UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, ~~2020~~2021


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

For the transition period from to

Commission file number: 1-35229

Xylem Inc.

(Exact name of registrant as specified in its charter)


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

1 International Drive, Rye Brook, NY 10573

(Address of principal executive offices) (Zip code)

(914) 323-5700

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange of which registered

Common Stock, par value $0.01 per share

XYL

New York Stock Exchange

2.250% Senior Notes due 2023

XYL23

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☑ No ☐

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

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of July ~~24, 2020,~~30, 2021, there were ~~179,959,293~~180,162,994 outstanding shares of the registrant’s common stock, par value $0.01 per share.

Xylem Inc.

Table of Contents


ITEM			PAGE
PART I – Financial Information
Item 1	-	~~Condensed Consolidated~~ Financial Statements:
		Condensed Consolidated Income Statements for the Three and Six Months Ended June 3 0 , ~~2020~~2021 and ~~2019~~2020 (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30 3 0 , ~~2020~~2021 and ~~2019~~2020 (Unaudited)	4
		Condensed Consolidated Balance Sheets as of June 3 0 , ~~2020~~2021 and December 31, ~~2019~~2020 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30 3 0 , ~~2020~~2021 and ~~2019~~2020 (Unaudited)	6
		Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
Item 2	-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3029
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	5047
Item 4	-	Controls and Procedures	5047
PART II – Other Information
Item 1	-	Legal Proceedings	5148
Item 1A	-	Risk Factors	5148
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	5148
Item 3	-	Defaults Upon Senior Securities	5148
Item 4	-	Mine Safety Disclosures	5148
Item 5	-	Other Information	5148
Item 6	-	Exhibits	5148
		Signatures	5450

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)

(in millions, except per share data)


		Three Months						Six Months							Three Months				Six Months

For the period ended June 30,	For the period ended June 30,	2020		2019		2020		2019		For the period ended June 30,	2021		2020		2021		2020
Revenue	Revenue	$	1,160	$	1,345	$	2,283	$	2,582	Revenue	$	1,351	$	1,160	$	2,607	$	2,283
Cost of revenue	Cost of revenue	726		819		1,440		1,582		Cost of revenue	831		726		1,597		1,440
Gross profit	Gross profit	434		526		843		1,000		Gross profit	520		434		1,010		843
Selling, general and administrative expenses	Selling, general and administrative expenses	288		294		585		597		Selling, general and administrative expenses	304		288		605		585
Research and development expenses	Research and development expenses	44		47		93		98		Research and development expenses	53		44		103		93
Restructuring and asset impairment charges	Restructuring and asset impairment charges	48		14		50		25		Restructuring and asset impairment charges	3		48		9		50

Operating income	Operating income	54		171		115		280		Operating income	160		54		293		115
Interest expense	Interest expense	18		18		34		36		Interest expense	21		18		42		34
Other non-operating (expense) income, net		(1)		3		(4)		5
Other non-operating expense, net										Other non-operating expense, net	(3)		(1)		(1)		(4)
Gain from sale of business	Gain from sale of business	—		—		—		1		Gain from sale of business	2		0		2		0
Income before taxes	Income before taxes	35		156		77		250		Income before taxes	138		35		252		77
Income tax expense	Income tax expense	4		17		8		32		Income tax expense	25		4		52		8
Net income	Net income	$	31	$	139	$	69	$	218	Net income	$	113	$	31	$	200	$	69

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.17	$	0.77	$	0.38	$	1.21	Basic	$	0.63	$	0.17	$	1.11	$	0.38
Diluted	Diluted	$	0.17	$	0.77	$	0.38	$	1.20	Diluted	$	0.62	$	0.17	$	1.10	$	0.38
Weighted average number of shares:	Weighted average number of shares:									Weighted average number of shares:
Basic	Basic	180.0		180.0		180.1		179.9		Basic	180.1		180.0		180.2		180.1
Diluted	Diluted	180.6		181.2		181.0		181.1		Diluted	181.3		180.6		181.4		181.0

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

Three Months Six Months
For the period ended June 30, 2020 2019 2020 2019
Net income $ 31 $ 139 $ 69 $ 218
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment 35 (18) (43) 11
Net change in derivative hedge agreements:
Unrealized gain (loss) 6 — 4 (9)
Amount of loss reclassified into net income — 2 3 4
Net change in postretirement benefit plans:
Amortization of prior service credit (1) (1) (2) (2)
Amortization of net actuarial loss into net income 5 3 10 6
Other comprehensive income (loss), before tax 45 (14) (28) 10
Income tax (benefit) expense related to items of other comprehensive income (loss) (7) (3) 7 1
Other comprehensive income (loss), net of tax 52 (11) (35) 9
Comprehensive income $ 83 $ 128 $ 34 $ 227
Less: comprehensive loss attributable to noncontrolling interests — — (1) —
Comprehensive income attributable to Xylem $ 83 $ 128 $ 35 $ 227


	Three Months				Six Months
For the period ended June 30,	2021		2020		2021		2020
Net income	$	113	$	31	$	200	$	69
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment	19		35		29		(43)

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


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


Other comprehensive income (loss), before tax	29		45		30		(28)
Income tax expense (benefit) related to items of other comprehensive income (loss)	1		(7)		15		7
Other comprehensive income (loss), net of tax	28		52		15		(35)
Comprehensive income	$	141	$	83	$	215	$	34
Less: comprehensive loss attributable to noncontrolling interests	0		0		0		(1)
Comprehensive income attributable to Xylem	$	141	$	83	$	215	$	35

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in millions, except per share amounts)

June 30,
2020 December 31,
2019

ASSETS
Current assets:
Cash and cash equivalents $ 1,577 $ 724
Receivables, less allowances for discounts, returns and doubtful accounts of $35 and $35 in 2020 and 2019, respectively 956 1,036
Inventories 595 539
Prepaid and other current assets 173 151
Total current assets 3,301 2,450
Property, plant and equipment, net 635 658
Goodwill 2,820 2,839
Other intangible assets, net 1,108 1,174
Other non-current assets 580 589
Total assets $ 8,444 $ 7,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 498 $ 597
Accrued and other current liabilities 663 628
Short-term borrowings and current maturities of long-term debt 212 276
Total current liabilities 1,373 1,501
Long-term debt 3,031 2,040
Accrued postretirement benefits 446 445
Deferred income tax liabilities 304 310
Other non-current accrued liabilities 425 447
Total liabilities 5,579 4,743
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 194.5 shares and 193.9 shares in 2020 and 2019, respectively 2 2
Capital in excess of par value 2,012 1,991
Retained earnings 1,838 1,866
Treasury stock – at cost 14.5 shares and 13.7 shares in 2020 and 2019, respectively (587) (527)
Accumulated other comprehensive loss (409) (375)
Total stockholders’ equity 2,856 2,957
Non-controlling interests 9 10
Total equity 2,865 2,967
Total liabilities and stockholders’ equity $ 8,444 $ 7,710


	June 30, 2021		December 31, 2020

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

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

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

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)

For the six months ended June 30, 2020 2019
Operating Activities
Net income $ 69 $ 218
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 58 58
Amortization 68 69
Share-based compensation 16 16
Restructuring and asset impairment charges 50 25
Gain from sale of business — (1)
Other, net 18 4
Payments for restructuring (12) (12)
Changes in assets and liabilities (net of acquisitions):
Changes in receivables 48 (68)
Changes in inventories (63) (10)
Changes in accounts payable (86) (23)
Other, net 13 (70)
Net Cash – Operating activities 179 206
Investing Activities
Capital expenditures (95) (129)
Acquisitions of businesses, net of cash acquired — (18)
Proceeds from sale of business — (2)
Other, net 7 3
Net Cash – Investing activities (88) (146)
Financing Activities
Short-term debt issued, net 359 257
Short-term debt repaid (422) (113)
Long-term debt issued, net 987 —
Repurchase of common stock (60) (39)
Proceeds from exercise of employee stock options 5 8
Dividends paid (95) (87)
Other, net — (1)
Net Cash – Financing activities 774 25
Effect of exchange rate changes on cash (12) 2
Net change in cash and cash equivalents 853 87
Cash and cash equivalents at beginning of year 724 296
Cash and cash equivalents at end of period $ 1,577 $ 383
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 45 $ 45
Income taxes (net of refunds received) $ 11 $ 74


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

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



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

Proceeds from sale of business	2		0



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

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

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

See accompanying notes to condensed consolidated financial statements.

XYLEM INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Background and Basis of Presentation

Background

Xylem Inc. (“Xylem” or the “Company”) is a leading equipment and service provider for water and wastewater applications with a broad portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment.

Xylem operates in 3 segments, Water Infrastructure, Applied Water and Measurement & Control Solutions. See Note ~~19,~~17, "Segment Information", to the condensed consolidated financial statements for further segment background information.

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

Basis of Presentation

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

The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) considered necessary for a fair statement of the financial position and results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 ("~~2019~~2020 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 ~~2019~~2020 Annual Report.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, ~~postretirement~~post-retirement obligations and assets, revenue recognition, income ~~tax contingency accruals and~~taxes, valuation ~~allowances,~~of intangible assets, goodwill and ~~indefinite lived~~indefinite-lived intangible impairment testing and contingent ~~liabilities and lease accounting.~~liabilities. Actual results could differ from these estimates. The global outbreak of the novel coronavirus ~~(COVID-19)~~("COVID-19") disease ~~was~~in March 2020, declared a pandemic by the World Health Organization, ~~and a national emergency by the U.S. Government in March 2020 and~~ has created significant global volatility, uncertainty and economic disruption. The COVID-19 pandemic also has caused increased uncertainty in estimates and assumptions affecting the condensed consolidated financial statements. Actual results could differ from these estimates.

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

~~Note 2. Recently Issued Accounting Pronouncements~~

~~Recently Adopted Pronouncements~~

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," amending the accounting for the impairment of financial instruments, including trade receivables. Under previous guidance, credit losses were recognized when the applicable losses had a probable likelihood of occurring and this assessment was based on past events and current conditions. The amended current guidance eliminates the “probable” threshold and requires an entity to use a broader range of

information, including forecast information when estimating expected credit losses. Generally, this should result in a more timely recognition of credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for interim and annual periods beginning after December 15, 2018. The requirements of the amended guidance should be applied using a modified retrospective approach except for debt securities, which require a prospective transition approach. We adopted this guidance as of January 1, 2020. The adoption of this guidance did not have a material impact on our financial condition and results of operations.

Note ~~3. Acquisitions and Divestitures~~

~~Acquisitions~~

~~During the three and six months ended June 30, 2020 we spent approximately $0 million, net of cash received on acquisition activity.~~

~~During the three and six months ended June 30, 2019 we spent approximately $13 million and $18 million, net of cash received on acquisition activity, respectively.~~

~~Note 4.~~2. Revenue

Disaggregation of Revenue

The following table illustrates the sources of revenue:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2021		2020		2021		2020
Revenue from contracts with customers	$	1,302	$	1,114	$	2,513	$	2,188
Lease Revenue	49		46		94		95
Total	$	1,351	$	1,160	$	2,607	$	2,283

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Revenue from contracts with customers $ 1,114 $ 1,281 $ 2,188 $ 2,459
Lease Revenue 46 64 95 123
Total $ 1,160 $ 1,345 $ 2,283 $ 2,582

The following table reflects revenue from contracts with customers by ~~application:~~

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Water Infrastructure
     Transport $ 350 $ 396 $ 668 $ 742
     Treatment 105 101 176 178
Applied Water
     Building Services 187 216 374 429
     Industrial Water 150 178 301 344
Measurement & Control Solutions
     Water 161 195 344 394
     Energy 70 85 142 158
     Software as a Service 23 25 44 49
     Test 68 85 139 165
Total $ 1,114 $ 1,281 $ 2,188 $ 2,459
application. The table below also reflects updates to the aggregation of applications to simplify and focus presentation.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2021		2020		2021		2020
Water Infrastructure
Transport	$	414	$	350	$	784	$	668
Treatment	106		105		200		176

Applied Water
Commercial Building Services	155		133		302		270
Residential Building Services	73		54		140		104
Industrial Water	186		150		365		301

Measurement & Control Solutions
Water	288		240		571		505
Energy	80		82		151		164



Total	$	1,302	$	1,114	$	2,513	$	2,188

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2021		2020		2021		2020
Water Infrastructure
United States	$	142	$	144	$	265	$	265
Western Europe	190		157		363		299
Emerging Markets (a)	133		109		255		195
Other	55		45		101		85

Applied Water
United States	202		183		396		374
Western Europe	99		70		191		144
Emerging Markets (a)	81		61		159		111
Other	32		23		61		46

Measurement & Control Solutions
United States	224		212		437		433
Western Europe	69		51		143		114
Emerging Markets (a)	49		39		95		80
Other	26		20		47		42

Total	$	1,302	$	1,114	$	2,513	$	2,188

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Water Infrastructure
     United States $ 144 $ 160 $ 265 $ 293
     Europe 177 179 334 339
Asia Pacific 81 94 140 168
Other 53 64 105 120
Applied Water
     United States 183 212 374 413
     Europe 81 92 163 186
Asia Pacific 36 41 60 80
Other 38 49 79 94
Measurement & Control Solutions
     United States 212 252 433 488
     Europe 58 64 132 136
Asia Pacific 25 27 47 59
Other 26 47 56 83
Total $ 1,114 $ 1,281 $ 2,188 $ 2,459

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

Contract Balances

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

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

(in millions) Contract Assets (a) Contract Liabilities
Balance at January 1, 2019 $ 96 $ 113
  Additions, net 55 84
  Revenue recognized from opening balance — (66)
  Billings (50) —
  Other 10 —
Balance at June 30, 2019 $ 111 $ 131
Balance at January 1, 2020 $ 106 $ 135
  Additions, net 63 85
  Revenue recognized from opening balance — (70)
  Billings (60) —
  Other (2) (4)
Balance at June 30, 2020 $ 107 $ 146


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




Other	(2)		(4)
Balance at June 30, 2020	$	107	$	146

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




Other	0		(1)
Balance at June 30, 2021	$	121	$	171

(a)Excludes receivable balances which are disclosed on the balance sheet

Performance obligations

Delivery schedules vary from customer to customer based upon their requirements. Typically, large projects require longer lead production cycles and delays can occur from time to time. As of June 30, ~~2020,~~2021, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied for contracts with performance obligations, amount to ~~$467~~$438 million. We expect to recognize the majority of revenue upon the completion of satisfying these performance obligations in the following 60 months. The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations that are part of a contract whose original expected duration is less than one year.

Note 5.3. Restructuring and Asset Impairment Charges

Restructuring

From time to time, the Company will incur costs related to restructuring actions in order to optimize our cost base and more strategically position ourselves. During the three and six months ended June 30, 2021, we recognized restructuring charges of $3 million and $8 million, respectively, of which $2 million and $6 million relate to actions previously announced in 2020. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment.

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, onin June 2, 2020 management committed to a restructuring ~~activities~~plan that includes actions across our businesses and functions globally. The plan is designed to support our long-term financial resilience, ~~and~~ simplify our operations, strengthen our competitive positioning and better serve our customers.

~~As a result of this action, during~~ During the three and six months ended June 30, 2020, we recognized restructuring charges of $38 million and $40 million, respectively. These charges included reduction of headcount across all segments and asset impairments within our Measurement & Control Solutions segment. ~~Immaterial restructuring charges incurred during the first quarter are included in the plan information presented below.~~

During the three and six months ended June 30, 2019, we recognized restructuring charges of $14 million and $22 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 Measurement & Control Solutions and Water Infrastructure segments, as well as headcount reductions within our Applied Water segment.

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

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
By component:
Severance and other charges $ 21 $ 13 $ 23 $ 20
Lease related charges — — — 1
Asset impairment 17 1 17 1
Total restructuring charges $ 38 $ 14 $ 40 $ 22
Asset impairment 10 — 10 3
Total restructuring and asset impairment charges $ 48 $ 14 $ 50 $ 25
By segment:
Water Infrastructure $ 6 $ 7 $ 8 $ 11
Applied Water 2 2 2 2
Measurement & Control Solutions 40 5 40 12


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

Asset impairment	0		17		1		17

Reversal of restructuring accruals	(1)		0		(1)		0
Total restructuring charges	$	3	$	38	$	8	$	40
Asset impairment charges	0		10		1		10
Total restructuring and asset impairment charges	$	3	$	48	$	9	$	50

By segment:
Water Infrastructure	$	3	$	6	$	7	$	8
Applied Water	0		2		1		2
Measurement & Control Solutions	0		40		1		40

The following table displays a roll-forward of the restructuring accruals, presented on our Condensed Consolidated Balance Sheets within ~~"accrued~~"Accrued and other current liabilities" and ~~"other~~"Other non-current accrued liabilities", for the six months ended June 30, ~~2020~~2021 and ~~2019:~~

(in millions) 2020 2019
Restructuring accruals - January 1 $ 27 $ 5
Restructuring charges 40 22
Cash payments (12) (12)
Asset impairment (17) (1)
Foreign currency and other (1) —
Restructuring accruals - June 30 $ 37 $ 14
By segment:
Water Infrastructure $ 4 $ 4
Applied Water 1 2
Measurement & Control Solutions 27 5
Regional selling locations (a) 4 3
Corporate and other 1 —
2020:


(in millions)	2021		2020
Restructuring accruals - January 1	$	29	$	27
Restructuring charges	8		40
Cash payments	(18)		(12)
Asset impairment	(1)		(17)
Foreign currency and other	0		(1)
Restructuring accruals - June 30	$	18	$	37

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

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

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


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

Total expected costs remaining	$	3	$	0	$	0	$	0	$	3

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

Total expected costs remaining	$	2	$	3	$	2	$	2	$	9

The Water Infrastructure actions commenced asin 2021 consist primarily of ~~June 30, 2020:~~

(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2020:
Total expected costs $ 28 $ 13 $ 34 $ 3 $ 78
Costs incurred during Q1 2020 1 — — — 1
Costs incurred during Q2 2020 5 2 30 — 37
Total expected costs remaining $ 22 $ 11 $ 4 $ 3 $ 40
Actions Commenced in 2019:
Total expected costs $ 20 $ 5 $ 27 $ — $ 52
Costs incurred during 2019 18 5 27 — 50
Costs incurred during Q1 2020 1 — — — 1
Costs incurred during Q2 2020 1 — — — 1
Total expected costs remaining $ — $ — $ — $ — $ —
Actions Commenced in 2017:
Total expected costs $ 8 $ 5 $ 4 $ — $ 17
Costs incurred during 2017 5 4 2 — 11
Costs incurred during 2018 2 1 1 — 4
Costs incurred during 2019 1 — 1 — 2
Costs incurred during Q1 2020 — — — — ��
Costs incurred during Q2 2020 — — — —
Total expected costs remaining $ — $ — $ — $ — $ —

severance charges. These actions are expected to continue through the second quarter of 2022.

The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2020 consist primarily of severance charges across segments and asset impairment charges in our Measurement & Control Solutions segment. These actions are expected to continue through ~~2021. The Water Infrastructure, Applied Water, and Measurement & Control Solutions actions commenced in 2019 consist primarily~~the second quarter of ~~severance charges. The actions commenced in 2019 are complete. The Water Infrastructure, Applied Water and Measurement & Control Solutions actions commenced in 2017 consist primarily~~2022.

During the second quarter of ~~severance charges and are complete.~~

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

Asset Impairment

During the second quarter of 2020 we determined that internally developed in-process software within our Measurement & Control Solutions segment was impaired as a result of actions taken to prioritize strategic investments. Accordingly, we recognized an impairment charge of $10 million. Refer to Note ~~9, "Goodwill and Other Intangible Assets," for additional information.~~

During the first quarter of 2019 we determined that certain assets within our Measurement & Control Solutions segment, including a customer relationship, were impaired. Accordingly we recognized an impairment charge of $3 million. Refer to Note 9,7, "Goodwill and Other Intangible Assets," for additional information.

