UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172022
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 10573301 Water Street SE, Washington, DC 20003
(Address of principal executive offices) (Zip code)
(914) 323-5700(202) 869-9150
(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, 2017,28, 2022, there were 179,599,998180,221,532 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-
31
Item 3-
4853
Item 4-
4853
PART II – Other Information
Item 1-
4954
Item 1A-
4954
Item 2-
4954
Item 3-
4954
Item 4-
4954
Item 5-
4954
Item 6-
5054
5156

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 MonthsNine Months
Three Months Nine Months
For the periods ended September 30,2017 2016 2017 2016For the periods ended September 30,2022202120222021
Revenue$1,195
 $897
 $3,430
 $2,676
Revenue$1,380 $1,265 $4,016 $3,872 
Cost of revenue724
 540
 2,088
 1,621
Cost of revenue856 793 2,505 2,390 
Gross profit471
 357
 1,342
 1,055
Gross profit524 472 1,511 1,482 
Selling, general and administrative expenses270
 219
 812
 665
Selling, general and administrative expenses294 273 912 878 
Research and development expenses45
 23
 131
 75
Research and development expenses47 49 152 152 
Restructuring and asset impairment charges, net4
 6
 22
 18
Restructuring and asset impairment charges (recoveries)Restructuring and asset impairment charges (recoveries)15 (2)22 7 
Operating income152
 109
 377
 297
Operating income168 152 425 445 
Interest expense21
 16
 62
 50
Interest expense12 21 37 63 
U.K. pension settlement expenseU.K. pension settlement expense140 — 140 — 
Other non-operating income, net1
 2
 3
 3
Other non-operating income, net1 2 2 1 
Gain from sale of business(1) —
 4
 —
Gain from sale of business— — 1 2 
Income before taxes131
 95
 322
 250
Income before taxes17 133 251 385 
Income tax expense27
 22
 62
 40
Income tax expense5 19 45 71 
Net income104
 73
 260
 210
Net income$12 $114 $206 $314 
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$0.07 $0.63 $1.14 $1.74 
Diluted$0.58
 $0.41
 $1.44
 $1.17
Diluted$0.07 $0.63 $1.14 $1.73 
Weighted average number of shares:       Weighted average number of shares:
Basic179.6
 179.3
 179.6
 179.0
Basic180.2 180.2 180.2 180.2 
Diluted180.9
 180.3
 180.7
 179.8
Diluted180.9 181.6 180.9 181.5 
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 MonthsNine Months
For the periods ended September 30,2022202120222021
Net income$12 $114 $206 $314 
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment(74)(19)(118)10 
Net change in derivative hedge agreements:
Unrealized gain (loss)(8)(1)(23)(8)
Amount of loss (gain) reclassified into net income8 2 13 — 
Net change in post-retirement benefit plans:
Amortization of prior service credit— (1)(1)(2)
Amortization of net actuarial loss into net income3 6 11 17 
U.K. pension settlement expense137 — 137 — 
Foreign currency translation adjustment46 — 46 — 
Income tax expense (benefit) related to items of other comprehensive income (loss)63 11 93 26 
Other comprehensive income (loss), net of tax49 (24)(28)(9)
Comprehensive income$61 $90 $178 $305 

 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

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,
2022		December 31,
2021
  
ASSETS
Current assets:
Cash and cash equivalents$1,186 $1,349 
Receivables, less allowances for discounts, returns and credit losses of $46 and $44 in 2022 and 2021, respectively1,018 953 
Inventories837 700 
Prepaid and other current assets150 158 
Total current assets3,191 3,160 
Property, plant and equipment, net585 644 
Goodwill2,637 2,792 
Other intangible assets, net933 1,016 
Other non-current assets760 664 
Total assets$8,106 $8,276 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$618 $639 
Accrued and other current liabilities828 752 
Short-term borrowings and current maturities of long-term debt483 — 
Total current liabilities1,929 1,391 
Long-term debt1,880 2,440 
Accrued post-retirement benefits361 438 
Deferred income tax liabilities260 287 
Other non-current accrued liabilities454 494 
Total liabilities4,884 5,050 
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 196.0 shares and 195.6 shares in 2022 and 2021, respectively2 2 
Capital in excess of par value2,123 2,089 
Retained earnings2,197 2,154 
Treasury stock – at cost 15.8 shares and 15.2 shares in 2022 and 2021, respectively(708)(656)
Accumulated other comprehensive loss(399)(371)
Total stockholders’ equity3,215 3,218 
Non-controlling interests7 8 
Total equity3,222 3,226 
Total liabilities and stockholders’ equity$8,106 $8,276 

 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


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 30,20222021
Operating Activities
Net income$206 $314 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation83 90 
Amortization93 96 
Share-based compensation28 25 
Restructuring and asset impairment charges22 7 
U.K. pension settlement expense140 — 
Gain from sale of business(1)(2)
Other, net(9)3 
Payments for restructuring(7)(21)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables(145)(78)
Changes in inventories(214)(135)
Changes in accounts payable47 19 
Changes in accrued taxes(12)— 
Other, net3 — 
Net Cash – Operating activities234 318 
Investing Activities
Capital expenditures(148)(127)
Proceeds from sale of business1 2 
Proceeds from the sale of property, plant and equipment3 1 
Cash received from investments5 — 
Cash paid for investments(9)— 
Cash received from cross-currency swaps24 11 
Other, net1 — 
Net Cash – Investing activities(123)(113)
Financing Activities
   Long-term debt repaid— (600)
Repurchase of common stock(52)(68)
Proceeds from exercise of employee stock options6 15 
Dividends paid(163)(152)
Other, net(1)(1)
Net Cash – Financing activities(210)(806)
Effect of exchange rate changes on cash(64)(19)
Net change in cash and cash equivalents(163)(620)
Cash and cash equivalents at beginning of year1,349 1,875 
Cash and cash equivalents at end of period$1,186 $1,255 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest$67 $83 
Income taxes (net of refunds received)$57 $71 
(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

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 three segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. The Water InfrastructureSee Note 18, "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, 20162021 ("20162021 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 20162021 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 related macroeconomic disruption. The COVID-19 pandemic and macroeconomic conditions have also 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 Pronouncements
Pronouncements Not Yet Adopted
In August 2017,September 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“FASB”ASU”) issued amended2022-04, "Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations." This guidance on hedging activities.requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The amendment better aligns a company’s risk management activities andnew standard does not affect the recognition, measurement, or financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying for hedging relationships and thestatement 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 issupplier finance program obligations. The ASU becomes 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 accountingJanuary 1, 2023, except 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 isrollforward requirement, which becomes 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.January 1, 2024. Early adoption is permitted. We are evaluatingwill reflect the impact of these disclosure updates in our Form 10-Q for the guidance on our financial condition and resultsquarterly period ended March 31, 2023.

Note 3. Revenue
Disaggregation of operations.Revenue
In May 2014,The following table illustrates the FASB issued guidance on recognizingsources of revenue:
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2022202120222021
Revenue from contracts with customers$1,319 $1,214 $3,852 $3,726 
Lease Revenue61 51 164 146 
Total$1,380 $1,265 $4,016 $3,872 

The following table reflects revenue from contracts with customers. customers by application.
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2022202120222021
Water Infrastructure
     Transport$410 $390 $1,235 $1,173 
     Treatment103 106 297 306 
Applied Water
     Commercial Building Services171 152 479 454 
Residential Building Services82 71 233 211 
     Industrial Water205 177 600 542 
Measurement & Control Solutions
     Water278 253 822 824 
     Energy70 65 186 216 
Total$1,319 $1,214 $3,852 $3,726 

8

The guidance outlines a single comprehensive model to use in accounting forfollowing table reflects revenue arising from contracts with customers by geographical region.
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2022202120222021
Water Infrastructure
     United States$155 $137 $467 $402 
Western Europe172 175 548 538 
Emerging Markets (a)135 137 356 391 
Other51 47 161 148 
Applied Water
     United States235 197 675 593 
Western Europe90 90 285 281 
Emerging Markets (a)100 81 258 240 
Other33 32 94 93 
Measurement & Control Solutions
     United States221 189 614 625 
Western Europe55 59 183 202 
Emerging Markets (a)48 46 142 141 
Other24 24 69 72 
Total$1,319 $1,214 $3,852 $3,726 

(a)Emerging Markets includes results from the following regions: Eastern Europe, the Middle East and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the model is that an entity recognizes revenue to portray the transfer of goodsAfrica, Latin America and services toAsia Pacific (excluding Japan, Australia and New Zealand, which are presented in "Other")

9

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. 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, 2021$117 $166 
  Additions, net99 109 
  Revenue recognized from opening balance— (106)
  Billings transferred to accounts receivable(85)— 
  Foreign currency and other(1)(2)
Balance at September 30, 2021$130 $167 
Balance at January 1, 2022$125 $164 
  Additions, net91 110 
  Revenue recognized from opening balance— (94)
  Billings transferred to accounts receivable(71)— 
  Foreign currency and other(8)(12)
Balance at September 30, 2022$137 $168 
(a)Excludes receivable balances, which are disclosed on the Condensed Consolidated Balance Sheets

Performance obligations
Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of contracts that Xylem is awarded inSeptember 30, 2022, 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 $567 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 prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2016 and early application is permitted. We adopted this guidance effective the first quarter of 2017. The adoption of this guidance did not impact our financial condition or results of operations.
Note 3. Acquisitions and Divestitures
2017 Acquisitions and Divestitures
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 shownperformance obligations 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

Inthree years. The Company elects to apply 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 arisingpractical expedient to exclude 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 assetsthis disclosure revenue 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 resultsperformance obligations that 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 inclusionpart of a $16 million tax valuation release and a $27 million reduction to warranty expense in the first calendar quarter of 2016.contract whose original expected duration is less than one year.
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 and Asset Impairment Charges
Restructuring
From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position ourselves based on the economic environment and customer demand.itself. During the three and nine months ended September 30, 2017,2022, we recognizedincurred restructuring chargescosts of $4$3 million and $17$9 million, respectively. We incurred these charges primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as headcount reductions within our Measurement & Control Solutions segment.across all segments.
During the three and nine months ended September 30, 2016,2021, we recognized net restructuring (recoveries) expense of $(2) million and charges of $6 million, respectively, of which $(2) million and $18$4 million, respectively. We incurred these charges primarilyrespectively, relate to actions previously announced in an effort to reposition our European2020 and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. Theearlier. These charges included the reduction of headcount across all segments and consolidation of facilitiesasset impairments within our Applied WaterMeasurement & Control Solutions segment and Water Infrastructure segments, as well as Corporate headcount reductions.accrual recoveries in our Measurement & Control Solutions segment.

10

The following table presents the components of restructuring expense and asset impairment charges.charges:
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2022202120222021
By component:
Severance and other charges$3 $1 $9 $9 
Asset impairment— — — 1 
Reversal of restructuring accruals— (3)— (4)
Total restructuring costs$3 $(2)$9 $6 
Asset impairment charges12 — 13 1 
Total restructuring and asset impairment charges$15 $(2)$22 $7 
By segment:
Water Infrastructure$2 $— $4 $7 
Applied Water— 1 1 2 
Measurement & Control Solutions13 (3)17 (2)
 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 nine months ended September 30, 20172022 and 2016.2021:
(in millions)20222021
Restructuring accruals - January 1$7 $29 
Restructuring costs, net9 6 
Cash payments(7)(21)
Asset impairment— (1)
Foreign currency and other(1)(2)
Restructuring accruals - September 30$8 $11 
By segment:
Water Infrastructure$1 $1 
Applied Water— 2 
Measurement & Control Solutions3 6 
Regional selling locations (a)2 2 
Corporate and other2 — 
(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 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 2022 and thereafter:
(in millions)Water InfrastructureApplied WaterMeasurement & Control SolutionsCorporateTotal
Actions Commenced in 2022:
Total expected costs$4 $1 $3 $— $8 
Costs incurred during Q1 2022— — — — — 
Costs incurred during Q2 20222 1 2 — 5 
Costs incurred during Q3 20222 — 1 — 3 
Total expected costs remaining$— $— $— $— $— 
Actions Commenced in 2021:
Total expected costs$3 $— $1 $— $4 
Costs incurred during 20213 — — — 3 
Costs incurred during Q1 2022— — — — — 
Costs incurred during Q2 2022— — — — — 
Costs incurred during Q3 2022— — — — — 
Total expected costs remaining$— $— $1 $— $1 
(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
During the second quarter of 2022, we also incurred charges of $1 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2021.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 20172022 consist primarily of severance chargescharges. The actions commenced in 2022 are complete.
The Water Infrastructure and Measurement & Control Solutions actions commenced in 2021 consist primarily of severance charges. The Water Infrastructure actions are complete and the Measurement & Control Solutions actions are expected to continue through the endfirst quarter of 2018. The Water Infrastructure, Applied Water, Measurement & Control Solutions and Corporate actions commenced in 2016 consist primarily of severance charges and are expected to continue through the end of 2018.2023.
Asset Impairment Charges
During the firstthird quarter of 20172022, we determined that certain assets including software and customer relationships within our Applied WaterMeasurement & Control Solutions segment including a tradename, were impaired. Accordingly, we recognized an impairment charge of $5$12 million. Refer to Note 9,8, "Goodwill and Other Intangible Assets," for additional information.

