign currency translation in relation to revenue during the three and ninesix months ended SeptemberJune 30, 2017:2021:
 Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal Xylem
(In millions)$ Change% Change$ Change% Change$ Change% Change$ Change% Change
2020 Revenue$501 $337 $322 $1,160 
Organic Growth32 6.4 %59 17.5 %37 11.5 %128 11.0 %
Divestitures— — %— — %(3)(0.9)%(3)(0.2)%
Constant Currency32 6.4 %59 17.5 %34 10.6 %125 10.8 %
Foreign currency translation (a)36 7.2 %18 5.3 %12 3.7 %66 5.7 %
Total change in revenue68 13.6 %77 22.8 %46 14.3 %191 16.5 %
2021 Revenue$569 $414 $368 $1,351 
(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.
35

 Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions)$ Change% Change $ Change% Change $ Change% Change $ Change% Change
2016 Revenue$478
  $343
  $76
  $897
 
Organic growth32
6.7% 8
2.3 % 4
5.3% 44
4.9%
Acquisitions/Divestitures—
NM
 (2)(0.6)% 234
307.9% 232
25.9%
Constant currency32
6.7% 6
1.7 % 238
313.2% 276
30.8%
Foreign currency translation (a)10
2.1% 5
1.5 % 7
9.2% 22
2.4%
Total change in revenue42
8.8% 11
3.2 % 245
322.4% 298
33.2%
2017 Revenue$520
  $354
  $321
  $1,195
 
Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal Xylem
(In millions)$ Change% Change$ Change% Change$ Change% Change$ Change% Change
2020 Revenue$939 $675 $669 $2,283 
Organic Growth79 8.4 %103 15.3 %37 5.5 %219 9.6 %
Divestitures— — %— — %(5)(0.7)%(5)(0.2)%
Constant Currency79 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 revenue139 14.8 %132 19.6 %53 7.9 %324 14.2 %
2021 Revenue$1,078 $807 $722 $2,607 
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, the Chinese Yuan, the Australian Dollar and the British Pound.
 Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions)$ Change% Change $ Change% Change $ Change% Change $ Change% Change
2016 Revenue$1,402
  $1,042
  $232
  $2,676
 
Organic growth24
1.7 % 16
1.5 % 7
3.0% 47
1.8 %
Acquisitions/Divestitures—
— % (5)(0.5)% 715
308.2% 710
26.5 %
Constant currency24
1.7 % 11
1.1 % 722
311.2% 757
28.3 %
Foreign currency translation (b)(5)(0.4)% (5)(0.5)% 7
3.0% (3)(0.1)%
Total change in revenue19
1.4 % 6
0.6 % 729
314.2% 754
28.2 %
2017 Revenue$1,421
  $1,048
  $961
  $3,430
 
(a)Foreign currency translation impact for the quarter due to fluctuations in the value of various currencies against the U.S. Dollar, primarily the Euro followed by Canadian Dollar, the Swedish Krona and the Australian Dollar.
(b)Foreign currency translation impact for the nine months due to fluctuations in the value of various currencies against the U.S. Dollar, the largest being British Pound which was partially offset by the Euro and the South African Rand.
Water Infrastructure
Water Infrastructure revenue increased $42$68 million, or 8.8%13.6%, for the thirdsecond quarter of 2017 (6.7%2021 (6.4% increase aton a constant currency) and increased $19 million, or 1.4%, for the nine months ended September 30, 2017 (1.7% increase at constant currency)currency basis) as compared to 2016.the prior year. Revenue benefited from $10$36 million of foreign currency translation, forwith the three months ended September 30, 2017 and was negatively impacted by $5 million from foreign currency translation for nine months ended September 30, 2017. The change at constant currency includedcoming entirely from organic growth of $32 million, or 6.7%, in the third quarter and organic growth of $24 million, or 1.7%, for the nine months ended September 30, 2017.million. Organic growth for the quarter was driven by strength in the industrial end market, particularly in North America andacross the emerging markets which was partially offset by declinesand, to a lesser extent, in western Europe. Organic growth for the quarter was also driven by strength in the public utility end market, particularlyprimarily in western Europe where we saw strong demand in utilities' operational spending coupled with recovery from prior year COVID-19 impacts. Organic growth in the Middle Eastutility end market was marginally offset by declines in North America during the quarter.
From an application perspective, organic revenue growth for the second quarter was driven by our transport application. The transport application 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 and Asia Pacific had strong revenue growth during the quarter, and in western Europe, where we had strong industrial and North America. Thisutility demand, positively impacted by COVID-19 recovery. Organic revenue growth from our transport application was partially offset by public utility declinesa modest decline in Asia Pacific. the treatment application, driven by the timing of project deliveries in the U.S. as compared to the prior year.
For the ninesix months ended SeptemberJune 30, 2017,2021, revenue increased $139 million, or 14.8% (8.4% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $60 million of foreign currency translation during the six month period, with the change at constant currency coming entirely from organic growth of $79 million. Organic growth during the year was driven by continued improvementstrength in the both the utility and industrial end markets. Strength in the utility end market was led by western Europe, where utilities' operational spending continues to be strong, and in the emerging markets, where China benefited from healthy order intake coming into the year. Organic growth in the industrial end market was particularly instrong across the emerging markets, as well as North America. Public utility declined organically year-to-date driven by reductionswhich included growth from the COVID-19 recovery in municipal spendingLatin America and healthy order intake in China and Africa, and in western Europe and difficult comparisons to the prior year in the United States where we had double digit growth rates in the United States.Europe.
From an application perspective, for the third quarter of 2017, organic revenue growth during the six month period was primarily driven by our transport applicationsapplication. The transport application was driven by strong revenue growth across the emerging markets, where we benefited from healthy order intake in Asia Pacific and Africa and a favorable prior year comparison in Latin America, as well as growth from the industrial end market dueCOVID-19 recovery in western Europe. Organic revenue from our treatment application also contributed to the segment's growth during the period, driven by strength in the dewatering business which benefited from distribution strength and improved construction, oil and gas, and miningemerging markets, particularly in North America.