Note 6.4. Income Taxes

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

The income tax provision for the three months ended June 30, ~~2020~~2021 was $4$25 million resulting in an effective tax rate of ~~10.9%~~18.5%, compared to a ~~$17~~$4 million expense resulting in an effective tax rate of ~~10.5%~~10.9% for the same period in ~~2019.~~2020. The income tax provision for the six months ended June 30, ~~2020~~2021 was $8$52 million resulting in an effective tax rate of ~~10.4%~~20.7%, compared to ~~a $32~~an $8 million expense resulting in an effective tax rate of ~~12.8%~~10.4% for the same period in ~~2019.~~2020. The effective tax rate for the three and six month periods ended June 30, ~~2020 differs from~~2021 was lower than the ~~United States~~U.S. federal statutory rate primarily due to ~~the~~favorable earnings mix, ~~of earnings in jurisdictions,~~ partially offset by the Global Intangible ~~Low-Taxed~~Low Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the three and six month periods ended June 30, ~~2020 differs~~2021 differ from the same periods in ~~2019~~2020 due to unfavorable earnings mix as compared to the ~~relative impact of the benefit from~~prior year and favorable equity compensation deductions onin the prior year. The effective tax rate ~~as well as release of unrecognized tax benefits~~for the six month period ended June 30, 2021 differs from the same period in 2020 ~~offset by changes~~due to the impact of tax settlements in ~~tax law in Switzerland in 2019.~~the current period.

Unrecognized Tax Benefits

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities or litigation, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits at June 30, 2020 was $126 million, as compared to $129 million at December 31, 2019, which if ultimately recognized will reduce our effective tax rate. We believe that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $1 million within the next 12 months as a result of the expiration of certain statutes of limitations. 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 June 30, 2020, we had $9 million of interest accrued for unrecognized tax benefits.

During 2019, Xylem’s Swedish subsidiary received a tax assessment for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. The assessment asserts an aggregate amount of approximately $80 million for tax, penalties and interest. Xylem filed an appeal with the Administrative Court of Stockholm. Management, in consultation with external legal advisors, believes it is more likely than not that Xylem will prevail

on the proposed assessment and is vigorously defending our position through litigation. As of June 30, ~~2020,~~2021, we have not recorded any unrecognized tax benefits related to this uncertain tax position.

Note 7.5. Earnings Per Share

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

Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income (in millions) $ 31 $ 139 $ 69 $ 218
Shares (in thousands):
Weighted average common shares outstanding 179,933 179,964 180,043 179,842
Add: Participating securities (a) 32 35 29 30
Weighted average common shares outstanding — Basic 179,965 179,999 180,072 179,872
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options 563 832 644 834
Dilutive effect of restricted stock units and performance share units 79 322 234 427
Weighted average common shares outstanding — Diluted 180,607 181,153 180,950 181,133
Basic earnings per share $ 0.17 $ 0.77 $ 0.38 $ 1.21
Diluted earnings per share $ 0.17 $ 0.77 $ 0.38 $ 1.20


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Net income (in millions)	$	113	$	31	$	200	$	69
Shares (in thousands):
Weighted average common shares outstanding	180,072		179,933		180,162		180,043
Add: Participating securities (a)	34		32		24		29
Weighted average common shares outstanding — Basic	180,106		179,965		180,186		180,072
Plus incremental shares from assumed conversions: (b)
Dilutive effect of stock options	897		563		845		644
Dilutive effect of restricted stock units and performance share units	346		79		380		234

Weighted average common shares outstanding — Diluted	181,349		180,607		181,411		180,950
Basic earnings per share	$	0.63	$	0.17	$	1.11	$	0.38
Diluted earnings per share	$	0.62	$	0.17	$	1.10	$	0.38

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

(b)Incremental shares from stock options, restricted stock units and performance share units are computed by the treasury stock method. The weighted average shares listed below were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented or were otherwise excluded under the treasury stock method. The treasury stock method calculates dilution assuming the exercise of all in-the-money options and vesting of restricted stock units and performance share units, reduced by the repurchase of shares with the proceeds from the assumed exercises and unrecognized compensation expense for outstanding awards. Performance share units will be included in the treasury stock calculation of diluted earnings per share upon achievement of underlying performance or market conditions at the end of the reporting period. See Note ~~15,~~13, "Share-Based Compensation Plans", to the condensed consolidated financial statements for further detail on the performance share units.

Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2019 2020 2019
Stock options 1,766 1,418 1,567 1,406
Restricted stock units 441 382 377 365
Performance share units 313 455 299 463

~~Note 8. Inventories~~

~~The components of total inventories are summarized as follows:~~

(in millions) June 30,
2020 December 31,
2019
Finished goods $ 234 $ 212
Work in process 54 47
Raw materials 307 280
Total inventories $ 595 $ 539


	Three Months Ended		Six Months Ended
	June 30,		June 30,
(in thousands)	2021	2020	2021	2020
Stock options	1,227	1,766	1,238	1,567
Restricted stock units	318	441	302	377
Performance share units	345	313	349	299

Note 6. Inventories

The components of total inventories are summarized as follows:


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

Note 9.7. Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying value of goodwill by reportable segment for the six months ended June 30, ~~2020~~2021 are as follows:


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


Foreign currency and other	0		(5)		(8)		(13)
Balance as of June 30, 2021	$	668	$	524	$	1,649	$	2,841

(in millions)
Water
Infrastructure
Applied Water Measurement & Control Solutions Total
Balance as of January 1, 2020 $ 651 $ 513 $ 1,675 $ 2,839
Activity in 2020
Foreign currency and other (3) (1) (15) (19)
Balance as of June 30, 2020 $ 648 $ 512 $ 1,660 $ 2,820

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

Other Intangible Assets

Information regarding our other intangible assets is as follows:

June 30, 2020 December 31, 2019
(in millions)
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Carrying
Amount
Accumulated
Amortization
Net
Intangibles
Customer and distributor relationships $ 922 $ (374) $ 548 $ 945 $ (352) $ 593
Proprietary technology and patents 200 (117) 83 204 (111) 93
Trademarks 139 (55) 84 148 (52) 96
Software 449 (227) 222 428 (206) 222
Other 21 (16) 5 20 (16) 4
Indefinite-lived intangibles 166 — 166 166 — 166
Other Intangibles $ 1,897 $ (789) $ 1,108 $ 1,911 $ (737) $ 1,174


	June 30, 2021						December 31, 2020
(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles
Customer and distributor relationships	$	941	$	(436)	$	505	$	941	$	(410)	$	531
Proprietary technology and patents	206		(138)		68		206		(131)		75
Trademarks	143		(68)		75		143		(63)		80
Software	523		(284)		239		500		(265)		235
Other	21		(19)		2		21		(18)		3
Indefinite-lived intangibles	169		0		169		169		0		169
Other Intangibles	$	2,003	$	(945)	$	1,058	$	1,980	$	(887)	$	1,093

Amortization expense related to finite-lived intangible assets was $33 million and $65 million for the three and six month periods ended June 30, 2021, respectively, and $33 million and $68 million for the three and six month periods ended June 30, 2020, ~~respectively, and $34 million and $69 million for the three and six month periods ended June 30, 2019,~~ respectively.

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

During the first quarter of 2019, we determined that the intended use of a finite-lived customer relationship within the test application of our Measurement & Control Solutions segment had changed. Accordingly we recorded a $3 million impairment charge. The charge was calculated using the income approach and is reflected in “Restructuring and asset impairment charges” in our Condensed Consolidated Income Statements.

Note ~~10.~~8. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Foreign Exchange Risk

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

Certain business units with exposure to foreign currency exchange risks have designated certain currency forward agreements as cash flow hedges of forecasted intercompany inventory purchases and sales. Our principal currency exposures relate to the Euro, Swedish Krona, British Pound, Canadian Dollar, Polish Zloty and Australian Dollar. We had foreign exchange contracts with purchased notional amounts totaling ~~$257~~$270 million and $0 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. As of June 30, ~~2020,~~2021, our most significant foreign currency derivatives included contracts to sell U.S. Dollar and purchase Euro, purchase Swedish Krona and sell Euro, sell British Pound and purchase Euro, purchase Polish Zloty and sell Euro, purchase U.S. Dollar and sell Canadian Dollar, and to sell Canadian Dollar and purchase Euro. The purchased notional amounts associated with these currency derivatives are ~~$100~~$97 million, ~~$83~~$88 million, ~~$25~~$36 million, ~~$16~~$14 million, ~~$15~~$13 million and ~~$13~~$12 million, respectively.

Hedges of Net Investments in Foreign Operations

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

~~Cross Currency~~Cross-Currency Swaps

Beginning in 2015, we entered into ~~cross currency~~cross-currency swaps to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. During the second quarter of 2019 and third quarter of 2020 we entered into additional ~~cross currency~~cross-currency swaps. The total notional amount of derivative instruments designated as net investment hedges was ~~$720~~$1,208 million and ~~$714~~$1,249 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

~~In July 2020, we entered into additional cross currency swaps with a notional amount $425 million to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate.~~

Foreign Currency Denominated Debt

On March 11, 2016, we issued 2.250% Senior Notes of €500 million aggregate principal amount due March 2023. We designated the entirety of the outstanding balance, or ~~$559~~$591 million and ~~$554~~$610 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, net of unamortized discount, as a hedge of a net investment in certain foreign subsidiaries.

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

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Cash Flow Hedges
Foreign Exchange Contracts
Amount of gain (loss) recognized in OCI $ 6 $ — $ 4 $ (9)
Amount of (gain) loss reclassified from OCI into revenue (1) 1 1 2
Amount of loss reclassified from OCI into cost of revenue 1 1 2 2
Net Investment Hedges
Cross Currency Swaps
Amount of gain (loss) recognized in OCI $ (22) $ (8) $ 23 $ (1)
Amount of income recognized in Interest Expense 5 4 $ 9 $ 7
Foreign Currency Denominated Debt
Amount of gain (loss) recognized in OCI $ (15) $ (6) $ (5) $ 1


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

Net Investment Hedges
Cross-Currency Swaps
Amount of gain (loss) recognized in OCI	$	2	$	(22)	$	32	$	23
Amount of income recognized in Interest Expense	5		5		$	10	$	9
Foreign Currency Denominated Debt
Amount of gain (loss) recognized in OCI	$	(6)	$	(15)	$	20	$	(5)

As of June 30, ~~2020, $4~~2021, $6 million of net ~~gains~~losses on cash flow hedges are expected to be reclassified into earnings in the next 12 months.

As of June 30, ~~2020,~~2021, no gains or losses on the net investment hedges are expected to be reclassified into earnings over their duration.

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

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

(in millions) June 30,
2020 December 31,
2019
Derivatives designated as hedging instruments
Assets
Cash Flow Hedges
Other current assets $ 4 $ —
Net Investment Hedges
Other non-current assets $ 19 $ 4
Liabilities
Net Investment Hedges
Other non-current accrued liabilities $ (13) $ (24)


(in millions)	June 30, 2021		December 31, 2020
Derivatives designated as hedging instruments





Liabilities
Cash Flow Hedges
Other current liabilities	$	(5)	$	0
Net Investment Hedges
Other non-current accrued liabilities	$	(82)	$	(117)

The fair value of our long-term debt, due in 2023, designated as a net investment hedge was ~~$582~~$614 million and ~~$591~~$640 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Note ~~11.~~9. Accrued and Other Current Liabilities

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

(in millions) June 30,
2020 December 31,
2019
Compensation and other employee benefits $ 196 $ 199
Customer-related liabilities 166 153
Accrued taxes 83 79
Lease liabilities 57 61
Accrued warranty costs 56 36
Other accrued liabilities 105 100
Total accrued and other current liabilities $ 663 $ 628


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

Note ~~12.~~10. Credit Facilities and Debt

Total debt outstanding is summarized as follows:

(in millions) June 30,
2020 December 31,
2019
1.950% Senior Notes due 2028 (a) $ 500 $ —
2.250% Senior Notes due 2031 (a) 500 —
4.875% Senior Notes due 2021 (b) 600 600
2.250% Senior Notes due 2023 (b) 562 557
3.250% Senior Notes due 2026 (b) 500 500
4.375% Senior Notes due 2046 (b) 400 400
Commercial paper 50 276
Other 162 —
Debt issuance costs and unamortized discount (c) (31) (17)
Total debt 3,243 2,316
Less: short-term borrowings and current maturities of long-term debt 212 276
Total long-term debt $ 3,031 $ 2,040


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

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





Debt issuance costs and unamortized discount (c)	(26)		(28)

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

(a)The fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due ~~2028 and 2031~~2021 was ~~$504~~$606 million and ~~$503~~$620 million ~~respectively,~~ as of June 30, ~~2020.~~2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2023 was $614 million and $640 million as of June 30, 2021 and December 31, 2020, respectively. The fair value of our Senior Notes due 2026 was $548 million and $563 million as of June 30, 2021 and December 31, 2020 respectively. The fair value of our Senior Notes due 2046 was $483 million and $496 million as of June 30, 2021 and December 31, 2020, respectively.

(b)The fair value of our Senior Notes was determined using quoted prices in active markets for identical securities, which are considered Level 1 inputs. The fair value of our Senior Notes due ~~2021~~2028 was ~~$630~~$508 million and ~~$629~~$529 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The fair value of our Senior Notes due ~~2023~~2031 was ~~$582~~$507 million and ~~$591~~$527 million as of June 30, ~~2020~~2021 and December 31, ~~2019, respectively. The fair value of our Senior Notes due 2026 was $551 million and $518 million as of June 30,~~ 2020, ~~and December 31, 2019, respectively. The fair value of our Senior Notes due 2046 was $439 million and $431 million as of June 30, 2020 and December 31, 2019,~~ respectively.

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

Senior Notes

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

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

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

Interest on the Green Bond is payable on January 30 and July 30 of each ~~year beginning on January 30, 2021.~~year. As of June 30, ~~2020,~~2021, we are in compliance with all covenants for the Green Bond.

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

The Senior Notes include covenants that restrict our ability, ~~subject to exceptions,~~and the ability of our restricted subsidiaries, to incur debt secured by liens ~~and~~on certain property above a threshold, to engage in certain sale and leaseback transactions ~~as well as provide for customary events~~involving certain property above a threshold, and to consolidate or merge, or convey or transfer all or substantially all of ~~default (subject, in certain cases, to receipt of notice of default and/or customary grace and cure periods).~~our assets. We may redeem the Senior Notes, as applicable, in whole or in part, at any time at a redemption price equal to the principal amount of the Senior Notes to be redeemed, plus a make-whole premium. We may also redeem the Senior Notes in certain other circumstances, as set forth in the applicable Senior Notes indenture.

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

Interest on the Senior Notes due 2021 is payable on April 1 and October 1 of each year. Interest on the Senior Notes due 2023 is payable on March 11 of each year. Interest on the Senior Notes due 2026 and the Senior Notes due 2046 is payable on May 1 and November 1 of each year. As of June 30, ~~2020,~~2021, we are in compliance with all covenants for the Senior Notes.

Credit Facilities

2019 ~~Five-Year~~Five-Year Revolving Credit Facility

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

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

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

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

Commercial Paper

U.S. Dollar Commercial Paper Program

Our U.S. Dollar commercial paper program generally serves as a means of short-term funding with a $600 million maximum issuing balance and a combined limit of $800 million inclusive of the 2019 Credit Facility. As of June 30, ~~2020~~2021 and December 31, ~~2019, $50 million and $0 million~~2020, none of the Company's $600 million U.S. Dollar commercial paper program was ~~outstanding, respectively, at a weighted average interest rate of 2.18%.~~outstanding. We have the ability to continue borrowing under this program going forward in future periods.

Euro Commercial Paper Program

On June 3, 2019, Xylem entered into a Euro commercial paper program with ING Bank N.V., as administrative agent, and a syndicate of dealers. The Euro commercial paper program provides for a maximum issuing balance of up to €500 million (approximately ~~$562~~$592 million) which may be denominated in a variety of currencies. The maximum issuing balance may be increased in accordance with the Dealer Agreement. As of June 30, ~~2020~~2021 and December 31, ~~2019, $0 million and $276 million~~2020, none of the Company's Euro commercial paper program was ~~outstanding, respectively.~~outstanding. We have the ability to continue borrowing under this program going forward in future periods.

~~Term Loan Facilities~~

~~ING Bank Term Loan Facility~~

On April 25, 2020, the Company’s subsidiary, Xylem Europe GmbH (the “borrower”) entered into a 12-month €100 million (approximately $112 million) term loan 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 entered into a parent guarantee in favor of ING Bank also dated April 25, 2020 to secure all present and future obligations of the borrower under the Term Loan Agreement. Borrowings accrue interest at a rate equal to the EURIBOR or a replacement base rate, plus an applicable margin based on Xylem's credit rating. Xylem will also pay quarterly fees whether such commitment is used or unused. The full amount of $112 million has been drawn as of June 30, 2020 at a weighted average interest rate of 1.40%.

~~Australia & New Zealand Banking Group Limited Term Loan Facility~~

On April 30, 2020, the Company entered into a 12-month $50 million term loan facility the terms of which are set forth in a term loan agreement among the Company and Australia and New Zealand Banking Group Limited. Borrowings accrue interest at a rate equal to an adjusted LIBOR rate plus 1.50%.~~The full amount of $50 million has been drawn as of June 30, 2020 at a weighted average interest rate of 2.26%.~~

Note ~~13. Postretirement~~11. Post-retirement Benefit Plans

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

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Domestic defined benefit pension plans:
Service cost $ 1 $ — $ 2 $ 1
Interest cost 1 1 2 2
Expected return on plan assets (2) (2) (4) (4)
Amortization of net actuarial loss 1 1 2 1
Net periodic benefit cost $ 1 $ — $ 2 $ —
International defined benefit pension plans:
Service cost $ 3 $ 2 $ 6 $ 5
Interest cost 3 5 6 10
Expected return on plan assets (3) (9) (6) (18)
Amortization of net actuarial loss 3 2 6 4
Net periodic benefit cost $ 6 $ — $ 12 $ 1
Total net periodic benefit cost $ 7 $ — $ 14 $ 1


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

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

Amortization of net actuarial loss	4		3		8		6

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

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

The total net periodic benefit cost for other ~~postretirement~~post-retirement employee benefit plans was less than $1$1 million, including net credits recognized into other comprehensive income of less than $1 million, for both the three and six months ended June 30, ~~2020. The total net periodic benefit cost for other postretirement employee benefit plans was less than $1 million for both the three~~2021 and ~~six months ended June 30, 2019, including net credits recognized into other comprehensive income of $1 million for both the three and six months ended June 30, 2019.~~2020, respectively.

We contributed ~~$16~~$12 million and $9$16 million to our defined benefit plans during the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Additional contributions ranging between approximately $5$7 million and $15 million are expected to be made during the remainder of ~~2020.~~2021.

During the first quarter of 2020, the Company purchased a bulk annuity policy with an insurance company for its largest defined benefit plan in the ~~UK,~~U.K., as a plan asset, to facilitate the termination and buy-out of the plan. The bulk annuity fully insures the benefits payable to the participants of the plan until a full buy-out of the plan can be executed, which is expected to occur in ~~2021.~~2022. Included in the Company's six months ended June 30, 2020 contributions is $5 million paid to meet the shortfall between the cost of the bulk annuity policy and the plan assets. As a result of the change in assets from a mix of equities and bonds to the bulk annuity, the plan's expected rate of return on assets was reduced to 1.00% at December 31, 2019. The rate at December 31, 2018 was 7.25%. On January 27, 2020, the plan's assets of $336 million were transferred to the insurance company for the purchase of the bulk annuity.