Note 5. Income Taxes
Our quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items within periods presented. The comparison of our effective tax rate between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction foreign income tax rate differentials and discrete items.
The income tax provision for the three months ended September 30, 20172022 was $27$5 million resulting in an effective tax rate of 21.1%27.8%, compared to $22a $19 million expense resulting in an effective tax rate of 22.9%13.9% for the same period in 2016.2021. The income tax provision for the nine months ended September 30, 20172022 was $62$45 million resulting in an effective tax rate of 19.4%17.8%, compared to $40a $71 million expense resulting in an effective tax rate of 16.0%18.3% for the same period in 2016.2021. The effective tax rate for the three month period ended September 30, 2022 was lowerhigher than the United StatesU.S. federal statutory rate primarily due to the miximpact of earnings in jurisdictions in both periods. Additionally, themix. The effective tax rate for the nine monthsmonth period ended September 30, 2016

2022 was lower than the current periodU.S. federal statutory rate primarily due to the release of an unrecognized tax benefit in 2016 due to the effective settlement of a tax examination,favorable earnings mix, partially offset by the nonrecurring repatriation of foreign earnings from 2016.Global Intangible Low Taxed Income ("GILTI") inclusion.
12

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. Xylem filed an appeal with the Administrative Court of Vaxjo, which rendered a decision adverse to Xylem in June 2022 for SEK788 million (approximately $70 million USD), consisting of the full tax assessment amount plus penalties and interest. Xylem has appealed this decision with the intermediate appellate court, the Administrative Court of Appeal (the “Court”). At this time, management, in consultation with external legal advisors, continues to believe it is more likely than not that Xylem will prevail on the taxproposed assessment and will continue to vigorously defend our position through the appellate process. The appeal to the Court is expected to take approximately one year; however, there can be no assurance as to the timing of the Court’s decision. Both parties will have the ability to seek appeal of the Court’s decision to the Supreme Administrative Court of Sweden. There can be sustained on examinationno assurance that the final determination by the taxing authorities based on the technical merits of thewill not be materially different than our position. The tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
The amount of unrecognized tax benefits at September 30, 2017 was $75 million, as compared to $67 million at December 31, 2016, which if ultimately recognized will reduce our effective tax rate. We do not believe that the unrecognized tax benefits will significantly change within the next twelve months.
We classify interest expense relating to unrecognized tax benefits as a component of other non-operating expense, net, and tax penalties as a component of income tax expense in our Condensed Consolidated Income Statements. As of September 30, 2017,2022, we had $3.6 million of interest accrued forhave not recorded any unrecognized tax benefits.benefits related to this uncertain tax position.

Note 6. Earnings Per Share
The following is a reconciliation of the shares used in calculating basic and diluted net earnings per share:
Three Months EndedNine Months Ended
 September 30,September 30,
2022202120222021
Net income (in millions)$12 $114 $206 $314 
Shares (in thousands):
Weighted average common shares outstanding180,191 180,221 180,173 180,182 
Add: Participating securities (a)26 15 28 21 
Weighted average common shares outstanding — Basic180,217 180,236 180,201 180,203 
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options523 949 516 880 
Dilutive effect of restricted stock units and performance share units199 457 153 405 
Weighted average common shares outstanding — Diluted180,939 181,642 180,870 181,488 
Basic earnings per share$0.07 $0.63 $1.14 $1.74 
Diluted earnings per share$0.07 $0.63 $1.14 $1.73 
(a)Restricted stock unit awards containing rights to non-forfeitable dividends that participate in undistributed earnings with common stockholders are considered participating securities for purposes of computing earnings per share.
(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note 14, "Share-Based Compensation Plans," to the condensed consolidated financial statements for further detail on the performance share units.
Three Months EndedNine Months Ended
 September 30,September 30,
(in thousands)2022202120222021
Stock options1,508 1,031 1,496 1,169 
Restricted stock units413 251 368 285 
Performance share units333 315 279 338 
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. Inventories
The components of total inventories are summarized as follows:
(in millions)September 30,
2022		December 31,
2021
Finished goods$316 $236 
Work in process67 58 
Raw materials454 406 
Total inventories$837 $700 

(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 9.8. Goodwill and Other Intangible Assets
Goodwill    
Changes in the carrying value of goodwill by reportable segment for the nine months ended September 30, 20172022 are as follows:
(in millions)
Water
Infrastructure
Applied WaterMeasurement & Control SolutionsTotal
Balance as of January 1, 2022$656 $515 $1,621 $2,792 
Activity in 2022
Foreign currency and other(39)(28)(88)(155)
Balance as of September 30, 2022$617 $487 $1,533 $2,637 
(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

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
September 30, 2022December 31, 2021
(in millions)
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor relationships$769 $(349)$420 $929 $(456)$473 
Proprietary technology and patents163 (114)49 201 (142)59 
Trademarks134 (75)59 141 (72)69 
Software500 (259)241 548 (303)245 
Other5 (3)2 21 (18)3 
Indefinite-lived intangibles162 — 162 167 — 167 
Other Intangibles$1,733 $(800)$933 $2,007 $(991)$1,016 
Amortization expense related to finite-lived intangible assets was $30$31 million and $91$93 million for the three and nine-month periods ended September 30, 2022, respectively, and $31 million and $96 million for the three and nine monthsmonth periods ended September 30, 2017, respectively, and $12 million and $36 million for the three and nine months ended September 30, 2016,2021, respectively.
During the firstthird quarter of 2017 we determined that2022, the intended useCompany assessed whether the carrying amounts of a finite lived trade namecertain long-lived assets within our Applied Waterthe Measurement & Control Solutions segment had changed. Accordingly we recorded a $4may not be recoverable. Our assessment resulted in an impairment charge of $12 million, impairment charge.primarily related to software and customer relationships. The charge was calculated using an income approach, which is considered a Level 3 input for fair value measurement, and is reflected in “Restructuring and asset impairment charges” in our Condensed Consolidated Income Statements.
14

Note 10.9. 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 for which we enter into cash flow hedges 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$130 million and $301 million as of September 30, 2017.2022 and December 31, 2021, respectively. As of September 30, 2017,2022, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase U.S. Dollar and sell Canadian Dollar, sell Canadian Dollar and purchase Euro, sell British PoundAustralian Dollar and purchase Euro, and to purchase Polish Zloty and sell Euro. The purchased notional amounts associated with these currency derivatives are $26$50 million, $9$39 million, $16 million, $8 million, $6 million, $6 million and $7$5 million, respectively. As of December 31, 2016 we did not hold any foreign exchange contracts.2021 the purchased notional amounts associated with these currency derivatives are $130 million, $88 million, $31 million, $14 million, $14 million, $13 million and $11 million, respectively.
Hedges of Net Investments in Foreign Operations
We are exposed to changes in foreign currencies impacting our net investments held in foreign subsidiaries.
Cross 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, third quarter of 2020, and second quarter of 2022 we entered into additional cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was $440$1,469 million and $391$1,151 million as of September 30, 20172022 and December 31, 2016,2021, 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
On June 2, 2022, we de-designated the entirety of the outstanding balance of the €500 million 2.250% Senior Notes, or $533 million from the net investment hedge relationship. Previously, the entirety of the outstanding balance, or $583$563 million as of December 31, 2021, net of unamortized discount, was designated as a hedge of a net investment in certain foreign subsidiaries.
Fair Value Hedges of Foreign Exchange Risk
The de-designation of our 2.250% Senior Notes of €500 million resulted in exposure to fluctuations in the Euro-U.S. Dollar exchange rate. We use currency forward agreements to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date.
On June 2, 2022, we entered into a currency forward agreement with a total notional amount of €500 million, designating the agreement as a fair value hedge of our Euro denominated notes. As of September 30, 2022, the total notional amount of the fair value hedge was $483 million.
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Effectiveness of derivatives designated as fair value hedges is assessed using the spot method. The changes in the fair value of these derivatives due to movements in spot exchange rates are recorded in Selling, general and administrative Expenses. Changes in the fair value of the 2.250% Senior Notes of €500 million related to spot exchange rates are also recorded in Selling, general and administrative expenses. Changes in the spot-forward differential and counterparty non-performance risk of the derivatives are excluded from the assessment of hedge effectiveness and will be recognized in Accumulated other comprehensive loss ("AOCL"). Amounts in AOCL are recognized in earnings, specifically Interest expense, using a systematic and rational method over the life of the hedging instrument.
The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Income Statements and Statements of Comprehensive Income.Income:
Three Months EndedNine Months Ended
 September 30,September 30,
(in millions)2022202120222021
Cash Flow Hedges
Foreign Exchange Contracts
Amount of (loss) recognized in OCL$(6)$(1)$(25)$(8)
Amount of loss reclassified from OCL into Revenue6 2 10 1 
Amount of (gain) loss reclassified from OCL into Cost of revenue— — 1 (1)
Net Investment Hedges
Cross-Currency Swaps
Amount of gain recognized in OCL$113 $27 $207 $59 
Amount of income recognized in Interest expense9 6 22 16 
Foreign Currency Denominated Debt
Amount of gain recognized in OCL$— $12 $31 $32 
Fair Value Hedges
Foreign Exchange Contracts
Amount of (loss) gain recognized in OCL$(2)$— $2 $— 
Amount of (loss) recognized in Selling, general and administrative expenses$(39)$— $(50)$— 
Amount recognized in Interest expense$(1)$— $(2)$— 
 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 September 30, 2017, $32022, $17 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 September 30, 2017,2022, 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
As of September 30, 2017.2022, $2 million of net gains on the fair value hedges are expected to be reclassified into earnings in the next 12 months.
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.

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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,
2022		December 31,
2021
Derivatives designated as hedging instruments
Assets
Cash Flow Hedges
  Prepaid and other current assets$1 $— 
Net Investment Hedges
Other non-current assets$185 $8 
Liabilities
Cash Flow Hedges
  Accrued and other current liabilities$(12)$(1)
Net Investment Hedges
Other non-current accrued liabilities$— $(26)
Fair Value Hedges
Accrued and other current liabilities$(51)$— 
(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)
The fair value of ourOur long-term debt, due in 2023, was de-designated from the hedging relationship in June 2022. The fair value of the long-term debt designated as a net investment hedge was $630 million and $555$577 million as of September 30, 2017 and December 31, 2016, respectively.2021.

Note 11.10. Accrued and Other Current Liabilities
The components of total accruedAccrued and other current liabilities are as follows:
(in millions)September 30,
2022		December 31,
2021
Compensation and other employee-benefits$246 $273 
Customer-related liabilities195 186 
Accrued taxes136 86 
Lease liabilities63 69 
Accrued warranty costs35 40 
Other accrued liabilities153 98 
Total accrued and other current liabilities$828 $752 

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(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 12.11. Credit Facilities and Debt
Total debt outstanding is summarized as follows:
(in millions)September 30,
2022		December 31,
2021
2.250% Senior Notes due 2023 (a)483 564 
3.250% Senior Notes due 2026 (a)500 500 
1.950% Senior Notes due 2028 (a)500 500 
2.250% Senior Notes due 2031 (a)500 500 
4.375% Senior Notes due 2046 (a)400 400 
Debt issuance costs and unamortized discount (b)(20)(24)
Total debt2,363 2,440 
Less: short-term borrowings and current maturities of long-term debt483 — 
Total long-term debt$1,880 $2,440 
(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)(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 2023 was $477 million and $577 million as of September 30, 2022 and December 31, 2021, respectively. The fair value of our Senior Notes due 2026 was $465 million and $537 million as of September 30, 2022 and December 31, 2021 respectively. The fair value of our Senior Notes due 2028 was $424 million and $497 million as of September 30, 2022 and December 31, 2021, respectively. The fair value of our Senior Notes due 2031 was $400 million and $496 million as of September 30, 2022 and December 31, 2021, was $653 million and $651 million as of September 30, 2017 and December 31, 2016, 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$332 million and $397$481 million as of September 30, 20172022 and December 31, 2016,2021, 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 debt issuance costs and unamortized discount are recognized as a reduction in the carrying value of the Senior Notes in the Condensed Consolidated Balance Sheets and are being amortized to interest expense in our Condensed Consolidated Income Statements over the expected remaining terms of the Senior Notes.
Senior Notes
On September 20, 2011,June 26, 2020, we issued 3.550%1.950% Senior Notes of $600$500 million aggregate principal amount due September 2016January 2028 (the "Senior“Senior Notes due 2016"2028”) and 4.875%2.250% Senior Notes of $600$500 million aggregate principal amount due October 2021January 2031 (the "Senior“Senior Notes due 2021"2031" and, together with the Senior Notes due 2028, the “Green Bond”).
The Green Bond includes covenants that restrict our ability, and the ability of our restricted subsidiaries, to incur debt secured by liens on certain property above a threshold, to engage in certain sale and leaseback transactions involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of our assets. We may redeem the Green Bond at any time, at our option, subject to certain conditions, at specified redemption prices, plus accrued and unpaid interest to the redemption date.
If a change of control triggering event (as defined in the applicable Green Bond indenture) occurs, we will be required to make an offer to purchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase.
Interest on the Green Bond is payable on January 30 and July 30 of each year. As of September 30, 2022, we are in compliance with all covenants for the Green Bond.
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.
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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 iswas 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 September 30, 2017,2022, 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. As of September 30, 20172022, 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 September 30, 20172022 and December 31, 2016 $30 million and $65 million2021, 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 $483 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 September 30, 2022 and December 31, 2021, 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.

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Note 13. Postretirement12. Post-retirement Benefit Plans
The components of net periodic benefit cost for our defined benefit pension plans are as follows:
Three Months EndedNine Months Ended
 September 30,September 30,
(in millions)2022202120222021
Domestic defined benefit pension plans:
Service cost$1 $1 $2 $2 
Interest cost— — 2 2 
Expected return on plan assets(1)(2)(4)(5)
Amortization of net actuarial loss1 1 2 3 
Net periodic benefit cost$1 $— $2 $2 
International defined benefit pension plans:
Service cost$3 $4 $10 $11 
Interest cost4 2 11 8 
Expected return on plan assets(4)(3)(11)(10)
Amortization of net actuarial loss3 5 9 13 
U.K. pension settlement expense140 — 140 — 
Net periodic benefit cost$146 $8 $159 $22 
Total net periodic benefit cost$147 $8 $161 $24 
 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 and the U.K, pension settlement expense are included in the line item "Other non-operating income, 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 nine months ended September 30, 2017. The total net periodic benefit cost for other postretirement employee benefit plans was $1 million2022 and $2 million, including amounts recognized in OCI of less than $1 million, for both the three and nine months ended September 30, 2016.2021, respectively.
We contributed $28$15 million and $22$16 million to our defined benefit plans during the nine months ended September 30, 20172022 and 2016,2021, 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 million and $9$7 million are expected to be made during the remainder of 2017.2022.
The Company initiated the process for a full buy-out of its largest defined benefit plan in the U.K. in 2019. During the first quarter of 2020, the Company purchased a bulk annuity policy as a plan asset to facilitate the termination and buy-out of the plan. The buyout was completed in September 2022, at which point the remaining benefit obligations were transferred to the insurer and we were relieved of any further obligation. As a result, we recorded a pension settlement charge of £123 million (approximately $140 million), primarily consisting of unrecognized actuarial losses.