The treatment application also had strong industrial growth drivenChina, which was partially offset by strongthe timing of project deliveries in the emerging markets.
ForU.S. during the nine months ended September 30, 2017, organic revenue growth was driven primarily by our transport application in the industrial end market due to strength in the dewatering business which benefited from a strong distribution channel and improved mining markets, primarily in Latin America and the United States. Our treatment application had flat overall organic revenue with growth in the industrial end markets, primarily in Asia Pacific, offset by declines in public utility driven by a difficult prior year comparison in the United States, as well as slower bidding activity in the Middle East where the oil and gas market downturn impacted municipal spending.year.
Applied Water
Applied Water revenue increased $11$77 million, or 3.2%22.8%, for the thirdsecond quarter of 2017 (1.7%2021 (17.5% increase aton a constant currency) and increased $6 million, or 0.6%, for the nine months ended September 30, 2017 (1.1% increase at constant currency)currency basis) as compared to the respective 2016 periods.prior year. Revenue benefited by $5from $18 million due toof foreign currency translation, forwith the three months ended September 30, 2017 and was negatively impacted by $5 million due to foreignchange at constant currency translation for nine months ended September 30, 2017. The revenue growth includedcoming entirely from organic growth of $8 million, or 2.3%, in the third quarter of 2017 and $16 million, or 1.5%,$59 million. Organic growth for the nine months ended September 30, 2017, whichquarter was driven by growthstrength in commercialevery end market and residential end markets, partially offset by declinesacross all major geographic regions, with particular strength in the industrial market.North America and western Europe.
36

From an application perspective, organic revenue growth in the thirdsecond quarter of 2017 was led by strength in the industrial water application which was primarily driven by market growth across the emerging markets, strong order intake in commercialNorth America, with particular strength in 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 Europe as well as project deliveries in China. Residential building service revenue also grew organically, primarilythe emerging markets, specifically driven by continued strength in Asia Pacific from demand forstrong second water supply sourcing. Thisbusiness in China. The commercial building services application also contributed organic growth was partially offset by a decline in industrial applications, primarily driven by unfavorable weather conditions impactingduring the agriculture business in the United States.
For the nine months ended September 30, 2017, growth in residential building services wasquarter, primarily driven by strength in the United States,U.S. and western Europe, where the industry was more significantly impacted by the COVID-19 pandemic in the prior year.
For the six months ended June 30, 2021, revenue increased $132 million, or 19.6% (15.3% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $29 million of foreign currency translation during the six month period, with the change at constant currency coming entirely from organic growth of $103 million. Organic growth during the period was driven by strength in every end market and across all major geographic regions.
From an application perspective, organic revenue growth during the six month period was led by strength in the industrial water application, which was primarily driven by market growth in the emerging markets, particularly in Asia Pacific where the industry was more significantly impacted by the COVID-19 pandemic in the first half of the prior year, strong order intake in North America and western Europe, reflecting recovery from the COVID-19 pandemic during the second quarter of the year. The 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 from the COVID-19 pandemic. Strength in North America also contributed to the growth in the residential building services application, as we benefited from timing of promotionshealthy backlog execution coming into the year, and modest share gains, and continue strengthmarket growth in Asia Pacific. Commercialwestern Europe during the period. The commercial building services also grew,application contributed organic growth during the first half of the year, primarily in North America, Asia Pacific and Europe, driven by new product traction and sales channel investments. This growth was partially offset by a decline in industrial applications, primarily driven by weaker than expected industrial market conditions in the United States, partially offset by strength in western Europe.Europe, North America and the emerging markets, particularly Asia Pacific.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $245$46 million, or 322.5%14.3%, for the thirdsecond quarter of 2017 (313.2% at constant currency) and increased $729 million, or 314.2%, for the nine months ended September 30, 2017 (311.2% at2021 (10.6% increase on a constant currency)currency basis) as compared to the respective 2016 periods. Theprior year. Revenue benefited from $12 million of foreign currency translation, with the change at constant currency driven by organic growth of $37 million which was partially offset by reduced revenue increase for the three and nine months ended September 30, 2017 was almost entirely made uprelated to divestiture impacts of the revenue contributed by the fourth quarter 2016 acquisitions, primarily Sensus, of $234 million and $715 million, respectively. Over 65% of the Sensus revenue was generated in the United States with additional revenue coming primarily from western Europe and China. The majority of Sensus revenue came from water applications with gas and electric applications making up most of the remaining sales in both periods.$3 million. Organic revenue growth induring the Measurement & Control Solutions segment was $4 million, or 5.3%, and $7 million, or 3.0%, for the three and nine months ended September 30, 2017, respectively. The organic growth in both periodsquarter was driven by strength in both the utility and industrial end markets and across all major geographic regions.
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, primarily fromas applicable, as both of these sub-applications provide products and services to the environmental monitoring businessbroader, ultimate applications of water and energy. From an application perspective, organic revenue growth was driven by the timing of project deployments in the United States.water application, coupled with COVID-19 recovery in the U.S. and western Europe during the quarter. The energy application experienced a modest decrease during the quarter, primarily driven project timing and supply chain constraints in the U.S.
For the six months ended June 30, 2021, revenue increased $53 million, or 7.9% (4.8% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $21 million of foreign currency translation during the six month period, with the change at constant currency driven by organic growth of $37 million which was partially offset by reduced revenue related to divestiture impacts of $5 million. Organic revenue growth during the period was driven by strength in both end markets and across all major geographic regions, particularly in western Europe.
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 regions benefited from a favorable prior year comparison during the period coupled with strong backlog execution. This organic revenue growth was partially offset by a decline in the energy application during the period driven by the gas business, where large project deployments in the U.S. during the prior year did not repeat and we experienced project delays driven by the COVID-19 pandemic during the year.
37


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 thirdsecond quarter of 20172021 were $1,249$1,660 million, an increase of $303$428 million, or 32.0%34.7%, over the third quarter of the prior year (29.7%(28.7% increase aton a constant currency)currency basis). Orders received during the ninesix months ended SeptemberJune 30, 20172021 were $3,598$3,198 million, an increase of $841$705 million, or 30.5%28.3%, fromover the prior year (30.6%(23.3% increase aton a constant currency)currency basis). Order intake benefited from $74 million and $123 million of foreign currency translation for the three and six months ended June 30, 2021, respectively. The order growth atincrease on a constant currency basis was primarily driven by additional orders from the fourth quarter 2016 acquisitions of $225 million and $688 million, as well as organic order growth of 6.1%$355 million and 5.7%,$590 million for the three and ninesix months ended SeptemberJune 30, 2017,2021, respectively.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three and six months ended June 30, 2021:
Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal Xylem
(in millions)$ Change% Change$ Change% Change$ Change% Change$ Change% Change
2020 Orders$598 $326 $308 $1,232 
Organic Growth— — %140 42.9 %215 69.8 %355 28.8 %
Divestitures— — %— — %(1)(0.3)%(1)(0.1)%
Constant Currency— — %140 42.9 %214 69.5 %354 28.7 %
Foreign currency translation (a)41 6.9 %20 6.1 %13 4.2 %74 6.0 %
Total change in orders41 6.9 %160 49.1 %227 73.7 %428 34.7 %
2021 Orders$639 $486 $535 $1,660 
(a)Foreign currency translation impact for the quarter due to the strengthening in value of various currencies against the U.S. Dollar, the largest being the Euro, the Chinese Yuan, the British Pound and the Australian Dollar.
Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal Xylem
(in millions)$ Change% Change$ Change% Change$ Change% Change$ Change% Change
2020 Orders$1,112 $698 $683 $2,493 
Organic Growth70 6.3 %232 33.2 %288 42.2 %590 23.7 %
Divestitures— — %— — %(8)(1.2)%(8)(0.4)%
Constant Currency70 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 orders138 12.4 %265 38.0 %302 44.2 %705 28.3 %
2021 Orders$1,250 $963 $985 $3,198 
(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.
Water Infrastructure
Water Infrastructure segment orders increased $37$41 million, or 7.1%6.9%, to $558$639 million (4.8% increase at(flat on a constant currency)currency basis) for the second quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $41 million of foreign currency translation. Organic orders remained essentially flat during the quarter as strength in the treatment application, which was driven by 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 growth driven by healthy market conditions in western Europe and North America during the quarter, including order growth in the dewatering business.
38