Note 12. Equity

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


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

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


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

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

~~Note 14. Equity~~

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

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

~~The following table shows the changes in stockholders' equity for the six months ended June 30, 2019:~~


		Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Non-Controlling Interest		Total			Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Non-Controlling Interest		Total
Balance at January 1, 2019		$	2	$	1,950	$	1,639	$	(336)	$	(487)	$	14	$	2,782
Sale of business		—		—		—		—		—		(2)		(2)
Balance at January 1, 2020																Balance at January 1, 2020	$	2	$	1,991	$	1,866	$	(375)	$	(527)	$	10	$	2,967
Cumulative effect of change in accounting principle																Cumulative effect of change in accounting principle	—		—		(2)		—		—		—		(2)
Net income																Net income	—		—		38		—		—		—		38
Other comprehensive loss, net																Other comprehensive loss, net	—		—		—		(86)		—		(1)		(87)
Dividends declared ($0.26 per share)																Dividends declared ($0.26 per share)	—		—		(48)		—		—		—		(48)
Stock incentive plan activity																Stock incentive plan activity	—		13		—		—		(10)		—		3
Repurchase of common stock																Repurchase of common stock	—		—		—		—		(50)		—		(50)
Balance at March 31, 2020																Balance at March 31, 2020	$	2	$	2,004	$	1,854	$	(461)	$	(587)	$	9	$	2,821
Net income	Net income	—		—		79		—		—		—		79		Net income	—		—		31		—		—		—		31
Other comprehensive income, net	Other comprehensive income, net	—		—		—		20		—		—		20		Other comprehensive income, net	—		—		—		52		—		—		52
Dividends declared ($0.24 per share)		—		—		(44)		—		—		—		(44)
Dividends declared ($0.26 per share)																Dividends declared ($0.26 per share)	—		—		(47)		—		—		—		(47)
Stock incentive plan activity	Stock incentive plan activity	—		12		—		—		(14)		—		(2)		Stock incentive plan activity	—		8		—		—		—		—		8
Repurchase of common stock		—		—		—		—		(25)		—		(25)
Balance at March 31, 2019		$	2	$	1,962	$	1,674	$	(316)	$	(526)	$	12	$	2,808
Net income		—		—		139		—		—		—		139
Other comprehensive loss, net		—		—		—		(11)		—		—		(11)
Dividends declared ($0.24 per share)		—		—		(43)		—		—		—		(43)
Stock incentive plan activity		—		13		—		—		—		—		13
Balance at June 30, 2019		$	2	$	1,975	$	1,770	$	(327)	$	(526)	$	12	$	2,906
Balance at June 30, 2020																Balance at June 30, 2020	$	2	$	2,012	$	1,838	$	(409)	$	(587)	$	9	$	2,865

Note ~~15.~~13. Share-Based Compensation Plans

Share-based compensation expense was $8 million and $17 million during the three and six months ended June 30, 2021, respectively, and $8 million and $16 million during the three and six months ended June 30, 2020, ~~respectively, and $7 million and $16 million during the three and six months ended June 30, 2019,~~ respectively. The unrecognized compensation expense related to our stock options, restricted stock units and performance share units was $9 million, ~~$29~~$30 million and ~~$14~~$16 million, respectively, at June 30, ~~2020~~2021 and is expected to be recognized over a weighted average period of ~~2.2,~~ 2.1, 2.0 and ~~2.2~~2.8 years, respectively. The amount of cash received from the exercise of stock options was $5$9 million and $8$5 million for the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

2221

Stock Option Grants

The following is a summary of the changes in outstanding stock options for the six months ended June 30, ~~2020~~2021:

Share units
(in thousands)
Weighted
Average
Exercise
Price / Share
Weighted Average
Remaining
Contractual
Term (Years)
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2020 2,040 $ 48.56 6.3
Granted 548 74.00
Exercised (131) 41.03
Forfeited and expired (40) 77.28
Outstanding at June 30, 2020 2,417 $ 54.27 6.7 $ 34
Options exercisable at June 30, 2020 1,615 $ 44.49 5.4 $ 33
Vested and expected to vest as of June 30, 2020 2,309 $ 53.36 6.6 $ 33


	Share units (in thousands)	Weighted Average Exercise Price / Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2021	1,961	$	56.66	6.4
Granted	259	102.31
Exercised	(135)	58.39
Forfeited and expired	(22)	83.88
Outstanding at June 30, 2021	2,063	$	61.93	6.3	$	122
Options exercisable at June 30, 2021	1,409	$	51.45	5.0	$	98
Vested and expected to vest as of June 30, 2021	1,987	$	60.98	6.2	$	119

The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the six months ended June 30, ~~2020~~2021 was ~~$5.6~~$7.1 million.

Stock Option Fair Value

The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for ~~2020~~2021 grants:


Volatility	~~24.07~~26.30		%
Risk-free interest rate	~~15.12~~0.86		%
Dividend yield	~~1.43~~1.10		%
Expected term (in years)	~~5.8~~5.7
Weighted-average fair value / share	$	~~14.69~~23.20

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

Restricted Stock Unit Grants

The following is a summary of restricted stock unit activity for the six months ended June 30, ~~2020~~2021. The fair value of the restricted share unit awards is determined using the closing price of our common stock on date of grant:

Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2020 512 $ 68.95
Granted 317 75.01
Vested (237) 63.32
Forfeited (21) 74.16
Outstanding at June 30, 2020 571 $ 74.42


	Share units (in thousands)	Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2021	537	$	74.62
Granted	213	103.36
Vested	(233)	74.47
Forfeited	(15)	85.91
Outstanding at June 30, 2021	502	$	86.47

2322

ROIC Performance Share Unit Grants

The following is a summary of Return on Invested Capital ("ROIC") performance share unit grants for the six months ended June 30, ~~2020.~~2021. The fair value of the ROIC performance share units is equal to the closing share price on the date of the grant:


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


Forfeited (a)	(65)	76.04
Outstanding at June 30, 2021	177	$	84.66

Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2020 225 $ 64.51
Granted 78 78.30
Vested (89) 49.15
Forfeited (8) 77.05
Outstanding at June 30, 2020 206 $ 75.89

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

TSR Performance Share Unit Grants

The following is a summary of our Total Shareholder Return ("TSR") performance share unit grants for the six months ended June 30, ~~2020:~~

Share units
(in thousands)
Weighted
Average
Grant Date
Fair Value /Share
Outstanding at January 1, 2020 225 $ 75.80
Granted 78 100.69
Adjustment for Market Condition Achieved (a) 35 49.15
Vested (124) 49.15
Forfeited (8) 77.05
Outstanding at June 30, 2020 206 $ 96.47
2021:


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

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

The fair value of TSR performance share units was calculated on the date of grant using a Monte Carlo simulation model utilizing several key assumptions, including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The following are weighted-average assumptions for ~~2020~~2021 grants:




Volatility	~~22.6~~33.5	%
Risk-free interest rate	~~1.08~~0.24	%

ESG Performance Share Unit Grants

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

Note ~~16.~~14. Capital Stock

For the three and six months ended June 30, 2021, the Company repurchased less than 0.1 million shares of common stock for $1 million and approximately 0.7 million shares of common stock for $68 million, respectively. For the three and six months ended June 30, 2020, the Company repurchased less than 0.1 million shares of common stock for less than $1 million and approximately 0.8 million shares of common stock for $60 million, respectively. ~~For the three and six months ended June 30, 2019, the Company repurchased less than 0.1 million shares for less than $1 million and approximately 0.5 million shares for $39 million, respectively.~~ Repurchases include both share repurchase programs approved by the Board of Directors and

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

On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. There were 0 shares repurchased under the program for the three months ended June 30, 2021. For the six months ended June 30, 2021, we repurchased approximately 0.6 million shares for $60 million. There were no shares repurchased under the program for the three months ended June 30, 2020. For the six months ended June 30, 2020, we repurchased approximately 0.7 million shares for $50 million. There ~~were no shares repurchased under the program for the three months ended June 30, 2019. For the six months ended June 30, 2019, we repurchased approximately 0.3 million shares for $25 million. There~~ are up to ~~$288~~$228 million in shares that may still be purchased under this plan as of June 30, ~~2020.~~2021.

Aside from the aforementioned repurchase program, we repurchased less than 0.1 million shares and approximately 0.1 million shares for ~~less than~~ $1 million and ~~approximately $10~~$8 million for the three and six months ended June 30, ~~2020,~~2021, respectively, in relation to settlement of employee tax withholding obligations due as a result of the vesting of restricted stock units. Likewise, we repurchased less than 0.1 million shares and approximately ~~0.2~~0.1 million shares for less than $1 million and ~~approximately $14~~$10 million for the three and six months ended June 30, ~~2019,~~2020, respectively.

Note ~~17.~~15. Accumulated Other Comprehensive Loss

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


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


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





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


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


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


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

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

(in millions) Foreign Currency Translation Postretirement Benefit Plans Derivative Instruments Total
Balance at January 1, 2020 $ (103) $ (269) $ (3) $ (375)
Foreign currency translation adjustment (77) — — (77)
Tax on foreign currency translation adjustment (13) — — (13)
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net — 4 — 4
Income tax impact on amortization of postretirement benefit plan items — (1) — (1)
Unrealized loss on derivative hedge agreements — — (2) (2)
Reclassification of unrealized loss on foreign exchange agreements into revenue — — 2 2
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue — — 1 1
Balance at March 31, 2020 $ (193) $ (266) $ (2) $ (461)
Foreign currency translation adjustment 35 — — 35
Tax on foreign currency translation adjustment 9 — — 9
Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net — 4 — 4
Income tax impact on amortization of postretirement benefit plan items — (1) — (1)
Unrealized gain on derivative hedge agreements — — 6 6
Income tax benefit on unrealized gain on derivative hedge agreements — — (1) (1)
Reclassification of unrealized gain on foreign exchange agreements into revenue — — (1) (1)
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue — — 1 1
Balance at June 30, 2020 $ (149) $ (263) $ 3 $ (409)

~~The following table provides the components of accumulated other comprehensive loss for the six months ended June 30, 2019:~~


(in millions)	(in millions)	Foreign Currency Translation		Postretirement Benefit Plans		Derivative Instruments		Total		(in millions)	Foreign Currency Translation		Post-retirement Benefit Plans		Derivative Instruments		Total
Balance at January 1, 2019		$	(121)	$	(214)	$	(1)	$	(336)
Balance at January 1, 2020										Balance at January 1, 2020	$	(103)	$	(269)	$	(3)	$	(375)

Foreign currency translation adjustment	Foreign currency translation adjustment	29		—		—		29		Foreign currency translation adjustment	(77)		—		—		(77)
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	(4)		—		—		(4)		Tax on foreign currency translation adjustment	(13)		—		—		(13)

Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net		—		2		—		2
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net										Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		4		—		4

Income tax impact on amortization of postretirement benefit plan items		—		(1)		—		(1)
Income tax impact on amortization of post-retirement benefit plan items										Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized loss on derivative hedge agreements	Unrealized loss on derivative hedge agreements	—		—		(9)		(9)		Unrealized loss on derivative hedge agreements	—		—		(2)		(2)
Income tax benefit on unrealized loss on derivative hedge agreements		—		—		1		1

Reclassification of unrealized loss on derivative hedge agreements into revenue		—		—		1		1

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

Balance at March 31, 2019		$	(96)	$	(213)	$	(7)	$	(316)
Balance at March 31, 2020										Balance at March 31, 2020	$	(193)	$	(266)	$	(2)	$	(461)

Foreign currency translation adjustment	Foreign currency translation adjustment	(18)		—		—		(18)		Foreign currency translation adjustment	35		—		—		35
Tax on foreign currency translation adjustment	Tax on foreign currency translation adjustment	3		—		—		3		Tax on foreign currency translation adjustment	9		—		—		9

Amortization of prior service cost and net actuarial loss on postretirement benefit plans into other non-operating income (expense), net		—		2		—		2
Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net										Amortization of prior service cost and net actuarial loss on post-retirement benefit plans into other non-operating income (expense), net	—		4		—		4

Reclassification of unrealized loss on foreign exchange agreements into revenue		—		—		1		1
Income tax impact on amortization of post-retirement benefit plan items										Income tax impact on amortization of post-retirement benefit plan items	—		(1)		—		(1)
Unrealized gain on derivative hedge agreements										Unrealized gain on derivative hedge agreements	—		—		6		6
Income tax benefit on unrealized gain on derivative hedge agreements										Income tax benefit on unrealized gain on derivative hedge agreements	—		—		(1)		(1)
Reclassification of unrealized gain on foreign exchange agreements into revenue										Reclassification of unrealized gain on foreign exchange agreements into revenue	—		—		(1)		(1)
Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	—		—		1		1		Reclassification of unrealized loss on foreign exchange agreements into cost of revenue	—		—		1		1
Balance at June 30, 2019		$	(111)	$	(211)	$	(5)	$	(327)
Balance at June 30, 2020										Balance at June 30, 2020	$	(149)	$	(263)	$	3	$	(409)

Note ~~18.~~16. Commitments and Contingencies

Legal Proceedings

From time to time, we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations of previously-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, ~~and~~property damage, personal injury, privacy, employment, labor and pension, government contract issues and commercial or contractual disputes.

From time to time, claims may be asserted against Xylem alleging injury caused by any of our products resulting from asbestos exposure. We believe there are numerous legal defenses available for such claims and would defend ourselves vigorously. Pursuant to the Distribution Agreement among ITT Corporation (now ITT ~~LLC)~~LLC; acquired by Delticus HoldCo, L.P., a portfolio company of Warburg Pincus LLC, on July 1, 2021), Exelis (acquired by Harris Corporation, now L3Harris Technologies, Inc.) and Xylem, ITT ~~Corporation (now ITT LLC)~~LLC has an obligation to indemnify, defend and hold Xylem harmless for asbestos product liability matters, including settlements, judgments, and legal defense costs associated with all pending and future claims that may arise from past sales of ITT’s legacy products. We believe ITT ~~Corporation (now ITT LLC)~~LLC remains a substantial entity with sufficient financial resources to honor its obligations to us.

See Note 6,4, "Income Taxes", of our condensed consolidated financial statements for a description of a pending tax litigation matter.

Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claims, we do not believe it is reasonably

possible that any asserted or unasserted legal claims or proceedings, individually or in aggregate, will have a material adverse effect on our results of operations, or financial condition. We have estimated and accrued $4$5 million and $5$6 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, for these general legal matters.

Indemnifications

As part of our 2011 spin-off from our former parent, ITT Corporation (now ITT ~~LLC)~~LLC; acquired by Delticus HoldCo, L.P., a portfolio company of Warburg Pincus LLC, on July 1, 2021), Exelis Inc. (acquired by Harris Corporation, now L3Harris Technologies, Inc.) and Xylem will indemnify, defend and hold harmless each of the other parties with respect to such parties’ assumed or retained liabilities under the Distribution Agreement and breaches of the Distribution Agreement or related spin agreements. ~~The former parent’s~~ITT LLC's indemnification obligations include asserted and unasserted asbestos and silica liability claims that relate to the presence or alleged presence of asbestos or silica in products manufactured, repaired or sold prior to October 31, 2011, the Distribution Date, subject to limited exceptions with respect to certain employee claims, or in the structure or material of any building or facility, subject to exceptions with respect to employee claims relating to Xylem buildings or facilities. The indemnification associated with pending and future asbestos claims does not expire. Xylem has not recorded a liability for material matters for which we expect to be indemnified by the former parent or Exelis Inc. through the Distribution Agreement and we are not aware of any claims or other circumstances that would give rise to material payments from us under such indemnifications. ~~On May 29, 2015, Harris Inc. acquired Exelis. As the parent of Exelis, Harris Inc. is responsible for Exelis’ indemnification obligations under the Distribution Agreement.~~

Guarantees

We obtain certain stand-by letters of credit, bank guarantees, surety bonds and insurance letters of credit from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy ~~insurance related~~insurance-related requirements. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the amount of surety bonds, bank guarantees, insurance letters of credit and stand-by letters of credit was ~~$298~~$410 million and ~~$340~~$378 million, respectively.

Environmental

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

Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Our accrued liabilities for these environmental matters represent our best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis. We have estimated and accrued $3$3 million as of both June 30, ~~2020~~2021 and December 31, ~~2019~~2020 for environmental matters.

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

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Warranties

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

(in millions) 2020 2019
Warranty accrual – January 1 $ 41 $ 60
Net charges for product warranties in the period 34 11
Settlement of warranty claims (15) (23)
Warranty accrual - June 30 $ 60 $ 48
accruals over each period:


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

Note ~~19.~~17. Segment Information

Our business has 3 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 storm water pumps, treatment equipment, and controls and systems. The Applied Water segment serves many of the primary uses of water and focuses on the residential, commercial and industrial markets. The Applied Water segment's major products include pumps, valves, heat exchangers, controls and dispensing equipment. The Measurement & Control Solutions segment focuses on developing advanced technology solutions that enable intelligent use and conservation of critical water and energy resources as well as analytical instrumentation used in the testing of water. The Measurement & Control Solutions segment's major products include smart metering, networked communications, measurement and control technologies, critical infrastructure technologies, software and services including cloud-based analytics, remote monitoring and data management, leak detection and pressure monitoring solutions and testing equipment.

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

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The accounting policies of each segment are the same as those described in the summary of significant accounting policies (see Note 1 in the ~~2019~~2020 Annual Report). The following ~~tables contain~~table contains financial information for each reportable segment:

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Revenue:
Water Infrastructure $ 501 $ 561 $ 939 $ 1,043
Applied Water 337 394 675 773
Measurement & Control Solutions 322 390 669 766
Total $ 1,160 $ 1,345 $ 2,283 $ 2,582
Operating Income:
Water Infrastructure $ 73 $ 98 $ 112 $ 149
Applied Water 41 62 88 118
Measurement & Control Solutions (46) 26 (58) 42
Corporate and other (14) (15) (27) (29)
Total operating income $ 54 $ 171 $ 115 $ 280
Interest expense $ 18 $ 18 $ 34 $ 36
Other non-operating (expense) income, net (1) 3 (4) 5
Gain from sale of business — — — 1
Income before taxes $ 35 $ 156 $ 77 $ 250
Depreciation and Amortization:
Water Infrastructure $ 16 $ 16 $ 31 $ 31
Applied Water 5 6 11 12
Measurement & Control Solutions 34 35 70 71
Regional selling locations (a) 7 4 11 8
Corporate and other — 2 3 5
Total $ 62 $ 63 $ 126 $ 127
Capital Expenditures:
Water Infrastructure $ 8 $ 21 $ 18 $ 51
Applied Water 3 4 12 10
Measurement & Control Solutions 24 29 51 53
Regional selling locations (b) 8 5 12 9
Corporate and other 1 1 2 6
Total $ 44 $ 60 $ 95 $ 129


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2021		2020		2021		2020
Revenue:
Water Infrastructure	$	569	$	501	$	1,078	$	939
Applied Water	414		337		807		675
Measurement & Control Solutions	368		322		722		669
Total	$	1,351	$	1,160	$	2,607	$	2,283
Operating Income (Loss):
Water Infrastructure	$	93	$	73	$	164	$	112
Applied Water	64		41		130		88
Measurement & Control Solutions	13		(46)		22		(58)
Corporate and other	(10)		(14)		(23)		(27)
Total operating income	$	160	$	54	$	293	$	115
Interest expense	$	21	$	18	$	42	$	34
Other non-operating income (expense), net	(3)		(1)		(1)		(4)
Gain from sale of business	2		0		2		0
Income before taxes	$	138	$	35	$	252	$	77
Depreciation and Amortization:
Water Infrastructure	$	13	$	16	$	26	$	31
Applied Water	6		5		12		11
Measurement & Control Solutions	37		34		73		70
Regional selling locations (a)	4		7		9		11
Corporate and other	2		0		4		3
Total	$	62	$	62	$	124	$	126
Capital Expenditures:
Water Infrastructure	$	13	$	8	$	24	$	18
Applied Water	3		3		7		12
Measurement & Control Solutions	20		24		41		51
Regional selling locations (b)	5		8		8		12
Corporate and other	0		1		0		2
Total	$	41	$	44	$	80	$	95

(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.