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Note 13. Equity
The following table shows the changes in stockholders' equity for the nine months ended September 30, 2022:
Common
Stock		Capital in Excess of Par ValueRetained
Earnings		Accumulated Other
Comprehensive Loss		Treasury StockNon-Controlling InterestTotal
Balance at January 1, 2022$2 $2,089 $2,154 $(371)$(656)$8 $3,226 
Net income— — 82 — — — 82 
Other comprehensive loss, net— — — (6)— — (6)
Dividends declared ($0.30 per share)— — (55)— — — (55)
Stock incentive plan activity— 10 — — (6)— 4 
Repurchase of common stock— — — — (45)— (45)
Balance at March 31, 2022$2 $2,099 $2,181 $(377)$(707)$8 $3,206 
Net income— — 112 — — — 112 
Other comprehensive income, net— — — (71)— — (71)
Dividends declared ($0.30 per share)— — (55)— — — (55)
Stock incentive plan activity— 12 — — (1)— 11 
Balance at June 30, 2022$2 $2,111 $2,238 $(448)$(708)$8 $3,203 
Net income— — 12 — — — 12 
Other comprehensive loss, net— — — 49 — — 49 
Distribution to minority shareholders— — — — — (1)(1)
Dividends declared ($0.30 per share)— — (53)— — — (53)
Stock incentive plan activity— 12 — — — — 12 
Balance at September 30, 2022$2 $2,123 $2,197 $(399)$(708)$7 $3,222 

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The following table shows the changes in stockholders' equity for the nine months ended September 30, 2021:
Common
Stock
Capital in Excess of Par Value		Retained
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)— — (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 
Net income— — 114 — — — 114 
Other comprehensive income, net— — — (24)— — (24)
Dividends declared ($0.28 per share)— — (51)— — — (51)
Stock incentive plan activity— 14 — — — — 14 
Balance at September 30, 2021$2 $2,077 $2,092 $(422)$(656)$9 $3,102 

22

Note 14. Share-Based Compensation Plans
Share-based compensation expense was $5$10 million and $16$28 million during the three and nine months ended September 30, 2017,2022, respectively, and $5$8 million and $15$25 million during the three and nine months ended September 30,2016, 2021, respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $7 million, $21$31 million and $14$15 million, respectively, at September 30, 20172022 and is expected to be recognized over a weighted average period of 1.8, 1.9 2.0 and 2.02.2 years, respectively. The amount of cash received from the exercise of stock options was $8$6 million and $22$15 million for the nine months ended September 30, 20172022 and 2016,2021, respectively.

Stock Option Grants
The following is a summary of the changes in outstanding stock options for the nine months ended September 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
2022:
Share units
(in thousands)
Weighted
Average
Exercise
Price / Share
Weighted  Average
Remaining
Contractual
Term (Years)
Aggregate Intrinsic Value
(in millions)
Outstanding at January 1, 20221,827 $64.12 6.1102
Granted306 86.76 
Exercised(101)57.52 
Forfeited and expired(39)90.75 
Outstanding at September 30, 20221,993 $67.41 6.1$43 
Options exercisable at September 30, 20221,387 $58.75 5.0$41 
Vested and expected to vest as of September 30, 20221,932 $66.76 5.9$43 
The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the nine months ended September 30, 20172022 was $5.5$3.2 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
 
2022 grants:
Volatility26.20%
Risk-free interest rate1.59%
Dividend yield1.38%
Expected term (in years)5.6
Weighted-average fair value / share$19.86
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.

23

Restricted Stock Unit Grants
The following is a summary of restricted stock unit activity for the nine months ended September 30, 20172022. 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, 2022484 $88.47 
Granted344 86.76 
Vested(226)84.73 
Forfeited(39)90.96 
Outstanding at September 30, 2022563 $88.76 
 
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 nine months ended September 30, 2017.2022. 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, 2022177 $84.84 
Granted35 86.76 
Forfeited (a)(64)76.60 
Outstanding at September 30, 2022148 $88.86 
(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.
 
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

TSR Performance Share UnitsUnit Grants
The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the nine months ended September 30, 2017.2022:
Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value / Share
Outstanding at January 1, 2022177 $102.96 
Granted70 71.14 
Adjustment for Market Condition Achieved (a)22 89.62 
Vested(75)89.62 
Forfeited(13)88.37 
Outstanding at September 30, 2022181 $100.58 
(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.
24
 
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

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.
2022 grants:
Volatility30.2%
Volatility33.3%
Risk-free interest rate1.501.44%


Revenue Performance Share Unit Grants
The following is a summary of our Revenue performance share unit grants for the nine months ended September 30, 2022:
Share units
 (in thousands)
Weighted
Average
Grant Date
Fair Value / Share
Outstanding at January 1, 2022— $— 
Granted35 86.76 
Forfeited(2)86.76 
Outstanding at September 30, 202233 $86.76 
The fair value of the Revenue performance share unit awards is determined using the closing price of our common stock on date of grant. The shares will vest contingent upon the achievement of a pre-set, three-year Revenue target.


Note 15. Capital Stock
For the three and nine months ended September 30, 20172022, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and 0.5approximately 0.6 million shares for $25 million of common stock for $52 million, respectively. For the three and nine months ended September 30, 2021, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and approximately 0.7 million shares of common stock for $68 million, respectively. Repurchases include both share repurchase programs approved by the Board of Directors and repurchases in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. The 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 shareholdersstockholders and maintains our focus on growth. There were no shares repurchased under thisthe program for the three months ended September 30, 2017.2022. For the nine months ended September 30, 20172022, we repurchased 0.10.5 million shares for $7approximately $46 million. There were no shares repurchased under thisthe program duringfor the three andmonths ended September 30, 2021. For the nine months ended September 30, 2016.2021, we repurchased approximately 0.6 million shares for $60 million. There are up to $413$182 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.2022.
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 $5approximately $6 million for the three and nine months ended September 30, 2017,2022, 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$8 million for the three and nine months ended September 30, 2016,2021, respectively.


25

Note 16. Accumulated Other Comprehensive Income (Loss)Loss
The following table provides the components of accumulated other comprehensive income (loss)AOCL for the threenine months ended September 30, 2017:2022:
(in millions)Foreign Currency TranslationPost-retirement Benefit PlansDerivative InstrumentsTotal
Balance at January 1, 2022$(101)$(268)$(2)$(371)
Foreign currency translation adjustment(3)— — (3)
Tax on foreign currency translation adjustment(2)— — (2)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net— 4 — 4 
Income tax impact on amortization of post-retirement benefit plan items— (1)— (1)
Unrealized loss on derivative hedge agreements— — (6)(6)
Reclassification of unrealized gain on foreign exchange agreements into revenue— — 2 2 
Balance at March 31, 2022$(106)$(265)$(6)$(377)
Foreign currency translation adjustment(41)— — (41)
Tax on foreign currency translation adjustment(28)— — (28)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net— 4 — 4 
Income tax impact on amortization of post-retirement benefit plan items— (1)— (1)
Unrealized gain on derivative hedge agreements— — (9)(9)
Income tax benefit on unrealized gain on derivative hedge agreements— — 1 1 
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 June 30, 2022$(175)$(262)$(11)$(448)
Foreign currency translation adjustment(74)— — (74)
Tax on foreign currency translation adjustment(28)— — (28)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net— 3 — 3 
U.K. pension settlement expense— 137 — 137 
Foreign currency translation adjustment for post-retirement benefit plans46 — 46 
Income tax impact on amortization of post-retirement benefit plan items and U.K. pension settlement expense— (35)— (35)
Unrealized loss on derivative hedge agreements— — (8)(8)
Reclassification of unrealized loss on foreign exchange agreements into revenue— — 6 6 
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue— — 2 2 
Balance at September 30, 2022$(277)$(111)$(11)$(399)

26

(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
 $(199)
The following table provides the components of accumulated other comprehensive income (loss)AOCL for the nine months ended September 30, 2017:2021:
(in millions)Foreign Currency TranslationPost-retirement Benefit PlansDerivative InstrumentsTotal
Balance at January 1, 2021$(86)$(330)$3 $(413)
Foreign currency translation adjustment10 — — 10 
Tax on foreign currency translation adjustment(14)— — (14)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net— 5 — 5 
Income tax impact on amortization of post-retirement benefit plan items— (1)— (1)
Unrealized loss on derivative hedge agreements— — (11)(11)
Income tax benefit on unrealized loss on derivative hedge agreements— — 1 1 
Reclassification of unrealized gain on foreign exchange agreements into revenue— — (2)(2)
Reclassification of unrealized gain on foreign exchange agreements into cost of revenue— — (1)(1)
Balance at March 31, 2021$(90)$(326)$(10)$(426)
Foreign currency translation adjustment19 — — 19 
Tax on foreign currency translation adjustment1 — — 1 
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net— 5 — 5 
Income tax impact on amortization of post-retirement benefit plan items— (2)— (2)
Unrealized gain on derivative hedge agreements— — 4 4 
Reclassification of unrealized loss on foreign exchange agreements into revenue— — 1 1 
Balance at June 30, 2021$(70)$(323)$(5)$(398)
Foreign currency translation adjustment(19)— — (19)
Tax on foreign currency translation adjustment(10)— — (10)
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income, net— 5 — 5 
Income tax impact on amortization of post-retirement benefit plan items— (1)— (1)
Unrealized gain on derivative hedge agreements— — (1)(1)
Reclassification of unrealized gain on foreign exchange agreements into revenue— — 2 2 
Balance at September 30, 2021$(99)$(319)$(4)$(422)

(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. 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.

27

From time to time claims may be asserted against Xylem alleging injury caused by anySee Note 5, "Income Taxes," of our products resulting from asbestos exposure. We believe there are numerous legal defenses availablecondensed consolidated financial statements for such claims and would defend ourselves vigorously. Pursuant to the Distribution Agreement among ITT Corporation (now ITT LLC), Exelis and Xylem, ITT Corporation (now ITT LLC) has an obligation to indemnify, defend and hold Xylem harmless for asbestos product liability matters, including settlements, judgments, and legal defense costs associated with alla description of a pending and future claims that may arise from past sales of ITT’s legacy products. We believe ITT Corporation (now ITT LLC) remains a substantial entity with sufficient financial resources to honor its obligations to us.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$4 million as of September 30, 20172022 and December 31, 2016,2021, respectively, for these general litigationlegal matters.
Indemnifications
As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT LLC), Exelis Inc. and Xylem will indemnify, defend and hold harmless each of the other parties with respect to such parties’ assumed or retained liabilities under the Distribution Agreement and breaches of the Distribution Agreement or related spin agreements. The former parent’s indemnification obligations include asserted and unasserted asbestos and silica liability claims that relate to the presence or alleged presence of asbestos or silica in products manufactured, repaired or sold prior to October 31, 2011, the Distribution Date, subject to limited exceptions with respect to certain employee claims, or in the structure or material of any building or facility, subject to exceptions with respect to employee claims relating to Xylem buildings or facilities. The indemnification associated with pending and future asbestos claims does not expire. Xylem has not recorded a liability for material matters for which we expect to be indemnified by the former parent or Exelis Inc. through the Distribution Agreement and we are not aware of any claims or other circumstances that would give rise to material payments from us under such indemnifications. On May 29, 2015, Harris Inc. acquired Exelis.  As the parent of Exelis, Harris Inc. is responsible for Exelis’s indemnification obligations under the Distribution Agreement.
Guarantees
We obtain certain stand-by letters of credit, bank guarantees, and surety bonds 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 September 30, 20172022 and December 31, 2016,2021, the amount of surety bonds, bank guarantees, insurance letters of credit, stand-by letters of credit bankas well as revenue and customs guarantees and surety bonds was $235$435 million and $218$415 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 millionand $4$3 million as of September 30, 20172022 and December 31, 2016, respectively,2021 for environmental matters.

It is difficult to estimate the final costs of investigation and remediation due to various factors, including incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the extent of investigation or remediation and our share, if any, of liability for such conditions, the selection of alternative remedial approaches, and changes in environmental standards and regulatory requirements. We believe the total amount accrued is reasonable based on existing facts and circumstances.
Warranties
We warrant numerous products, the terms of which vary widely. In general, we warrant products against defect and specific non-performance. The table below provides the changes in 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)20222021
Warranty accrual – January 1$57 $65 
Net charges for product warranties in the period18 23 
Settlement of warranty claims(19)(25)
Foreign currency and other(4)(1)
Warranty accrual - September 30$52 $62 

28
(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. Segment Information
Our business has three 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.