For the six months ended June 30, 2021, orders increased $138 million, or 12.4%, to $1,250 million (6.3% increase on a constant currency basis) as compared to the same prior year period. Order growth during the period benefited from $68 million of foreign currency translation. The order increase on a constant currency basis consisted entirelyprimarily of an increase in organic orders. Organic order growth spanned all ofin the applications. The transport applications hadtreatment application. Organic growth in the treatment application was driven by increased strength in dewatering from distributor order strength

North America, the emerging markets, particularly in China, and western Europe. Organic orders for the transport application also increased weather related activityduring the period, primarily driven by healthy market conditions in western Europe and North America. This growth wasAmerica which were partially offset by organic declines against a strong prior year for transport applicationsweakness 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 strength in Latin America and Africa during period.
Applied Water
Applied Water segment orders increased $160 million, or 49.1%, to $486 million (42.9% increase on a constant currency basis) for the second quarter of 2021 as there was a large project booking in our wastewater transport businesscompared to the prior year. Treatment applications had strongOrder growth for the quarter benefited from $20 million of foreign currency translation. The order intake,increase on a constant currency basis was driven by organic order growth across all end markets, primarily from a large project wins in the United States, as well as order strengthU.S., where we benefited from strong demand recovery, amplified by longer lead times for delivering product, and to a lesser extent, in Europe.western Europe and the emerging markets.
For the ninesix months ended SeptemberJune 30, 20172021, orders increased $81$265 million, or 5.5%38.0%, to $1,546$963 million (5.8%(33.2% increase aton a constant currency)currency basis) as compared to the same prior year period. Order growth during the period benefited from $33 million of foreign currency translation. The order increase on a constant currency basis was driven by organic order growth across all end markets during the first half of the year, primarily in the U.S., where we benefited from strong demand, amplified by early ordering to mitigate longer lead times, and to a lesser extent, in western Europe and the emerging markets, particularly in China where order intake was weakened by COVID-19 impacts in the prior year.
Measurement & Control Solutions
Measurement & Control Solutions segment orders increased $227 million, or 73.7%, to $535 million (69.5% increase on a constant currency basis) for the second quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $13 million of foreign currency translation. The order increase on a constant currency basis consisted almost entirely of an increase in organic orders.order growth of $215 million, or 69.8%. Organic order growth spanned all applications. The transport applications had year-to-date organic order growth drivenwas led by growth in the United States for transport projects and dewatering distributor orders, as well as strong project orders in China and India and dewatering rental strength in Latin America from increased mining activity. Treatment applications hadwater application, which experienced strong order intake in North Americathe U.S., amplified by increased ordering due to component shortages, and the emerging markets,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.
Applied Water segmentFor the six months ended June 30, 2021, orders increased $32$302 million, or 9.4%44.2%, to $374$985 million (8.2%(41.0% increase aton a constant currency) for the third quartercurrency basis) as compared to the same prior year period. The order increase forOrder growth during the third quarter on a constantperiod benefited from $22 million of foreign currency basis included organic order growth of 8.8% driven by strong commercial performance in the United States and strength in the emerging markets. For the nine months ended September 30, 2017 orders increased $46 million, or 4.4%, to $1,103 million (4.9% increase at constant currency) as compared to the same prior year period.translation. The order increase on a constant currency basis included organic order growth of 5.4%$288 million, or 42.2%, which was partially offset by a $8 million reduction in orders related to divestiture impacts during the period. Organic order growth was led by the water application, which was driven by strengthstrong order intake in the emerging markets, strong residentialU.S., amplified by increased ordering due to component shortages, and commercial performancein western Europe, coupled with a favorable comparison, driven by COVID-19 recovery. Order intake in the United States as well as industrial strengthenergy application also grew organically during the first half of the year, primarily driven by large projects in the Americas.North America.
Measurement & Control Solutions segment orders increased $234 million, or 281.9%, to $317 million (274.7% increase at constant currency) for the third quarter of 2017 as compared to the same prior year period. The order increase included orders from recent acquisitions, mostly Sensus, of $225 million and organic order growth of $3 million, or 3.6% from test application strength in China and the United States. For the nine months ended ended September 30, 2017 orders increased $714 million, or 303.8%, to $949 million (301.3% increase at constant currency) as compared to the same prior year period and included orders from recent acquisitions, primarily Sensus, of $693 million and organic order growth of $15 million, or 6.4% from test application strength in the United States and China.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 can occur from time to time. Total backlog was $1,556$2,779 million at SeptemberJune 30, 2017,2021, an increase of $781$766 million or 100.8%38.1%, as compared to SeptemberJune 30, 2016, which did not include the Sensus acquisition,2020 backlog of $2,013 million, and an increase of $264$655 million or 20.4%30.8%, as compared to December 31, 20162020 backlog of $1,292 million. The December 31, 2016 backlog balance has been revised to include contractual agreements that Sensus has with customers that do not have minimum commitments but which we believe will be executed upon over$2,124 million driven by the terms ofsignificant increase in orders in the contracts.year. We anticipate that approximately 40%50% of the backlog at SeptemberJune 30, 2017
39

2021 will be recognized as revenue in the remainder of 2017.2021. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue decreased 40increased 110 and 180 basis points to 39.4%38.5% and 30 basis points to 39.1%, respectively,38.7% for the three and ninesix months ended SeptemberJune 30, 2017,2021, as compared to 39.8%37.4% and 39.4%, respectively,36.9% for the comparative 20162020 periods. The gross margin declines wereincrease for both periods was primarily driven by cost inflation, unfavorable mix and Sensus gross margins, which include unfavorable purchase accounting impacts. The negative impacts to gross margin were largely offset by cost reductions from our global procurement and continuousproductivity improvement initiatives.