2928


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.~~

This Report contains ~~information that may constitute~~ “forward-looking statements" within the meaning of Section 27A of the ~~Private~~ Securities ~~Litigation Reform~~ Act of ~~1995. Forward-looking statements by their nature address matters that are, to different degrees, uncertain.~~1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” "contemplate," "predict," “project,” “forecast,” “likely,” “believe,” “target,” “will,” “could,” “would,” “should,” "potential," "may" and similar expressions or their negative, may, but are not necessary to, identify forward-looking statements. ~~However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These~~By their nature, forward-looking statements address uncertain matters and include any statements that are not historical, ~~in nature, including any~~such as statements about ~~the capitalization of Xylem Inc. (the "Company"), the Company’s restructuring and realignment~~our strategy, financial plans, ~~future strategic plans and other statements that describe the Company’s business strategy,~~ outlook, objectives, plans, intentions or ~~goals. All statements that~~goals; or address ~~operating~~possible 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, revenues, operating margins and earnings per share ~~growth, and~~growth.

Although we believe that the expectations reflected in any of our forward-looking statements ~~expressing general views about future operating results -~~ are ~~forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause~~reasonable, actual results tocould differ materially from those ~~expressed~~projected or ~~implied~~assumed in ~~or reasonably inferred from, such~~any of our forward-looking statements. ~~Many~~Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, many of which are beyond our control. Additionally, many of these risks and uncertainties are, ~~currently amplified by~~ and may continue to be, amplified by ~~or in~~ the ~~future may be amplified by, the novel~~ coronavirus ~~("COVID-19"~~(“COVID-19”) pandemic.

~~Factors~~ Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from ~~those anticipated include:~~estimates or projections contained in or implied by our forward-looking statements include, among others, the following: overall industry and economic conditions, including industrial, governmental and private sector spending and the strength of the residential and commercial real estate markets; geopolitical, regulatory, economic and ~~business conditions;~~other risks associated with international operations; continued uncertainty ofaround the COVID-19 pandemic’s magnitude, duration ~~geographic reach~~ and ~~impact on the global economy of the COVID-19 pandemic; the current, and uncertain future, impact of the COVID-19 pandemic~~impacts on our business, operations, growth, ~~projections,~~and financial condition, ~~operations, cash flows,~~as well as uncertainty around approved vaccines and ~~liquidity, including~~ the ~~impact~~pace of ~~adverse economic conditions caused by~~recovery when the ~~COVID-19~~ pandemic ~~on our performance or customer markets;~~subsides; actual or potential other epidemics, pandemics or global health crises; ~~geopolitical~~manufacturing and operating cost increases due to inflation, prevailing price changes, tariffs and other risks associated with our international operations, including military actions, protectionism, economic sanctions or trade barriers including tariffs and embargoes that could affect customer markets and our business, and non-compliance with laws, including foreign corrupt practice laws, data privacy, export and import laws and competition laws; potential for unexpected cancellations or delays of customer orders in our reported backlog; our exposure tofactors; fluctuations in foreign currency exchange rates; disruption, competition and pricing pressures in the markets we serve; industrial, governmental and private sector spending; the strength of housing and related markets; weather conditions; ability to retain and attract talent and key members of management; our relationship with and the performance of our supply chain including channel partners; our ability to successfully identify, complete and integrate acquisitions; our ability to borrow or to refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; changes in the value of goodwill or intangible assets; the preliminary nature of our cost and savings estimates related to restructuring, realignment and related charges, including the timing of such charges and savings, which are subject to change as the Company makes decisions and refines estimates over time; timing delays in implementing restructuring, realignment and strategic initiatives; our ability to realize all of the cost savings anticipated in connection with restructuring and realignment; management and employee distraction resulting from restructuring actions; our ability to continue making strategic investments for growth; risks relating to product defects, product security, product liability and recalls; claims or investigations by governmental or regulatory bodies; cybersecurity ~~attacks, breaches~~incidents or other disruptions of information technology systems on which we rely, or involving our products; disruptions in operations at our facilities or that of third parties upon which we rely; ~~our sustainability initiatives; the anticipated use~~availability of ~~proceeds~~products, parts, electronic components and raw materials from our ~~green bond offering,~~supply chain; availability, regulation and interference with radio spectrum used by some of our products; our ability to retain and attract senior management and other key talent; uncertainty related to restructuring and realignment actions and related charges and savings; our ability to continue strategic investments for growth; our ability to successfully identify, execute and integrate acquisitions; risks relating to products, including ~~any~~defects, security, warranty and liability claims, and recalls; difficulty predicting our financial results, including uncertainties due to the nature of our short- and long-cycle businesses; volatility in our results due to weather conditions; our ability to borrow or refinance our existing indebtedness and the availability of liquidity sufficient to meet our needs; risk of future impairments to goodwill and other intangible assets; failure to ~~allocate~~comply with, or changes in, laws or regulations, including those pertaining to anti-corruption, data privacy and security, export and import, competition, and the ~~net proceeds to eligible green projects,~~environment and climate change; changes in our effective tax rates or ~~to meet~~tax expenses; legal, governmental or ~~continue to meet the investment requirements of certain environmentally focused investors; litigation~~regulatory claims, investigations or proceedings and associated contingent liabilities; and other factors set forth under “Item 1A. Risk Factors” in our ~~2019~~ Annual ~~Report, "Item 1A. Risk Factors" in the Company's Quarterly~~ Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~March~~December 31, 2020 ("2020 Annual Report") and in subsequent filings we ~~have made or may~~ make with the ~~SEC.~~

Securities and Exchange Commission (“SEC”).

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

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 in utility, industrial, residential and commercial building services settings. Our broad portfolio of solutions addresses customer needs across the water cycle, from the delivery, measurement and use of drinking water to the collection, test, treatment and analysis of wastewater to the return of water to the environment. Our product and service offerings are organized into three reportable segments that are aligned around the critical market applications they provide: Water Infrastructure, Applied Water and Measurement & Control Solutions.

•Water Infrastructure serves the water infrastructure sector with pump systems that transport water from aquifers, lakes, rivers and seas; with filtration, ultraviolet and ozone systems that provide treatment, making the water fit to use; and pumping solutions that move the wastewater and storm water to treatment facilities where our mixers, biological treatment, monitoring and control systems provide the primary functions in the treatment process. We also provide sales and rental of specialty dewatering pumps and related equipment and services. Additionally, our offerings use monitoring and control, smart and connected technologies to allow for remote monitoring of performance and enable products to self-optimize pump operations maximizing energy efficiency and minimizing unplanned downtime and maintenance for our customers. In the Water Infrastructure segment, we provide the majority of our sales directly to customers along with strong applications expertise, while the remaining amount is through distribution partners.

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

•Measurement & Control Solutions primarily serves the utility infrastructure solutions and services sector by delivering communications, smart metering, measurement and control technologies and critical infrastructure technologies that allow customers to more effectively use their distribution networks for the delivery, monitoring and control of critical resources such as water, electricity and natural gas. We also provide analytical instrumentation used to measure and analyze water quality, flow and level in clean water, wastewater, surface water and coastal environments. Additionally, we offer software and services including cloud-based analytics, remote monitoring and data management, leak detection, condition assessment, asset management and pressure monitoring solutions. ~~We also offer smart lighting solutions that improve efficiency and public safety efforts across communities.~~ 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

The global spread of the COVID-19 pandemic has curtailed the movement of people, goods and services worldwide, including in many of the regions where we sell our products and services and conduct operations.

This section summarizes the most significant impacts related to the COVID-19 pandemic that we have experienced to date, and we have included additional details as applicable throughout other sections of this Report. Many of these impacts did not begin to be felt broadly across our businesses until the latter part of the first quarter of 2020 and continued into the second quarter. In response to the COVID-19 pandemic, Xylem deployed a COVID-19 Response Team, responsible for Xylem's Pandemic Plan, which is designed to aid in prevention, preparedness, response and recovery at our sites.

Update

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

Public health officials have recommended, or governments have mandated, precautions to mitigate the spread of COVID-19, including stay at home or similar measures in many of the areas in which we operate. Operationally, our production facilities located in Latin America, Europe and Asia Pacific experienced reduced production levels due to such measures. Currently our overall operating capacity remains just over 90% globally, with all of our production facilities operational. Our production facilities continue to spread out operations over multiple shifts and implement other protective measures such as temperature screening and social distancing while maintaining operational capabilities in order to maintain a safe work environment.

The COVID-19 pandemic ~~is also~~as well as broader market dynamics have adversely ~~affecting,~~affected, and isare expected to continue to adversely affect, our ~~operations,~~ supply ~~chains~~chains. We have experienced, and ~~businesses. While we~~ expect ~~from time~~ to ~~time, to experience~~continue experiencing, shortages in the supply of components, parts and raw materials, and, in some cases, unpredictable interruptions with our external suppliers wein 2021. We have ~~enhanced~~also experienced increased logistics costs related to the current global capacity shortages. We continue to enhance our supplier pulsing and redundancy to ~~minimize those impacts.~~

~~To date,~~help mitigate these challenges. Additionally, we have in the ~~most significant impacts were experienced in volume reductions ranging across all segments and major geographic regions.~~

~~Future demand for our products and services is uncertain as the COVID-19 pandemic has also had an adverse impact on many of the customers we serve. As such, we have~~past and may continue to ~~experience decreased~~take measures with respect to buffer stock or ~~delayed demand for our products~~use of alternative suppliers to mitigate the impacts of freight and services, as well as changes in the payment patterns of our customers. At the end of the second quarter, total backlog increased 11.8% as compared to December 31, 2019 and there has not been a notable increase in contract cancellations to date. In many cases, Xylem’s products and services are considered "essential services" under various governmental mandates, and as a result we did not experience significant issues in our ability to distribute products or services, aside from customer-driven projectlogistics delays and ~~shipping delays due~~bolster our access to ~~stay at home measures. However, because the severity, magnitude~~raw materials and ~~duration of the COVID-19 pandemic~~components. If these shortages and ~~its economic consequences~~interruptions are ~~uncertain and rapidly changing, the pandemic’s ongoing and future impacts~~sustained, or if additional interruptions occur, they could have a negative impact on our ~~business, financial condition,~~ results of ~~operations, and stock price remains uncertain and difficult to predict, but we expect our results to continue to be adversely impacted beyond the quarter ending June 30, 2020.~~operations. Our current overall operating capacity approximates normal levels globally.

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, management committed to restructuring activities across our businesses and functions globally. These initiatives are designed to support our long-term financial resilience and simplify our operations, strengthen our competitive positioning and better serve our customers. In light of the uncertainty created by the COVID-19 pandemic, we have also proactively taken further cost reduction actions which include a temporary 20% reduction in the base salary of the Company's Chief Executive Officer ("CEO") and all direct reports to the CEO and a temporary 20% reduction in annual cash retainer fees payable to our Board of Directors. These temporary reductions are effective from June 1, 2020 through December 31, 2020. Additionally, we have committed to reduced capital expenditure and discretionary operating spending during the year.

Xylem has taken measures to protect the health and safety of our employees and work with our customers to minimize potential disruptions. In the first quarter, we implemented a support pay program for employees impacted by COVID-19, and an essential services premium pay program for the benefit of employees whose roles are classified as an “essential service” and, as such, are required to work either onsite at a Xylem facility or in the field supporting customers during periods of mandated stay at home or similar measures. These programs will remain in place through the third quarter of 2020 and continue to be evaluated for continuation as necessary going forward. Xylem Watermark, our corporate social responsibility program, ~~is also supporting~~continues to support our communities in addressing the challenges posed by this global pandemic through its partnership with Americares and UNICEF, as well as the ~~expansion of the~~ Partner Community Grants program and matching donations program for employees and partners, and other philanthropic commitments.

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

Many of our offices globally ~~have transitioned to~~remain in a ~~fully~~substantially remote work from home status ~~with no material disruption to operations, financial reporting systems, internal control over financial reporting or disclosure controls~~ and ~~procedures. As public health officials and governments ease recommendations and regulations regarding stay at home measures,~~ our COVID-19 Response Team ~~is applying~~applies a set of Xylem "Return to Workplace" health and safety guidelines for remote workers to return to our facilities. These guidelines require government officials to first declare an easing of their restrictions, upon which we do a full review of our site to determine its readiness and follow a phased return to work approach, all in service to help ensure the safety of our people.

~~We will continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19.~~ We continue to assess the evolving nature of the pandemic and its possible implications to our business, employees, supply chain, customers and ~~customers,~~communities, and to take ~~necessary~~ actions in an effort to mitigate adverse consequences.

Risk related to ~~these items~~the impact of COVID-19 as well as our supply chain are described in further detail under "Item 1A. Risk Factors" in the Company's ~~Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.~~2020 Annual Report.

Executive Summary

Xylem reported revenue for the second quarter of ~~2020~~2021 of ~~$1,160~~$1,351 million, ~~a decrease~~an increase of ~~13.8%~~16.5% compared to ~~$1,345~~$1,160 million reported in the second quarter of ~~2019.~~2020. On a constant currency basis, revenue ~~decreased~~increased by ~~$160~~$125 million, or ~~11.9%~~10.8%, driven ~~entirely~~ by organic ~~declines~~revenue growth across all segments and in all end markets. ~~Organic revenue decline during the quarter was anticipated as our business continues to be impacted by the COVID-19 pandemic.~~

We generated operating income of ~~$54~~$160 million (margin of ~~4.7%~~11.8%) during the second quarter of ~~2020,~~2021, as compared to ~~$171~~$54 million (margin of ~~12.7%~~4.7%) in ~~2019.~~2020. Operating income in the second quarter of ~~2020 included unfavorable impacts~~2021 benefited from ~~increased~~a decrease in restructuring and realignment costs of ~~$22~~$37 million as compared to the second quarter of 2020 and special charges of $11 million incurred during ~~the period.~~2020 that did not recur. Excluding the impact of these items, adjusted operating income was $166 million (adjusted margin of 12.3%) during the second quarter of 2021 as compared to $108 million (adjusted margin of 9.3%) ~~during the second quarter of 2020 as compared to $192 million (adjusted margin of 14.3%)~~ in ~~2019.~~2020. The ~~decrease~~increase in adjusted operating margin was primarily due to ~~unfavorable~~cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted ~~significantly~~ by ~~COVID-19; cost inflation; increased inventory management costs; incremental~~ COVID-19 ~~related costs; increased spending on strategic investments and unfavorable mix.~~recovery. These impacts were partially offset by cost ~~reductions from our productivity~~inflation and ~~other cost saving initiatives and price realization.~~increased spending on strategic investments.

Additional financial highlights for the quarter ended June 30, ~~2020~~2021 include the following:

•Orders of ~~$1,232~~$1,660 million, ~~down 11.5%~~up 34.7% from ~~$1,392~~$1,232 million in the prior year, and ~~down 8.9%~~up 28.8% on an organic ~~basis, impacted by the COVID-19 pandemic.~~basis.

•Earnings per share of ~~$0.17, down 77.9%~~$0.62, up 264.7% when compared to the prior year ($~~0.40, down 49.4%~~0.66, up 65.0% on an adjusted basis).

•Net income as a percent of revenue of 8.4%, up 570 basis points compared to 2.7% in the prior year. EBITDA margin of 16.2%, up 650 basis points when compared to 9.7% in the prior year (17.3%, up 200 basis points on an adjusted basis)

•Net cash flow provided by operating activities of ~~$179~~$206 million for the six months ended June 30, ~~2020, down~~2021, an increase of $27 million from cash provided in the same period of the prior year. Free cash flow ~~of $84~~was $126 million, up $7$42 million from the prior year.

Key Performance Indicators and Non-GAAP Measures

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

•"organic revenue" and "organic orders" defined as revenue and orders, respectively, excluding the impact of fluctuations in foreign currency translation and contributions from acquisitions and divestitures. Divestitures include sales or discontinuance of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. The period-over-period change resulting from foreign currency translation impacts is determined by translating current period and prior period activity using the same currency conversion rate.

•"constant currency" defined as financial results adjusted for foreign currency translation impacts by translating current period and prior period activity using the same currency conversion rate. This

approach is used for countries whose functional currency is not the U.S. ~~dollar.~~Dollar.

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


		Three Months Ended														Six Months Ended																Three Months Ended					Six Months Ended
		June 30,														June 30,																June 30,					June 30,
(In millions, except for per share data)	(In millions, except for per share data)	2020						2019						2020								2019					(In millions, except for per share data)	2021				2020				2021	2020
Net income & Earnings per share	Net income & Earnings per share	$	31	$	0.17	$	139	$	0.77	$	69	$	0.38	$	218	$	1.20	Net income & Earnings per share	$	113	$	0.62	$	31	$	0.17		$	200	$	1.10	$	69	$	0.38
Restructuring and realignment, net of tax of $10 and $12 for 2020 and $4 and $8 for 2019		33		0.18		17		0.09		40		0.22		33		0.18
Restructuring and realignment, net of tax of $1 and $3 for 2021 and $10 and $12 for 2020																		Restructuring and realignment, net of tax of $1 and $3 for 2021 and $10 and $12 for 2020	5		0.03		33		0.18			11		0.06		40		0.22

Special charges, net of tax of $3 and $3 for 2020 and $0 for 2019		10		0.06		—		—		11		0.06		4		0.02
Special charges, net of tax of $1 and $1 for 2021 and $3 and $3 for 2020																		Special charges, net of tax of $1 and $1 for 2021 and $3 and $3 for 2020	2		0.01		10		0.06			5		0.03		11		0.06
Tax-related special items	Tax-related special items	(1)		(0.01)		(13)		(0.07)		(5)		(0.03)		(17)		(0.09)		Tax-related special items	1		0.01		(1)		(0.01)			7		0.04		(5)		(0.03)
Gain from sale of business, net of tax of $0 for 2019		—		—		—		—		—		—		(1)		—
Gain from sale of business, net of tax of $0 for 2021																		Gain from sale of business, net of tax of $0 for 2021	(2)		(0.01)		—		—			(2)		—		—		—
Adjusted net income & Adjusted earnings per share	Adjusted net income & Adjusted earnings per share	$	73	$	0.40	$	143	$	0.79	$	115	$	0.63	$	237	$	1.31	Adjusted net income & Adjusted earnings per share	$	119	$	0.66	$	73	$	0.40		$	221	$	1.23	$	115	$	0.63

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

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

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in millions)	2021			2020			2021			2020
Net Income	$	113		$	31		$	200		$	69
Income tax expense	25			4			52			8
Interest expense, net	19			16			38			30
Depreciation	29			29			59			58
Amortization	33			33			65			68
EBITDA	$	219		$	113		$	414		$	233
EBITDA Margin	16.2		%	9.7		%	15.9		%	10.2		%
Share-based compensation	$	8		$	8		$	17		$	16
Restructuring and realignment	6			43			14			52
Special charges	3			13			6			14
Gain from sale of business	(2)			—			(2)			—
Adjusted EBITDA	$	234		$	177		$	449		$	315
Adjusted EBITDA Margin	17.3		%	15.3		%	17.2		%	13.8		%

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

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

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

•"free cash flow" defined as net cash from operating activities, as reported in the Statement of Cash Flows, less capital expenditures. Our definition of "free cash flow" does not consider certain non-discretionary cash payments, such as debt. The following table provides a reconciliation of free cash flow.