29


The accounting policies of each segment are the same as those described in the summarySummary of significant accounting policies (seeSignificant Accounting Policies section of Note 1 in the 20162021 Annual Report).Report. The following tables containtable contains financial information for each reportable segment:
Three Months EndedNine Months Ended
 September 30,September 30,
(in millions)2022202120222021
Revenue:
Water Infrastructure$574 $547 $1,696 $1,625 
Applied Water458 400 1,312 1,207 
Measurement & Control Solutions348 318 1,008 1,040 
Total$1,380 $1,265 $4,016 $3,872 
Operating Income (Loss):
Water Infrastructure$104 $101 $286 $265 
Applied Water77 60 197 190 
Measurement & Control Solutions(2)7 (17)29 
Corporate and other(11)(16)(41)(39)
Total operating income$168 $152 $425 $445 
Interest expense$12 $21 $37 $63 
U.K. pension settlement expense140 — 140 — 
Other non-operating income, net1 2 2 1 
Gain from sale of business— — 1 2 
Income before taxes$17 $133 $251 $385 
Depreciation and Amortization:
Water Infrastructure$12 $12 $39 $38 
Applied Water4 5 14 17 
Measurement & Control Solutions35 38 103 111 
Regional selling locations (a)5 6 14 15 
Corporate and other2 1 6 5 
Total$58 $62 $176 $186 
Capital Expenditures:
Water Infrastructure$19 $18 $49 $42 
Applied Water6 4 14 11 
Measurement & Control Solutions19 19 61 60 
Regional selling locations (b)5 4 15 12 
Corporate and other4 2 9 2 
Total$53 $47 $148 $127 
(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.

30
 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.

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.

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," “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 (including those related to our social, environmental and other sustainability goals); 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 impacts from changes in international conditions, including as a result of the war between Russia and Ukraine, coronavirus (“COVID-19”) pandemic and macroeconomic conditions, including inflation. 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 by our forward-looking statements include, among others, the following: the impact of overall industry and general economic conditions, including industrial, governmental, and public and private sector spending, inflation, interest rates and related monetary policy by governments in or reasonably inferred from, such forward-looking statements.
Factors that could cause resultsresponse to differ materially from those anticipated include: overallinflation, and the strength of the residential and commercial real estate markets, on economic activity and business conditions, politicalour operations; geopolitical events, including the war between Russia and Ukraine, and regulatory, economic and other risks associated with our internationalglobal sales and operations, including military actions, economic sanctionswith respect to domestic content requirements applicable to projects with governmental funding; continued uncertainty around the ongoing impacts of the COVID-19 pandemic on the macroeconomy and our business, operations, growth, and financial condition; actual or trade embargoes that could affect customer markets, and non-compliance with laws, including foreign corrupt practice laws, export and import laws and competition laws; potential for unexpected cancellationsother epidemics, pandemics or global health crises; availability, shortage or delays of customer orders in receiving electronic components (in particular, semiconductors), parts, and raw materials from our reported backlog;supply chain; manufacturing and operating cost increases due to macroeconomic conditions, including inflation, energy supply, supply chain shortages, logistics challenges, tight labor markets, prevailing price changes, tariffs and other factors; demand for our exposure to fluctuations in foreign currency exchange rates;products; disruption, competition andor pricing pressures in the markets we serve; the strengthcybersecurity incidents or other disruptions of housing and related markets; weather conditions;information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; ability to retain and attract senior management and other diverse and key members of management;talent, as well as competition for overall talent and labor; difficulty predicting our relationshipfinancial results; defects, security, warranty and liability claims, and recalls with and the performancerespect to products; availability, regulation or interference with radio spectrum used by certain of our channel partners;products; uncertainty related to restructuring and realignment actions and related costs and savings; our ability to continue strategic investments for growth; our ability to successfully identify, completeexecute and integrate acquisitions,acquisitions; volatility in served markets or impacts on business and operations due to weather conditions, including the integrationeffects of Sensus;climate change; fluctuations in foreign currency exchange rates; our ability to borrow or to refinance our existing indebtedness and uncertainty around 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, our products, 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, 20162021 ("20162021 Annual Report") and within subsequent filings we make with the Securities and Exchange Commission ("SEC"(“SEC”).
Forward-looking and other statements in this Report regarding our environmental and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or are required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking social, environmental and sustainability related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. All forward-looking statements made herein are based on information currently available to the Companyus as of the date of
31

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.
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 and Macroeconomic Conditions
Our markets and operations have largely demonstrated resilience against the effects of the pandemic. However, we have experienced, and may continue to experience, shortages in the supply of components, including electronics, particularly semiconductors ("chips"), parts and raw materials. For example, China has adopted and continues to rely upon a “zero-COVID” policy pursuant to which it has declared a number of total and partial lockdowns in cities throughout China that has, and may continue to adversely affect the global supply chain. Chip supply has modestly improved in each successive quarter in 2022, which we expect to continue through the fourth quarter assuming no new unforeseen impacts to the global supply chain.

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In addition to impacts on our supply chain, we have also experienced, and continue to experience other impacts from the macroeconomic conditions, including increased inflation of materials and labor, energy, overhead, freight and logistics costs, and are engaging in various mitigation strategies and activities, including productivity and price realization efforts. Specifically, our productivity efforts include selective chip allocation, product redesigns, alternate sourcing options, and global procurement efforts to mitigate inflationary impacts. We have also initiated restructuring plans to further optimize our cost structure.

Risks related to the pandemic, supply chain and macroeconomic issues, including inflation, are described in further detail under "Item 1A. Risk Factors" in the Company's 2021 Annual Report.
Executive Summary
Xylem reported revenue for the third quarter of 20172022 of $1,195$1,380 million, an increase of 33.2%9.1% compared to $897$1,265 million reported in the third quarter of 2016.2021. On a constant currency basis, revenue increased 30.8% mostly due to $234by $195 million, of revenue related to the Sensus business acquisition andor 15.4%, driven by organic revenue growth of $44 million driven by growth in all end markets. These results were driven by organic growth across all segments and in all end markets.
OperatingWe generated operating income forof $168 million (margin of 12.2%) during the third quarter of 2017 was2022, as compared to $152 million reflecting an increase(margin of 39.4% compared to $109 million12.0%) in 2021. Operating income in the third quarter of 2016. Operating margin was 12.7% for 2017 versus 12.2% for 2016,2022 included an increase in special charges of 50 basis points. The increase in operating margin was primarily due$13 million and an unfavorable impact from increased restructuring and realignment costs of $6 million as compared to cost reductions resulting from progress in our global procurement and productivity initiatives, restructuring savings and a decrease in Sensus acquisition related coststhe third quarter of 2021. Excluding the impact of special charges and restructuring and realignment charges. These favorable impacts on operating margin were largely offset by cost inflation increases, Sensus purchase accounting impacts and special charges.
Adjustedcosts, adjusted operating income was $169$187 million with an operating(adjusted margin of 14.1% in 2017 as compared to adjusted operating income of $131 million with an adjusted operating margin of 14.6% in13.6%) during the third quarter of 2016.2022 as compared to $155 million (adjusted margin of 12.3%) in 2021. The decreaseincrease in adjusted operating margin was mostly dueprimarily related to cost inflation increasesprice realization, productivity savings and Sensus purchase accounting impacts which werefavorable volume, partially offset by cost reductions resulting from progress in our global procurementinflation, increased spending on strategic investments and productivity initiatives and restructuring savings. The non-cash Sensus purchase accounting impact 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.



unfavorable mix.
Additional financial highlights for the quarter ended September 30, 20172022 include the following:
•Orders of $1,249$1,419 million, up 32.0%down 6.5% from $946$1,518 million in the prior year up 6.1%period, and down 0.7% on an organic basisbasis.
•Earnings per share of $0.58,$0.07, down 88.9% compared to prior year ($0.79, up 41.5% from25.4% versus prior year, on an adjusted basis).
•Net income as a percent of revenue of .87%, down 813 basis points compared to 9.0% in the prior year. EBITDA margin of 5.9%, down 1,110 basis points when compared to 17.0% in the prior year ($0.65, up 20.4%(18.3% on an adjusted basis)basis, up 40 basis points)
Cash•Net cash flow fromgenerated in operating activities of $379$234 million for the nine months ended September 30, 2017, up 38.3%2022, a decrease of $84 million during the same period of the prior year. Free cash flow of $86 million, down $105 million 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 yearyear.


33

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,free cash flow, 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 non-GAAP measures whichto 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 EndedNine Months Ended
 September 30,September 30,
(in millions, except for per share data)2022202120222021
Net income & Earnings per share$12 $0.07 $114 $0.63 $206 $1.14 $314 $1.73 
Restructuring and realignment6 0.03 2 0.01 18 0.10 16 0.09 
Special charges154 (b)0.84 2 0.01 159 0.88 8 0.04 
(Gain) loss from sale of business— — — — (1)(0.01)(2)(0.01)
Tax effects of adjustments (a)(28)(c)(0.15)(1)(0.01)(34)(0.19)1 (0.02)
Adjusted net income & Adjusted earnings per share$144 $0.79 $116 $0.63 $348 $1.92 $337 $1.86 
(a) The tax effects of adjustments are calculated using the statutory tax rate, taking into consideration the nature of the item and the relevant taxing jurisdiction.
(b) The special charges in the quarter primarily relates to the U.K. pension settlement expense of $140 million and asset impairment charges of $12 million recorded in the period.
(c) The $28 million in tax effects of adjustments in the quarter primarily consists of $23 million related to to the U.K. pension settlement expense.
34

 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 restructuringexpenses" and realignment costs, Sensus acquisition related costs and special charges""adjusted gross profit" defined as operating expenses and gross profit, respectively, 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.
•“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.
•“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 diligenceand both operating and non-operating adjustments for costs initial acquisition costs not related to Sensus and other special non-operating items, as well as interest expense related to the early extinguishment of debt and financing costs on the bridge loan entered into for the Sensus acquisition during 2016.U.K. pension plan buy-out.
•"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 statementCondensed Consolidated Statement 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.
Nine Months Ended
 September 30,
(in millions)20222021
Net cash provided by operating activities$234 $318 
Capital expenditures(148)(127)
Free cash flow$86 $191 
Net cash used in investing activities$(123)$(113)
Net cash used in financing activities$(210)$(806)


35

 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
2022 Outlook

“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

2017 Outlook
We anticipateare further updating our total revenue growth to be in the range of 24% to 25%approximately 4% in 20172022, with organic revenue growth anticipated to be in the low-single-digits and the Sensus acquisition contributing mostrange of the additional revenue growth.9% to 10%. The following is a summary of our organic revenue outlook by end market.markets:
Industrial market
•Utilities revenue was up low-single-digitsincreased by approximately 5% through the third quarter on an organic basis through the third quarter. We expect oil and gas and mining markets to stabilize in North America through the balance of the year, and we expect market conditionsdriven by strength in the United States to improve modestly throughoutU.S. and western Europe partially offset by weakness in the emerging markets. For 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, primarily 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 20172022, we expect organic revenue growth in the mid-single-digit range, as utilities continue to remain focused on mission-critical applications in wastewater. Long-term capex outlook supported by aging infrastructure and the emerging markets’ continued advancement. On the clean water side, the timing of large project deployments has been impacted by the global shortage of electronic components. Although chip supply remains constrained, we see the United States market continuing to be strong while the European market is experiencing growth related to new energy efficientdo expect a continued, modest easing of chip supply, sequentially. Additionally, we can expect continued momentum for water quality products and sales channel investments.increased demand for pipeline assessment services due to aging infrastructure.
In residential markets, organic growth was into the low-double-digits•Industrial revenue increased by approximately 13% through the third quarter primarilyon an organic basis driven by strength across all major geographic regions. For 2022, we now expect organic revenue growth in the low-double-digit range. We expect to see continued robust growth in our dewatering business, especially in the emerging markets from mining demand. We expect sustained demand in light industrial activity globally.
•In the commercial markets, organic revenue increased by approximately 8% through the third quarter on an organic basis driven by strength across all major geographic regions. For the remainder of 2022, we now expect organic revenue growth in the high-single to low-double digit range. We expect increased demand for green buildings and energy efficiency related projects, particularly in Europe, and strong commercial development in the Middle East.
•In the residential markets, organic revenue increased by approximately 16% through the third quarter on an organic basis predominately driven by strength in the United States and Asia Pacific. In 2017U.S. This market is primarily driven by solid replacement revenue serviced through our distribution network. For 2022, we expect full year organic revenue performance will be upgrowth in the high-single-digits.high-teens. We continueanticipate dealer activity to expect the United States marketremain healthy and order demand to be competitive given the replacement nature of the sector we serve. We expect growth from the European market, which looks to be modestly strongernormalize as increased residential building permitting provides an indicator of sales. Additionally, we expect to benefit from market share gains from channel disruption throughout the remainder of the year.supply chains and lead times improve.

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 2017,2022, we expect to incur approximately $50$25 million and $30 million in restructuring and realignment costs, as well as Sensus acquisition related costs. We expect to realize approximately $20 million of


incremental net savings in 2017 from actions initiated in 2016, and an additional $6 million of net savings from our 2017 actions.
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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.

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 EndedNine Months Ended
September 30,September 30,
(in millions)20222021Change20222021Change
Revenue$1,380 $1,265 9.1 %$4,016 $3,872 3.7 %
Gross profit524 472 11.0 %1,511 1,482 2.0 %
Gross margin38.0 %37.3 %70 bp 37.6 %38.3 %(70)bp 
Total operating expenses356 320 11.3 %1,086 1,037 4.7 %
Expense to revenue ratio25.8 %25.3 %50 bp 27.0 %26.8 %20 bp 
Restructuring and realignment costs6 2 200.0 %18 16 12.5 %
Special charges13 1 NM15 3 400.0 %
Adjusted operating expenses337 317 6.3 %1,053 1,018 3.4 %
Adjusted operating expenses to revenue ratio24.4 %25.1 %(70)bp26.2 %26.3 %(10)bp
Operating income168 152 10.5 %425 445 (4.5)%
Operating margin12.2 %12.0 %20 bp 10.6 %11.5 %(90)bp 
U.K. pension settlement expense140 — 100.0 %140 — 100.0 %
Interest and other non-operating expense, net11 19 (42.1)%35 62 (43.5)%
Gain from sale of business— — — 1 2 (50.0)%
Income tax expense5 19 (73.7)%45 71 (36.6)%
Tax rate27.8 %13.9 %1,390 bp17.8 %18.3 %(50)bp
Net income$12 $114 (89.5)%$206 $314 (34.4)%
NM - Not meaningful percentage change
Revenue
Revenue generated during the three and nine months ended September 30, 20172022 was $1,195$1,380 million and $3,430$4,016 million, reflecting increases of $298$115 million, or 33.2%9.1%, and $754$144 million, or 28.2%3.7%, respectively, compared to the same prior year periods. On a constant currency basis, revenue grew 30.8%15.4% and 28.3%8.2% for the three and nine months ended September 30, 2017, respectively. These2022. The increases in revenueon a constant currency basis were primarily driven by an additional $234organic revenue growth of $199 million and $715$326 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 marketsacross all major geographic regions 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 declinesand on a year-to-date basis, driven by the United Kingdom.strong backlog execution and price realization.