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 ninesix months ended SeptemberJune 30, 20172021 and 2016:
 Three Months Ended Nine Months Ended
 September 30, September 30,
(In millions)2017 2016 Change 2017 2016 Change
Selling, general and administrative expenses ("SG&A")$270
 $219
 23.3
% $812
 $665
 22.1
% 
SG&A as a % of revenue22.6% 24.4% (180)bp  23.7% 24.9% (120)bp 
Research and development expenses ("R&D")45
 23
 95.7
%  131
 75
 74.7
% 
R&D as a % of revenue3.8% 2.6% 120
bp  3.8% 2.8% 100
bp 
Restructuring and asset impairment charges, net4
 6
 (33.3)%  22
 18
 22.2
% 
Operating expenses$319
 $248
 28.6
%  $965
 $758
 27.3
% 
Expense to revenue ratio26.7% 27.6% (90)bp  28.1% 28.3% (20)bp 
2020:
Three Months EndedSix Months Ended
 June 30,June 30,
(In millions)20212020Change20212020Change
Selling, general and administrative expenses ("SG&A")$304 $288 5.6 %$605 $585 3.4 % 
SG&A as a % of revenue22.5 %24.8 %(230)bp 23.2 %25.6 %(240)bp 
Research and development expenses ("R&D")53 44 20.5 % 103 93 10.8 % 
R&D as a % of revenue3.9 %3.8 %10 bp 4.0 %4.1 %(10)bp 
Restructuring and asset impairment charges3 48 (93.8)% 9 50 (82.0)% 
Operating expenses$360 $380 (5.3)% $717 $728 (1.5)% 
Expense to revenue ratio26.6 %32.8 %(620)bp 27.5 %31.9 %(440)bp 
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased by $51$16 million to $270$304 million, or 22.6%22.5% of revenue, in the thirdsecond quarter of 2017,2021, as compared to $219$288 million, or 24.4%24.8% of revenue, in the comparable 20162020 period; and increased by $147$20 million to $812$605 million, or 23.7%23.2% of revenue, in the ninesix months ended SeptemberJune 30, 2017,2021, as compared to $665$585 million, or 24.9%25.6% of revenue, in the comparable 2020 period. The improvement in SG&A as a percent of revenue for the nine months ended in 2016. The increases in SG&A expenses include approximately $49 millionboth periods was primarily driven by cost reductions from our productivity, restructuring and $145 million of additional SG&A spending for the Sensus business, respectively. Additionally we have incurred Sensus acquisition relatedother cost saving initiatives and decreased quality management costs, of $5 million and $19 million for the three and nine months ended September 30, 2017, respectively versus $10 million in both comparative prior year periods. Excluding these impacts, SG&A expenses increased by $7 million over the three months as inflation increases, spending on strategic investments and negative currency impactswhich were only partially offset by savings from restructuring actions and global procurement and continuous improvement initiatives. For the nine month period, excluding the the Sensus acquisition impacts, SG&A expenses decreased by $7 million as savings from global procurement and continuous improvementcost inflation, additional investments in strategic growth initiatives and restructuring actions more than offset inflation increases and spending on strategic investments.other costs.
Research and Development ("R&D") Expenses
R&D spendingexpense was $45$53 million, or 3.9% of revenue, in the second quarter of 2021, as compared to $44 million, or 3.8% of revenue, in the third quartercomparable 2020 period; and was $103 million, or 4.0% of 2017revenue, in the six months ended June 30, 2021, as compared to $23$93 million, or 2.6%4.1% of revenue, in the comparable period of 2016; and was $131 million or 3.8% of revenue in the nine months ended September 30, 2017 as compared to $75 million or 2.8% of revenue in the comparable period of 2016. The increase in R&D spending for the three and nine months ended September 30, 2017 was primarily due to higher rates of investment in new products and technology, primarily within our most recently acquired Sensus business, and to drive revenue growth synergies between Xylem and the Sensus business.2020 period.
40

Restructuring Charges and Asset Impairment Charges
Restructuring
During the three and ninesix months ended SeptemberJune 30, 2017,2021, we recognized restructuring charges of $4$3 million and $17$8 million, respectively. We incurred these charges relatedrespectively, of which $2 million and $6 million relate to actions takenpreviously announced in 2017 primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The2020. These charges included the reduction of headcount across all segments and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as headcount reductionsasset impairments within our Measurement & Control Solutions segment. Included
In response to the changes in business and economic conditions arising as a result of the charges recorded during the threeCOVID-19 pandemic, in June 2020 management committed to a restructuring plan that includes actions across our businesses and nine months ended September 30, 2017 were $1 millionfunctions globally. The plan is designed to support our long-term financial resilience, simplify our operations, strengthen our competitive positioning and $8 million, respectively, related to actions commenced in prior years.
better serve our customers. During the three and ninesix months ended SeptemberJune 30, 2016,2020, we recognized restructuring charges of $6$38 million and $18$40 million, respectively. We incurred theseThese charges related to actions taken in 2016 primarily in an effort to reposition our European and North American businesses to optimize our cost structure and improve our

operational efficiency and effectiveness. The charges included the reduction of headcount across all segments and consolidation of facilitiesasset impairments within our Applied Water and Water Infrastructure segments, as well as Corporate headcount reductions. Included inMeasurement & Control Solutions segment.

The following is a roll-forward for the charges recorded during the three and ninesix months ended SeptemberJune 30, 2016 were $1 million related to actions commenced in prior years.2021 and 2020 of employee position eliminations associated with restructuring activities:
20212020
Planned reductions - January 1319 196 
Additional planned reductions72 579 
Actual reductions and reversals(202)(115)
Planned reductions - June 30189 660 
The following table presents expected restructuring spend:spend in 2021 and thereafter:
(in millions)Water InfrastructureApplied WaterMeasurement & Control SolutionsCorporateTotal
Actions Commenced in 2021:
Total expected costs$5 $— $— $— $5 
Costs incurred during Q1 20211 — — — 1 
Costs incurred during Q2 20211 — — — 1 
Total expected costs remaining$3 $— $— $— $3 
Actions Commenced in 2020:
Total expected costs$25 $8 $33 $2 $68 
Costs incurred during 202019 4 30 — 53 
Costs incurred during Q1 20212 1 1 — 4 
Costs incurred during Q2 20212 — — — 2 
Total expected costs remaining$2 $3 $2 $2 $9 
(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2017:          
Total expected costs $12
 $4
 $2
 $—
 18
Costs incurred during Q1 2017 —
 1
 1
 —
 2
Costs incurred during Q2 2017 3
 1
 —
 —
 4
Costs incurred during Q3 2017 1
 1
 1
 —
 3
Total expected costs remaining $8

$1

$—

$—

$9
           
Actions Commenced in 2016:          
Total expected costs $13
 $14
 $10
 $2
 $39
Costs incurred during 2016 11
 10
 6
 2
 29
Costs incurred during Q1 2017 2
 2
 1
 —
 5
Costs incurred during Q2 2017 —
 1
 1
 —
 2
Costs incurred during Q3 2017 —
 1
 —
 —
 1
Total expected costs remaining $—
 $—
 $2
 $—
 $2
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 20172020 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 endsecond quarter of 2018. The Water Infrastructure, Applied Water,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 and Corporate actions commenced in 2016 consist primarily of severance charges and are expected to continue through the end of 2018.segment.
We currently expect to incur approximately $20between $15 million and $25 million in restructuring costs for the full year. These
41