		Six Months Ended							Six Months Ended
		June 30,							June 30,
(In millions)	(In millions)	2020		2019		(In millions)	2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	179	$	206	Net cash provided by operating activities	$	206	$	179
Capital expenditures	Capital expenditures	(95)		(129)		Capital expenditures	(80)		(95)
Free cash flow	Free cash flow	$	84	$	77	Free cash flow	$	126	$	84
Net cash used by investing activities	Net cash used by investing activities	$	(88)	$	(146)	Net cash used by investing activities	$	(69)	$	(88)
Net cash provided by financing activities		$	774	$	25
Net cash (used) provided by financing activities						Net cash (used) provided by financing activities	$	(162)	$	774

3433

•“EBITDA” defined as earnings before interest, taxes, depreciation and amortization expense and "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.

Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Net Income $ 31 $ 139 $ 69 $ 218
Income tax expense 4 17 8 32
Interest expense (income), net 16 18 30 35
Depreciation 29 29 58 58
Amortization 33 34 68 69
EBITDA $ 113 $ 237 $ 233 $ 412
Share-based compensation $ 8 $ 7 16 16
Restructuring and realignment 43 21 52 41
Special charges 13 — 14 4
Gain from sale of business — — — (1)
Adjusted EBITDA $ 177 $ 265 $ 315 $ 472

~~2020~~2021 Outlook

We ~~withdrew 2020 guidance on March 31, 2020 due~~anticipate total revenue growth in the range of 8% to ~~uncertainties caused by COVID-19. Given the continued uncertainties around the potential impact on the second half of the year, we are not reinstating full-year guidance, but we are providing the~~10% in 2021, with organic revenue ~~outlook for the third quarter. We expect revenue~~growth anticipated to be ~~down 10% to 14%~~ in the ~~third quarter,~~range of 6% to 8% ~~to 12% organically, driven primarily by the impact of COVID-19.~~

. The following is a summary of our organic revenue outlook by ~~each of our~~ end markets:

•Utilities revenue ~~decreased~~increased by approximately 7%5% organically through the first half of the year driven by ~~weakness~~strength in western Europe and the ~~United States, the Middle East and Asia Pacific,~~emerging markets, partially offset by ~~strength~~weakness in ~~Europe. During 2020~~North America. For 2021, we expect organic revenue growth in the mid to high-single-digit range with continued resilience on the wastewater side, as ~~essential operational spending continues~~utilities remain focused on mission-critical applications and ~~capital~~anticipate modest growth on a global basis through the year. The timing of large clean water utility project ~~funding for the year~~deployments has been ~~secured. However,~~impacted by the ~~clean water utilities will continue facing workforce challenges from impacts~~global shortage of ~~COVID-19 on the way in~~electronic components, which ~~they need to operate. We are seeing delays in project deployments, but~~we expect to ~~start to see modest recovery as physical distancing requirements ease.~~continue throughout the remainder of 2021. We ~~continue to gain~~anticipate that these deployments will ramp up when supply constraints ease based on our strong backlog position and orders momentum. Additionally, we expect healthy momentum ~~behind key multi-year wins setting up healthy longer term growth.~~in the test and treatment markets globally and increased demand for our smart water solution and digital offerings.

•Industrial revenue ~~decreased~~increased by approximately ~~13%~~15% organically through the first half of the year driven by ~~weakness~~strength across all major geographic regions. For 2021, we expect organic revenue growth in the high-single-digit range as activity across all segments rebounds globally and our dewatering business continues to recover, especially in the emerging markets, as demand increases and site access restrictions continue to ease. We anticipate growth in during the second half of the year led by North America, ~~the~~with growth in emerging markets and western Europe. As 2020 progresses we expect industrial facilities to continue limiting access to sales teams and channel partners, causing slower orders and activity while non-essential work is deferred. Exposure to the impacts of a soft oil and gas market will continue to have an effect on both our dewatering and applied water businesses potentially leading to demand declines. We anticipate modest recovery in growth trajectoryEurope as ~~countries and regions begin to re-open and activity resumes.~~well.

•In the commercial markets, organic revenue ~~decline~~growth was approximately ~~11%~~8% through the first half of the year driven by ~~weakness~~strength in ~~the United States~~western Europe, North America and the emerging markets. ~~During 2020~~For 2021, we expect organic revenue growth in the mid to high-single-digit range. We expect replacement business in the ~~United States to continue~~U.S. to be ~~impacted by COVID-19.~~stable during the year and anticipate continued healthy activity in Europe. We ~~anticipate mixed performance~~expect new construction activity in North America to be soft, however we are optimistic that conditions will begin to recover late in the ~~institutional building sector depending on the "essential" nature of end customer. Backlog remains robust as we work to restock distributors that delayed orders early on in the pandemic.~~year.

•In the residential markets, organic revenue ~~decline~~growth was approximately ~~14%~~30% through the first half of the year driven by ~~weakness~~strength in the emerging markets, North America and western ~~Europe, the United States and Asia Pacific.~~Europe. This market is primarily driven by replacement revenue serviced through our distribution network. ~~As such,~~For 2021, we expect organic revenue growth in the low-teens, driven by healthy demand activity from increased residential users in the U.S. and Europe. Additionally, we anticipate ~~primarily emergency replacement activity as a result of social distancing requirements.~~strong demand in China for secondary water supply product applications.

~~In response~~We will continue to ~~the changes~~strategically execute restructuring and realignment actions in ~~business~~an effort to optimize our cost structure, improve our operational efficiency and economic conditions arising as a result of the COVID-19 pandemic, on June 2, 2020 management committed to structural cost actions across our businesses and functions globally. These plans are designed to support our long-term financial resilience and simplify our operations,effectiveness, strengthen our competitive positioning and better serve our customers. Additionally, we will continue to strategically execute previously announced restructuring and realignment actions, primarily to reposition our European and North American businesses in an effort to optimize our cost structure and improve our operational efficiency and effectiveness. During ~~2020,~~2021, we expect to incur between ~~$80~~$30 million and ~~$100~~$40 million in restructuring and realignment ~~costs, with approximately $25 million of these costs being non-cash charges.~~costs. We expect to realize ~~approximately $67~~between $35 million and $40 million of net savings in ~~2020,~~2021, consisting of ~~$25~~between $33 million and $35 million of incremental net savings from restructuring and realignment actions initiated in ~~2019,~~2020, and ~~approximately $42~~between $2 million and $5 million of net savings from the restructuring, realignment and other structural cost actions initiated during this year.

Results of Operations

Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2020 2019 Change 2020 2019 Change
Revenue $ 1,160 $ 1,345 (13.8) % $ 2,283 $ 2,582 (11.6) %
Gross profit 434 526 (17.5) % 843 1,000 (15.7) %
Gross margin 37.4 % 39.1 % (170) bp 36.9 % 38.7 % (180) bp
Total operating expenses 380 355 7.0 % 728 720 1.1 %
Expense to revenue ratio 32.8 % 26.4 % 640 bp 31.9 % 27.9 % 400 bp
Restructuring and realignment costs 43 21 104.8 % 52 41 26.8 %
Special charges 11 — NM 11 4 175.0 %
Adjusted operating expenses 326 334 (2.4) % 665 675 (1.5) %
Adjusted operating expenses to revenue ratio 28.1 % 24.8 % 330 bp 29.1 % 26.1 % 300 bp
Operating income 54 171 (68.4) % 115 280 (58.9) %
Operating margin 4.7 % 12.7 % (800) bp 5.0 % 10.8 % (580) bp
Interest and other non-operating expense, net 19 15 26.7 % 38 31 22.6 %
Gain from sale of business — — — % — 1 NM
Income tax expense 4 17 (76.5) % 8 32 (75.0) %
Tax rate 10.9 % 10.5 % 40 bp 10.4 % 12.8 % (240) bp
Net income $ 31 $ 139 (77.7) % $ 69 $ 218 (68.3) %


	Three Months Ended								Six Months Ended
	June 30,								June 30,
(In millions)	2021			2020			Change		2021			2020			Change
Revenue	$	1,351		$	1,160		16.5	%	$	2,607		$	2,283		14.2	%
Gross profit	520			434			19.8	%	1,010			843			19.8	%
Gross margin	38.5		%	37.4		%	110	bp	38.7		%	36.9		%	180	bp



Total operating expenses	360			380			(5.3)	%	717			728			(1.5)	%
Expense to revenue ratio	26.6		%	32.8		%	(620)	bp	27.5		%	31.9		%	(440)	bp
Restructuring and realignment costs	6			43			(86.0)	%	14			52			(73.1)	%

Special charges	—			11			—	%	2			11			(81.8)	%
Adjusted operating expenses	354			326			8.6	%	701			665			5.4	%
Adjusted operating expenses to revenue ratio	26.2		%	28.1		%	(190)	bp	26.9		%	29.1		%	(220)	bp
Operating income	160			54			196.3	%	293			115			154.8	%
Operating margin	11.8		%	4.7		%	710	bp	11.2		%	5.0		%	620	bp
Interest and other non-operating expense, net	24			19			26.3	%	43			38			13.2	%
Gain from sale of business	2			—			NM		2			—			NM
Income tax expense	25			4			525.0	%	52			8			550.0	%
Tax rate	18.5		%	10.9		%	760	bp	20.7		%	10.4		%	1,030	bp
Net income	$	113		$	31		264.5	%	$	200		$	69		189.9	%

NM - Not meaningful change

Revenue

Revenue generated during the three and six months ended June 30, ~~2020~~2021 was ~~$1,160~~$1,351 million and ~~$2,283~~$2,607 million, reflecting ~~decreases~~increases of ~~$185~~$191 million, or ~~13.8%~~16.5%, and ~~$299~~$324 million, or ~~11.6%~~14.2%, respectively, compared to the same prior year periods. On a constant currency basis, revenue ~~declined 11.9%~~grew 10.8% and ~~9.9%~~9.4% for the three and six months ended June 30, ~~2020.~~2021. The ~~decreases at~~increases on a constant currency ~~consisted entirely of declines in~~basis were driven by organic revenue growth of ~~$160~~$128 million and ~~$255~~$219 million, respectively, reflecting ~~significantly lower demand~~strong organic growth across all major geographic regions and ~~segments largely due to COVID-19 related impacts.~~segments.

The following table illustrates the impact from organic ~~declines,~~growth, recent ~~acquisitions and~~ divestitures, and foreign currency translation in relation to revenue during the three and six months ended June 30, ~~2020:~~

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Revenue $ 561 $ 394 $ 390 $ 1,345
Organic Impact (44) (7.8) % (51) (12.9) % (65) (16.7) % (160) (11.9) %
Acquisitions/(Divestitures) — — % — — % — — % — — %
Constant Currency (44) (7.8) % (51) (12.9) % (65) (16.7) % (160) (11.9) %
Foreign currency translation (a) (16) (2.9) % (6) (1.5) % (3) (0.8) % (25) (1.9) %
Total change in revenue (60) (10.7) % (57) (14.5) % (68) (17.4) % (185) (13.8) %
2020 Revenue $ 501 $ 337 $ 322 $ 1,160
2021:


	Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(In millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Revenue	$	501			$	337			$	322			$	1,160
Organic Growth	32		6.4	%	59		17.5	%	37		11.5	%	128		11.0	%
Divestitures	—		—	%	—		—	%	(3)		(0.9)	%	(3)		(0.2)	%
Constant Currency	32		6.4	%	59		17.5	%	34		10.6	%	125		10.8	%
Foreign currency translation (a)	36		7.2	%	18		5.3	%	12		3.7	%	66		5.7	%
Total change in revenue	68		13.6	%	77		22.8	%	46		14.3	%	191		16.5	%
2021 Revenue	$	569			$	414			$	368			$	1,351

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

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(In millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Revenue $ 1,043 $ 773 $ 766 $ 2,582
Organic Impact (76) (7.3) % (89) (11.5) % (90) (11.7) % (255) (9.9) %
Acquisitions/(Divestitures) — — % — — % — — % — — %
Constant Currency (76) (7.3) % (89) (11.5) % (90) (11.7) % (255) (9.9) %
Foreign currency translation (a) (28) (2.7) % (9) (1.2) % (7) (0.9) % (44) (1.7) %
Total change in revenue (104) (10.0) % (98) (12.7) % (97) (12.7) % (299) (11.6) %
2020 Revenue $ 939 $ 675 $ 669 $ 2,283


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

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

Water Infrastructure

Water Infrastructure revenue ~~decreased $60~~increased $68 million, or ~~10.7%~~13.6%, for the second quarter of ~~2020 (7.8% decrease at~~2021 (6.4% increase on a constant ~~currency)~~currency basis) as compared to the prior year. Revenue ~~was negatively impacted by $16~~benefited from $36 million of foreign currency translation, with the change at constant currency coming entirely from an organic ~~decline~~growth of ~~$44~~$32 million. Organic ~~weakness~~growth for the quarter was ~~primarily~~ driven by strength in the industrial end market, particularly ~~in North America, due to continued soft market conditions in oil and gas and mining, as well as in~~across the emerging ~~markets.~~markets and, to a lesser extent, in western Europe. Organic ~~revenue decline~~growth for the quarter was also driven by ~~weakness~~strength in the utility end market, ~~particularly~~primarily in ~~the United States, due to softness~~western Europe where we saw strong demand in ~~the construction market as compared to the~~utilities' operational spending coupled with recovery from prior year ~~as well as in India due the market slow down as well as the lapping of a large project delivery in the prior year. Declines~~COVID-19 impacts. Organic growth in the utility end market ~~were~~was marginally offset by ~~organic growth~~declines in ~~Europe~~North America during the period primarily driven by spending for operational needs in eastern Europe. Market conditions in both end markets for the segment were negatively impacted by the COVID-19 pandemic during the quarter, heavily impacting the organic revenue decline.quarter.

From an application perspective, ~~the~~ organic revenue ~~decline during~~growth for the second quarter was ~~primarily~~ driven by our transport application. The transport application had strong revenue growth in the emerging markets, where the dewatering business in Latin America and Africa benefited from strong market conditions ~~continued to soften~~ in ~~the United States in the dewatering applications, with construction,~~ mining ~~and oil and gas all down in~~during the quarter ~~heavily~~and Asia Pacific had strong revenue growth during the quarter, and in western Europe, where we had strong industrial and utility demand, positively impacted by ~~the~~ COVID-19 ~~pandemic.~~recovery. Organic revenue decline within the transport application was also driven by softness in Asia Pacific and Latin America which were also impacted by the COVID-19 pandemic during the quarter. Organic revenue decline in thegrowth from our transport application was partially offset by a modest ~~growth from our~~decline in the treatment application, driven by the timing of project deliveries in the ~~United States during~~U.S. as compared to the ~~quarter.~~

prior year.

For the six months ended June 30, ~~2020,~~2021, revenue ~~decreased $104~~increased $139 million, or ~~10.0% (7.3% decrease at constant currency) as compared to prior year. Revenue was negatively impacted by $28 million of foreign currency translation, with the change at~~14.8% (8.4% increase on a constant currency coming entirely from an organic decline of $76 million. Organic weakness for the six month period was primarily driven by the industrial end market, particularly in North America, due to continued soft market conditions in oil and gas and mining, and in the emerging markets, where organic growth was heavily impacted by the COVID-19 pandemic during the year. Organic revenue decline during the six month period was also driven by weakness in the utility end market, particularly in the United States, due to softness in construction and the lapping of projects in the prior year, as well as in India due to the timing of project deployments in the prior year. Declines in the utility end market in these regions were partially offset by organic growth in Europe during the period. The COVID-19 pandemic negatively impacted organic growth during the period throughout the entire segment and both end markets.

From an application perspective, the organic revenue decline during the six months ended June 30, 2020 was driven by our transport application where market conditions continued to soften in United States in the dewatering applications, with construction, oil and gas and mining all down during the first half of the year. We also saw organic revenue decline within the emerging markets in the transport application, primarily driven softness in Latin America and India, with India experiencing the lapping of some large projects executed in the prior year. Organic revenue declines in the transport application for all regions were impacted by the COVID-19 pandemic during the period. Organic revenue declines within the transport application were partially offset by modest organic growth in the treatment application during the year, primarily driven by projects in the middle east.

~~Applied Water~~

~~Applied Water revenue decreased $57 million, or 14.5%, for the second quarter of 2020 (12.9% decrease at constant currency)~~basis) as compared to the prior year. Revenue ~~was negatively impacted by $6 million of foreign currency translation for the quarter, with the change at constant currency coming entirely~~benefited from an organic decline of $51 million. Organic weakness for the quarter was driven by declines across all end markets and in all major geographic regions. Organic revenue declines in the segment were impacted by weakening market conditions during the quarter which have been accelerated by the COVID-19 pandemic, particularly in the United States, western Europe and in the emerging markets where restricted activities impacted the markets served.

From an application perspective, the organic revenue decline in the second quarter was led by weakness in the industrial water application driven by the United States, western Europe and the emerging markets, where we experienced industry softening, which has been amplified by the COVID-19 pandemic with restricted activities. The building services application in the commercial markets also experienced a decline in organic revenue during the quarter which was driven by the impact of the COVID-19 pandemic in the United States where the timing of shipments was impacted by the economic slowdown and restricted activity. Weakness in the building services application in the residential market also contributed to the organic revenue decline during the quarter, primarily in the United States and western Europe.

For the six months ended June 30, 2020, revenue decreased $98 million, or 12.7% (11.5% decrease at constant currency) as compared to the prior year. Revenue was negatively impacted by $9 million of foreign currency translation for the period, with the change at constant currency coming entirely from an organic decline of $89 million. Organic weakness during the first half of the year was driven by declines across all end markets and in all major geographic regions. Organic revenue declines in the segment were significantly driven by impacts from the COVID-19 pandemic, particularly in the United States, the emerging markets and western Europe where lockdown activities caused a slow down in the markets served and the general softening of market conditions.

From an application perspective, the organic revenue decline for the six month period was led by weakness in the building services application. The building services application in the commercial markets experienced a decline in organic revenue during the period driven by the impact of the COVID-19 pandemic in the United States, where construction was impacted by the economic slowdown, as well as in the emerging markets, particularly China and the Middle East. Weakness in the building services application in the residential market also contributed to the organic revenue decline during the first half of the year, primarily in the United States and western Europe. The segment also had organic revenue declines in the industrial water application driven by continued industry softening, which has been amplified by the COVID-19 pandemic, in the United States, western Europe and the emerging markets.

~~Measurement & Control Solutions~~

Measurement & Control Solutions revenue decreased $68 million, or 17.4%, for the second quarter of 2020 (16.7% at constant currency) as compared to the prior year. Revenue was negatively impacted by $3 million of foreign currency translation for the quarter, with the change at constant currency coming entirely from an organic decline of $65 million. Organic weakness for the quarter was driven by a decline in the utility end market, primarily in North America and the Middle East and, to a lesser extent, weakness in the industrial end market across all major geographic regions. Organic revenue declines in the segment were significantly impacted by the COVID-19 pandemic during the quarter, particularly in the United States.

From an application perspective, the organic revenue decline for the segment was driven by the water application, where the COVID-19 pandemic drove market softness in the United States, and we lapped strong project deployments in the Middle East during the second quarter of the prior year. The test application also experienced organic revenue decline during the quarter, primarily driven by the negative impacts of the COVID-19 pandemic experienced in North America and western Europe, as well as the lapping of large ocean and coastal projects in the Middle East in the prior year. Organic revenue declined in the energy application driven by large gas project deployments in the United States during the prior year that did not repeat, coupled with softening market conditions, which were negatively impacted by the COVID-19 pandemic. The software as a service ("SaaS") application had a modest decline in revenue as compared to the prior year, primarily in the United States.