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 nine months ended September 30, 2017:2022:
 Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal Xylem
(in millions)$ Change% Change$ Change% Change$ Change% Change$ Change% Change
2021 Revenue$547 $400 $318 $1,265 
Organic Growth73 13.3 %79 19.8 %47 14.8 %199 15.7 %
Divestitures— — %— — %(4)(1.3)%(4)(0.3)%
Constant Currency73 13.3 %79 19.8 %43 13.5 %195 15.4 %
Foreign currency translation (a)(46)(8.4)%(21)(5.3)%(13)(4.1)%(80)(6.3)%
Total change in revenue27 4.9 %58 14.5 %30 9.4 %115 9.1 %
2022 Revenue$574 $458 $348 $1,380 
(a)Foreign currency translation impact for the quarter due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Chinese Yuan and the Swedish Krona.
37

 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
2021 Revenue$1,625 $1,207 $1,040 $3,872 
Organic Growth170 10.5 %149 12.3 %7 0.7 %326 8.4 %
Divestitures— — %— — %(9)(0.9)%(9)(0.2)%
Constant Currency170 10.5 %149 12.3 %(2)(0.2)%317 8.2 %
Foreign currency translation (a)(99)(6.1)%(44)(3.6)%(30)(2.9)%(173)(4.5)%
Total change in revenue71 4.4 %105 8.7 %(32)(3.1)%144 3.7 %
2022 Revenue$1,696 $1,312 $1,008 $4,016 
(a)Foreign currency translation impact for the year due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Swedish Krona and the Australian Dollar.
 Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions)$ 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$27 million, or 8.8%4.9%, for the third quarter of 2017 (6.7%2022 (13.3% 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 $10was negatively impacted by $46 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.$73 million. Organic growth for the quarter was driven by strength in both the utility and industrial end markets. The utilities end market experienced organic growth of $49 million across all major geographic regions, with particular strength in the U.S. driven by good price realization and strength in the construction sector, and in western Europe where we saw strong demand in utilities' capital spending coupled with good price realization. The industrial end market also had organic growth of $24 million spanning all major geographic regions, with particular strength in emerging markets led by strong dewatering demand in Latin America and Africa, as well as strength in western Europe where we benefited from strong backlog execution.
From an application perspective, organic revenue growth for the third quarter was driven by our transport applications with $67 million of organic growth, with dewatering accounting for almost half of that. All three of our major geographic regions contributed to the organic revenue growth in transport, led by the U.S. where we continued to experience strong price realization and healthy market conditions, followed by western Europe which had strong demand from utility capital projects and solid project execution. We also experienced strong growth in the emerging markets driven by strong price realization a well as robust mining demand in our dewatering business, particularity in Latin America and Africa. Organic revenue for the treatment application was up $6 million for the quarter, driven by backlog execution in western Europe.
For the nine months ended September 30, 2022, revenue increased $71 million, or 4.4% (10.5% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $99 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $170 million. Organic growth for the period was driven by strength in both the utility and industrial end markets. The utilities end market experienced organic growth of $90 million led by strength in the U.S. and western Europe, bolstered by strong price realization, solid backlog execution and timing of projects as compared to prior year; which was partially offset by weakness in the emerging markets, primarily due to the negative impact of continued COVID impacts in China. The industrial end market had $80 million of organic growth across all major geographies, particularly in North Americawestern Europe due to strong backlog execution, and the emerging markets, driven by mining projects and price realization in both Latin America and Africa.
From an application perspective, organic revenue growth during the nine-month period was driven by our transport applications. Transport experienced $160 million of revenue growth, almost half of which came from the dewatering application. The increase in organic revenue was led by the U.S. and western Europe, where we experienced solid price realization and executed on strong backlog in both regions. The emerging markets also had strong growth in dewatering from mining demand in Latin America and Africa, which was partially offset by declines in Europe.China due to COVID impacts. Organic growthrevenue for the treatment application also contributed $10 million for the period, as revenue growth from strong backlog execution in western Europe and the U.S., partially offset by declines in emerging markets led by the continued negative COVID impacts on China.

38

Applied Water
Applied Water revenue increased $58 million, or 14.5%, for the third quarter of 2022 (19.8% increase on a constant currency basis) as compared to the prior year. Revenue was also drivennegatively impacted by $21 million of foreign currency translation, with the change at constant currency coming entirely from organic growth of $79 million, led by strength in the public utilityindustrial end market, particularlyfollowed by strength in the Middle Eastcommercial and Africa,residential end markets. Organic revenue growth in the third quarter was $40 million for the industrial water application, driven by the emerging markets, due to strong backlog execution driven by market recovery in China and in western Europe where we benefited from strength in the marine and North America. Thisfood & beverage sectors and continued investments that drove strong growth in manufacturing output. The U.S. also experienced continued strength in the industrial water application, driven by strong price realization. The commercial and residential building services applications grew organically $26 million and $13 million, respectively. Growth in these applications was partially offsetdriven by public utility declinesprice realization and strong backlog execution in Asia Pacific. the U.S. due to supply chain improvements.
For the nine months ended September 30, 2017,2022, revenue increased $105 million, or 8.7% (12.3% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $44 million of foreign currency translation during the nine month period, with the change at constant currency coming entirely from organic growth of $149 million. Organic growth during the period was driven by continued improvementstrength in all three end markets and across all major geographic regions, with particular strength in the U.S. and western Europe. Organic revenue growth during the nine month period was led by strength in the industrial water application of $78 million, where in the U.S. where we benefited from price realization and strong backlog execution, in the emerging markets where we saw market recovery in China, and in Western Europe where we had healthy order intake across the sector. Commercial building services grew $38 million organically during the period, particularly in the U.S. and western Europe, where we benefited from price realization and strong backlog execution. The residential building services application had $33 million of organic revenue growth during the period, primarily in the U.S. driven by price realization and strong backlog execution.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $30 million, or 9.4%, for the third quarter of 2022 (13.5% increase on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $13 million of foreign currency translation, with the change at constant currency coming from an organic growth of $47 million (14.8% growth) and reduced revenue related to divestiture impacts of $4 million. Organic growth in the quarter was driven by $42 million in the utility end markets across all major geographies. The industrial end market experienced modest growth of $5 million.
From an application perspective, organic revenue growth during the quarter was driven by the water application of $38 million, primarily in the U.S., as a result of easing of electronic component shortages and strong price realization. The energy applications grew $9 million driven by gas metering backlog execution in the U.S.
For the nine months ended September 30, 2022, revenue decreased $32 million, or 3.1% (0.2% decrease on a constant currency basis) as compared to the prior year. Revenue was negatively impacted by $30 million of foreign currency translation, with the change at constant currency coming from an organic increase of $7 million (0.7% increase) and reduced revenue related to divestiture impacts of $9 million. Organic revenue growth in the period consisted of growth in the industrial end market particularlyof $8 million, driven by strength in our test business in the emerging markets, as well as North America. Public utility declined organically year-to-date drivenslightly offset by reductions in municipal spending in western Europe and difficult comparisons to the prior year$1 million of declines in the United States where we had double digit growth rates in the United States.utility end market.
From an application perspective, organic revenue growth during the nine-month period consisted of growth in the water application of $27 million, partially offset by declines in the energy applications of $20 million. Organic revenue growth in the water application was driven by strength in the U.S. due to strong price realization, and backlog execution in the emerging markets. Declines in the energy applications were driven by impacts from electronic component shortages in the U.S. during the first half of the year.
39

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 third quarter of 2022 were $1,419 million, a decrease of $99 million, or 6.5%, over the prior year (1.1% decrease on a constant currency basis). Orders received during the nine months ended September 30, 2022 were $4,818 million, an increase of $102 million, or 2.2%, over the prior year (6.2% increase on a constant currency basis). Order intake was negatively impacted by $82 million and $189 million of foreign currency translation for the three and nine months ended September 30, 2022, respectively. The decrease on a constant currency basis for the quarter was primarily driven by organic order declines of $10 million. The increase on a constant currency basis for the nine month period was primarily driven by organic order growth of $309 million.
The following table illustrates the impact from organic growth, recent divestitures, and foreign currency translation in relation to orders during the three and nine months ended September 30, 2022:
Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal Xylem
(in millions)$ Change% Change$ Change% Change$ Change% Change$ Change% Change
2021 Orders$623 $446 $449 $1,518 
Organic Growth18 2.9 %(17)(3.8)%(11)(2.4)%(10)(0.7)%
Divestitures— — %— — %(7)(1.6)%(7)(0.4)%
Constant Currency18 2.9 %(17)(3.8)%(18)(4.0)%(17)(1.1)%
Foreign currency translation (a)(47)(7.5)%(20)(4.5)%(15)(3.3)%(82)(5.4)%
Total change in orders(29)(4.7)%(37)(8.3)%(33)(7.3)%(99)(6.5)%
2022 Orders$594 $409 $416 $1,419 
(a)Foreign currency translation impact for the quarter due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Chinese Yuan and the Swedish Krona.
Water InfrastructureApplied WaterMeasurement & Control SolutionsTotal Xylem
(in millions)$ Change% Change$ Change% Change$ Change% Change$ Change% Change
2021 Orders$1,873 $1,409 $1,434 $4,716 
Organic Growth225 12.0 %30 2.1 %54 3.8 %309 6.6 %
Divestitures— — %— — %(18)(1.3)%(18)(0.4)%
Constant Currency225 12.0 %30 2.1 %36 2.5 %291 6.2 %
Foreign currency translation (a)(113)(6.0)%(45)(3.2)%(31)(2.2)%(189)(4.0)%
Total change in orders112 6.0 %(15)(1.1)%5 0.3 %102 2.2 %
2022 Orders$1,985 $1,394 $1,439 $4,818 
(a)Foreign currency translation impact for the year due to the weakening in value of various currencies against the U.S. Dollar, the largest being the Euro, the British Pound, the Swedish Krona and the Australian Dollar.

Water Infrastructure
Water Infrastructure segment orders decreased $29 million, or 4.7%, to $594 million (2.9% increase on a constant currency basis) for the third quarter of 2017, organic revenue growth2022 as compared to the prior year. Order intake for the quarter was negatively impacted by $47 million of foreign currency translation. The order increase on a constant currency basis in the quarter was driven by organic order growth in our transport applications in the U.S. and western Europe, where we benefited from healthy market conditions, large infrastructure projects and price realization. Transport order growth in the U.S. and western Europe was slightly offset by declines in emerging markets, where dewatering strength in Latin America and Africa was more than offset by order softness in India, China and
40

Russia. For the treatment application, organic orders declined modestly in the quarter, primarily due to modest weakness in the emerging markets and western Europe more than offsetting growth in the U.S.
For the nine months ended September 30, 2022, orders increased $112 million, or 6.0%, to $1,985 million (12.0% on a constant currency basis) as compared to the prior year. Order growth for the period was negatively impacted by $113 million of foreign currency translation. Organic orders increased during the period as strength in the transport applications came primarily from the U.S. where we benefited from strong market demand and timing of large infrastructure projects in utilities. There was also order growth from water utility customers in western Europe mainly from increased demand in utility capital projects and healthy market conditions in the first half of the year. The treatment application saw a decrease in orders driven by the emerging markets due to declines in China related to COVID impacts, which more than offset modest growth in the U.S.
Applied Water
Applied Water segment orders decreased $37 million, or 8.3%, to $409 million (3.8% decrease on a constant currency basis) for the third quarter of 2022 as compared to the prior year. Order weakness for the quarter was negatively impacted by $20 million of foreign currency translation. The order decrease on a constant currency basis was driven by weakness in the U.S. following strong demand recovery in the prior year. The declines in the U.S. were primarily in the specialty flow control business in the industrial end market, due to strengthas well as in the dewatering business which benefited from distribution strength and improved construction, oil and gas, and mining markets, particularly in North America.