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 $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 2017,2021, we anticipate approximately $5between $1 million and $3 million of total net savings to be realized during 2017.2021.
Asset Impairment
During the firstsecond quarter of 20172020 we determined that certain assetsinternally developed in-process software within our Applied WaterMeasurement & Control Solutions segment includingwas impaired as a tradename were impaired.result of actions taken to prioritize strategic investments. Accordingly, we recognized an impairment charge of $5$10 million. Refer to Note 9,7, "Goodwill and Other Intangible Assets," for additional information.
Operating Income
We generatedOperating income during the second quarter of 2021 was $160 million, reflecting an increase of 196.3% compared to $54 million in the second quarter of 2020. Operating margin was 11.8% for the second quarter of 2021 versus 4.7% for the comparable period in 2020, an increase of 710 basis points. Operating margin benefited from a decrease in restructuring and realignment costs of $37 million as compared to the second quarter of 2020 and special charges of $11 million incurred during 2020 that did not recur. Excluding the impact of these items, adjusted operating income was $166 million with an adjusted operating margin of 12.3% in the second quarter of 2021 as compared to adjusted operating income of $152$108 million (marginwith an adjusted operating margin of 12.7%) during9.3% in the thirdsecond quarter of 2017, a $43 million increase compared to $109 million (margin of 12.2%) in 2016.2020. The increase in operating income was largely driven by the inclusion of Sensus operating income in the current year. Additionally, the increase in operating income andadjusted operating margin was primarily due to cost reductions from our global procurementproductivity, restructuring and productivityother 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.
Operating income for the six months ended June 30, 2021 was $293 million, reflecting an increase of 154.8% compared to $115 million in 2020. Operating margin was 11.2% for the six months ended June 30, 2021 versus 5.0% for the comparable period in 2020, an increase of 620 basis points. Operating margin benefited from a decrease in restructuring savingsand realignment costs of $38 million and a decrease in Sensus acquisition related costs and restructuring and realignment charges. These favorable impacts on operating income and operating margin were largely offset by cost inflation increases, spending on strategic investments and Sensus purchase accounting impacts.
Adjustedspecial charges of $9 million as compared to 2020. Excluding the impact of these items, adjusted operating income was $169$309 million (adjustedwith an adjusted operating margin of 14.1%) during11.9% for the third quarter of 2017six months ended June 30, 2021 as compared to $131 million (adjusted margin of 14.6%) in 2016. The increase inadjusted operating income of $38$178 million was largely driven by the inclusionwith an adjusted operating margin of Sensus operating income7.8% in the current year.2020. The decreaseincrease in adjusted operating margin was mostlyprimarily due to cost inflation increases, spending on strategicreductions from our productivity, restructuring and other cost saving initiatives and Sensus purchase accountingfavorable volume, impacted by COVID-19 recovery. These impacts which were partially offset by cost reductions from global procurementinflation and increased spending on strategic investments.

42

productivity initiatives, favorable volume impacts and restructuring savings. The non-cash Sensus purchase accounting impact on adjusted operating margin for the quarter was 70 basis points.
We generated operating income of $377 million (margin of 11.0%) during the nine months ended September 30, 2017, an $80 million increase compared to the $297 million (margin of 11.1%) in 2016. The increase in operating income was largely driven by the inclusion of Sensus operating income in the current year. Sensus acquisition related costs and special charges increased $9 million and $3 million, respectively, while restructuring and realignment costs remained flat as compared to the nine months ended September 30, 2016. Excluding these costs, adjusted operating income was $436 million (adjusted margin of 12.7%) for the nine months ended September 30, 2017 as compared to $344 million (adjusted margin of 12.9%) in 2016. Adjusted operating margin was negatively impacted by several factors with cost inflation, Sensus operating margins which include unfavorable purchase accounting impacts and unfavorable product mix being among the largest. These negative impacts on adjusted operating margin were largely offset by cost savings from our global procurement and productivity initiatives, as well as restructuring savings and favorable volume impacts. The non-cash Sensus purchase accounting impact on adjusted operating margin for the year-to-date period was 70 basis points.

The table below provides a reconciliation of the total and each segment's operating income to adjusted operating income, and a calculation of the corresponding adjusted operating margin:
 Three Months Ended Nine Months Ended
 September 30, September 30,
(In millions)2017 2016 Change 2017 2016 Change
Water Infrastructure             
Operating income$91
 $75
 21.3
% $205
 $192
 6.8
%
Operating margin17.5% 15.7% 180
bp 14.4% 13.7% 70
bp
Restructuring and realignment costs3
 5
 (40.0)% 12
 14
 (14.3)%
Special charges—
 —
 NM
  —
 2
 NM
 
Adjusted operating income$94
 $80
 17.5
% $217
 $208
 4.3
%
Adjusted operating margin18.1% 16.7% 140
bp 15.3% 14.8% 50
bp 
Applied Water             
Operating income$51
 $50
 2.0
% $136
 $140
 (2.9)%
Operating margin14.4% 14.6% (20)bp 13.0% 13.4% (40)bp
Restructuring and realignment costs5
 3
 66.7
% 14
 9
 55.6
%
Special charges—
 —
 NM
  5
 —
 NM
 
Adjusted operating income$56
 $53
 5.7
% $155
 $149
 4.0
%
Adjusted operating margin15.8% 15.5% 30
bp  14.8% 14.3% 50
bp
Measurement & Control Solutions             
Operating income$26
 $4
 550.0
% $80
 $11
 627.3
%
Operating margin8.1% 5.3% 280
bp 8.3% 4.7% 360
bp
Sensus acquisition related costs4
 —
 NM
  13
 —
 NM
 
Restructuring and realignment costs1
 4
 (75.0)  6
 7
 (14.3)%
Special charges—
 —
 NM
  —
 3
 NM
 
Adjusted operating income$31
 $8
 287.5
% $99
 $21
 371.4
%
Adjusted operating margin9.7% 10.5% (80)bp 10.3% 9.1% 120
bp
Corporate and other             
Operating loss$(16) $(20) (20.0)% $(44) $(46) (4.3)%
Restructuring and realignment costs—
 —
 NM
  —
 2
 NM
 
Sensus acquisition related costs1
 10
 (90.0)  6
 10
 (40.0) 
Special charges3
 —
 NM
  3
 —
 NM
 
Adjusted operating loss$(12) $(10) 20.0
% $(35) $(34) 2.9
%
Total Xylem             
Operating income$152
 $109
 39.4
% $377
 $297
 26.9
%
Operating margin12.7% 12.2% 50
bp  11.0% 11.1% (10)bp 
Restructuring and realignment costs9
 12
 (25.0)% 32
 32
 —
%
Sensus acquisition related costs5
 10
 (50.0)  19
 10
 90.0
 