~~For the six months ended June 30, 2020, revenue decreased $97 million, or 12.7% (11.7% at constant currency) as compared to the prior year. Revenue was negatively impacted by $7~~$60 million of foreign currency translation during the six month period, with the change at constant currency coming entirely from an organic ~~decline~~growth of ~~$90~~$79 million. Organic ~~weakness~~growth during the year was driven by strength in the both the utility and industrial end markets. Strength in the utility end market was led by western Europe, where utilities' operational spending continues to be strong, and in the emerging markets, where China benefited from healthy order intake coming into the year. Organic growth in the industrial end market was particularly strong across the emerging markets, which included growth from the COVID-19 recovery in Latin America and healthy order intake in China and Africa, and in western Europe.

From an application perspective, organic revenue growth during the six month period was primarily driven by our transport application. The transport application was driven by strong revenue growth across the emerging markets, where we benefited from healthy order intake in Asia Pacific and Africa and a favorable prior year comparison in Latin America, as well as growth from the COVID-19 recovery in western Europe. Organic revenue from our treatment application also contributed to the segment's growth during the period, driven by strength in the emerging markets, particularly in China, which was partially offset by the timing of project deliveries in the U.S. during the year.

Applied Water

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

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

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

From an application perspective, organic revenue growth during the six month period was led by strength in the ~~utility end~~industrial water application, which was primarily driven by market ~~primarily~~growth in the ~~United States, the Middle East and~~emerging markets, particularly in Asia Pacific ~~marginally offset~~where the industry was more significantly impacted by ~~modest~~the COVID-19 pandemic in the first half of the prior year, strong order intake in North America and western Europe, reflecting recovery from the COVID-19 pandemic during the second quarter of the year. The residential building services application revenue also had strong organic growth during the first half of the year, primarily driven by the emerging markets where we experienced strong second water supply business and a favorable prior year comparison in China, as markets conditions recover from the COVID-19 pandemic. Strength in North America also contributed to the growth in the residential building services application, as we benefited from healthy backlog execution coming into the year, and market growth in western Europe during the period. The commercial building services application contributed organic growth during the first half of the year, primarily driven by strength in western Europe, North America and the emerging markets, particularly Asia Pacific.

Measurement & Control Solutions

Measurement & Control Solutions revenue increased $46 million, or 14.3%, for the second quarter of 2021 (10.6% increase on a constant currency basis) as compared to the prior year. Revenue benefited from $12 million of foreign currency translation, with the change at constant currency driven by organic growth of $37 million which was partially offset by reduced revenue related to divestiture impacts of $3 million. Organic revenue ~~declines~~growth during the quarter was driven by strength in both the utility and industrial end markets and across all major geographic regions.

In order to simplify and focus the application discussion, beginning with the first quarter of 2021, we are aggregating the test application into the water application and the software as a service and other application into the water and energy applications, as applicable, as both of these sub-applications provide products and services to the broader, ultimate applications of water and energy. From an application perspective, organic revenue growth was driven by the timing of project deployments in the ~~segment were impacted~~water application, coupled with COVID-19 recovery in the U.S. and western Europe during the quarter. The energy application experienced a modest decrease during the quarter, primarily driven project timing and supply chain constraints in the U.S.

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

From an application perspective, organic revenue growth during the period was driven by the water application, particularly in the U.S. and western Europe, where regions benefited from a favorable prior year comparison during the period coupled with strong backlog execution. This organic revenue growth was partially offset by a decline in the energy application during the period driven by the gas business, where large project deployments in the U.S. during the prior year did not repeat and we experienced project delays driven by the COVID-19 pandemic during the ~~period, particularly in the United States and the emerging markets.~~year.

From an application perspective, the organic revenue decline for the segment was driven by the water application, where the COVID-19 pandemic drove market softness in the United States and we lapped strong project deployments in the Middle East during the prior year. The test application also experienced organic revenue decline during the period across all major regions, where we experienced negative impacts from the COVID-19 pandemic, and large prior year project executions in the Middle East. The energy application and, to a lesser extent, the SaaS application also had declines in organic revenue as compared to the prior year, primarily in the United States as we lapped a few large project deployments and continue to be negatively impacted by the COVID-19 pandemic.

Orders / Backlog

An order represents a legally enforceable, written document that includes the scope of work or services to be performed or equipment to be supplied to a customer, the corresponding price and the expected delivery date for the applicable products or services to be provided. An order often takes the form of a customer purchase order or a signed quote from a Xylem business. Orders received during the second quarter of ~~2020~~2021 were ~~$1,232~~$1,660 million, ~~a decrease~~an increase of ~~$160~~$428 million, or ~~11.5%~~34.7%, over the prior year ~~(8.9% decrease at~~(28.7% increase on a constant ~~currency)~~currency basis). Orders received during the six months ended June 30, ~~2020~~2021 were ~~$2,493~~$3,198 million, ~~a decrease~~an increase of ~~$214~~$705 million, or ~~7.9%~~28.3%, over the prior year ~~(5.7% decrease at~~(23.3% increase on a constant ~~currency)~~currency basis). Order intake ~~was negatively impacted by $36~~benefited from $74 million and ~~$59~~$123 million of foreign currency translation for the three and six months ended June 30, ~~2020,~~2021, respectively. The ~~change at~~increase on a constant currency basis was primarily driven ~~entirely~~ by organic ~~declines~~order growth of ~~$124~~$355 million and ~~$155~~$590 million for the three and six months ended June 30, ~~2020,~~2021, respectively.

The following table illustrates the impact from organic ~~declines,~~growth, recent ~~acquisitions and~~ divestitures, and foreign currency translation in relation to orders during the three and six months ended June 30, ~~2020:~~

Water Infrastructure Applied Water Measurement & Control Solutions Total Xylem
(in millions) $ Change % Change $ Change % Change $ Change % Change $ Change % Change
2019 Orders $ 586 $ 399 $ 407 $ 1,392
Organic Impact 39 6.7 % (67) (16.8) % (96) (23.6) % (124) (8.9) %
Acquisitions/(Divestitures) — — % — — % — — % — — %
Constant Currency 39 6.7 % (67) (16.8) % (96) (23.6) % (124) (8.9) %
Foreign currency translation (a) (27) (4.6) % (6) (1.5) % (3) (0.7) % (36) (2.6) %
Total change in orders 12 2.0 % (73) (18.3) % (99) (24.3) % (160) (11.5) %
2020 Orders $ 598 $ 326 $ 308 $ 1,232
2021:


	Water Infrastructure				Applied Water				Measurement & Control Solutions				Total Xylem
(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2020 Orders	$	598			$	326			$	308			$	1,232
Organic Growth	—		—	%	140		42.9	%	215		69.8	%	355		28.8	%
Divestitures	—		—	%	—		—	%	(1)		(0.3)	%	(1)		(0.1)	%
Constant Currency	—		—	%	140		42.9	%	214		69.5	%	354		28.7	%
Foreign currency translation (a)	41		6.9	%	20		6.1	%	13		4.2	%	74		6.0	%
Total change in orders	41		6.9	%	160		49.1	%	227		73.7	%	428		34.7	%
2021 Orders	$	639			$	486			$	535			$	1,660


		Water Infrastructure						Applied Water						Measurement & Control Solutions							Total Xylem					Water Infrastructure				Applied Water				Measurement & Control Solutions		Total Xylem
(in millions)	(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change			$ Change		% Change		(in millions)	$ Change		% Change		$ Change		% Change		$ Change		% Change		$ Change		% Change
2019 Orders		$	1,118			$	793			$	796				$	2,707
Organic Impact		36		3.2	%	(85)		(10.7)	%	(106)		(13.3)	%		(155)		(5.7)	%
Acquisitions/(Divestitures)		—		—	%	—		—	%	—		—	%		—		—	%
2020 Orders																			2020 Orders	$	1,112			$	698			$	683			$	2,493
Organic Growth																			Organic Growth	70		6.3	%	232		33.2	%	288		42.2	%	590		23.7	%
Divestitures																			Divestitures	—		—	%	—		—	%	(8)		(1.2)	%	(8)		(0.4)	%
Constant Currency	Constant Currency	36		3.2	%	(85)		(10.7)	%	(106)		(13.3)	%		(155)		(5.7)	%	Constant Currency	70		6.3	%	232		33.2	%	280		41.0	%	582		23.3	%
Foreign currency translation (a)	Foreign currency translation (a)	(42)		(3.8)	%	(10)		(1.3)	%	(7)		(0.9)	%		(59)		(2.2)	%	Foreign currency translation (a)	68		6.1	%	33		4.7	%	22		3.2	%	123		4.9	%
Total change in orders	Total change in orders	(6)		(0.5)	%	(95)		(12.0)	%	(113)		(14.2)	%		(214)		(7.9)	%	Total change in orders	138		12.4	%	265		38.0	%	302		44.2	%	705		28.3	%
2020 Orders		$	1,112			$	698			$	683				$	2,493
2021 Orders																			2021 Orders	$	1,250			$	963			$	985			$	3,198

Water Infrastructure

Water Infrastructure segment orders increased ~~$12~~$41 million, or ~~2.0%~~6.9%, to ~~$598~~$639 million ~~(6.7% increase at~~(flat on a constant ~~currency)~~currency basis) for the second quarter of ~~2020~~2021 as compared to the prior year. Order ~~intake during~~growth for the quarter ~~was negatively impacted by $27~~benefited from $41 million of foreign currency ~~translation, with~~translation. Organic orders remained essentially flat during the ~~change at constant currency coming from organic~~quarter as strength in the treatment application, which was driven by strong order ~~growth~~intake across all major geographies, was offset by decline in the transport application, which ~~was partially offset~~included a significant project order of greater than $100 million in India during the second quarter of 2020 that did not recur. Excluding the impact of the significant India order in 2020, the transport application had organic order growth driven by anhealthy market conditions in western Europe and North America during the quarter, including order growth in the dewatering business.

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

Applied Water

Applied Water segment orders increased $160 million, or 49.1%, to $486 million (42.9% increase on a constant currency basis) for the second quarter of 2021 as compared to the prior year. Order growth for the quarter benefited from $20 million of foreign currency translation. The order increase on a constant currency basis was driven by ~~market weakness in the dewatering transport application,~~organic order growth across all end markets, primarily in the ~~United States. The treatment application saw~~U.S., where we benefited from strong demand recovery, amplified by longer lead times for delivering product, and to a ~~reduction~~lesser extent, in ~~organic orders during the quarter, primarily in~~western Europe and the emerging markets and North America where we had several large project orders during the prior year, and in Europe where market conditions softened. We believe the COVID-19 pandemic also negatively impacted organic order growth during the quarter.markets.

For the six months ended June 30, ~~2020,~~2021, orders ~~decreased $6~~increased $265 million, or ~~0.5%~~38.0%, to ~~$1,112~~$963 million ~~(3.2%~~(33.2% increase aton a constant ~~currency)~~currency basis) as compared to the same prior year period. Order ~~intake~~growth during the period ~~was negatively impacted by $42~~benefited from $33 million of foreign currency ~~translation, with the change at~~translation. The order increase on a constant currency coming from organic growth in orders in the transport application, which was partially offset by a modest decline in organic orders in the treatment application. Organic growth in the transport applicationbasis was driven by strong order intake in India, where we had a significant project order during the second quarter of greater than $100 million, partially offset by market weakness in the transport applications, primarily driven by the dewatering application in North America. The treatment application experienced a modest organic order ~~decline~~growth across all end markets during the first half of the year, primarily ~~driven~~

~~by large project orders~~ in the ~~emerging markets placed during the prior year, which was partially offset~~U.S., where we benefited from strong demand, amplified by ~~strong order intake in Europe~~early ordering to mitigate longer lead times, and ~~Latin America during the period. e believe the COVID-19 pandemic also negatively impacted organic order growth for the segment during the first half of the year.~~

~~Applied Water~~

~~Applied Water segment orders decreased $73 million, or 18.3%,~~ to $326 million (16.8% decrease at constant currency) for the second quarter of 2020 as compared to the prior year. Order intake during the quarter was negatively impacted by $6 million of foreign currency translation. The order decrease on a ~~constant currency basis was primarily driven by organic weakness across all end markets in the United States and reduced order intake~~lesser extent, in western Europe and the emerging markets, ~~during the quarter with continued negative impact on orders from the~~particularly in China where order intake was weakened by COVID-19 ~~pandemic.~~

For the six months ended June 30, 2020, orders decreased $95 million, or 12.0%, to $698 million (10.7% decrease at constant currency) as compared to the same prior year period. Order intake during the period was negatively impacted by $10 million of foreign currency translation. The order decrease on a constant currency basis was primarily driven by organic weakness across all end marketsimpacts in the United States and, to a lesser extent, reduced order intake in the emerging markets and western Europe during the period. We believe that the COVID-19 pandemic negatively impacted the organic order growth during the period.prior year.

Measurement & Control Solutions

Measurement & Control Solutions segment orders ~~decreased $99~~increased $227 million, or ~~24.3%~~73.7%, to ~~$308~~$535 million ~~(23.6% decrease at~~(69.5% increase on a constant ~~currency)~~currency basis) for the second quarter of ~~2020~~2021 as compared to the prior year. Order ~~intake during~~growth for the quarter ~~was negatively impacted by $3~~benefited from $13 million of foreign currency translation. The order ~~decrease~~increase on a constant currency basis consisted almost entirely of organic order growth of $215 million, or 69.8%. Organic order growth was ~~driven~~led by ~~an organic decline in~~ the water application, which ~~was negatively impacted~~experienced strong order intake in the U.S., amplified by ~~the~~increased ordering due to component shortages, and benefited from a favorable comparison, driven by COVID-19 ~~pandemic and the lapping of strong prior year orders.~~recovery, as well as strength in western Europe. Order intake in the ~~test~~energy application also ~~declined~~grew organically during the quarter, ~~driven by negative COVID-19 impacts~~primarily in North America ~~and Europe. The energy application experienced reduced order intake~~where the gas business benefited from a favorable comparison, driven by COVID-19 recovery, coupled with project related ordering in the electric business during the ~~quarter as the impact from large prior year gas project deployments, coupled with the negative impact of the COVID-19 pandemic, more than offset electric order growth during the~~ quarter. ~~The SaaS application also saw modest organic order decline in the quarter as several of our large prior year orders did not repeat.~~

For the six months ended June 30, ~~2020,~~2021, orders ~~decreased $113~~increased $302 million, or ~~14.2%~~44.2%, to ~~$683~~$985 million ~~(13.3% decrease at~~(41.0% increase on a constant ~~currency)~~currency basis) as compared to the same prior year period. Order ~~intake~~growth during the period ~~was negatively impacted by $7~~benefited from $22 million of foreign currency translation. The order ~~decrease~~increase on a constant currency basis included organic order growth of $288 million, or 42.2%, which was partially offset by a $8 million reduction in orders related to divestiture impacts during the period. Organic order growth was led by the water application, which was driven by ~~an organic decline~~strong order intake in the ~~water application~~U.S., amplified by increased ordering due to component shortages, and toin western Europe, coupled with a ~~lesser extent,~~favorable comparison, driven by COVID-19 recovery. Order intake in the energy application ~~specifically~~also grew organically during the first half of the year, primarily driven by prior year gas project deployments, both of which were negatively impacted by the COVID-19 pandemic and the lapping of prior year orders. The SaaS application also contributed to the organic decline driven by the lapping of large ~~project deployment orders~~projects in North America during the prior year. The test application, primarily in North America, also experienced a reduction in order intake during the period. We believe that the COVID-19 pandemic negatively impacted the organic order growth during the period.America.

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 ~~$2,013~~$2,779 million at June 30, ~~2020,~~2021, an increase of ~~$148~~$766 million or ~~7.9%~~38.1%, as compared to June 30, ~~2019~~2020 backlog of ~~$1,865~~$2,013 million, and an increase of ~~$212~~$655 million or ~~11.8%~~30.8%, as compared to December 31, ~~2019~~2020 backlog of ~~$1,801 million.~~$2,124 million driven by the significant increase in orders in the year. We anticipate that approximately ~~46%~~50% of the backlog at June 30, ~~2020~~

2021 will be recognized as revenue in the remainder of ~~2020. Cancellations in~~2021. There were no significant order cancellations during the ~~quarter were materially consistent with the prior year.~~quarter.

Gross Margin

Gross margin as a percentage of revenue ~~decreased 170~~increased 110 and 180 basis points to ~~37.4%~~38.5% and ~~36.9%~~38.7% for the three and six months ended June 30, ~~2020,~~2021, as compared to ~~39.1%~~37.4% and ~~38.7%~~36.9% for the comparative ~~2019~~2020 periods. The gross margin ~~decrease~~increase for both periods was primarily driven ~~by cost inflation, increased inventory management costs, unfavorable volume, impacted by COVID-19, unfavorable mix and other lesser impacts, which were partially offset~~

by cost reductions from our global procurement and productivity improvement initiatives and ~~price realization.~~favorable volume, impacted by COVID-19 recovery, which were partially offset by cost inflation.

Operating Expenses

The following table presents operating expenses for the three and six months ended June 30, ~~2020~~2021 and ~~2019:~~

Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2020 2019 Change 2020 2019 Change
Selling, general and administrative expenses ("SG&A") $ 288 $ 294 (2.0) % $ 585 $ 597 (2.0) %
SG&A as a % of revenue 24.8 % 21.9 % 290 bp 25.6 % 23.1 % 250 bp
Research and development expenses ("R&D") 44 47 (6.4) % 93 98 (5.1) %
R&D as a % of revenue 3.8 % 3.5 % 30 bp 4.1 % 3.8 % 30 bp
Restructuring and asset impairment charges 48 14 242.9 % 50 25 100.0 %
Operating expenses $ 380 $ 355 7.0 % $ 728 $ 720 1.1 %
Expense to revenue ratio 32.8 % 26.4 % 640 bp 31.9 % 27.9 % 400 bp
2020:


	Three Months Ended								Six Months Ended
	June 30,								June 30,
(In millions)	2021			2020			Change		2021			2020			Change
Selling, general and administrative expenses ("SG&A")	$	304		$	288		5.6	%	$	605		$	585		3.4	%
SG&A as a % of revenue	22.5		%	24.8		%	(230)	bp	23.2		%	25.6		%	(240)	bp
Research and development expenses ("R&D")	53			44			20.5	%	103			93			10.8	%
R&D as a % of revenue	3.9		%	3.8		%	10	bp	4.0		%	4.1		%	(10)	bp
Restructuring and asset impairment charges	3			48			(93.8)	%	9			50			(82.0)	%

Operating expenses	$	360		$	380		(5.3)	%	$	717		$	728		(1.5)	%
Expense to revenue ratio	26.6		%	32.8		%	(620)	bp	27.5		%	31.9		%	(440)	bp

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

SG&A expenses ~~decreased~~increased by $6$16 million to $304 million, or 22.5% of revenue, in the second quarter of 2021, as compared to $288 million, or 24.8% of revenue, in the ~~second quarter of~~comparable 2020 ~~as compared~~period; and increased by $20 million to ~~$294~~$605 million, or ~~21.9%~~23.2% of revenue, in the ~~comparable 2019 period; and decreased $12 million~~six months ended June 30, 2021, as compared to $585 million, or 25.6% of revenue, in the ~~six months ended June 30,~~comparable 2020 ~~as compared to $597 million, or 23.1% of revenue, for the six months ended in 2019.~~period. The ~~increase~~improvement in SG&A as a percent of revenue for both periods was primarily driven by ~~the drop in revenue, which was significantly driven by impacts of the COVID-19 pandemic, as well as in~~ cost ~~inflation~~reductions from our productivity, restructuring and ~~additional investment in strategic growth~~other cost saving initiatives and decreased quality management costs, which were partially offset by cost ~~reductions from global procurement~~inflation, additional investments in strategic growth initiatives and ~~productivity improvement initiatives, including restructuring savings.~~other costs.