The treatment application also had strong industrial growth drivenresidential building services. This decline was partially offset by strong project deliverieshigher order intake in the emerging markets.
For 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.
Applied Water
Applied Water revenue increased $112022, orders decreased $15 million, or 3.2%1.1%, for the third quarter of 2017 (1.7%to $1,394 million (2.1% 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. Revenue benefited by $5 million due to foreign currency translationprior year. Order weakness for the three months ended September 30, 2017 andperiod was negatively impacted by $5$45 million due toof foreign currency translation for nine months ended September 30, 2017.translation. The revenue growth included organic growth of $8 million, or 2.3%, in the third quarter of 2017 and $16 million, or 1.5%, for the nine months ended September 30, 2017, whichorder increase on a constant currency basis was driven by growth in commercial and residential end markets, partially offset by declines in the industrial market.
From an application perspective, organic revenue growth in the third quarter of 2017 was led by growth in commercial building services, driven by strength in North America and Europe as well as project deliveries in China. Residential building service revenue also grew organically, primarily driven by continued strength in Asia Pacific from demand for second water supply sourcing. This organic growth was partially offset by a decline in industrial applications, primarily driven by unfavorable weather conditions impacting the agriculture business in the United States.
For the nine months ended September 30, 2017, growth in residential building services was primarily driven by strength in the United States, where we benefited from timingemerging markets and western Europe as a result of promotionsstrong market conditions and modest share gains, and continue strength in Asia Pacific. Commercial building services also grew, primarily in North America, Asia Pacific and Europe, drivenstocking by new product traction and sales channel investments. This growth waspartners, partially offset by a decline in industrial applications, primarily driven by weaker than expected industrial market conditionsweakness in the United States, partially offset by strengthU.S. following very strong demand recovery in western Europe.the prior year reflecting order growth of 28% in the prior year period.
Measurement & Control Solutions
Measurement & Control Solutions revenue increased $245segment orders decreased $33 million, or 322.5%7.3%, to $416 million (4.0% decrease on a constant currency basis) for the third quarter of 2017 (313.2% at2022 as compared to the prior year. Order weakness for the quarter was negatively impacted by $15 million of foreign currency translation and reduced orders related to divestiture impacts of $7 million. The order decrease on a constant currency) and increased $729currency basis consisted primarily of organic order declines of $11 million, or 314.2%,(2.4)%. The order declines in the current quarter are lapping very strong organic order growth of 42% in the same prior year period. Organic orders for the quarter decreased in the energy applications, primarily driven by moderation of the increased demand and advanced ordering to address electronic component shortages that we benefited from in the prior year. This decline was partially offset by strength in the water application driven by large project orders in the U.S. and the emerging markets.
For the nine months ended September 30, 2017 (311.2% at2022, orders increased $5 million or 0.3%, to $1,439 million (2.5% increase on a constant currency) compared to the respective 2016 periods. The revenue increase for the three and nine months ended September 30, 2017 was almost entirely made up 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. Organic revenue growth in 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 periods was driven by strength in the test applications primarily from the environmental monitoring business in the United States.
Orders / Backlog
Orders received during the third quarter of 2017 were $1,249 million, an increase of $303 million, or 32.0%, over the third quarter of the prior year (29.7% increase at constant currency). Orders received during the nine months ended September 30, 2017 were $3,598 million, an increase of $841 million, or 30.5%, from the prior year (30.6% increase at constant currency). The order growth at constant currency 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% and 5.7%, for the three and nine months ended September 30, 2017, respectively.
Water Infrastructure segment orders increased $37 million, or 7.1%, to $558 million (4.8% increase at constant currency) for the quarterbasis) as compared to the same prior year period.year. Order growth for the period was negatively impacted by $31 million of foreign currency translation and reduced orders related to divestiture impacts of $18 million. The order increase on a constant currency basis consisted entirelyprimarily of an increase in organic orders. Organic order growth spanned allof $54 million, or 3.8%. The modest order growth in the period is lapping very strong order growth of 42% in the same period during the prior year. Organic orders for the period increased in the energy applications, primarily driven by demand and advanced ordering in the first half of the applications. The transport applications had growth driven by increased strength in dewatering from distributor order strength

and increased weather related activity in North America.year to address electronic component shortages. This growthincrease was partially offset by organic declines against a strongweakness in the water application driven by the moderation of early orders to mitigate electronic component shortages and longer lead times that drove order growth in the prior year, for transport applications in emerging markets as there was a large project booking in our wastewater transport business the prior year. Treatment applications had strong order intake, primarily from a large project wins in the United States, as well as order strength in Europe.
For the nine months ended September 30, 2017 orders increased $81 million, or 5.5%, to $1,546 million (5.8% increase at constant currency) as compared to the same prior year period. The order increase on a constant currency basis consisted entirely of an increase in organic orders. Organicmodest order growth spanned all applications. The transport applications had year-to-date organic order growth driven by growth in the United States for transport projectsour test 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 had strong order intake in North America and the emerging markets, as well as western Europe.assessment service offerings.
Applied Water segment orders increased $32 million, or 9.4%, to $374 million (8.2% increase at constant currency) for the third quarter as compared to the same prior year period. The order increase for the third quarter on a constant 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. The order increase on a constant currency basis included organic order growth of 5.4% driven by strength in the emerging markets, strong residential and commercial performance in the United States as well as industrial strength in the Americas.
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$3,667 million at September 30, 2017,2022, an increase of $781$703 million or 100.8%23.7%, as compared to September 30, 2016, which did not include the Sensus acquisition,2021 backlog of $2,964 million, and an increase of $264$427 million or 20.4%13.2%, as compared to December 31, 20162021 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$3,240
41

million, driven by the terms ofsignificant increase in orders in the contracts.year. We anticipate that approximately 40%30% of the backlog at September 30, 20172022 will be recognized as revenue in the remainder of 2017.2022. There were no significant order cancellations during the quarter.
Gross Margin
Gross margin as a percentage of revenue increased 70 and decreased 4070 basis points to 39.4%38.0% and 30 basis points to 39.1%, respectively,37.6% for the three and nine months ended September 30, 2017,2022, as compared to 39.8%37.3% and 39.4%, respectively,38.3% for the comparative 2016 periods.2021 period. The gross margin declines wereincrease for the quarter included favorable impacts of 840 basis points, driven by cost570 basis points of price realization and 250 basis points of productivity savings. Favorable impacts in the quarter were partially offset by 770 basis points of negative impacts, driven by 570 basis points of inflation, 80 basis points of unfavorable mix and Sensus50 basis points of spending on strategic investments. The gross margins, which include unfavorable purchase accounting impacts. Themargin decrease for the nine month period included 770 basis points of negative impacts, to gross margindriven by 610 basis points of cost inflation, as well as increased spending on strategic investments of 60 basis points and unfavorable mix of 60 basis points. These impacts were largelypartially offset favorable impacts of 700 basis points, driven by cost reductions from global procurement440 basis points of price realization and continuous improvement initiatives.

230 basis points of productivity savings.
Operating Expenses
The following table presents operating expenses for the three and nine months ended September 30, 20172022 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 
2021:
Three Months EndedNine Months Ended
 September 30,September 30,
(in millions)20222021Change20222021Change
Selling, general and administrative expenses ("SG&A")$294 $273 7.7 %$912 $878 3.9 % 
SG&A as a % of revenue21.3 %21.6 %(30)bp 22.7 %22.7 %— bp 
Research and development expenses ("R&D")47 49 (4.1)% 152 152 — % 
R&D as a % of revenue3.4 %3.9 %(50)bp 3.8 %3.9 %(10)bp 
Restructuring and asset impairment charges15 (2)(850.0)% 22 7 214.3 % 
Operating expenses$356 $320 11.3 % $1,086 $1,037 4.7 % 
Expense to revenue ratio25.8 %25.3 %50 bp 27.0 %26.8 %20 bp 
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased by $51$21 million to $270$294 million, or 22.6%21.3% of revenue, in the third quarter of 2017,2022, as compared to $219$273 million, or 24.4%21.6% of revenue, in the comparable 2016 period;2021 period. Revenue growth was higher than SG&A increases resulting in a lower SG&A as a percentage of sales for the third quarter. Cost increases were driven by increased investments in strategic growth initiatives of $18 million and inflation of $9 million, partially offset by $5 million productivity savings.

SG&A expenses increased by $147$34 million to $812$912 million, or 23.7%22.7% of revenue, in the nine months ended September 30, 2017,2022, as compared to $665$878 million, or 24.9%22.7% of revenue, forin the nine months endedcomparable 2021 period. Cost increases were driven by increased investments in 2016. The increases in SG&A expenses include approximately $49strategic growth initiatives of $41 million and $145inflation of $28 million, of additional SG&A spending for the Sensus business, respectively. Additionally we have incurred Sensus acquisition related 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 impacts were only partially offset by savings from restructuring actions$29 million of favorable currency impacts and global procurement and continuous improvement initiatives. For the nine month period, excluding the the Sensus acquisition impacts, SG&A expenses decreased by $7$15 million as savings from global procurement and continuous improvement initiatives and restructuring actions more than offset inflation increases and spending on strategic investments.productivity savings.

Research and Development ("R&D") Expenses
R&D spendingexpense was $45$47 million, or 3.8%3.4% of revenue, in the third quarter of 20172022, as compared to $23$49 million, or 2.6%3.9% of revenue in the comparable periodthird quarter of 2016;2021; and was $131$152 million, or 3.8% of revenue, in the nine months ended September 30, 20172022, as compared to $75$152 million, or 2.8%3.9% of revenue, in the comparable period of 2016.2021 period. The increaseR&D spend was fairly consistent year over year 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.both periods.
42

Restructuring Charges and Asset Impairment Charges
Restructuring
During the three and nine months ended September 30, 2017,2022, we recognizedincurred restructuring chargescosts of $4$3 million and $17$9 million, respectively. We incurred these charges related to actions taken in 2017 primarily as a continuation of our efforts to reposition our European and North American businesses to optimize our cost structure and improve our operational efficiency and effectiveness. The charges included the reduction of headcount and consolidation of facilities within our Applied Water and Water Infrastructure segments, as well as headcount reductions within our Measurement & Control Solutions segment. Included in the charges recorded during the three and nine months ended September 30, 2017 were $1 million and $8 million, respectively, related to actions commenced in prior years.across all segments.
During the three and nine months ended September 30, 2016,2021, we recognized restructuring recoveries of $(2) million and charges of $6 million, respectively, of which $(2) million and $18$4 million, respectively. We incurred these charges relatedrespectively, relate to actions takenpreviously announced 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. The2020. These 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 nine months ended September 30, 2016 were $1 million related to actions commenced in prior years.2022 and 2021 of employee position eliminations associated with restructuring activities:
20222021
Planned reductions - January 160 319 
Additional planned reductions92 73 
Actual reductions and reversals(66)(234)
Planned reductions - September 3086 158 
The following table presents expected restructuring spend:spend in 2022 and thereafter:
(in millions)Water InfrastructureApplied WaterMeasurement & Control SolutionsCorporateTotal
Actions Commenced in 2022:
Total expected costs$4 $1 $3 $— $8 
Costs incurred during Q1 2022— — — — — 
Costs incurred during Q2 20222 1 2 — 5 
Costs incurred during Q3 20222 — 1 — 3 
Total expected costs remaining$— $— $— $— $— 
Actions Commenced in 2021:
Total expected costs$3 $— $1 $— $4 
Costs incurred during 20213 — — — 3 
Costs incurred during Q1 2022— — — — — 
Costs incurred during Q2 2022— — — — — 
Costs incurred during Q3 2022— — — — — 
Total expected costs remaining$— $— $1 $— $1 
(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
During the second quarter of 2022, we also incurred charges of $1 million within the Measurement & Control Solutions segment, related to actions commenced prior to 2021.
The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 20172022 consist primarily of severance chargescharges. The actions commenced in 2022 are complete.
The Water Infrastructure and Measurement & Control Solutions actions commenced in 2021 consist primarily of severance charges. The Water Infrastructure actions are complete and the Measurement & Control Solutions actions are expected to continue through the endfirst quarter of 2018. The Water Infrastructure, Applied Water, Measurement & Control Solutions and Corporate actions commenced in 2016 consist primarily of severance charges and are expected to continue through the end of 2018.2023.
43

We currently expect to incur approximately $20between $10 million and $15 million in restructuring costs for the full year. As a result of all of the actions takenThese restructuring costs are primarily related to efforts to optimize our cost structure, improve our operational efficiency and expected to be taken in 2017, we anticipate approximately $5 million of total net savings to be realized during 2017.effectiveness, strengthen our competitive positioning and better serve our customers.
Asset Impairment
During the firstthird quarter of 20172022, we determined that certain assets including software and customer relationships within our Applied WaterMeasurement & Control Solutions segment including a tradename were impaired. Accordingly, we recognized an impairment charge of $5$12 million. Refer to Note 9,8, "Goodwill and Other Intangible Assets," for additional information.

Operating Income and Adjusted EBITDA
We generated operatingOperating income was $168 million (operating margin of $152 million (margin of 12.7%12.2%) during the third quarter of 2017, a $432022, an increase of $16 million, increaseor 10.5%, when compared to $109 million (margin of 12.2%) in 2016. The increase in operating income was largely driven byof $152 million (operating margin of 12.0%) during the inclusionprior year, or a total increase of Sensus operating income20 basis points. Operating margin expansion included unfavorable impacts of 110 basis points from increases in the current year. Additionally, the increase in operating income and operating margin was primarily due to cost reductions from our global procurement and productivity initiatives, favorable volume impacts, restructuring savings and a decrease in Sensus acquisition related costsspecial charges and restructuring and realignment charges. These favorable impacts on operating income andcosts as compared to the prior year. Additionally, operating margin were largelyincluded 1200 basis points of expansion from favorable operating impacts, which consisted of an 800 basis point increase related to price realization, 300 basis points related to productivity savings and 100 basis points of favorable volume. Margin expansion was offset by costnegative operating impacts of 1070 basis points driven by 650 basis points of inflation, increases,190 basis points of increased spending on strategic investments and Sensus purchase accounting impacts.
Adjusted operating income was $169 million (adjusted margin80 basis points of 14.1%) during the third quarter of 2017 as compared to $131 million (adjusted margin of 14.6%) in 2016. The increase in operating income of $38 million was largely driven by the inclusion of Sensus operating income in the current year. The decrease in adjusted operating margin was mostly due to cost inflation increases, spending on strategic initiatives and Sensus purchase accounting impacts, which were partially offset by cost reductions from global procurement and

productivity initiatives, favorable volume impactsunfavorable mix. Excluding special charges 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$187 million (adjusted operating margin of 12.7%13.6%) for the third quarter of 2022 as compared to adjusted operating income of $155 million (adjusted operating margin of 12.3%) or the third quarter of 2021.
Operating income was $425 million (operating margin of 10.6%) for the nine months ended September 30, 20172022, a decrease of $20 million, or 4.5%, when compared to operating income of $445 million (operating margin of 11.5%) during the prior year, or a total decrease of 90 basis points. Operating margin declines included unfavorable impacts of 30 basis points from increases in special charges and restructuring and realignment costs as compared to $344the prior year, as well as 990 basis points of unfavorable operating impacts, driven by 700 basis points of inflation and 180 basis points of increased spending on strategic investments. Operating margin declines were offset by 930 basis points from favorable operating impacts, which were driven by a 630 basis point increase from price realization and 280 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was $458 million (adjusted operating margin of 12.9%11.4%) in 2016. Adjustedfor the nine months ended September 30, 2022 as compared to adjusted operating income of $464 million (adjusted operating margin of 12.0%) for the nine months ended September 30, 2021.
Adjusted EBITDA was negatively impacted by several$252 million (adjusted EBITDA margin of 18.3%) during the third quarter of 2022, an increase of $25 million, or 11.0%, when compared to adjusted EBITDA of $227 million (adjusted EBITDA margin of 17.9%) during the comparable quarter in the prior year. The increase in adjusted EBITDA margin was primarily due to the same factors with cost inflation, Sensus operating margins which include unfavorable purchase accounting impacts and unfavorable product mix being among the largest. These negative impacts onimpacting adjusted operating margin were largely offset by cost savingsnoted above; however, adjusted EBITDA margin expansion excludes the benefit from our global procurementa year over year reduction in depreciation and productivity initiatives, as well as restructuring savings and favorable volume impacts.amortization expense.
Adjusted EBITDA for the nine months ended September 30, 2022 was $659 million (adjusted EBITDA margin of 16.4%), a decrease of $17 million, or 2.5%, when compared to adjusted EBITDA of $676 million (adjusted EBITDA margin of 17.5%) during the comparable period in prior year. The non-cash Sensus purchase accounting impact ondecrease in adjusted EBITDA margin was primarily due to the same factors impacting adjusted operating margin for the year-to-date period was 70 basis points.noted above; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.