Special charges3
 —
 NM
  8
 5
 60.0
%
Adjusted operating income$169
 $131
 29.0
% $436
 $344
 26.7
%
Adjusted operating margin14.1% 14.6% (50)bp  12.7% 12.9% (20)bp
Three Months EndedSix Months Ended
 June 30,June 30,
(In millions)20212020Change20212020Change
Water Infrastructure
Operating income$93 $73 27.4 %$164 $112 46.4 %
Operating margin16.3 %14.6 %170 bp15.2 %11.9 %330 bp
Restructuring and realignment costs4 8 (50.0)%9 13 (30.8)%
Adjusted operating income$97 $81 19.8 %$173 $125 38.4 %
Adjusted operating margin17.0 %16.2 %80 bp16.0 %13.3 %270 bp 
Applied Water
Operating income$64 $41 56.1 %$130 $88 47.7 %
Operating margin15.5 %12.2 %330 bp16.1 %13.0 %310 bp
Restructuring and realignment costs2 4 (50.0)%3 6 (50.0)%
Special charges— — — %1 — NM
Adjusted operating income$66 $45 46.7 %$134 $94 42.6 %
Adjusted operating margin15.9 %13.4 %250 bp 16.6 %13.9 %270 bp
Measurement & Control Solutions
Operating income (loss)$13 $(46)128.3 %$22 $(58)137.9 %
Operating margin3.5 %(14.3)%1,780 bp3.0 %(8.7)%1,170 bp
Restructuring and realignment costs— 31 NM2 33 (93.9)%
Special charges— 10 NM— 10 NM
Adjusted operating income (loss)$13 $(5)360.0 %$24 $(15)260.0 %
Adjusted operating margin3.5 %(1.6)%510 bp3.3 %(2.2)%550 bp
Corporate and other
Operating loss$(10)$(14)(28.6)%$(23)$(27)(14.8)%
Special charges— 1 NM1 1 — %
Adjusted operating loss$(10)$(13)(23.1)%$(22)$(26)(15.4)%
Total Xylem
Operating income$160 $54 196.3 %$293 $115 154.8 %
Operating margin11.8 %4.7 %710 bp 11.2 %5.0 %620 bp 
Restructuring and realignment costs6 43 (86.0)%14 52 (73.1)%
Special charges— 11 NM2 11 (81.8)%
Adjusted operating income$166 $108 53.7 %$309 $178 73.6 %
Adjusted operating margin12.3 %9.3 %300 bp 11.9 %7.8 %410 bp
NM - Not meaningful percentage change

Water Infrastructure
Operating income for our Water Infrastructure segment increased $16$20 million, or 21.3%27.4%, for the thirdsecond quarter of 20172021 compared to the prior year, with operating margin also increasing from 15.7%14.6% to 17.5%16.3%. Operating margin was positively impacted by decreasedbenefited from a decrease in restructuring and realignment costs of $2$4 million in 2017.during the quarter. Excluding these restructuring and realignment costs, adjusted operating income increased $14$16 million, or 17.5%19.8%, with adjusted operating margin increasing from 16.7%16.2% to 18.1%17.0%. The increase in adjusted operating margin for the quarter was primarily due to cost reductions from global procurementour productivity, restructuring and continuous improvementother cost saving initiatives, favorable volume as well as restructuring savings, whichand decreased inventory management costs. These impacts were partially offset by cost inflation, increases,increased spending on strategic investments, increased employee-related costs and negative transactionalforeign currency impacts.
43

For the ninesix months ended SeptemberJune 30, 2017,2021, operating income for our Water Infrastructure segment increased $13$52 million, or 6.8%46.4%, as compared to the prior year, with operating margin also increasing from 13.7%11.9% to 14.4%15.2%. Operating margin was positively impacted by special charges of $2 millionbenefited from a decrease in 2016 that did not recur and decreased restructuring and realignment costs of $2$4 million in 2017 compared with the prior year.2021. Excluding these items,restructuring and realignment costs, adjusted operating income increased $9$48 million, or 4.3%38.4%, with adjusted operating margin increasing from 14.8%13.3% to 15.3%.The16.0%. The increase in adjusted operating margin during the period was primarily due to cost reductions from global procurementour productivity, restructuring and continuous improvementother cost saving initiatives as well as restructuring savings and favorable volume. These driversimpacts were partially offset by increases in cost inflation, andincreased spending on strategic investments, as well as negative transactional currencyincreased employee-related costs and other lesser impacts.
Applied Water
Operating income for our Applied Water segment increased $1$23 million, or 2.0%56.1%, for the thirdsecond quarter of 20172021 compared to the prior year, with operating margin decreasingalso increasing from 14.6%12.2% to 14.4%15.5%. Operating margin was negatively impacted by increasedbenefited from a decrease in restructuring and realignment costs of $2 million.million during the quarter. Excluding these restructuring and realignment costs, adjusted operating income increased $3$21 million, or 5.7%46.7%, with adjusted operating margin increasing from 15.5%13.4% to 15.8%15.9%. The increase in adjusted operating margin for the quarter was primarily due to favorable volume, impacted by COVID-19 recovery, and cost reductions from our global procurementproductivity, restructuring and continuous improvement initiatives and restructuring savings, whichother cost saving initiatives. These impacts were partially offset by increases in cost inflation, increased logistics costs, increased employee-related costs and increased spending on strategic initiatives, as well as unfavorable impacts from mix, price and transactional currency.investments.
For the ninesix months ended SeptemberJune 30, 2017,2021, operating income decreased $4for our Applied Water segment increased $42 million, or 2.9%47.7%, as compared to the prior year, with operating margin also decreasingincreasing from 13.4%13.0% to 13.0%16.1%. Operating margin was negatively impacted by higher special charges forbenefited from a non-cash impairment of $5 million and increaseddecrease in restructuring and realignment costs of $5 million.$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 $6$40 million, or 4.0%42.6%, with adjusted operating margin increasing from 14.3%13.9% to 14.8%16.6%. The increase in adjusted operating margin during the period was primarily due to cost reductions from global procurementour productivity, restructuring and continuous improvementother cost saving initiatives whichand favorable volume, impacted by COVID-19 recovery. These impacts were partially offset by increases in cost inflation, increased logistics costs, increased spending on strategic investments and unfavorable mix and currency impacts.increased employee-related costs.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment increased $22$59 million, or 550.0%128.3%, for the thirdsecond quarter of 20172021 compared to the prior year, with operating margin increasing from (14.3)% to 3.5%. Operating margin benefited from $31 million of restructuring and realignment costs and $10 million of special charges that were incurred during 2020 that did not recur during the quarter. Excluding these items, adjusted operating income increased $18 million, or 360.0%, with adjusted operating margin increasing from (1.6)% to 3.5%. The increase in adjusted operating margin for the quarter was primarily due to the inclusion of Sensus operating income of in the current year results, with operating margin also increasingcost reductions from 5.3% to 8.1%. Operating margin was negativelyour restructuring, productivity and other cost saving initiatives, favorable volume, impacted by $4 million of Sensus acquisition related costs incurred during the quarter whichCOVID-19 recovery, and favorable mix. These impacts were partially offset by $3cost inflation, increased spending on strategic investments and increased employee-related costs.
For the six months ended June 30, 2021, operating income for our Measurement & Control Solutions segment increased $80 million, relatedor 137.9%, as compared to the prior year, with operating margin increasing from (8.7)% to 3.0%. Operating margin benefited from a decrease in restructuring and realignment costs of $31 million during the year and $10 million of special charges incurred in 20162020 that did not recur. Excluding these items, adjusted operating income increased $23$39 million, or 287.5%260.0%, with most of the increase coming from the inclusion of the operating income for Sensus in the current year. Adjustingadjusted operating margin decreased from 10.5% to 9.7%. The decrease in adjusted operating margins was largely due to the inclusion of Sensus margins, which are negatively impacted by purchase accounting, and unfavorable mix, which is partially offset by cost reductions from global procurement and continuous improvement initiatives and restructuring savings. Non-cash Sensus purchase accounting negatively impacted the segment's operating margin in the quarter by 230 basis points.
For the nine months ended September 30, 2017, operating income increased $69 million, or 627.3%, as compared to the prior year, primarily due to the inclusion of Sensus operating income of in the current year results, with operating margin also increasing from 4.7%(2.2)% to 8.3%3.3%. Operating margin was negatively impacted by $13 million of Sensus acquisition related costs which were partially offset by $3 million related to special charges in 2016 that did not recur, as well as a $1 million decrease in restructuring and realignment costs. Excluding these items, adjusted operating income increased $78 million, or 371.4%, with most of the increase coming from the inclusion of the operating income for Sensus in the current year. Adjusted operating margin increased from 9.1%