Research and Development ("R&D") Expenses

R&D expense was $53 million, or 3.9% of revenue, in the second quarter of 2021, as compared to $44 million, or 3.8% of revenue, in the ~~second quarter of~~comparable 2020 ~~as compared to $47~~period; and was $103 million, or ~~3.5% of revenue, in the comparable period of 2019; and was $93 million, or 4.1%~~4.0% of revenue, in the six months ended June 30, ~~2020,~~2021, as compared to ~~$98~~$93 million, or ~~3.8%~~4.1% of revenue, in the comparable ~~period of 2019. The increase in R&D as a percent of revenue for both periods was primarily driven by the drop in revenue, which was significantly driven by impacts of the COVID-19 pandemic.~~2020 period.

Restructuring and Asset Impairment Charges

Restructuring

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

The following is a roll-forward for the six months ended June 30, ~~2020~~2021 and ~~2019~~2020 of employee position eliminations associated with restructuring activities:

2020 2019
Planned reductions - January 1 196 69
Additional planned reductions 579 350
Actual reductions and reversals (115) (298)
Planned reductions - June 30 660 121


	2021	2020
Planned reductions - January 1	319	196
Additional planned reductions	72	579
Actual reductions and reversals	(202)	(115)
Planned reductions - June 30	189	660

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


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

Total expected costs remaining	$	3	$	—	$	—	$	—	$	3

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

The Water Infrastructure actions commenced asin 2021 consist primarily of ~~June 30, 2020:~~

(in millions) Water Infrastructure Applied Water Measurement & Control Solutions Corporate Total
Actions Commenced in 2020:
Total expected costs $ 28 $ 13 $ 34 $ 3 $ 78
Costs incurred during Q1 2020 1 — — — 1
Costs incurred during Q2 2020 5 2 30 37
Total expected costs remaining $ 22 $ 11 $ 4 $ 3 $ 40
Actions Commenced in 2019:
Total expected costs $ 20 $ 5 $ 27 $ — $ 52
Costs incurred during 2019 18 5 27 — 50
Costs incurred during Q1 2020 1 — — — 1
Costs incurred during Q2 2020 1 — — — 1
Total expected costs remaining $ — $ — $ — $ — $ —
Actions Commenced in 2017:
Total expected costs $ 8 $ 5 $ 4 $ — $ 17
Costs incurred during 2017 5 4 2 — 11
Costs incurred during 2018 2 1 1 — 4
Costs incurred during 2019 1 — 1 — 2
Costs incurred during Q1 2020 — — — — —
Costs incurred during Q2 2020 — — — —
Total expected costs remaining $ — $ — $ — $ — $ —
severance charges. These actions are expected to continue through the second quarter of 2022.

During the second quarter of ~~severance charges and are complete.~~

We currently expect to incur between ~~$60~~$15 million and ~~$80~~$25 million in restructuring costs for the full ~~year, with approximately $20 million of these costs being non-cash charges.~~year. These

restructuring charges are primarily related to actions taken in response to the changes in business and economic conditions arising as a result of the

COVID-19 ~~pandemic.~~pandemic as well as other efforts to optimize our cost structure, improve our operational efficiency and effectiveness, strengthen our competitive positioning and better serve our customers. We expect to realize ~~approximately $25~~between $33 million and $35 million of incremental net savings in ~~2020~~2021 from restructuring actions initiated in ~~2019,~~2020. As a result of all of the actions taken and ~~approximately $22~~expected to be taken in 2021, we anticipate between $1 million and $3 million of total net savings ~~in 2020 from the restructuring actions initiated~~to be realized during ~~this year.~~2021.

Asset Impairment

During the first quarter of 2019 we determined that certain assets within our Measurement & Control Solutions segment, including customer relationships, were impaired. Accordingly we recognized an impairment charge of $3 million. Refer to Note 9,7, "Goodwill and Other Intangible Assets," for additional information.

Operating Income

Operating income during the second quarter of ~~2020~~2021 was ~~$54~~$160 million, reflecting ~~a decrease~~an increase of ~~68.4%~~196.3% compared to ~~$171~~$54 million in the second quarter of ~~2019.~~2020. Operating margin was ~~4.7%~~11.8% for the second quarter of ~~2020~~2021 versus ~~12.7%~~4.7% for the comparable period in ~~2019, a decrease~~2020, an increase of ~~800~~710 basis points. Operating margin ~~was negatively impacted by increased~~benefited from a decrease in restructuring and realignment costs of ~~$22~~$37 million as compared to the second quarter of 2020 and special charges of $11 million incurred in during 2020 that did not recur. Excluding the ~~quarter. Excluding~~impact of these ~~restructuring and realignment costs and special charges,~~items, adjusted operating income was $166 million with an adjusted operating margin of 12.3% in the second quarter of 2021 as compared to adjusted operating income of $108 million with an adjusted operating margin of 9.3% in the second quarter of ~~2020 as compared to adjusted operating income of $192 million with an adjusted operating margin of 14.3% in the second quarter of 2019.~~2020. The ~~decrease~~increase in adjusted operating margin was primarily due to ~~unfavorable~~cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted ~~significantly~~ by ~~COVID-19; cost inflation; increased inventory management costs; incremental~~ COVID-19 ~~related costs; increased spending on strategic investments and unfavorable mix.~~recovery. These impacts were partially offset by cost ~~reductions from our productivity~~inflation and ~~other cost saving initiatives and price realization.~~increased spending on strategic investments.

Operating income for the six months ended June 30, ~~2020~~2021 was $293 million, reflecting an increase of 154.8% compared to $115 million ~~reflecting a decrease of 58.9% compared to $280 million~~ in ~~2019.~~2020. Operating margin was ~~5.0%~~11.2% for the six months ended June 30, ~~2020~~2021 versus ~~10.8%~~5.0% for the comparable period in ~~2019, a decrease~~2020, an increase of ~~580~~620 basis points. Operating margin ~~was negatively impacted by increased~~benefited from a decrease in restructuring and realignment costs of ~~$11~~$38 million and ~~increased~~a decrease in special charges of $7$9 million as compared to 2020. Excluding the ~~prior year. Excluding~~impact of these ~~restructuring and realignment costs and special charges,~~items, adjusted operating income was $309 million with an adjusted operating margin of 11.9% for the six months ended June 30, 2021 as compared to adjusted operating income of $178 million with an adjusted operating margin of 7.8% ~~for the six months ended June 30, 2020 as compared to adjusted operating income of $325 million with an adjusted operating margin of 12.6%~~ in ~~2019.~~2020. The ~~decrease~~increase in adjusted operating margin was primarily due to ~~unfavorable~~cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted ~~significantly~~ by ~~COVID-19; cost inflation; increased inventory management costs; unfavorable mix; increased spending on strategic investments and other lesser impacts.~~COVID-19 recovery. These impacts were partially offset by ~~our productivity~~cost inflation and ~~other cost saving initiatives and price realization.~~

increased spending on strategic investments.

4442

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

Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2020 2019 Change 2020 2019 Change
Water Infrastructure
Operating income $ 73 $ 98 (25.5) % $ 112 $ 149 (24.8) %
Operating margin 14.6 % 17.5 % (290) bp 11.9 % 14.3 % (240) bp
Restructuring and realignment costs 8 9 (11.1) % 13 18 (27.8) %
Adjusted operating income $ 81 $ 107 (24.3) % $ 125 $ 167 (25.1) %
Adjusted operating margin 16.2 % 19.1 % (290) bp 13.3 % 16.0 % (270) bp
Applied Water
Operating income $ 41 $ 62 (33.9) % $ 88 $ 118 (25.4) %
Operating margin 12.2 % 15.7 % (350) bp 13.0 % 15.3 % (230) bp
Restructuring and realignment costs 4 4 — % 6 7 (14.3) %
Adjusted operating income $ 45 $ 66 (31.8) % $ 94 $ 125 (24.8) %
Adjusted operating margin 13.4 % 16.8 % (340) bp 13.9 % 16.2 % (230) bp
Measurement & Control Solutions
Operating (loss) income $ (46) $ 26 (276.9) % $ (58) $ 42 (238.1) %
Operating margin (14.3) % 6.7 % (2,100) bp (8.7) % 5.5 % (1,420) bp
Restructuring and realignment costs 31 8 287.5 % 33 16 106.3 %
Special charges 10 — NM 10 4 150.0 %
Adjusted operating (loss) income $ (5) $ 34 (114.7) % $ (15) $ 62 (124.2) %
Adjusted operating margin (1.6) % 8.7 % (1,030) bp (2.2) % 8.1 % (1,030) bp
Corporate and other
Operating loss $ (14) $ (15) (6.7) % $ (27) $ (29) (6.9) %
Special charges 1 — NM 1 — NM
Adjusted operating loss $ (13) $ (15) (13.3) % $ (26) $ (29) (10.3) %
Total Xylem
Operating income $ 54 $ 171 (68.4) % $ 115 $ 280 (58.9) %
Operating margin 4.7 % 12.7 % (800) bp 5.0 % 10.8 % (580) bp
Restructuring and realignment costs 43 21 104.8 % 52 41 26.8 %
Special charges 11 — NM 11 4 175.0 %
Adjusted operating income $ 108 $ 192 (43.8) % $ 178 $ 325 (45.2) %
Adjusted operating margin 9.3 % 14.3 % (500) bp 7.8 % 12.6 % (480) bp


	Three Months Ended								Six Months Ended
	June 30,								June 30,
(In millions)	2021			2020			Change		2021			2020			Change
Water Infrastructure
Operating income	$	93		$	73		27.4	%	$	164		$	112		46.4	%
Operating margin	16.3		%	14.6		%	170	bp	15.2		%	11.9		%	330	bp
Restructuring and realignment costs	4			8			(50.0)	%	9			13			(30.8)	%

Adjusted operating income	$	97		$	81		19.8	%	$	173		$	125		38.4	%
Adjusted operating margin	17.0		%	16.2		%	80	bp	16.0		%	13.3		%	270	bp
Applied Water
Operating income	$	64		$	41		56.1	%	$	130		$	88		47.7	%
Operating margin	15.5		%	12.2		%	330	bp	16.1		%	13.0		%	310	bp
Restructuring and realignment costs	2			4			(50.0)	%	3			6			(50.0)	%
Special charges	—			—			—	%	1			—			NM
Adjusted operating income	$	66		$	45		46.7	%	$	134		$	94		42.6	%
Adjusted operating margin	15.9		%	13.4		%	250	bp	16.6		%	13.9		%	270	bp
Measurement & Control Solutions
Operating income (loss)	$	13		$	(46)		128.3	%	$	22		$	(58)		137.9	%
Operating margin	3.5		%	(14.3)		%	1,780	bp	3.0		%	(8.7)		%	1,170	bp

Restructuring and realignment costs	—			31			NM		2			33			(93.9)	%
Special charges	—			10			NM		—			10			NM
Adjusted operating income (loss)	$	13		$	(5)		360.0	%	$	24		$	(15)		260.0	%
Adjusted operating margin	3.5		%	(1.6)		%	510	bp	3.3		%	(2.2)		%	550	bp
Corporate and other
Operating loss	$	(10)		$	(14)		(28.6)	%	$	(23)		$	(27)		(14.8)	%


Special charges	—			1			NM		1			1			—	%
Adjusted operating loss	$	(10)		$	(13)		(23.1)	%	$	(22)		$	(26)		(15.4)	%
Total Xylem
Operating income	$	160		$	54		196.3	%	$	293		$	115		154.8	%
Operating margin	11.8		%	4.7		%	710	bp	11.2		%	5.0		%	620	bp
Restructuring and realignment costs	6			43			(86.0)	%	14			52			(73.1)	%

Special charges	—			11			NM		2			11			(81.8)	%
Adjusted operating income	$	166		$	108		53.7	%	$	309		$	178		73.6	%
Adjusted operating margin	12.3		%	9.3		%	300	bp	11.9		%	7.8		%	410	bp

NM - Not meaningful percentage change

Water Infrastructure

Operating income for our Water Infrastructure segment ~~decreased $25~~increased $20 million, or ~~25.5%~~27.4%, for the second quarter of ~~2020~~2021 compared to the prior year, with operating margin also ~~decreasing~~increasing from ~~17.5%~~14.6% to ~~14.6%~~16.3%. Operating margin benefited from a ~~slight~~ decrease in restructuring and realignment costs of $1$4 million ~~in 2020.~~during the quarter. Excluding these restructuring and realignment costs, adjusted operating income ~~decreased $26~~increased $16 million, or ~~24.3%~~19.8%, with adjusted operating margin ~~decreasing~~increasing from ~~19.1%~~16.2% to ~~16.2%~~17.0%. The ~~decrease~~increase in adjusted operating margin for the quarter was primarily due to cost ~~inflation; unfavorable~~reductions from our productivity, restructuring and other cost saving initiatives, favorable volume ~~impacted significantly by COVID-19; increased~~and decreased inventory management ~~costs; unfavorable mix; increased spending on strategic investments and other lesser impacts.~~costs. These impacts were partially offset by cost ~~reductions from our productivity~~inflation, increased spending on strategic investments, increased employee-related costs and ~~other cost saving initiatives and price realization.~~negative foreign currency impacts.

4543

For the six months ended June 30, ~~2020,~~2021, operating income ~~decreased $37~~for our Water Infrastructure segment increased $52 million, or ~~24.8%~~46.4%, as compared to the prior year, with operating margin also ~~decreasing~~increasing from ~~14.3%~~11.9% to ~~11.9%~~15.2%. Operating margin benefited from a decrease in restructuring and realignment costs of $5$4 million in ~~2020.~~2021. Excluding these restructuring and realignment costs, adjusted operating income ~~decreased $42~~increased $48 million, or ~~25.1%~~38.4%, with adjusted operating margin ~~decreasing~~increasing from ~~16.0%~~13.3% to ~~13.3%~~16.0%. The ~~decrease~~increase in adjusted operating margin during the period was primarily due by cost inflation, unfavorable volume, impacted significantly by COVID-19; unfavorable mix; increased inventory management costs; increased spending on strategic investments, negative currency impacts and other lesser impacts. These impacts were partially offsetto cost reductions from our productivity, restructuring and other cost saving initiatives and ~~price realization.~~favorable volume. These impacts were partially offset by cost inflation, increased spending on strategic investments, increased employee-related costs and other lesser impacts.

Applied Water

Operating income for our Applied Water segment ~~decreased $21~~increased $23 million, or ~~33.9%~~56.1%, for the second quarter of ~~2020~~2021 compared to the prior year, with operating margin also ~~decreasing~~increasing from ~~15.7%~~12.2% to ~~12.2%~~15.5%. Operating margin ~~was impacted by $4 million~~benefited from a decrease in restructuring and realignment costs ~~in both years.~~of $2 million during the quarter. Excluding these restructuring and realignment costs, adjusted operating income ~~decreased~~increased $21 million, or ~~31.8%~~46.7%, with adjusted operating margin ~~decreasing~~increasing from ~~16.8%~~13.4% to ~~13.4%~~15.9%. The ~~decrease~~increase in adjusted operating margin for the quarter was primarily due to ~~unfavorable~~favorable volume, impacted ~~significantly~~ by ~~COVID-19;~~COVID-19 recovery, and cost ~~inflation; increased inventory management costs; unfavorable mix~~reductions from our productivity, restructuring and other ~~various lesser impacts.~~cost saving initiatives. These impacts were partially offset by cost ~~reductions from our productivity~~inflation, increased logistics costs, increased employee-related costs and ~~other cost saving initiatives and price realization.~~increased spending on strategic investments.

For the six months ended June 30, ~~2020,~~2021, operating income ~~decreased $30~~for our Applied Water segment increased $42 million, or ~~25.4%~~47.7%, as compared to the prior year, with operating margin also ~~decreasing~~increasing from ~~15.3%~~13.0% to ~~13.0%~~16.1%. Operating margin benefited from a ~~slight~~ decrease in restructuring and realignment costs of $3 million during the year which was partially offset by $1 million of special charges incurred in ~~2020.~~2021. Excluding these ~~restructuring and realignment costs,~~items, adjusted operating income ~~decreased $31~~increased $40 million, or ~~24.8%~~42.6%, with adjusted operating margin ~~decreasing~~increasing from ~~16.2%~~13.9% to ~~13.9%~~16.6%. The ~~decrease~~increase in adjusted operating margin during the period was primarily due to ~~unfavorable~~cost reductions from our productivity, restructuring and other cost saving initiatives and favorable volume, impacted ~~significantly~~ by ~~COVID-19; cost inflation; increased inventory management costs and other lesser impacts.~~COVID-19 recovery. These impacts were partially offset by cost ~~reductions from our productivity~~inflation, increased logistics costs, increased spending on strategic investments and ~~other cost saving initiatives and price realization.~~increased employee-related costs.

Measurement & Control Solutions

Operating income for our Measurement & Control Solutions segment ~~decreased $72~~increased $59 million, or ~~276.9%~~128.3%, for the second quarter of ~~2020~~2021 compared to the prior year, ~~resulting in an operating loss of $46 million,~~ with operating margin ~~also decreasing~~increasing from ~~6.7%~~(14.3)% to ~~(14.3)%~~3.5%. Operating margin ~~was negatively impacted by increased~~benefited from $31 million of restructuring and realignment costs ~~of $23 million~~ and $10 million of special charges that were incurred ~~in 2020.~~during 2020 that did not recur during the quarter. Excluding these items, adjusted operating income ~~decreased $39~~increased $18 million, or ~~114.7%~~360.0%, ~~resulting in an adjusted operating loss of $5 million,~~ with adjusted operating margin ~~decreasing~~increasing from ~~8.7%~~(1.6)% to ~~(1.6)%~~3.5%. The ~~decrease~~increase in adjusted operating margin for the quarter was primarily due to ~~unfavorable~~cost reductions from our restructuring, productivity and other cost saving initiatives, favorable volume, impacted ~~significantly~~ by ~~COVID-19; cost inflation; increased quality management costs; increased spending on strategic investments~~COVID-19 recovery, and ~~incremental COVID-19 related costs.~~favorable mix. These impacts were partially offset by cost ~~reductions from our productivity~~inflation, increased spending on strategic investments and ~~other cost saving initiatives and price realization.~~increased employee-related costs.

For the six months ended June 30, ~~2020,~~2021, operating income ~~decreased $100~~for our Measurement & Control Solutions segment increased $80 million, or ~~238.1%~~137.9%, as compared to the prior year, ~~resulting in an operating loss of $58 million,~~ with operating margin ~~also decreasing~~increasing from ~~5.5%~~(8.7)% to ~~(8.7)%~~3.0%. Operating margin ~~was negatively impacted by increased~~benefited from a decrease in restructuring and realignment costs of ~~$17~~$31 million during the year and ~~increased~~$10 million of special charges ~~of $6 million~~incurred in ~~2020.~~2020 that did not recur. Excluding these items, adjusted operating income ~~decreased $77~~increased $39 million, or ~~124.2%~~260.0%, ~~resulting in an adjusted operating loss of $15 million,~~ with adjusted operating margin ~~decreasing~~increasing from ~~8.1%~~(2.2)% to ~~(2.2)%~~3.3%. The ~~decrease~~increase in adjusted operating margin during the period was ~~driven by unfavorable volume, impacted significantly by COVID-19; increased~~primarily due to cost reductions from our restructuring, productivity and other cost saving initiatives, decreased quality management costs, primarily due to a ~~$15 million~~specific warranty charge recorded during the ~~first quarter for~~prior year that did not recur related to a firmware issue ~~in some of our meters; cost inflation; increased spending on strategic investments, unfavorable mix~~that was identified and ~~other lesser impacts.~~addressed timely, favorable volume, driven by COVID-19 recovery and favorable mix. These impacts were partially offset by cost ~~reductions from our productivity~~inflation, increased spending on strategic investments, increased employee-related costs and other ~~cost saving initiatives and price realization.~~lesser impacts.