44

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 EndedNine Months Ended
 September 30,September 30,
(in millions)20222021Change20222021Change
Water Infrastructure
Operating income$104 $101 3.0 %$286 $265 7.9 %
Operating margin18.1 %18.5 %(40)bp16.9 %16.3 %60 bp
Restructuring and realignment costs3 1 200.0 %7 10 (30.0)%
Special charges— — NM— — NM
Adjusted operating income$107 $102 4.9 %$293 $275 6.5 %
Adjusted operating margin18.6 %18.6 %— bp17.3 %16.9 %40 bp 
Applied Water
Operating income$77 $60 28.3 %$197 $190 3.7 %
Operating margin16.8 %15.0 %180 bp15.0 %15.7 %(70)bp
Restructuring and realignment costs1 2 (50.0)%4 5 (20.0)%
Special charges— — NM— 1 NM
Adjusted operating income$78 $62 25.8 %$201 $196 2.6 %
Adjusted operating margin17.0 %15.5 %150 bp 15.3 %16.2 %(90)bp
Measurement & Control Solutions
Operating income (loss)$(2)$7 (128.6)%$(17)$29 158.6 %
Operating margin(0.6)%2.2 %(280)bp(1.7)%2.8 %(450)bp
Restructuring and realignment costs2 (1)NM7 1 600.0 %
Special charges12 — 100.0 %13 — 100.0 %
Adjusted operating income$12 $6 100.0 %$3 $30 90.0 %
Adjusted operating margin3.4 %1.9 %150 bp0.3 %2.9 %(260)bp
Corporate and other
Operating loss$(11)$(16)31.3 %$(41)$(39)5.1 %
Special charges1 1 NM2 2 — %
Adjusted operating loss$(10)$(15)(33.3)%$(39)$(37)5.4 %
Total Xylem
Operating income$168 $152 10.5 %$425 $445 (4.5)%
Operating margin12.2 %12.0 %20 bp 10.6 %11.5 %(90)bp 
Restructuring and realignment costs6 2 200.0 %18 16 12.5 %
Special charges13 1 1,200.0 %15 3 400.0 %
Adjusted operating income$187 $155 20.6 %$458 $464 (1.3)%
Adjusted operating margin13.6 %12.3 %130 bp 11.4 %12.0 %(60)bp
NM - Not meaningful percentage change

45

The table below provides a reconciliation of net income to consolidated EBITDA and adjusted EBITDA:
Three Months EndedNine Months Ended
(in millions)September 30,September 30,
20222021Change20222021Change
Net Income$12 $114 (89)%$206 $314 (34)%
Net Income margin0.9 %9.0 %(810)bp5.1 %8.1 %(30.0)bp
Depreciation27 31 (13)%83 90 (8)%
Amortization31 31 — %93 96 (3)%
Interest expense, net7 20 (65)%28 58 (52)%
Income tax expense5 19 (74)%45 71 (37)%
EBITDA$82$215 (62)%$455$629 (28)%
Share-based compensation10 8 25 %28 25 12 %
Restructuring & realignment6 2 200 %18 16 13 %
U.K. pension settlement expense140 — 100.0 %140 — 100.0 %
Special charges14 2 600 %19 8 138 %
Gain from sale of business— — NM(1)(2)(50)%
Adjusted EBITDA$252 $227 11 %$659 $676 (3)%
Adjusted EBITDA margin18.3 %17.9 %40 bp16.4 %17.5 %(110)bp

The tables below provide a reconciliation of each segment's operating income (loss) to EBITDA and adjusted EBITDA:
Three Months Ended
September 30, 2022
(in millions)Water Infrastructure Applied Water Systems Measurement & Control Solutions
Operating Income (Loss)$104 $77 $(2)
Depreciation11 4 8 
Amortization1 — 27 
Other non-operating expense— (1)(1)
EBITDA$116 $80 $32 
Share-based compensation— 2 2 
Restructuring & realignment3 1 2 
Special charges— — 12 
Adjusted EBITDA$119 $83 $48 
Adjusted EBITDA margin20.7 %18.1 %13.8 %

46

Three Months Ended
September 30, 2021
(in millions)Water Infrastructure Applied Water Systems Measurement & Control Solutions
Operating Income$101 $60 $7 
Depreciation11 5 11 
Amortization1 — 27 
Other non-operating expense1 — — 
EBITDA$114 $65 $45 
Share-based compensation1 1 1 
Restructuring & realignment1 2 (1)
Adjusted EBITDA$116 $68 $45 
Adjusted EBITDA margin21.2 %17.0 %14.2 %
 2022 versus 2021
(in millions)Water Infrastructure Applied Water Systems Measurement & Control Solutions
Operating Income (Loss)$3 $17 $(9)
Depreciation— (1)(3)
Amortization— — — 
Other non-operating expense(1)(1)(1)
EBITDA$2 $15 $(13)
Share-based compensation(1)1 1 
Restructuring & realignment2 (1)3 
Special charges— — 12 
Adjusted EBITDA$3 $15 $3 
Adjusted EBITDA margin(0.5)%1.1 %(0.4)%

Nine Months Ended
September 30, 2022
(in millions)Water Infrastructure Applied Water Systems Measurement & Control Solutions
Operating Income (Loss)$286 $197 $(17)
Gain from sale of business— — 1 
Depreciation33 13 25 
Amortization6 1 78 
Other non-operating expense(3)(2)(2)
EBITDA$322 $209 $85 
Share-based compensation1 4 5 
Restructuring & realignment7 4 7 
Special charges— — 13 
Gain from sale of business— — (1)
Adjusted EBITDA$330 $217 $109 
Adjusted EBITDA margin19.5 %16.5 %10.8 %

47

Nine Months Ended
September 30, 2021
(in millions)Water Infrastructure Applied Water Systems Measurement & Control Solutions
Operating Income$265 $190 $29 
Gain from sale of business— 2 — 
Depreciation33 15 30 
Amortization5 2 81 
Other non-operating expense(3)(1)(2)
EBITDA$300 $208 $138 
Share-based compensation2 3 4 
Restructuring & realignment10 5 1 
Special charges— 1 — 
Gain from sale of business— (2)— 
Adjusted EBITDA$312 $215 $143 
Adjusted EBITDA margin19.2 %17.8 %13.8 %

2022 versus 2021
(in millions)Water Infrastructure Applied Water Systems Measurement & Control Solutions
Operating Income (Loss)$21 $7 $(46)
Gain from sale of business— (2)1 
Depreciation— (2)(5)
Amortization1 (1)(3)
Other non-operating expense— (1)— 
EBITDA$22 $1 $(53)
Share-based compensation(1)1 1 
Restructuring & realignment(3)(1)6 
Special charges— (1)13 
Gain from sale of business— 2 (1)
Adjusted EBITDA$18 $2 $(34)
Adjusted EBITDA margin0.3 %(1.3)%(3.0)%

Water Infrastructure
Operating income for our Water Infrastructure segment increased $16was $104 million or 21.3%, for(operating margin of 18.1%) during the third quarter of 20172022, an increase of $3 million, or 2.9%, when compared to operating income of $101 million (operating margin of 18.5%) during the prior year, or a total decrease of 40 basis points. Operating margin declines included unfavorable impacts of 40 basis points from increases in restructuring and realignment costs as compared to the prior year, withas well as negative operating margin also increasingimpacts of 1,080 basis points driven by 560 basis points of inflation, 250 basis points of increased spending on strategic investments and 190 basis points of unfavorable mix. Margin declines were offset by 1,080 basis points from 15.7% to 17.5%. Operating margin was positively impacted by decreased restructuringfavorable operating impacts consisting a 680 basis points of price realization, 300 basis points of productivity savings and realignment costs100 basis points of $2 million in 2017.favorable volume. Excluding thesespecial charges and restructuring and realignment costs, adjusted operating income increased $14was $107 million or 17.5%, with(adjusted operating margin of 18.6%) for the third quarter of 2022 as compared to adjusted operating margin increasing from 16.7% to 18.1%. The increase in adjustedincome of $102 million (adjusted operating margin of 18.6%) or the third quarter of 2021.
48