to 10.3%. The increase in adjusted operating income and margin during the period was primarily due to cost reductions from global procurement and continuous improvement initiatives,our restructuring, savings as well as volumeproductivity and other cost saving initiatives, 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. These impacts which were partially offset by unfavorable mixcost inflation, increased spending on strategic investments, increased employee-related costs and the inclusion of Sensus margins, which were negatively impacted by purchase accounting. Non-cash Sensus purchase accounting negatively impacted the segment's year-to-date operating margin in the quarter by 230 basis points.other lesser impacts.
Corporate and other
Operating expenseloss for corporate and other decreased $4 million, foror 28.6%, during the thirdsecond quarter of 2017 as2021 compared to the prior year primarily due to a $9 million decrease in Sensus acquisition related costs. This was partially offset by $3 million of special charges incurred during the current quarter. Excluding these costs, adjusted operating expense increased $2 million for the quarter, mostly driven by increased employee related costs.period. For the ninesix months ended SeptemberJune 30, 20172021, operating expense decreased $2 million as compared with the prior year. This decrease in operating expense was primarily due to a decrease of Sensus acquisition related costs and a reduction in restructuring and realignment costs, which were partially offset by an increase in special charges as compared to the prior year. Excluding these costs, adjusted operating expenseloss for corporate and other was essentially flat for the nine months ended September 30, 2017 asdecreased $4 million, or 14.8%, compared to 2016.the same prior year period. The decreases in cost are driven by reduced costs related to COVID-19 initiatives.
44

Interest Expense
Interest expense was $21 million and $62$42 million for the three and ninesix months ended SeptemberJune 30, 2017,2021 and $16$18 million and $50$34 million for the three and ninesix months ended SeptemberJune 30, 2016. The increased interest expense for the three and nine month periods includes additional interest expense in 2017 related to debt entered into in the third quarter of 2016 to fund our acquisition of Sensus.2020. The increase in interest expense was partially offsetfor both periods is primarily driven by the reduction in special interest chargesissuance of $8 million and $4 million that were incurred inour Green Bond during the second quarter of 2016 in connection with the early extinguishment of our Senior Notes due in 2016 and financing charges on the bridge loan related to the Sensus acquisition in the third quarter of 2016, respectively, neither of which recurred in 2017.2020. See Note 12,10, "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 SeptemberJune 30, 20172021 was $27$25 million resulting in an effective tax rate of 21.1%18.5%, compared to $22a $4 million expense resulting in an effective tax rate of 10.9% for the same period in 2020. The income tax provision for the six months ended June 30, 2021 was $52 million resulting in an effective tax rate of 22.9% for the same period in 2016. The income tax provision for the nine months ended September 30, 2017 was $6220.7%, compared to a $8 million expense resulting in an effective tax rate of 19.4%, compared to $40 million resulting in an effective tax rate of 16.0%10.4% for the same period in 2016.2020. The effective tax rate for the three and six month periods ended June 30, 2021 was lower than the United StatesU.S. federal statutory rate primarily due to favorable earnings mix, partially offset by the mix of earnings in jurisdictions in both periods.Global Intangible Low Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the nine monthsthree and six month periods ended SeptemberJune 30, 2016 was lower than2021 differ from the current periodsame periods in 2020 due to the release of an unrecognized tax benefit in 2016 related to the effective settlement of a tax examination offset in part by the nonrecurring repatriation of foreignunfavorable earnings from 2016.
Other Comprehensive Income
Other comprehensive income was $21 million for the three months ended September 30, 2017 compared to a loss of $3 million for the same period in2016. This increase in other comprehensive income was driven primarily by favorable foreign currency translation impacts, primarily due to the strengthening of the Great British Pound and the Canadian Dollar against the U.S. Dollar in 2017 as compared to the weakening of these currencies in the prior year. Additionally, the Euro continued to strengthen as compared to the U.S. Dollar year over year for the quarter, which was partially mitigated by the Euro movement on the Company's net investment hedge during the same period. The tax impact on the foreign currency translation related to the net investment hedge also contributed to the year over year increase.
For the nine months ended September 30, 2017 Other comprehensive income was $119 million as compared to a loss of $17 million for the same period in 2016. This increase was driven primarily by favorable foreign currency translation impacts, primarily due to the increased strengthening of the Euro and Brazilian Real against the U.S. Dollarmix as compared to the prior year. Additionally, the strengthening of the Great British Pound against the U.S. Dollar in the current year as compared to the weakening of this currencyand favorable equity compensation deductions in the prior year. Partially offsetting these favorable movements, wasThe effective tax rate for the Euro movement onsix month period ended June 30, 2021 differs from the Company's net investment hedge as comparedsame period in 2020 due to the prior year. Theimpact of tax impact onsettlements in the foreign currency translation related to the net investment hedge also contributed to the year over year increase.current period.


Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
Six Months Ended
 June 30,
(In millions)20212020Change
Operating activities$206 $179 $27 
Investing activities(69)(88)19 
Financing activities(162)774 (936)
Foreign exchange (a)(10)(12)2 
Total$(35)$853 $(888)
 Nine Months Ended
 September 30,
(In millions)2017 2016 Change
Operating activities$379
 $274
 $105
Investing activities(122) (155) 33
Financing activities(299) (150) (149)
Foreign exchange (a)17
 10
 7
Total$(25) $(21) $(4)
(a)The impact is primarily due to the strengthening of the Canadian Dollar, the Chinese Yuan, the Russian Ruble and various other currencies against the U.S. Dollar.
(a)The impact is primarily due to the strengthening of the Euro against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
During the nine months ended September 30, 2017, netNet cash provided by operating activities increased by $105was $206 million for the six months ended June 30, 2021 as compared to $179 million in the samecomparable prior year period. The year-over-yearThis increase was primarily driven by increased net cash from the operating activities of the Sensus business acquired in the fourth quarter of 2016. This increase wasearnings, partially offset by higher tax payments and increased use of working capital as well as increased payments for restructuring charges and interest as comparedlevels to the prior year.support year-over-year growth.
Investing Activities
Cash used in investing activities was $122$69 million for the ninesix months ended SeptemberJune 30, 20172021 as compared to $155$88 million in the comparable prior year period. This decrease in cash used of $19 million was mainly driven by the $70 million spentlower spending on the acquisition of Tideland Signal Corporation during the nine months ended September 30, 2016 versus the $16 million spent for acquisitions in 2017. Additionally, we received $10 million of proceeds from the sale of a business we divested in the first quarter of 2017, which was offset by increased spending of $29 million overcapital expenditures compared to the prior year on capital projects, including spending on capitalized software in the Sensus business.year.
Financing Activities
Cash used by financing activities was $299$162 million for the ninesix months ended SeptemberJune 30, 20172021 as compared to cash usedgenerated of $150$774 million in the comparable prior year period. TheThis net increasedecrease in cash usedgenerated by financing activities during the period was primarily driven by increases in cash used for repaymentthe issuance of our Green Bond and higher levels of short-term debt net of debt issuance proceeds induring the prior year increasesperiod, partially offset by the repayment of short-term debt during 2020 and an increase in share repurchase activity of $22 million to offset dilution, reductions to proceeds from stock option exercises of $14 million, and an increase in dividends paid of $13$8 million.


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 centeredneeds. We will continue to monitor the economic effects of the COVID-19 pandemic and its impact on the Company's future operating activities, working capital, capital expenditures, and strategic investments.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 effectivecost-effective basis. As of June 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 commercial papercapital markets, we believe there is sufficient liquidity to meet our funding requirements.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 billion, consisting of $1.8 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 2021 consist of $600 million in Senior Notes, which we expect to pay out of cash. Our next long-term debt maturity is March 2023.
We anticipate thatRisk related to these items are described in our present sources of funds, including funds from operations and additional borrowings, will provide us with sufficient liquidity and capital resources to meetrisk factor disclosures referenced under “Item 1A. Risk Factors" in our liquidity and capital needs in both the United States and outside of the United States over the next twelve months.

2020 Annual Report.
Credit Facilities & Long-Term Contractual Commitments
See Note 12,10, "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 53% and 54%56% of our revenue from non-U.S. operations for both the three and ninesix months ended SeptemberJune 30, 20172021 and 59%approximately 51% and 50% for the three and ninesix months ended SeptemberJune 30, 2016.2020, respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of the United States,U.S., we expect to continue to generate significant revenue from non-U.S. operations and we 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 effectivecost-effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, which support our current designation of a portion of these funds as being indefinitely reinvested and reassess whether there is a demonstrated need to repatriate funds held internationally to support our U.S. operations. If,As of June 30, 2021, we have provided a deferred tax liability of $6 million for net foreign withholding taxes and state income taxes on $235 million of earnings expected to be repatriated to the U.S. parent as a result of our review, it is determined that all or a portion of the funds may be needed for our operationsdeemed necessary in the United States, we may be required to accrue additional U.S. taxes. As of September 30, 2017, our foreign subsidiaries were holding $267 million in cash or marketable securities.future.
46

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.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 20162020 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. ThereOther than as discussed below, there have been no significant changes in the information concerning our critical accounting estimates as stated in our 20162020 Annual Report.
New Accounting PronouncementsIn 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 30, 2021, the remaining goodwill balance in our AIA reporting unit after recording the goodwill impairment charge was $112 million.
See Note 2, "Recently Issued Accounting Pronouncements," toThe uncertainty of the condensed consolidated financial statements for a complete discussion of recent accounting pronouncements. We are currently evaluating thefuture impact of certain recently issued guidancethe 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 financial condition and results of operationsassets are included in future periods.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 20162020 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, the Company’sour internal control over financial reporting.




47

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. Somebusinesses (or the business operations of thesepreviously-owned entities). These proceedings may seek remedies relating to matters including environmental, matters,tax, intellectual property, matters,acquisitions or divestitures, product liability, property damage, personal injury, claims,privacy, employment, labor and pension, matters, government contract issues and commercial or contractual disputes, sometimes related to acquisitions or divestitures.disputes. See Note 1716, "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 20162020 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 SeptemberJune 30, 2017:
2021:
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PERIOD
TOTAL NUMBER OF SHARES PURCHASEDAVERAGE PRICE PAID PER SHARE (a)TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b)APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b)
7/4/1/1721 - 7/31/174/30/21———$413228
8/5/1/1721 - 8/5/31/1721———$413228
9/6/1/1721 - 9/6/30/1721———$413228
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)
(a)Average price paid per share is calculated on a settlement basis.
(b)On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. There were no shares repurchased under this program during three months ended September 30, 2017. There are up to $413 million in shares that may still be purchased under this plan as of September 30, 2017.
On August 18, 2012, our Board of Directors authorized the repurchase of up to 2.0 million shares of common stock with no expiration date. The program's objective is to offset dilution associated with various Xylem employee stock plans by acquiring shares in the open market from time to time. There were no shares repurchased under this program during the three months ended SeptemberJune 30, 2017, as we had exhausted the authorized amount2021. There are up to repurchase$228 million in shares that may still be purchased under this plan during the second quarteras of 2017.June 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 following the signature page hereto for a list of exhibits filed as part of this report and incorporated herein by reference.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
48

XYLEM INC.
EXHIBIT INDEX
XYLEM INC.
(Registrant)
/s/ Paul Stellato
Paul Stellato
Vice President, Controller and Chief Accounting Officer
October 31, 2017

XYLEM INC.
EXHIBIT INDEX
Exhibit
Number
DescriptionDescriptionLocation
3.1
ForthFourth 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
ForthFourth Amended and Restated By-laws of Xylem Inc.Incorporated by reference to Exhibit 3.13.2 of Xylem Inc.’s Form 8-K filed on May 15, 2017 (CIK No. 1524472, File No. 1-35229).
11.010.1
Statement Re-Computation#Form of Per Share EarningsXylem 2011 Omnibus Incentive Plan Non-Qualified Stock Option Award Agreement for Certain Executives and Executive Officers as Approved by the Leadership Development & Compensation Committee
Information required to be presented in Exhibit 11 is provided under “Earnings Per Share” in Note 6 to the Condensed Consolidated Financial Statements in Part I, Item 1 “Condensed Consolidated Financial Statements” of this Report in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share.
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 2002Filed 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 2002Filed herewith.
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002This 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 2002This 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.
101.0The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended SeptemberJune 30, 2017,2021, formatted in XBRL (ExtensibleInline Extensible Business Reporting Language)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.




104.0The cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2021 formatted in Inline XBRL and contained in Exhibit 101.0.


# Management contract or compensatory plan or arrangement
52
49

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, 2021
50