Corporate and other

Operating loss for corporate and other decreased $1$4 million, or ~~6.7%~~28.6%, ~~for~~during the second quarter of ~~2020~~2021 compared to the prior year period. For the six months ended June 30, ~~2020,~~2021, operating loss for corporate and other decreased $2$4 million, or ~~6.9%~~14.8%, compared to the same prior year period. The decreases in cost are ~~the result of cost saving actions taken during the year.~~driven by reduced costs related to COVID-19 initiatives.

4644

Interest Expense

Interest expense was $21 million and $42 million for the three and six months ended June 30, 2021 and $18 million and $34 million for the three and six months ended June 30, ~~2020 and $18 million and $36 million for the three and six months ended June 30, 2019.~~2020. The ~~decrease~~increase in interest expense for ~~the six month period ended June 30, 2020~~both periods is primarily driven by the ~~impact~~issuance of ~~cross currency swaps.~~our Green Bond during the second quarter of 2020. See Note 10, ~~"Derivative Financial Instruments"~~"Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our ~~cross currency swaps.~~credit facilities and long-term debt and related interest.

Income Tax Expense

The income tax provision for the three months ended June 30, ~~2020~~2021 was $4$25 million resulting in an effective tax rate of ~~10.9%~~18.5%, compared to a ~~$17~~$4 million expense resulting in an effective tax rate of ~~10.5%~~10.9% for the same period in ~~2019.~~2020. The income tax provision for the six months ended June 30, ~~2020~~2021 was $8$52 million resulting in an effective tax rate of ~~10.4%~~20.7%, compared to a ~~$32~~$8 million expense resulting in an effective tax rate of ~~12.8%~~10.4% for the same period in ~~2019.~~2020. The effective tax rate for the three and six month periods ended June 30, ~~2020 differs from~~2021 was lower than the ~~United States~~U.S. federal statutory rate primarily due to ~~the~~favorable earnings mix, ~~of earnings in jurisdictions,~~ partially offset by the Global Intangible ~~Low-Taxed~~Low Taxed Income ("GILTI") inclusion. Additionally, the effective tax rate for the three and six month periods ended June 30, ~~2020 differs~~2021 differ from the same periods in ~~2019~~2020 due to the relative impact of the benefit from favorable equity compensation deductions on the effective tax rate as well as release of unrecognized tax benefits in 2020, offset by changes in tax law in Switzerland in 2019.

~~Other Comprehensive Income (Loss)~~

Other comprehensive income was $52 million for the three months ended June 30, 2020 compared to a loss of $11 million for the same period in 2019. Foreign currency translation contributed favorable impacts during the quarter of $53 million, driven primarily by the strengthening of the British Pound, the Australian Dollar and the Chinese Yuan as compared to the U.S. Dollar in 2020 versus the weakening of these currencies in the same prior year period. Additionally, the strengthening of the Euro as compared to the U.S. Dollar was greater in 2020 than the strengthening in the prior year. These favorable currency translation impacts were partially offset by the movement in our Euro net investment hedges during the quarter. In addition to net favorable foreign currency translation impacts, there were also favorable impacts from gain in derivative hedge agreements of $6 million and the movement of tax on the net investment hedgesunfavorable earnings mix as compared to the prior year ~~of $5 million that contributed to~~and favorable equity compensation deductions in the ~~increase in in other comprehensive income during the quarter.~~

~~For~~prior year. The effective tax rate for the six ~~months~~month period ended June 30, ~~2020, other comprehensive loss was $35 million compared to income of $9 million for~~2021 differs from the same period in 2019. Foreign currency translation contributed unfavorable impacts during the period of $54 million, driven primarily by the weakening of the British Pound, the South African Rand, the Canadian Dollar, the Euro, the Mexican Peso, the Indian Rupee and the Chilean Peso as compared2020 due to the ~~U.S. Dollar in 2020 versus the strengthening~~impact of ~~these currencies~~tax settlements in the ~~same prior year~~current period. These unfavorable currency translation impacts were partially offset by the movement in our Euro net investment hedges during the period. In addition to net unfavorable foreign currency translation impacts, there was an unfavorable impact from the movement of tax on the net investment hedges as compared to the prior year of $5 million during the period that contributed to the loss. Partially offsetting these unfavorable drivers was a gain in derivative hedge agreements during the year as compared to a loss in the same prior year period.

Liquidity and Capital Resources

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

Six Months Ended
June 30,
(In millions) 2020 2019 Change
Operating activities $ 179 $ 206 $ (27)
Investing activities (88) (146) 58
Financing activities 774 25 749
Foreign exchange (a) (12) 2 (14)
Total $ 853 $ 87 $ 766


	Six Months Ended
	June 30,
(In millions)	2021		2020		Change
Operating activities	$	206	$	179	$	27
Investing activities	(69)		(88)		19
Financing activities	(162)		774		(936)
Foreign exchange (a)	(10)		(12)		2
Total	$	(35)	$	853	$	(888)

(a)The impact is primarily due to the ~~weakness~~strengthening of the Canadian Dollar, the Chinese Yuan, the Russian Ruble ~~the Chilean Peso, the Indian Rupee, the Mexican Peso~~ and various other currencies against the U.S. Dollar.

Sources and Uses of Liquidity

Operating Activities

Net cash provided by operating activities was ~~$179~~$206 million for the six months ended June 30, ~~2020~~2021 as compared to ~~$206~~$179 million in the comparable prior year period. This ~~decrease~~increase was primarily driven by ~~a decrease in~~increased net cash ~~from~~ earnings, partially offset by ~~a significant decrease cash paid for taxes during the first half of the current year as compared~~higher tax payments and increased working capital levels to ~~the prior year, partially from delayed timing of payments.~~support year-over-year growth.

Investing Activities

Cash used in investing activities was ~~$88~~$69 million for the six months ended June 30, ~~2020~~2021 as compared to ~~$146~~$88 million in the comparable prior year period. This decrease in cash used of ~~$58~~$19 million was mainly driven by lower spending on capital expenditures compared to the prior ~~year and a $18 million reduction in spending on acquisitions.~~year.

Financing Activities

Cash ~~generated~~used by financing activities was ~~$774~~$162 million for the six months ended June 30, ~~2020~~2021 as compared to cash generated of ~~$25~~$774 million in the comparable prior year period. This ~~increase~~net decrease in cash generated by financing activities during the period was primarily driven by the issuance of our Green Bond and higher levels of short-term debt during the prior year period, partially offset by the repayment of short-term debt during 2020 and an increase in share repurchase activity of ~~$21~~$8 million.

Funding and Liquidity Strategy

Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. As a result of uncertainties caused by the COVID-19 pandemic, we continue to evaluate aspects of our spending, including capital expenditures, strategic investments and dividends. ~~Additionally, we have committed to reducing our annual capital expenditures.~~ We will continue to evaluate aspects of our spending as the year ~~progresses. We have elected~~progresses and anticipate our capital expenditures will gradually begin to ~~utilize certain federal, state and foreign tax programs related~~increase to ~~timing of tax payments and deductions to further manage our liquidity, and~~normal levels during the ~~liabilities associated with these programs are appropriately classified~~year as the markets we operate in the applicable accrued and other current liabilities or other non-current accrued liabilities accounts in our Condensed Consolidated Balance Sheets. We will continue to consider available federal, state and foreign tax programs.recover.

Historically, we have generated operating cash flow sufficient to fund our primary cash needs. As the uncertainty and severity associated with the global spread of the COVID-19 pandemic continued to grow during the year, Xylem issued Senior Notes of $1 billion in aggregate principal on June 26, 2020. The primary long-term intention of incurring this debt is to fund green projects across our business segments, as well as manage liquidity risk and increase flexibility, as the duration of the economic effects of the pandemic are uncertain. See Note 12, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt. Xylem's liquidity position has evolved favorably from an operational perspective during the second quarter of 2020, and weWe will continue to monitor the economic effects of the COVID-19 pandemic and its impact on the Company's future operating cash ~~flows.~~flows going forward. If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time, we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and

conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. There can be no assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. Our securities are rated investment grade. A significant change in credit rating could impact our ability to borrow at favorable rates. Refer to Note ~~12,~~10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of limitations on obtaining additional funding.

We monitor our global funding requirements and seek to meet our liquidity needs on a ~~cost effective~~cost-effective basis. As of June 30, ~~2020,~~2021, the COVID-19 pandemic has not materially impacted our borrowing costs or other costs of capital, however the future impact of the COVID-19 pandemic is uncertain and may increase our borrowing costs and other costs of capital and otherwise adversely affect our business, results of operations, financial condition and liquidity.

We have considered the impacts of the COVID-19 pandemic on our liquidity and capital resources and do not currently expect it to impact our ability to meet future liquidity needs or continue to comply with debt covenants. To ensure that we will continue to have the full capacity of our credit facilities available going forward, Xylem entered into Amendment No. 1 to the 2019 Credit Facility on June 22, 2020 which modified the covenant calculation methodology through the quarter ending September 30, 2021 and restricts stock repurchases until March 31, 2021, except for shares of common stock in an amount not to exceed the number of shares issued after the date of the Amendment, subject to customary exceptions. See Note 12, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.

Based on our current global cash positions, cash flows from operations and access to the capital markets, we believe there is sufficient liquidity to meet our funding requirements and service debt and other ~~obligations.~~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 ~~$2.4~~$2.6 billion, consisting of ~~$1.6~~$1.8 billion of cash and $800 million of available credit facilities as disclosed in Note ~~12,~~10, "Credit Facilities and Debt", of our condensed consolidated financial statements. Our debt repayment obligations in ~~2020~~2021 consist of ~~$50~~$600 million in ~~outstanding commercial paper and $162 million~~Senior Notes, which we expect to pay out of ~~other borrowings.~~cash. Our next ~~long term~~long-term debt maturity is ~~October 2021.~~March 2023.

Risk related to these items are described in our risk factor disclosures referenced under “Item 1A. Risk Factors" in our ~~2019~~2020 Annual ~~Report and "Item 1A. Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.~~

Report.

Credit Facilities & Long-Term Contractual Commitments

See Note ~~12,~~10, "Credit Facilities and Debt", of our condensed consolidated financial statements for a description of our credit facilities and long-term debt.

~~Non-United States~~Non-U.S. Operations

We generated approximately ~~51% and 50%~~56% of our revenue from ~~non-United States~~non-U.S. operations for both the three and six months ended June 30, 2021 and approximately 51% and 50% for the three and six months ended June 30, 2020, ~~respectively, and approximately 50% for both the three and six month periods ended June 30, 2019.~~respectively. As we continue to grow our operations in the emerging markets and elsewhere outside of the ~~United States,~~U.S., we expect to continue to generate significant revenue from ~~non-United States~~non-U.S. operations and expect that a substantial portion of our cash will be predominately held by our foreign subsidiaries. We expect to manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the ~~United States~~U.S. and other international subsidiaries when we believe it is ~~cost effective~~cost-effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, and reassess whether there is a need to repatriate funds held internationally to support our ~~United States~~U.S. operations. As of June 30, ~~2020,~~2021, we have provided a deferred tax liability of $8$6 million for net foreign withholding taxes and state income taxes on ~~$505~~$235 million of earnings expected to be repatriated to the ~~United States~~U.S. parent as deemed necessary in the future.

4946

Critical Accounting Estimates

Our discussion and analysis of our results of operations and capital resources are based on our condensed consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We believe the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain, particularly at this time and moving forward given the uncertainty around the magnitude and duration of the COVID-19 pandemic. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the ~~2019~~2020 Annual Report describes the critical accounting estimates used in preparation of the condensed consolidated financial statements. Actual results in these areas could differ from management’s estimates. Other than as discussed below, there have been no significant changes in the information concerning our critical accounting estimates as stated in our ~~2019~~2020 Annual Report.

~~The carrying value~~In the third quarter of ~~our~~2020, management updated forecasts of future cash flows for the Advanced Infrastructure Analytics ~~(“AIA”~~("AIA") businesses, which reflected significant negative volume impacts from the COVID-19 pandemic, primarily on our assessment services business. Our ongoing investment in the AIA businesses also continues to impact near-term profitability. Based on these factors, we determined that there were indicators that the AIA reporting unit’s goodwill ~~reporting unit is $170 million~~may be impaired, and accordingly, we performed an interim goodwill impairment test as of ~~June 30,~~July 1, 2020. ~~During~~The results of the ~~fourth quarter of 2019 we completed our annual goodwill assessment. Our 2019~~ impairment ~~analysis indicated~~test showed that the fair value of the AIA reporting unit ~~exceeded its~~was lower than the carrying value, ~~by less than 20%. We used~~resulting in a $58 million goodwill impairment charge. As of June 30, 2021, the ~~income approach to determine the fair value of~~remaining goodwill balance in our ~~goodwill reporting units. Under the income approach, the fair value of the reporting units was based on the present value of the estimated cash flows that the~~AIA reporting unit is expected to generate over its remaining life. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rateafter recording the goodwill impairment charge was ~~based on the weighted average cost of capital appropriate for the reporting unit.~~$112 million.

~~Given the~~The uncertainty of the future impact of the COVID-19 pandemic may also contribute to further deterioration of our future cash ~~flows may lead to a charge to earnings. We will continue to evaluate~~flows. If we do not achieve our forecasts, it is possible that the goodwill ~~on an annual basis as~~ of the ~~beginning of our fourth quarter and whenever events and changes~~AIA reporting unit could be deemed to be impaired again in ~~circumstances indicate there may be~~ a ~~potential impairment.~~

future period. The risks and potential impacts of COVID-19 on the fair value of our assets are included in our risk factor disclosures referenced under “Item 1A. Risk Factors" in the Company's ~~Quarterly Report on Form 10-Q for the quarter ended March 31,~~ 2020

~~New Accounting Pronouncements~~

~~See Note 2, "Recently Issued Accounting Pronouncements", to the condensed consolidated financial statements for a complete discussion of recent accounting pronouncements.~~ Annual Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no ~~other~~ material change in the information concerning market risk as stated in our ~~2019~~2020 Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

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

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

5047

PART II

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in legal and regulatory proceedings that are incidental to the operation of our businesses (or the business operations of ~~previously owned~~previously-owned entities). These proceedings may seek remedies relating to matters including environmental, tax, intellectual property, acquisitions or divestitures, product liability, ~~and~~property damage, personal injury, ~~claims,~~ privacy, employment, labor and pension, government contract issues and commercial or contractual disputes. See Note ~~18,~~16, "Commitments and Contingencies", to the condensed consolidated financial statements for further information and any updates.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in "Item 1A. Risk Factors" of our ~~2019~~2020 Annual ~~Report and in "Item 1A. Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.~~Report.

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

The following table presents information with respect to purchases of the Company's common stock by the Company during the three months ended June 30, ~~2020:~~

2021:

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

PERIOD

TOTAL NUMBER OF SHARES PURCHASED

AVERAGE PRICE PAID PER SHARE (a)

TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS (b)

APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (b)

4/1/2021 - 4/30/2021

—

$~~288~~228

5/1/2021 - 5/31/2021

—

$~~288~~228

6/1/2021 - 6/30/2021

—

$~~288~~228

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

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

(b)On August 24, 2015, our Board of Directors authorized the repurchase of up to $500 million in shares with no expiration date. The program's objective is to deploy our capital in a manner that benefits our shareholders and maintains our focus on growth. There were no shares repurchased under this program during the three months ended June 30, ~~2020.~~2021. There are up to ~~$288~~$228 million in shares that may still be purchased under this plan as of June 30, ~~2020.~~2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

5148

XYLEM INC.

EXHIBIT INDEX


Exhibit Number		Description	Location

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

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

~~4.11~~	~~Fourth Supplemental Indenture, dated June 26, 2020, by and between the Company and Deutsche Bank Trust Company Americas, as trustee~~	~~Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Current Report on Form 8-K filed on June 26, 2020 (CIK No. 1524472, File No. 1-35229~~

~~4.12~~10.1	#	Form of ~~1.950% Senior Notes due 2028.~~Xylem 2011 Omnibus Incentive Plan Non-Qualified Stock Option Award Agreement for Certain Executives and Executive Officers as Approved by the Leadership Development & Compensation Committee	~~Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Current Report on Form 8-K filed on June 26, 2020 (CIK 1524472, File No. 1-35229)~~Filed herewith.

~~4.13~~	~~Form of 2.250% Senior Notes due 2031~~	~~Incorporated by reference to Exhibit 4.1 of Xylem Inc.’s Current Report on Form 8-K filed on June 26, 2020 (CIK 1524472, File No. 1-35229)~~

~~10.34.1~~	~~Amendment No. 1, dated June 22, 2020, to the Five-Year Revolving Credit Facility Agreement, dated as of March 5, 2019, each~~ ~~among Xylem Inc. and Citibank, N.A., as administrative agent~~	~~Incorporated by reference to Exhibit 10.34.1 of Xylem Inc.’s Current Report on Form 8-K filed on June 23, 2020 (CIK No. 1524472, File No. 1-35229)~~

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

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

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

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


~~Exhibit~~ ~~Number~~	~~Description~~	~~Location~~
101.0		The following materials from Xylem Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, ~~2020,~~2021, formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Income Statements, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements	The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104.0		The cover page from Xylem Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, ~~2020~~2021 formatted in Inline XBRL and contained in Exhibit 101.0.

# Management contract or compensatory plan or arrangement

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

~~July 30, 2020~~August 3, 2021

5450


	June 30, 2020		December 31, 2019

ASSETS
Current assets:
Cash and cash equivalents	$	1,577	$	724
Receivables, less allowances for discounts, returns and doubtful accounts of $35 and $35 in 2020 and 2019, respectively	956		1,036
Inventories	595		539
Prepaid and other current assets	173		151

Total current assets	3,301		2,450
Property, plant and equipment, net	635		658
Goodwill	2,820		2,839
Other intangible assets, net	1,108		1,174
Other non-current assets	580		589
Total assets	$	8,444	$	7,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	498	$	597
Accrued and other current liabilities	663		628
Short-term borrowings and current maturities of long-term debt	212		276
Total current liabilities	1,373		1,501
Long-term debt	3,031		2,040
Accrued postretirement benefits	446		445
Deferred income tax liabilities	304		310
Other non-current accrued liabilities	425		447
Total liabilities	5,579		4,743
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common Stock – par value $0.01 per share:
Authorized 750.0 shares, issued 194.5 shares and 193.9 shares in 2020 and 2019, respectively	2		2
Capital in excess of par value	2,012		1,991
Retained earnings	1,838		1,866
Treasury stock – at cost 14.5 shares and 13.7 shares in 2020 and 2019, respectively	(587)		(527)
Accumulated other comprehensive loss	(409)		(375)
Total stockholders’ equity	2,856		2,957
Non-controlling interests	9		10
Total equity	2,865		2,967
Total liabilities and stockholders’ equity	$	8,444	$	7,710


	June 30, 2020										December 31, 2019
(in millions)	Carrying Amount		Accumulated Amortization		Net Intangibles		Carrying Amount		Accumulated Amortization		Net Intangibles
Customer and distributor relationships	$	922	$	(374)	$	548	$	945	$	(352)	$	593
Proprietary technology and patents	200		(117)		83		204		(111)		93
Trademarks	139		(55)		84		148		(52)		96
Software	449		(227)		222		428		(206)		222
Other	21		(16)		5		20		(16)		4
Indefinite-lived intangibles	166		—		166		166		—		166
Other Intangibles	$	1,897	$	(789)	$	1,108	$	1,911	$	(737)	$	1,174


	Share units (in thousands)	Weighted Average Grant Date Fair Value /Share
Outstanding at January 1, 2020	512	$	68.95
Granted	317	75.01
Vested	(237)	63.32
Forfeited	(21)	74.16
Outstanding at June 30, 2020	571	$	74.42