Operating income was $286 million for the quarter was primarily due to cost reductions from global procurement and continuous improvement initiatives, favorable volume, as well as restructuring savings, which were partially offset by cost inflation increases, spending on strategic investments and negative transactional currency impacts.
Forour Water Infrastructure segment (operating margin of 16.9%) for the nine months ended September 30, 2017,2022, an increase of $21 million, or 7.9%, when compared to operating income increased $13of $265 million (operating margin of 16.3%) during the prior year, or 6.8%,a total increase of 60 basis points. Operating margin expansion included favorable impacts of 20 basis points from a decrease in restructuring and realignment costs as compared to the prior year, withas well as 940 basis points from favorable operating margin also increasingimpacts, driven by 510 basis points of price realization, 280 basis points from 13.7%productivity savings and 90 basis points of favorable volume. Margin expansion was offset by 900 basis points of unfavorable impacts driven by 570 basis points of inflation, 220 basis points due to 14.4%. Operating margin was positively impacted byincreased spending on strategic investments and 80 basis points of unfavorable mix. Excluding special charges of $2 million in 2016 that did not recur and decreased restructuring and realignment costs, adjusted operating income was $293 million (adjusted operating margin of $217.3%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $275 million in 2017(adjusted operating margin of 16.9%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $119 million (adjusted EBITDA margin of 20.7%) for the third quarter of 2022, an increase of $3 million, or 2.6%, when compared withto adjusted EBITDA of $116 million (adjusted EBITDA margin of 21.2%) during the prior year. Excluding these items,The adjusted EBITDA margin was impacted by the same offsetting factors impacting the adjusted operating income increased $9margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in share based compensation expense and other non-operating expense.
Adjusted EBITDA was $330 million (adjusted EBITDA margin of 19.5%) for the nine months ended September 30, 2022, an increase of $18 million, or 4.3%5.8%, withwhen compared to adjusted operatingEBITDA of $312 million (adjusted EBITDA margin increasing from 14.8% to 15.3%.Theof 19.2%) during 2021. The increase in adjusted operatingEBITDA margin was primarily due to cost reductions from global procurement and continuous improvement initiatives as well as restructuring savings and favorable volume. These drivers were partially offset by increasesthe same factors impacting the increase in cost inflation and spending on strategic investments, as well as negative transactional currency impacts.adjusted operating margin.
Applied Water
Operating income for our Applied Water segment increased $1was $77 million or 2.0%, for(operating margin of 16.8%) during the third quarter of 20172022, an increase of $17 million, or 28.3%, when compared to operating income of $60 million (operating margin of 15.0%) during the prior year, or a total increase of 180 basis points. Operating margin expansion included favorable impacts of 30 basis points from a decrease in restructuring and realignment costs as compared to the prior year, withas well as 1,510 basis points from favorable operating margin decreasingimpacts, driven by 1,150 basis points from 14.6% to 14.4%. Operating marginprice realization and 320 basis points from productivity savings. Margin expansion was negatively impactedoffset by negative operating impacts of 1,360 basis points driven by 860 basis points of inflation, 130 basis points of increased restructuringspending on strategic investments, 130 basis points of inventory management costs and realignment costs60 basis points of $2 million.unfavorable mix. Excluding special charges and restructuring and realignment costs, adjusted operating income increased $3was $78 million (adjusted operating margin of 17.0%) for the third quarter of 2022 as compared to adjusted operating income of $62 million (adjusted operating margin of 15.5%) for the third quarter of 2021.
Operating income was $197 million for our Applied Water segment (operating margin of 15.0%) for the nine months ended September 30, 2022, an increase of $7 million, or 5.7%3.7%, withwhen compared to operating income of $190 million (operating margin of 15.7%) during the prior year, or a total decrease of 70 basis points. Operating margin declines included favorable impacts of 20 basis points from a decrease in restructuring and realignment costs and special charges as compared to the prior year, as well as 1,300 basis points of unfavorable operating impacts, driven by 950 basis points of inflation, 100 basis points of increased spending on strategic investments, and 70 basis points of increased inventory management costs. Margin declines were offset by 1,210 basis points from favorable operating impacts, which were driven by 880 basis points of price realization and 320 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was $201 million (adjusted operating margin increasing from 15.5%of 15.3%) for the nine months ended September 30, 2022 as compared to 15.8%.adjusted operating income of $196 million (adjusted operating margin of 16.2%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $83 million (adjusted EBITDA margin of 18.1%) for the third quarter of 2022, an increase of $15 million, or 22.1%, when compared to adjusted EBITDA of $68 million (adjusted EBITDA margin of 17.0%) during the prior year. The increase in adjusted operatingEBITDA margin was primarily due to cost reductionsthe same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.
Adjusted EBITDA was $217 million (adjusted EBITDA margin of 16.5%) for the nine months ended September 30, 2022, an increase of $2 million, or 0.9%, when compared to adjusted EBITDA of $215 million (adjusted EBITDA margin of 17.8%) during the prior year. The decrease in adjusted EBITDA margin was primarily due to the same factors impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.
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Measurement & Control Solutions
Operating loss for our global procurement and continuous improvement initiativesMeasurement & Control Solutions segment was $2 million (operating margin of (0.6%)) during the third quarter of 2022, a decrease of $9 million, or (128.6)%, when compared to operating income of $7 million (operating margin of 2.2%) during the prior year, or a total decrease of 280 basis points. Operating margin declines included unfavorable impacts of 430 basis points from increases in special charges (asset impairment) and restructuring savings, whichand realignment costs as compared to the prior year. Operating margin declines also included negative operating impacts of 530 basis points driven by 490 basis points of inflation. Margin declines were partially offset by increases in cost inflation680 basis points from favorable operating impacts consisting of 440 basis points of price realization and spending on strategic initiatives,240 basis points of favorable volume. Excluding special charges and restructuring and realignment costs, adjusted operating income was $12 million (adjusted operating margin of 3.4%) for the third quarter of 2022 as well ascompared to adjusted operating income of $6 million (adjusted operating margin of 1.9%) for the third quarter of 2021.
Operating loss was $17 million for our Measurement & Control Solutions (operating margin of (1.7%)) for the nine months ended September 30, 2022, a decrease of $46 million, or (158.9)%, when compared to operating income of $29 million (operating margin of 2.8%) during the prior year, or a total decrease of 450 basis points. Operating margin declines included unfavorable impacts of 190 basis points an increase in special charges (asset impairment) and restructuring and realignment costs as compared to the prior year. Operating margin declines also had negative operating impacts of 890 basis points of unfavorable impacts driven by 530 basis points of inflation, 160 basis points of unfavorable volume and 90 basis points of unfavorable mix. Margin declines were offset by 630 basis points from mix,favorable operating impacts consisting of 410 basis points of price realization and transactional currency.220 basis points from productivity savings. Excluding special charges and restructuring and realignment costs, adjusted operating income was $3 million (adjusted operating margin of 0.3%) for the nine months ended September 30, 2022 as compared to adjusted operating income of $30 million (adjusted operating margin of 2.9%) for the nine months ended September 30, 2021.
Adjusted EBITDA was $48 million (adjusted EBITDA margin of 13.8%) for the third quarter of 2022, an increase of $3 million, or 6.7%, when compared to adjusted EBITDA of $45 million (adjusted EBITDA margin of 14.2%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the increase in adjusted operating margin; however, adjusted EBITDA margin did not benefit from a year over year reduction in depreciation and amortization expense.
Adjusted EBITDA was $109 million (adjusted EBITDA margin of 10.8%) for the nine months ended September 30, 2022, a decrease of $34 million, or 23.8%, when compared to adjusted EBITDA of $143 million (adjusted EBITDA margin of 13.8%) during the prior year. The decrease in adjusted EBITDA margin was due to the same factors as those impacting the decrease in adjusted operating margin; however, adjusted EBITDA margin decline was greater as it did not benefit from a year over year reduction in depreciation and amortization expense.
Corporate and Other
Operating loss for corporate and other decreased $5 million, or 31.2%, during the third quarter of 2022 compared to the prior year period. For the nine months ended September 30, 2017,2022, operating income decreased $4loss for corporate and other increased $2 million, or 2.9%5.1%, compared to the same prior year period. The decrease in operating loss for the three months ended September 30, 2022 was due to the timing of employee-related expenses as compared to the prior year, with operating margin also decreasing from 13.4% to 13.0%. Operating margin was negatively impacted by higher special charges for a non-cash impairment of $5 million and increased restructuring and realignment costs of $5 million. Excluding these items, adjusted operating income increased $6 million, or 4.0%, with adjusted operating margin increasing from 14.3% to 14.8%.year. The increase in adjusted operating marginloss for the year was primarily due to cost reductions from global procurement and continuous improvement initiatives, which were partially offset by increases in cost inflation and unfavorable mix and currency impacts.
Measurement & Control Solutions
Operating income for our Measurement & Control Solutions segment increased $22 million, or 550.0%, for the third quarter of 2017 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 5.3% to 8.1%. Operating margin was negatively impacted by $4 million of Sensus acquisitionhigher performance related costs incurred during the quarter which were partially offset by $3 million related to special charges in 2016 that did not recur. Excluding these items, adjusted operating income increased $23 million, or 287.5%, with most of the increase coming from the inclusion of the operating income for Sensus in the current year. Adjusting 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% to 8.3%. 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 realignmentincentive 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 was primarily due to cost reductions from global procurement and continuous improvement initiatives, restructuring savings as well as volume and other favorable impacts, which were partially offset by unfavorable mix 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.
Corporate and other
Operating expense for corporate and other decreased $4 million for the third quarter of 2017 as 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. For the nine months ended September 30, 2017 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 expense for corporate and other was essentially flat for the nine months ended September 30, 2017 as compared to 2016.
Interest Expense
Interest expense was $21$12 million and $62$37 million for the three and nine months ended September 30, 2017,2022 and $16$21 million and $50$63 million for the three and nine months ended September 30, 2016.2021, respectively. 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. The increasedecrease in interest expense was partially offsetis primarily driven by the reduction in special interest charges of $8 million and $4 million that wereexpense incurred in the second quarter of 2016 in connection with the early extinguishment of our Senior Notes due in 2016 and financing charges on the bridge loanduring 2021 related to the Sensus acquisitionour senior note that was paid off in the third quarter of 2016, respectively, neither of which recurredOctober 2021 and interest income related to additional net investment hedges executed in 2017.during 2022. See Note 12,9., “Derivative Financial Instruments” and Note 11, "Credit Facilities and Debt"Debt," of our condensed consolidated financial statements for a description of our net investment hedges and credit facilities and long-term debt, and related interest.respectively.
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Income Tax Expense
The income tax provision for the three months ended September 30, 20172022 was $27$5 million resulting in an effective tax rate of 21.1%27.8%, compared to $22a $19 million expense resulting in an effective tax rate of 22.9%13.9% for the same period in 2016.2021. The income tax provision for the nine months ended September 30, 20172022 was $62$45 million resulting in an effective tax rate of 19.4%17.8%, compared to $40a $71 million expense resulting in an effective tax rate of 16.0%18.3% for the same period in 2016.2021. The effective tax rate was lower than the United States federal statutory rate primarily due to the mix of earnings in jurisdictions in both periods. Additionally, the effective tax rate for the nine months ended September 30, 2016 was lower than the current period 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 foreign 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 for2022 differs from the same period in2016. This increase in other comprehensive income was driven primarily by favorable foreign currency translation impacts, primarily 2021 due to the strengtheningimpact of the Great British Pound and the Canadian Dollar against the U.S. Dollar in 2017 as compared to the weakening of these currenciesearnings mix in the prior year. Additionally, the Euro continued to strengthen as compared to the U.S. Dollar year over yearcurrent period. The effective tax rate 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 monthsmonth period ended September 30, 2017 Other comprehensive income was $119 million as compared to a loss of $17 million for2022 differs from the same period in 2016. This increase was driven primarily by favorable foreign currency translation impacts, primarily2021 due to the increased strengtheningimpact of the Euro and Brazilian Real against the U.S. Dollar as compared to the prior year. Additionally, the strengthening of the Great British Pound against the U.S. Dollartax settlement benefits in the current year as compared to the weakening of this currency in the prior year. Partially offsetting these favorable movements,period which was the Euro movement on the Company's net investment hedge as compared to the prior year. The tax impact on the foreign currency translation related to the net investment hedge also contributed to the year over year increase.partially offset by permanent differences.

Liquidity and Capital Resources
The following table summarizes our sources and (uses) of cash:
Nine Months Ended
 September 30,
(in millions)20222021Change
Operating activities$234 $318 $(84)
Investing activities(123)(113)(10)
Financing activities(210)(806)596 
Foreign exchange (a)(64)(19)(45)
Total$(163)$(620)$457 
 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 weakening of the Euro and Chinese Yuan partially offset by strengthening of the Russian Ruble.
(a)The impact is primarily due to the strengthening of the Euro against the U.S. Dollar.
Sources and Uses of Liquidity
Operating Activities
DuringCash generated by operating activities was $234 million for the nine months ended September 30, 2017, net cash provided by operating activities increased by $105 million2022 as compared to $318 million in the samecomparable prior year period. The year-over-year increasereduction in cash generated was primarily driven by higher working capital levels, reflecting increased cash from the operating activities of the Sensus business acquired in the fourth quarter of 2016. This increase wassafety stock and higher accounts receivable driven by increased sales. Lower interest and income tax payments partially offset by increased use of working capital as well as increased payments for restructuring charges and interest as compared to the prior year.these items.
Investing Activities
Cash used in investing activities was $122$123 million for the nine months ended September 30, 20172022 as compared to $155$113 million in the comparable prior year period. This decreaseThe increase in spending was mainly driven by higher capital expenditures driven primarily by investments in equipment and rental fleet. Cash received from cross-currency swaps partially offset the $70 million spent 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 over the prior year on capital projects, including spending on capitalized software in the Sensus business.outflow.
Financing Activities
Cash used by financing activities was $299$210 million for the nine months ended September 30, 20172022 as compared to cash used of $150$806 million in the comparable prior year period. The net increasereduction in cash used by financing activities was primarily driven by increases in cash used forthe repayment of debt, net of debt issuance proceedsSenior Notes due 2021 in the prior year, increases 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 million.year.
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 both directly and indirectly by the COVID-19 pandemic and macroeconomic conditions, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends.
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Historically, we have generated operating cash flow sufficient to fund our primary cash needs centered on operating activities, working capital, capital expenditures, and strategic investments.needs. 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 11, "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.
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 $2.0 billion, consisting of $1.2 billion of cash and $800 million of available credit facilities as disclosed in Note 11, "Credit Facilities and Debt", of our condensed consolidated financial statements. On October 1, 2021 our Senior Notes due 2021 were settled with cash on hand for a total of $600 million. We intend to repay the Senior Notes due 2023 in December 2022 at par using cash on hand.
We anticipate thatRisks 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.

2021 Annual Report.
Credit Facilities & Long-Term Contractual Commitments
See Note 12,11, "Credit Facilities and Debt"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% of our revenue from non-U.S. operations for the three and nine months ended September 30, 20172022, respectively, and 59%56% for both the three and nine months ended September 30, 2016.2021. 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 and our, expected future cash generation and investment opportunities, which support our current designation of a portion of these funds as being indefinitely reinvested and reassess whether there is a demonstrated need to repatriate funds held internationally to support our U.S. operations. If, as a result of our review, it is determined that all or a portion of the funds may be needed for our operations in the United States, we may be required to accrue additional U.S. taxes. As of September 30, 2017, our2022, we have provided a deferred tax liability of $1 million for net foreign subsidiaries were holding $267withholding taxes and state income taxes on $475 million of earnings expected to be repatriated to the U.S. parent as deemed necessary in cash or marketable securities.the future.
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 and related macro economic conditions. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 20162021 Annual Report describes the critical accounting estimates used in preparation of the condensed consolidated financial statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in the information concerning our critical accounting estimates as stated in our 20162021 Annual Report.
New Accounting Pronouncements
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See Note 2, "Recently Issued Accounting Pronouncements,"Post-retirement Benefit Plans. As described in our 2021 Annual Report, the Company initiated the process for a full buy-out of its largest defined benefit plan in the U.K. in 2019. During the first quarter of 2020, the Company purchased a bulk annuity policy as a plan asset to facilitate the termination and buy-out of the plan. The buyout was completed in September 2022, at which point the remaining benefit obligations were transferred to the condensed consolidated financial statements forinsurer and we were relieved of any further obligation. As a complete discussionresult, we recorded a pension settlement charge of recent accounting pronouncements. We are currently evaluating£123 million (approximately $140 million), primarily consisting of unrecognized actuarial losses. The settlement also resulted in the recognition of $23 million in net tax benefits. The settlement of the plan did not impact of certain recently issued guidance on our financial condition and results of operations in future periods.cash position.




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 20162021 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.




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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 17, "Commitments and Contingencies"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 20162021 Annual Report.


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

The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended September 30, 2017:
2022:
(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)
7/1/1722 - 7/31/1722———$413182
8/1/1722 - 8/31/1722———$413182
9/1/1722 - 9/30/1722———$413182
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$500 million in 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 sharesdeploy our capital in the open market from time to time.a manner that benefits our stockholders and maintains our focus on growth. There were no shares repurchased under this program duringfor the three months ended September 30, 2017, as we had exhausted the authorized amount2022. There are up to repurchase$182 million in shares that may still be purchased under this plan during the second quarteras of 2017.September 30, 2022.


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.
54

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).
11.031.1
Statement Re-Computation of Per Share Earnings
Information required to be presented in Exhibit 11 is provided under “Earnings Per Share” in Note 6 to the Condensed Consolidated Financial Statements in Part I, Item 1 “Condensed Consolidated Financial Statements” of this Report in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share.
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 September 30, 2017,2022, 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 September 30, 2022 formatted in Inline XBRL and contained in Exhibit 101.0.

55

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
November 1, 2022
52
56